The Finger Lakes – Economic Challenges and Strategic Response: An Assessment

This research is a case study of employment challenges facing the Rochester Metropolitan area and the Finger Lakes region, and an analysis of the region’s strategic economic development plans and reports, developed in response to Governor Cuomo’s challenge to regions seeking economic development funding.  While the report finds reasons why the region’s recent weak economic growth may improve, there are real concerns about the focus of its strategic economic development plans, and the absence of meaningful outcome/impact measurement and analysis.

Employment History

The Rochester area, among all the metropolitan areas in New York State, was historically most dependent on a few large manufacturing employers.  Rochester companies like Kodak and Xerox were industry leaders that pioneered dominant imaging technologies in the 20th Century.  The 2011 Finger Lakes Strategic Plan[1] reported that in 1983, Eastman Kodak had 60,400 employees in the region, and that “Kodak, Xerox, Bausch + Lomb, and General Motors employed nearly one fifth of the local workforce and indirectly had an impact on half of the region’s economy.”  Today, according to Greater Rochester Enterprise,[2] Kodak employs 1,750, and Bausch and Lomb 985, while Xerox, according to the Rochester Democrat and Chronicle, employs 3,400.[3]  General Motors employment in Rochester is 880.[4]  Together, these companies now account for about 1% of regional employment.

Over the 47 years between 1970 and 2017, manufacturing employment in the Rochester MSA declined by 63% – from 152,511 to 56,546.  The number of manufacturing jobs decreased in every decade, except the 1970-1980 decade. In 2017, 11% of Rochester MSA employment was in manufacturing industries, compared with 10% nationally.

The presence of large manufacturers in the 20th Century was good for employee incomes as well.[5]  In 1970, average worker earnings were 12% higher than the national average.  Because of the shift of employment from manufacturing to lower paying service sector occupations, Rochester area average worker earnings in 2016 were 8% lower than the nation.[6]

Like other rust belt areas, and neighboring Buffalo-Niagara Falls and Syracuse, Rochester’s employment growth since 2000 has been nearly non-existent. Rochester area employment grew by less than one percent by 2017, while Buffalo grew 1.4%, and Syracuse lost 2%.[7] Employment growth for the nation was 12% during the period.

Manufacturing employment declined substantially between 2000 and 2017 in the United States, upstate New York and the Rust Belt. In upstate New York,  Rochester and Syracuse were most affected, each losing more than 40% during the period.  Buffalo lost more than 35% of its manufacturing jobs.  These locations and most rust belt metros lost greater percentages of manufacturing jobs than the United States, which lost 28%.

Automobile manufacturing industries experienced a sharp employment decline with the bankruptcies of GM and Chrysler in 2009.  But, the federal bailout led to a substantial increase in employment after that.  As a result, automobile manufacturing employment grew by 25% between 2010 and 2016, compared with 5% for other manufacturing industries.  Metropolitan areas like Detroit, and others in Michigan and Ohio that have high concentrations of manufacturing had stronger manufacturing employment recoveries than those in New York.

Since the recession of 2008-10, manufacturing employment in Rochester, Buffalo and Syracuse has seen smaller declines or has stabilized.  Buffalo’s manufacturing employment has been stable for the past four years, while Syracuse has seen a rebound after losing New Venture Gear/Magna in 2012, and Rochester’s decline has slowed.  In Rochester, continued job losses in chemical manufacturing (primarily Kodak) accounted for 4,402 jobs lost between 2010 and 2017.[8]

While manufacturing employment declined significantly after 2000, employment in other private sector industries continued to grow in Rochester, Buffalo, Niagara-Falls, other rust belt metropolitan areas and the nation.  Nationally, private sector non-manufacturing employment grew by 19%, the Rochester MSA grew by 13%, Buffalo-Niagara Falls by 9.7% and Syracuse by 5.8%.

Overall, the Rochester MSA’s performance since 2000 is near the middle of the group of rust belt metropolitan areas, even though only Flint and Ann Arbor, Michigan and Youngstown, Ohio lost greater percentages of manufacturing employment.  Rochester’s weak manufacturing performance was offset by relatively strong employment growth in non-manufacturing industries, compared to other rust belt metropolitan areas.

Industry Performance from 2010-2017

Industry Sectors

Most service industries in the Rochester MSA saw growth between 2010 and 2017.  Employment in health care and social assistance increased by more than 8,000, professional and technical services grew by 3,861 and educational services increased by 3,250.  Nine industry sectors had employment growth of more than 10%.  Industry sectors  with significant employment decreases were management of companies and enterprises, losing 1,148, Information, losing 1,318 and manufacturing, losing 4,165.

Manufacturing losses were concentrated in two industries – chemical manufacturing, largely Kodak, which lost 4,402 jobs between 2010 and 2017, and machinery manufacturing, which lost 1,720.  The losses in chemical manufacturing were larger than the overall employment losses in manufacturing.

The performance of industries within the manufacturing sector varied.  The region saw significant employment growth in computer and electronic product manufacturing (1,268), and two food related industries – food manufacturing and beverage and tobacco product manufacturing (these industries grew by 1,661 employees).  But, other manufacturing industries each lost more than 500 employees:  machinery manufacturing, chemical manufacturing, miscellaneous manufacturing, transportation equipment manufacturing, and electrical equipment and appliances.

Industries with Largest Employment Gains

The industry showing the largest employment growth (5,453) in the Rochester area between 2010 and 2017 was professional and technical services.  Employment within the industry sector was primarily in four sub-sectors:  engineering services, information technology services, management, scientific, and technical consulting services and scientific research and development services.

Education and health related industries, so-called “eds and meds” also had relatively large employment growth. Hospital employment grew by 4,445 (18%) while educational services employment grew by 3,250 (13%).   Nursing and residential care facilities and ambulatory health care services each grew by more than 1,500 employees.  It should be noted that a large portion of the growth in employment in the health care industries is from health care use by area residents, not from service users from outside the region.

Fast Growing Companies

The Rochester metropolitan area had 22 companies on the Inc. 5000 list of fastest growing privately held companies for 2017.  The number of companies is 34% higher than would be expected from the area’s population.  Twenty of the Inc. 5000 growing companies in the area were service businesses, two were manufacturers.  Information technology services, particularly software services, was about one-third of the total, suggesting that the area has potential strength in this industry.

Finger Lakes Regional Economic Development Strategy

In 2011, Governor Andrew Cuomo restructured the delivery of economic development assistance to create a formal role for regional economic development councils in the decision-making process.  The regional economic development awards temporarily replaced the process of state legislative grant-making though so-called “member items.”[9]  That process required local organizations to request funding from individual state legislators.  Funding was allocated by party leaders within the legislature.  The new, executive branch-controlled process involves regional council members in the decision-making process, though the project scoring system allocates 80% of points to the state agencies administering projects, and only 20% to the regional councils.

As a part of the restructuring, in 2011 regions developed strategic plans.  The 2011 guidance document, “A New State Strategy for Economic Growth” required public involvement, an assessment of current conditions, issues and opportunities, creation of a vision statement, development of strategies and implementation agendas and monitoring and evaluation of effectiveness.[10]

In 2015, Governor Cuomo created a regional competition for $1.5 billion of state funding, with $500,000,000 awarded to each of three regions.  The purpose was to “create and maintain high-paying permanent private sector jobs and to lure private sector investments in amounts that are significant to the region.”[11]  The initiative required regional applicants to develop transformative regional strategies to create significant employment and income growth.  The Finger Lakes Regional Economic Development Council, along with Central New York and the Southern Tier received funding through the 2015 round.

The Finger Lakes 2017 Progress report describes the region’s strategies,

    • Three industry clusters, or pillars, that will act as the core drivers of job and output growth: (1) Optics, Photonics, and Imaging (OPI); (2) Agriculture and Food Production; and (3) Next Generation Manufacturing and Technology.
    • Three core enablers that will facilitate economic growth within the key pillar industries: (1) Pathways to Prosperity: Workforce Development; (2) Entrepreneurship and Development; and (3) Higher Education, Research, & Healthcare.
    • And four foundational strategies that will support the pillar and enabler strategies enhance the region’s quality of life and help the region attract and retain jobs: (1) Global NY; (2) Tourism & Arts; (3) Infrastructure & Transportation; and (4) Sustainability.[12]

Although some funding through the regional strategies involves traditional economic development assistance to business such as capital projects and worker training, most of the region’s effort is focused on developing broad based initiatives in support of economic growth – ranging from support for industry related research and manufacturing process improvements to entrepreneurial assistance, institutional capacity for workforce development and civic improvements.

Only 17% of regional “priority project” grants – projects designated by the Finger Lakes Regional Economic Development Council as important elements of its strategic plan went to businesses.  Most grants were given to non-profit organizations (60%), followed by universities and colleges (19%).

Analysis

At the outset it must be acknowledged that the Rochester metropolitan area’s economic performance since 2011 continues to be weak.  In fact, the Rochester MSA, along with Buffalo and Syracuse, had less employment growth between 2011 and 2018 than rust belt metropolitan areas in Ohio and Michigan, except for Youngstown.[13]  Also of concern is the difference in average wages between growing and declining industries.   The average wage in growing industries in the Rochester MSA was $45,752 in 2017, while in industries with declining employment it was $53,786.[14]

The regional strategies are works in progress.  Many of the projects initiated through the regional strategy have not yet been completed.  But, if the Governor’s approach is to have significant employment benefits, they are yet to be realized.

In this section, I examine strengths and weaknesses in the Finger Lakes Regional economic development strategy and in the overall strategic planning and implementation process as implemented by New York State.

Industry Targeting

The 2017 Finger Lakes Progress Report states that “Three industry clusters, or pillars, that will act as the core drivers of job and output growth: (1) Optics, Photonics, and Imaging (OPI); (2) Agriculture and Food Production; and (3) Next Generation Manufacturing and Technology.”

Much of the region’s funding reflected its stated priorities.  Photonics/Optics and Imaging received the largest amount of funding, $148,155,000 through 2016.[15]  $147,000,000 was granted to the AIM photonics facility.  Advanced manufacturing projects received the second largest amount – $69,457,000.  Higher Education, Research and Health Care received $39,498,000

The Finger Lakes regional strategies between 2011 and 2016 supported several of the region’s fast-growing industries, particularly education and research.  But, the emphasis overall in the strategic plans was on support of manufacturing related initiatives.  59% of regional funding went to advanced manufacturing and optics, photonics and imaging.  Manufacturing is important to the Finger Lakes economy – average wages are high, and the region benefits from the income that results from the sale of manufactured products outside it.  Consequently, regional efforts to help local manufacturers improve their competitive position should be key elements of the region’s employment retention strategy.

But, to identify next generation manufacturing and optics, photonics and imaging as two of the region’s three pillars driving job and output growth is unrealistic given the weakness of the area’s (and the nation’s) manufacturing performance in the past forty years.  Though it is true that the Finger Lakes region is far less dependent than it was on a few large manufacturers like Kodak and Xerox, without the employment losses at those businesses, the region’s manufacturing employment growth during the recovery since 2010, like that of the nation, continues to be slow, and has lagged service sector growth.  Manufacturing, including photonics, optics and imaging may grow, but because of its size and long-term growth, the fate of the region’s service sector is most important to future job creation.

In one significant way, the practice of grant making differs from the conception of the 2011 and 2015 strategic plans.   Higher education and health care received about 11% of all funding – nearly $40 million.  The plans view higher education and research as enablers – ways to develop the workforce to encourage employment growth in photonics/optics/imaging, advanced manufacturing and technology and agriculture/food processing.  But, in fact, higher education and research are among the region’s largest industries and are also among those that have shown the most employment growth since 2010.  Future planning efforts could benefit if they viewed growing traded service industries, including higher education and research and professional and technical services as employment drivers.

Optics, Photonics and Imaging

Optics, photonics and imaging is by far the largest manufacturing initiative in the Finger Lakes strategy.  Greater Rochester Enterprise lists optics, photonics and imaging companies in the greater Rochester region.  Companies on the list in related industries employed about 11,000 workers in the region in 2018.[16]  Because the industry grouping contains Kodak and Xerox, employment has declined substantially over the past 40 years.  To support future industry growth, the Finger Lakes region has made substantial efforts to support photonics initiatives at universities and other research and development institutions.

The most significant funding initiative through the regional strategies has been the American Institute for Manufacturing Integrated Photonics partnership.  The AIM Photonics initiative is a $600 million public-private partnership that will receive $250 million of state support and $110 million from the Federal Government.  The initiative is the region’s largest single bet for future employment growth.

The largest portion of AIM Photonics Initiative funding in the region – $147 million – went to create a photonics test, assembly and packaging facility in Rochester for industry partners.  The objective of the effort is “invest in nurturing start-ups, enable small businesses and attract large enterprises” in order to “create thousands of jobs.”[19]  The Finger Lakes regional strategy includes some significant efforts to support entrepreneurs and small businesses in the field.

To attract major industry companies to build large manufacturing plants, the region must develop industry intelligence, relationships with key industry players and build a long-term marketing campaign.  In addition, appropriate sites for manufacturing facilities should be evaluated, permitted and basic site infrastructure development should be undertaken.  Finally, attracting such a facility would require a large grant from New York State.  Even so, because there is intense competition for major manufacturing plants, because electronics manufacturing has largely moved off-shore, and because the region does not have growing major regionally based stakeholders in photonics, success could be elusive.

A Strategic Plan, or a Strategic Planning and Implementation Process?

Strategic plans are of no real value if they do not guide actions, effectively measure outcomes against goals, and use knowledge gained in the implementation process to guide future action.  Though the 2011 guidance for regional strategic plans required “monitoring and evaluation of effectiveness,”[20] regional plans have focused primarily on describing the funding status of projects, rather than outcomes.

Finger Lakes 2017 Annual Report – Progress

The 2017 Finger Lakes Progress Report section titled “Progress” begins, on pages 5-9 with a series of charts showing economic conditions in the region.  Though the section is labelled “progress,” the charts do not examine the impacts of actions taken by the regional councils and the state in funding projects.  Instead, we cannot know whether the conditions described are a result of regional initiatives or would have occurred in their absence.

The second section of the “Progress” section is a listing of funded projects.  In this section, projects are identified with the amount of state funding received, total project cost, and project status (i. e., progressing on schedule, complete, etc.)

The final section provides aggregated data about project funding and status.  In this section, there is a table on page 17 labelled “job creation to date”.  But the data is provided without information about its source.  Does the table show the estimated number of jobs created and retained based on contractual commitments to the state or are they actual jobs as measured by Empire State Development in its post-funding employment compliance reports?[21] Equally important, the measures of actual or projected job creation and retention are not tied to specific goals, project categories, or projects.  As a result, the chart is of no value in assessing progress against program or project goals.

Finger Lakes 2017 Annual Report –“Implementation Agenda”

The following section of the 2017 Annual Report labelled “Implementation Agenda” looks at specific regional strategies.  The sections detail activities undertaken by regional entities in support of major initiatives.  For example, the first portion of the section, “Workforce Development” explains how workforce development is delivered in the Finger Lakes region, describing the steps being taken to address the need to help workers acquire marketable job skills.  The quantitative data provided shows intermediate program activity but does offers little information about how many workers were able to get jobs because of the assistance provided.  Here is an example:

“In the past program year, the three workforce development boards

and their community partners have achieved a record of success in several areas. Collectively they:

      • Hosted 125 recruitments and job fairs attended by 6,000 job seekers.
      • Funded skills training for 800 workers and job seekers.
      • Served 20,000 customers at their career centers throughout the region.
      • Helped 14,700 job seekers find employment (latest data from the 2016 program year).
      • Served more than 1,000 youth with employment and job readiness services.
      • Hosted multiple special events and programs such as Finger Lakes Works with their Hands, Health Care Career Day,
      • Rochester Work’s Criminal Justice Partnership, Agricultural Career Day, and del Lago Casino & Spa recruitment days.”[22]

 The section then provides a number of vague assertions about program effectiveness.

“Employers are moving the Finger Lakes forward.

  • Through initiatives such as the Young Adults Manufacturing & Training Employment Program (YAMTEP).

Economic developers are moving the Finger Lakes forward.

  • In partnership with Monroe Community College, Monroe County is leading the charge to train the local workforce with the new LadderzUP program. The program recruits, trains, and places workers into the most in demand careers in the region.

Secondary educators are moving the Finger Lakes forward.

  • The Hillside Work – Scholarship Connection has been a consistent beacon of hope for at risk youth in the region for thirty years.
  • Students that fully participate in the program maintain employment and graduate at a rate of over 90%.

Post-secondary educators are moving the Finger Lakes forward.

  • Rochester Institute of Technology (RIT) Electronic Assembly Training program trained 10 veterans and 10 dislocated workers in 20 days to enter the electronic assembly industry.

The community is moving the Finger Lakes forward.

  • Catholic Family Center, Action for a Better Community, and Community Place of Greater Rochester have partnered to offer two adult mentoring programs to the community.”

The data provides no useful information to evaluate the effectiveness of the region’s workforce development efforts because it does not measure outcomes/impacts of specific programs or kinds of assistance, (i. e, how many training participants were able to secure employment in the field for which they received training).  Given this, it isn’t possible to know how much impact the initiatives have had on worker skill deficits in the region or do any measurement of costs and benefits.

Another portion of the Implementation Agenda section, “Higher Education, Research, and Healthcare Work Team presents a series of charts described as performance indicators.  Several of the charts[23] appear to show that the region is not meeting goals but offer no discussion of the data or how the region intends to address the failures. In  other cases charts present data that is not relevant to the goal in the chart title.  For example, The first chart presents “Goal 1 – increase enrollment” in regional colleges and universities:

The data shows that enrollments have declined by about 5,000 over the 2011-2015 period.  Clearly, this goal is not being achieved.  But, the text provides no discussion of this issue, or how it might be addressed. Instead, the reader is provided with six pages of project descriptions, like the one below. None of the items provide specific information about which priority goal is being addressed, what specific strategic goal related benefit is to be derived, or a status description showing progress to a specific goal.  For example:

The Chart, “Goal 2: Increase R&D” similarly shows that R&D has been declining in the Finger Lakes Region since 2011.  Again, no discussion of the data is presented, nor is a specific strategy to remedy the shortfall identified.

 

 

The chart labelled, “GOAL 4: Increase STEM Graduates” is supposed to show area progress in increasing the number of STEM (Science, Technology, Engineering and Mathematics Graduates), But, the chart doesn’t measure change in the area’s ranking, or in the number of STEM graduates over time.  Even the static data that is presented doesn’t show which year the data is taken from.

Evidence Based Policy Implementation

The Governor’s regional planning and grant program could potentially provide a rich source of data for regional and state decision-makers to measure project impacts, evaluate what works and what doesn’t, and to use the information to guide future actions.  The Evidence Based Policy Making Collective[24] provides useful guidance as to how an effective implementation and evaluation could work.  The Collective argues for this process:

Monitor program delivery

      • To clearly define the key components of a program model and track the inputs, activities, outputs, and outcomes of program service delivery through process evaluation and performance management
      • To check whether services are delivered as intended, in terms of both quantity and quality, and whether programs are meeting their goals

Use impact evaluation to measure program effectiveness

      • The systematic collection of information about a program to identify (or estimate) the specific contribution of that program to intended outcomes
      • That specific contribution, in the language of evaluators, is known as a program’s impact5…

A process by which measurable goals are specified, and relevant data is collected and evaluated is essential to understanding the real impacts of programs and to making informed decisions about program continuation or termination.  Unfortunately, that process does not exist in the Governor’s regional planning and funding competitions.

Since State and regional decision-makers are operating in the dark about the specific contribution to the intended strategic outcomes of the projects that received more than $4 billion in funding provided by state taxpayers, to strengthen future decisions, much improved definitions of project goals and appropriate impact measures are absolutely necessary.  If the Governor’s regional partnership initiative is to continue, it is imperative that the state mandate substantial improvements in data reporting, performance analysis and evaluation.

Conclusion

The Finger Lakes, since 2000, has been hard hit by the collapse of employment at several large manufacturers.  Because relatively few jobs remain at these companies, the region has less concentrated risk of losing jobs at one or a few companies.   At the same time, the Finger Lakes region has had faster service sector growth than other upstate metropolitan areas west of Albany-Schenectady-Troy, available data suggests a strong entrepreneurial culture, and strong knowledge-based industries, all of which could strengthen its future employment growth.

The region’s strategic economic development plans and annual reports are concerns, though.  The plan has an unrealistic view of the potential for manufacturing employment, particularly optics, photonics and imaging, to create regional employment growth, while giving short shrift to those service industries that are growing.

Of equal concern is the total absence of any kind of outcome/impact measurement or program evaluation.  This weakness is not unique to the Finger Lakes strategies and reports.  Several regional economic development strategies and reports have the same weakness. For example, see the Central New York Region Report:

Given the $4 billion that has been spent of the regional economic development grant competitions, the Governor and legislature should mandate effective impact measurement and evaluation as a condition of participation in the next round of funding.

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[1] “NEWYORK OPEN FOR BUSINESS – Seneca County CCE.” 14 Nov. 2011, http://senecacountycce.org/resources/finger-lakes-redc-strategic-plan. Accessed 20 Jun. 2018.

[2] “Top Optics, Imaging & Photonics Companies – Greater Rochester ….” http://www.rochesterbiz.com/Portals/0/Top%20Optics%2C%20Photonics%2C%20and%20Imaging%20Companies%20in%20the%20Greater%20Rochester%2C%20NY%20Region%2C%202018.pdf. Accessed 20 Jun. 2018.

[3] “Fate of local jobs uncertain after Xerox, Fujifilm announce merger.” 31 Jan. 2018, https://www.democratandchronicle.com/story/money/business/2018/01/31/fuji-xerox-fujifilm-merger-cost-savings-jeff-jacobson/1081916001/. Accessed 20 Jun. 2018.

[4] “GM Corporate Newsroom – United States – Company – GM Media Site.” 4 Jun. 2018, http://media.gm.com/media/us/en/gm/company_info/facilities/component-fac/rochester.html. Accessed 20 Jun. 2018.

[5] United States Department of Commerce, Bureau of Economic Analysis, Regional Economic Accounts, https://www.bea.gov/itable/iTable.cfm?ReqID=70&step=1#reqid=70&step=1&isuri=1

[6] Author’s calculations from BEA data.

[7] Department of Labor, Bureau of Labor Statistics, Current Employment Statistics.  https://www.bls.gov/data/

[8] Source:  U. S. Census Bureau, County Business Patterns.

[9] The practice of making grants directed by the legislature later returned, see:  https://www.empirecenter.org/publications/inside-albanys-secretive-slush-fund/ and https://www.politico.com/states/new-york/albany/story/2015/10/partisan-spoils-persist-in-new-legislative-earmark-program-026317

[10]“A New State Government Approach to Economic Growth” https://regionalcouncils.ny.gov/sites/default/files/2017-12/2011-redc-guidebook.pdf

[11] “Competition Guidelines:  New York Urban Revitalization Initiative, April 2015” https://regionalcouncils.ny.gov/sites/default/files/2017-12/2015-uri-guidebook.pdf

[12] Finger Lakes Progress Report 2017, p. 8.  https://regionalcouncils.ny.gov/sites/default/files/2017-12/2017ProgressReportFingerLakes.pdf

[13] Department of Labor, Bureau of Labor Statistics, Current Employment Statistics.  https://www.bls.gov/data/

[14] Employment change from 2010-2017.

[15] Most recent available data from 2017 Finger Lakes Progress Report, op cit.

[16][16] “Top Optics, Photonics and Imaging Companies in the Greater Rochester, NY Region, 2018”  http://www.rochesterbiz.com/Portals/0/Top%20Optics%2C%20Photonics%2C%20and%20Imaging%20Companies%20in%20the%20Greater%20Rochester%2C%20NY%20Region%2C%202018.pdfyujg8hni6rthuj76i  Number adjusted to reflect more recent Xerox employment from Rochester Democrat and Chronicle, op. cit.

[17] https://en.wikipedia.org/wiki/Photonics

[18] http://www.aimphotonics.com/what-is-integrated-photonics/

[19] “Finger Lakes 2015 Upstate Revitalization Initiative Plan,” https://regionalcouncils.ny.gov/sites/default/files/2017-12/2015-finger-lakes-uri-plan.pdf

[20] “A New State Government Approach to Economic Growth,” op. cit.

[21] See, for example, “2016 Annual Jobs Report on ESD’s Loan and Grant Programs,”  https://esd.ny.gov/sites/default/files/2016-Annual-Jobs-Report-Final.pdf

[22] 2017 Finger Lakes Progress Report, p. 25.

[23] 2017 Finger Lakes Progress Report, p. 31

[24] https://www.evidencecollaborative.org/principles-evidence-based-policymaking




Government Policies and Job Growth in New York State and the Rust Belt

A recent Washington Post article, “As senator, Clinton promised 200,000 jobs in Upstate New York. Her efforts fell flat.”[1] points out that during Senator Clinton’s tenure between 2001 and 2009, Upstate New York saw job growth of only 0.2%, far from what Clinton claimed could be achieved.  While the article neglects to point out that the nation as a whole actually lost jobs during the period, since Clinton’s term ended near the low point of the recession of 2008-2009, it is clear that her claim was unfounded.

But, Senator Clinton’s emphasis on economic development and job creation is not unique.  Politicians in New York state and elsewhere regularly claim that their policies lead to job creation, often using statistics to tout their arguments.  In 1994, a significant element of Governor George Pataki’s first campaign for Governor focused on his claim that the state’s loss of jobs in the period immediately prior to the campaign was a result of Governor Mario Cuomo’s tax and regulatory policies.  Governor Pataki was fortunate, initially, because following the recession that took place in the early 1990’s, the national economy, and New York’s, improved.  Each month for the first five years of Pataki’s terms of office, his Administration pointed to the creation of thousands of jobs in New York State.

Then, in 2000, the nation again entered recession, which was exacerbated by the 9/11 attack on the World Trade Center. Not surprisingly, New York stopped seeing job growth, and the frequent press releases ceased.

More recently we have seen Governor Andrew Cuomo point to continued job growth during his administration.  In his 2016 State of the State speech, the Governor said, “We limited the state’s new spending to less than 2% a year. We passed a 2% property tax cap that has brought welcome relief to the citizens of our state and we have cut income, corporate and estate taxes. In total, we have reduced the tax burden on New Yorkers by $114 billion dollars. Why is that important? Because reducing taxes is part of our strategy to create jobs.”

During Governor Cuomo’s administration, like the first years of Governor Pataki’s administration, New York State has seen significant job growth.  But can governors or senators rightfully take credit for employment growth during their administrations?  Is New York’s relative job creation performance primarily the result of State and local tax and spending policy?  This post will examine patterns of job growth in New York, and will attempt to provide some answers.

Employment Change in New York State and the Nation

Many analyses of employment change focus on comparisons between New York State and the national average.  Between 1990 and 2015, private sector employment grew by 18.7 percent, compared with 33.5% for the nation (note, data in this report, unless otherwise noted, is from the U. S. Department of Labor, Bureau of Labor Statistics, Current Employment Statistics).  When New York is broken into regions – the New York City metropolitan region, and the rest of the state (Upstate) – there is a considerable difference in performance.  New York metropolitan employment grew by 24.5%, while Upstate employment grew by 6.1%.

NYS V US

 

But, a closer examination of the state’s performance shows significant variations in performance across different economic cycles.  Since 1990, the nation has experienced three significant growth periods, broken by recessions in 1990-1992, 2000-2002, and 2007-2009.  In the first growth period, 1992-2000, New York’s performance lagged the nation’s – private sector employment in the state as a whole grew by 15.2%, compared with 23.5% for the nation.  The difference in performance between upstate New York and the New York metropolitan area was substantial – downstate employment grew by 18.2%, while upstate job growth was 8.2%.

Percent Employment Change  – 1990-2015
    United States New York NYC Metro Upstate
 Recession   1990-1992  -0.08% -5.24% -6.84% -1.83%
 Growth   1992-2000  23.52% 15.18% 18.70% 8.06%
 Recession   2000-2002  -2.55% -4.38% -4.56% -3.97%
 Growth   2002-2007 6.39% 5.10% 6.43% 2.14%
 Recession   2007-2009  -7.54% -3.97% -4.04% -3.81%
 Growth   2009-2015 12.88% 12.65% 15.54% 6.00%

During the second growth period – from 2002-2007, New York’s performance again lagged the nation’s, but by significantly less than in the 1990’s.  Nationally, private sector employment grew by 6.4% compared with 5.1% for New York State.  Employment in the New York portion of the New York metropolitan area grew by 6.4%, which was greater than the national growth, while upstate employment grew by only 2.1%.

During the third growth period, from 2009-2015, private sector job growth in New York State about equaled the growth in the nation – 12.7% in New York vs 12.9% in the nation.  Growth in the New York portion of the New York Metropolitan area exceeded the nation’s – 15.54%, while that in upstate New York was again sub-par, at 6%.

New York Compared to Rust Belt States

Population growth in the United States has continued to shift south and west.  That factor alone contributes to regional variations in employment change.  Additionally, regions vary in “industry mix,” the relative proportions of their populations employed in different industries.  Given the historic importance of manufacturing in the rust belt, states in the Northeast and Midwest have suffered more than the rest of the nation.  For thirty years, manufacturing employment was stayed constant, at 18 million jobs, as service employment grew.  But, the decade from 2000 to 2010 saw one in every three manufacturing jobs disappear in the United States – from 17.3 million to 11.5 million.[2]

640

Not surprisingly, employment growth in rust belt states in the first decade of this century reflected the weak performance of the manufacturing sector.  Even before the great recession of 2007-2009 rust belt states saw little or no private sector job growth.  For the rust belt, both the decade between 1990 and 2000 and that between 2010 and today saw much better economic performance.

rustbelt2

Employment Change in Rust Belt States – 1990-2015

 

 

Illinois Indiana Massachusetts  Michigan New York Ohio Pennsylvania
1990-1992 -0.18% 2.45% -3.93% 0.81% -5.26% -0.34% -1.19%
1992-2000 15.78% 17.93% 21.10% 20.55% 14.56% 17.18% 13.50%
2000-2007 -1.62% -1.04% -2.91% -11.85% 0.52% -5.22% 1.46%
2007-2009 -9.09% -10.31% -5.11% -12.44% -4.48% -9.78% -5.55%
2009-2015 9.00% 13.41% 11.50% 14.45% 12.73% 10.91% 7.67%

State and Local Tax Policy and Job Creation

Does the data support the argument that state economic performance is related to tax policy?  We have often seen arguments that New York, as a relatively high taxed state, is at a disadvantage to regional competitors with lower tax burdens.  The data shows that some states with relatively high tax burdens – Massachusetts and New York – did better than states with significantly lower burdens – Michigan and Ohio, for example. (source -State & Local Government Finance Data Query System. http://slfdqs.taxpolicycenter.org/pages.cfm. The Urban Institute-Brookings Institution Tax Policy Center. Data from U.S. Census Bureau, Annual Survey of State and Local Government Finances, Government Finances, Volume 4, and Census of Governments (1977-2013)).  It also shows that the relative performance of states varied from period to period.  For example, Michigan was one of the strongest performers in the rust belt from 1992 to 2000, but was among the weakest in the recessions of 2000-2002 and 2007 to 2009.

State and Local Taxes Per Capita

Region and State 2013
United States ……………………………………………………………………… $4,599
Massachusetts……………………………………………………………………… $5,723
New York……………………………………………………………………… $8,047
Pennsylvania……………………………………………………………………… $4,627
Illinois……………………………………………………………………… $5,374
Indiana……………………………………………………………………… $3,793
Michigan……………………………………………………………………… $3,750
Ohio……………………………………………………………………… $4,275

The Upstate Downstate Divide

For the past half century, Upstate New York has consistently grown more slowly than downstate, largely because of its historical dependence on manufacturing.  Even so, the chart below shows that there have been significant differences in private sector employment growth between New York’s metropolitan areas.  The New York City metropolitan area had the greatest employment growth – more than 25% – among those studied in New York State between 1990-2015.  The Albany Schenectady Troy metropolitan area was second, with about 20% private sector job growth.

NY Metros Jobs2

 

But other metropolitan areas upstate had little private sector employment growth, or in some cases, losses.  Rochester’s employment grew by about 5%, and Buffalo’s by 3%. Binghamton’s employment declined by more than 15% during the period.

The job creation performance of New York metropolitan areas compared to other metropolitan areas in the rust belt varied substantially during different periods of growth and recession, even within relatively short time periods.  Relative to other rust belt metropolitan areas, New York metropolitan areas showed the weakest performance in the 1990-1992 recession, and the strongest in the 2007-2009 recession.  These kinds of shifts can reflect the effects of differing economic environments as they relate to metropolitan areas’ industrial bases.  For example, in 2007-2009,  metropolitan areas in Michigan, highly dependent on the auto industry, were particularly hard hit while New York’s metropolitan areas generally did relatively well.  Syracuse and Buffalo’s performance was weak between 1990 and 2000, but did relatively well between 2000 and 2009.

upstate employment change rank

Is the large variation in private sector employment change between metropolitan areas in New York State found in other states?  A look at employment change in other rust belt states shows that it is.

Ohio

Ohio Employment

Michigan

michigan

Pennsylvania

pennsylvania

The differences in employment change between cities within each state were substantially larger than those between states.  For example, Columbus, Ohio metropolitan area private sector employment grew more than 40% between 1990 and 2015, while Youngstown saw a decline of nearly 10%.  In Michigan, Grand Rapids private sector employment grew by more than 40%, while Flint’s dropped by nearly 20%.  The high level of dispersion between the economic performance of individual cities within states points to the fact that in these historically relatively undiversified metropolitan areas, the performance of a dominant industry or company can significantly affect metropolitan area private sector employment change.  Both Detroit and Flint suffered signficantly from the woes of the domestic auto industry, while the Rochester area saw Eastman Kodak employment decrease from nearly 50,000 in 1988 to a small fraction of that today.

Implications

There is clear evidence that federal policies, whether relating to labor and environmental regulations, taxes, trade, or the use of fiscal and monetary policy, can have a significant impact on corporate decision making and job growth.  But, former Senator Clinton’s claims about growing the upstate economy foundered on several realities.  First, the Senator failed to recognize that the region’s job creation would largely depend on national economic conditions.  When the national economy contracted from 2007 to 2009, any chance that 200,000 jobs would be created in upstate New York disappeared.  And, it must be recognized that  as a junior senator in a body of 100 members, Senator Clinton’s influence on federal economic policy was very limited.

Policy claims about employment change in New York often center around the notion that New York’s high taxes have retarded the state’s growth.  These claims are rooted in historical experience.  Beginning in the 1960’s New York State began to see its manufacturing base erode, as textile manufacturers, appliance makers and others sought locations with lower labor costs and taxes, and easier regulatory policies.

But it is important to remember that even then, other factors influenced location decisions.  While some people and businesses moved south and west for lower living costs, quality of life was a factor as well, probably a more important one than tax costs.  People chose to locate in the sunbelt to avoid cold winters and snow, and to access new opportunities found in these areas. As the nation’s population grew in the South and West, New York and other rust belt states were no longer as competitive as locations to serve national markets as they had been.  Metropolitan areas in the rust belt stagnated as areas in the South and West grew.  Areas that were heavily dependent on manufacturing saw  the greatest losses.

The data shows that New York’s employment change over the past 25 years has been similar to that in other rust belt states.  The relatively small differences in performance at the state level do not show an association with state and local tax levels.  There were  large differences in relative job creation performance between metropolitan areas within states overall, and significant variations in the relative performance of metropolitan areas over relatively short time periods.

Both of these findings are inconsistent with the argument that state and local tax differences are a primary explanation of state economic performance, since state and local tax burdens within states do not significantly differ, and New York’s state and local tax burden relative to other rust belt states has not shifted significantly over time.  If tax levels were a significant factor influencing job growth, we would expect to find more consistent patterns of performance within states  and across time periods, and differences in job growth between states that would be consistent with differing tax burdens.  Instead, the data points to the fact that job creation in metropolitan areas depends mostly on their industry mix – the performance of the companies within the industries that make up their economies.

These findings reflect the fact that today, state and local tax costs are a very small percentage of total firm operating costs, and that differences between states are even smaller.  In earlier research, based on data from the Tax Foundation,  I found that state and local taxes amounted to less than 4% of business operating costs (less than 2% for manufacturing businesses), on average, and that differences between New York  taxes and  taxes in other states were less than 2% of operating costs. These relatively small differences pale compared with the large differences in labor costs between locations in the United States and in low wage countries.

One study, by Professor Peter Navarro, estimated that differences in labor costs between the United States and China could amount to 17% of the cost of production – more than ten times the impact of state and local taxes on manufacturing operating costs.  For manufacturers, the large differences in labor costs and the growth of global markets have led to the movement of manufacturing operations to locations outside the United States.

While New Yorkers might legitimately question whether the services they receive are good enough to justify paying state and local taxes that are 80% higher than the average for the nation, and substantially above the average for the rust belt, the data does not support the notion that high taxes have hurt employment levels in New York State.

________________________________________________________

Metropolitan areas included in rust belt comparison:  Illinois:  Champaign-Urbana, Chicago, Peoria, Rockford, Springfield; Indiana:  Elkhart, Evansville, Fort Wayne, Gary, Indianapolis; Massachusetts:  Boston, Springfield, Worcester; Michigan:  Ann Arbor, Detroit, Flint, Grand Rapids, Kalamazoo, Lansing; New York:  Albany-Schenectady-Troy, Binghamton, Buffalo-Niagara Falls, New York City, Rochester, Syracuse, Utica; Ohio:  Akron, Canton, Cincinnati, Cleveland, Columbus, Dayton, Toledo, Youngstown; Pennsylvania:  Allentown-Bethlehem-Easton, Erie, Harrisburg, Lancaster, Philadelphia, Pittsburgh, Reading, Scranton-Wilkes-Barre, York.

[1] “As senator, Clinton promised 200,000 jobs in Upstate New York. Her efforts fell flat.” Jerry Markon, Washington Post, August 7, 2016.

[2] Economic Policy Institute, “The Manufacturing Footprint and the Importance of U. S. Manufacturing Jobs,” Robert E. Scott.  January 22, 2015.  http://www.epi.org/publication/the-manufacturing-footprint-and-the-importance-of-u-s-manufacturing-jobs/

 




Syracuse’s Empty Film Hub

The New York Times carried an article, “Cuomo’s $15 Million High-Tech Film Studio? It’s a Flop,”[1] on August 22nd.  The article points out that the Central New York Hub for Emerging Nano Industries, owned by the Fort Schuyler Management Corporation (FSMC), a non-profit subsidiary of the SUNY Research Foundation, is largely vacant, and has housed only two as yet unreleased film projects creating several hundred temporary jobs.  Currently, the facility employs only two workers, according to the Times.

When the film studio was initially  announced, the press release claimed it would create at least 350 high technology jobs.  The release stated, the Hub “will specialize in providing advanced visual production research and education to support Upstate New York’s rapidly growing film and television industry…. The film industry of tomorrow is being born today in Central New York.”[2]

In an earlier post, concerning the Solar City solar panel factory now being constructed in Buffalo,[3] I pointed out that the economic development model employed by SUNY carried significant risks, and questionable benefits. Among the most significant problems with the Solar City project are:

  • The fact that the SUNY created Fort Schuyler Management Corporation retained ownership of the solar panel factory, and leased it to Solar City, instead of providing a grant to Solar City for construction of the facility.
  • Because a state created entity retains ownership, it carries the risk that if Solar City discontinues operations in Buffalo, FSMC would be stuck with a specialized facility that would have little market value, and significant costs associated with redevelopment.
  • The project also suffers from inflated job creation claims, and enforcement responsibilities for job creation requirements are unclear.
  • FSMC has never disclosed decision processes or benchmarks used in structuring the project.

The Absence of a Lead Organization and Local Partners

The Central New York Hub poses some of the same problems as the Solar City development, along with others.  First, although the release claimed that the Hub would be a research and education center for advanced film production, it never identified the entities that would do research and provide education there.  Instead, it identified a film production company that would do post-production work at the facility, and though that company produced a film there, the use of the site was associated with only one project that was undertaken in the area.  In essence, the Hub was real estate development, without a well-developed business plan to utilize it. Today, no film production is underway, and there is no employment at the site by tenants.

A Convoluted Economic Development Model

The Central New York Nano Hub employs an economic development model used by the SUNY Research Foundation and FSMC that involves developing, and in some cases equipping, facilities for the use of real or potential tenants.  Tenants lease the facilities, in some cases for virtually no cost, with the expectation that they will create jobs.  Because a non-profit (FSMC) that is the child of the State University develops the facility, a state related intermediary (Empire State Development) is required to impose and enforce contract requirements on FSMC, and to disburse money to it.  But, because of the convoluted funding and ownership structure, Empire State Development has no direct relationship with the entities expected to create and retain jobs, complicating enforcement of any job requirements associated with the projects.

In contrast, in the past, economic development entities at the State and local levels provide funding subsidies to entities creating and retaining jobs themselves – manufacturers and service companies – not real estate developers.  Because of this direct relationship, enforcement of job requirements, by withholding or recapturing subsidies, is relatively simple.

The development of the Central New York Nano Hub was speculative.  As a result, the SUNY related entity FSMC has created a white elephant – a facility with no real likelihood that it will be used as intended.  Consequently, at this point there is no real expectation of job creation, let alone enforcement of job creation requirements.

A Project without an Economic Development Strategy

Because the Syracuse Hub did not build on the strengths of existing area institutions, such as Syracuse University, or local businesses with expertise in the field, it lacked the essential organizational capital needed to succeed.  This is in sharp contrast to the state supported development of nanotechnology and semiconductor manufacturing in the Albany area, which had strong leadership from Dr. Alan Kaloyeros at SUNY Albany, and relationships with significant technology leaders, including IBM and AMD, as well as semiconductor equipment manufacturers.

The Governor established a process of regional competitions for economic development funding that required the development or regional strategic plans.  The Central New York Regional Economic Development Council developed such a plan, “Central New York Regional Economic Development Council: Five Year Strategic Plan: 2012 – 2016,[4] and has updated it yearly.  The plan identifies the region’s economic characteristics, and develops a strategy to build on area strengths, and remedy weaknesses.  But the development of the Syracuse Nano Hub was done without reference to the plan or the area’s capacity to support film production research, education, or related businesses.  In effect, the project was dropped on the region by the State University, without involvement of local partners.

Implications

Without a disciplined approach to spending state dollars for economic development or for other purposes, taxpayer dollars are likely to be wasted.  Because SUNY, through the Fuller Road Management Corporation, has declined to provide information about how it makes funding decisions, or justification for acting as project developer and facility owner, taxpayers cannot be assured that their money is being used wisely. Because the Central New York Nano Hub was developed without regard to existing regional economic development strategies, it did not build on regional strengths or remedy weaknesses. And, because the project was developed without local organizational commitments and partners, it had no real chance of succeeding.

In the end, the State, through SUNY or Empire State Development, might find a tenant outside the film industry to create jobs in the region by providing additional financial incentives.  But if it does, the Hub will be a government funded facility, paid for by taxpayers, competing with locations developed by area private sector developers.

 

[1] http://www.nytimes.com/2016/08/23/nyregion/in-cuomos-film-hub-vacant-studios-lawsuits-and-little-action.html?hp&action=click&pgtype=Homepage&clickSource=story-heading&module=second-column-region&region=top-news&WT.nav=top-news&_r=0

[2] https://www.governor.ny.gov/news/governor-cuomo-announces-start-construction-new-central-new-york-film-hub

[3] http://policybynumbers.com/solar-city-the-risk-embedded-in-buffalos-billion

[4] http://regionalcouncils.ny.gov/themes/nyopenrc/rc-files/centralny/final%20CNY%20REDC%20plan%20single%20pages.pdf

 




Rex Smith’s Albany Times-Union Column, “Development Dollars Draw on Politics”

The Albany Times-Union carried a column by its Editor, Rex Smith on August 6th, concerning decision making by NewYork’s Regional Economic Development Councils, questioning whether their efforts are directed at areas of the state with greatest need.  His column may be found here.  The column draws on research that I recently published on this site.  It may be found here:

I have also written about Empire State Development’s use of tax incentives here: and about the Solar City project here:




New York’s Ineffective Business Tax Incentives

In 1987, New York State enacted legislation to create an Economic Development Zones Program, modelled after the enterprise zones concept, championed by Congressman Jack Kemp.  Proponents argued that by reducing taxes in specific geographic areas with high concentrations of poverty and unemployment, existing firms would be more likely to create jobs, and other firms would be encouraged to locate in the areas and create jobs.

Enterprise Zones programs were attractive to policy makers, in part because they were “off budget.”  The programs provided financial benefits to companies that, unlike incentive grants, did not require the appropriation of state budget dollars to pay for them.

There is scant evidence that Enterprise Zones programs have been effective.  See, for example, this GAO report,[1]  which concluded that evaluations of Federal Empowerment Zones and Enterprise Communities could not demonstrate effectiveness, and this study,[2] which was did not show any impact as a result of Enterprise Zones programs in Florida and California.  Evaluations of the New York State program found significant administrative problems, but did not find significant benefits.[3]  The major problem with the Enterprise Zones concept was that because the tax advantages provided by the program were insufficient to offset the perceived disadvantages of inner city locations, the program did not result in job creation within the zones.

The program generated a cottage industry of consultants who advised businesses on how to take advantage of the benefits, by reorganizing in to new organizations so that existing jobs could be counted as new ones and by modifying zone boundaries, creating gerrymanders, to incorporate specific businesses.

But, over the years, the program was expanded and the benefits deepened.  It was renamed the Empire Zones program.  More areas were made eligible, yet the areas that the program was initially intended to benefit – distressed inner city communities in New York State – did not see improved conditions.  In fact, 20 years after the program’s enactment, they were in significantly worse economic condition.  In 1969, upstate cities had poverty rates that were slightly higher than the average for the state.  By 2013, most upstate cities had poverty rates that were more than double the state’s.

poverty cities

(Data for cities with populations of less than 100,000 is not available before 1999)

In the end, Economic Development Zones/Empire Zones became an embarrassment to successive governors and Empire State Development because of the difficulties in policing the abuses of the overly complex program, and its lack of success in inducing job creation.  Successive legislative efforts to “clean the program up” were met with continued creative approaches to exploit it by businesses.  The program was ended in 2010.

Despite the failure of the tax benefits contained in the Economic Development Zones and Empire Zones programs to induce job creation, and despite the administrative difficulties associated with administering the programs, Governors Paterson and Cuomo continued to rely on tax incentives as key elements of their economic development efforts.  Governor Paterson initiated the “Excelsior Jobs” tax credit that focuses on providing benefits to companies in industries that make capital investments and/or create new jobs in manufacturing and other sectors of the economy.  Governor Cuomo proposed the Start-Up NY program that offered tax-free benefits to certain businesses in selected locations connected to universities and colleges.  Both programs were promoted as major initiatives that would significantly improve New York’s economy.  But like the Enterprise/Economic Development/Empire Zones, the programs have failed to create significant numbers of jobs.  And, the job creation figures reported for them contain many jobs that would likely have been created without the loss of tax revenues.

Problems with Business Tax Incentives

Business tax incentives are similar to incentives provided to buyers of electric cars or insulation for their homes, in that people or companies become eligible by doing something that government considers desirable – conserving energy or creating jobs. But, they contain no “but for” test – users of the credits are not required to show that without the credits they would not do what is being incentivized.  As a result, some credits are always wasted on “free riders” — people or companies that would have acted if the credit was not available.

The use of tax policy to incentivize behavior is widespread, and if large enough, credible arguments can be made for their effectiveness.  For example, the available federal tax credit for the purchase of a Nissan Leaf, an electric car, is $7,500.  The advertised price of a Leaf begins at about $30,000.  Similarly, federal credits for energy conserving improvements in households have been as much as a quarter of the cost.  While we do not know how many of the people who purchased Nissan Leafs or weatherized their homes did so because of the availability of financial incentives from government, it is likely that some did.

But, while energy conservation incentives have been designed to be large enough to change people’s purchase decisions, state taxes are too small as components of business revenues to make a significant difference in most cases, particularly given the large differences in wage rates, which are a larger portion of business costs, between the United States and competitive locations.

The Tax Foundation published[4] a comparative analysis of total state and local tax costs for representative businesses in seven industries, including manufacturing, distribution, corporate headquarters, research and development, call centers, and retail.  From their data, I calculated total state and local tax costs as a percentage of firm operating costs, and compared New York with national medians, and with nearby states.[5]  The data shows that state and local tax costs are a very small percentage of total firm operating costs, and that differences between states are even smaller.

NYS VS MEDIAN

New York State had higher total state and local tax costs than the national median for most types of businesses, but the differences ranged from 0.7% more for call centers, to 1.8% more for research and development facilities.  For manufacturers, New York’s total tax costs were lower than the national median, but again the difference between state and local tax costs for manufacturers in New York State and for manufacturers in other states was less than 1% of operating costs.

comparable states

Compared to neighboring states, the picture was similar.  New York state and local tax costs were higher for some businesses, but lower for others.  But, in most cases, variations in other factors in the cost of production could be large enough to significantly change the relative advantage of differing locations.

In many cases, state taxes are too small a component of business revenues to make a significant difference in comparative location costs.  Fifty years ago, American businesses competed with businesses in other locations in the United States.  Differences in wages, construction and transportation costs were relatively small.   Today, with globalization, for manufacturers and other businesses that can move operations offshore, the large difference in wage costs between any state in the United States and in low wage locations outside the United States would swamp differences in company operating costs resulting from differences in state and local taxes.

While manufacturing cost structures vary widely,[6] on average, labor is estimated to account for 21% of manufacturing costs.[7]  In an article examining China’s manufacturing cost advantage, Peter Navarro, Professor of Economics at the University of California, Irvine, estimates that the cost of labor in China, adjusted for productivity differences, is 18% of that in the United States.  As a result, Navarro estimates that manufacturers would save 17% of manufacturing costs by producing in China, compared to the United States.

Business locations are not based solely on cost factors – labor availability, site quality, transportation, quality of life and other factors come into play.  But, available evidence shows that differences in state and local tax levels are relatively small factors in business costs, and that adjusting state tax structures to reduce business tax burdens has limited impact.

Repeating Failed Policies:  The Excelsior Jobs Program

When the Excelsior Jobs program was created in 2010, Governor David Paterson said “I’m pleased that the Excelsior Jobs Program, a streamlined economic development effort that will support significant potential for private sector economic growth, is now available in the marketplace to encourage businesses to grow and invest in New York.[8]

Eligible industries are those that could create net new jobs in New York State, not those, like most retail jobs, that simply move jobs from one company in New York State to another in the State.  The program description states, “The Program is limited to firms making a substantial commitment to growth – either in employment or through investing significant capital in a New York facility…The Job Growth Track comprises 75% of the Program and includes all firms in targeted industries creating new jobs in New York.”  While the program requires a commitment to job growth and/or investment, it does not limit program benefits to firms that would not expand or locate in New York State without the assistance.

The program requires that participants receving credits for job creation or investment have a positive benefit/cost ratio, defined as “total investment, wages and benefits divided by the value of the tax credits, or 10 to 1 or greater.  The program provides a refundable credit equal to 6.85% of new employee wages, or two percent of qualified capital investment, or 50% of the Federal Research and Development Credit.  Various employment and investment thresholds along with an aggregate benefit cap limit eligibility.[9]  Aggregate benefits were initially limited to $250 million annually.

Though the program had a generous dollar allotment for credits, credits actually issued never came near the $250-million-dollar annual limit.  In its best year, it provided $18.4 million in credits. Activity decreased to $745,000 in 2015.  The program has had a small job creation impact.  Empire State Development reports that companies receiving credits during that time period created 15,582 net new jobs, at a cost to the state of $47,357,602. The program’s impact has decreased in each of the last two years, with only 531 jobs credited as being created by companies receiving the tax credit in 2015.[10]

excelsior

Because the program does not have a “but for” requirement, ESD’s job figures certainly overstate the program’s true job impact.  While the exact percentage of “free rider” jobs is not known, one study estimated that nine of ten jobs created by companies receiving business tax incentives would be created without them.[11]  If that is true for the Excelsior Jobs program, the true program impact would be only about 1,500 jobs,  three tenths of one percent of New York’s private sector employment growth during the period.

Additionally, a recently issued audit from the State Comptroller’s office points to issues with ESD’s administration of the Excelsior Jobs Program.  The describes weaknesses in ESD’s processes in evaluating applications in in confirming job creation claims (note that the agency disputes a number of the audit’s findings.)[12]  In particular, the audit noted that “ESD generally authorizes tax credits based on the job numbers and investment costs that businesses self-report without corroborating support….[13]

Why has the program failed to have a significant impact?  The evidence points to the fact that because much of its emphasis is on manufacturers and other companies that could locate outside the United States, it does not offer benefits that are sufficiently large to offset the cost disadvantages of creating jobs in New York State, or anywhere else in the United States.[14]

Repeating Failed Policies:  Start-Up NY

In announcing the Start-Up NY program, Governor Cuomo said, “Upstate New York has seen too many years of decline, and our communities have lost too many of their young people,… We desperately need to jumpstart the Upstate economy and these new tax-free communities will give New York an edge like we’ve never had before when it comes to attracting businesses, start-ups, and new investment. Today’s agreement on the START-UP NY legislation is a major victory for our Upstate communities as we are now set to launch what will be one of the most ambitious economic development programs our state has seen in decades.”[15]

 The promotional materials for the program advertise tax free benefits, and give the impression that the program is relatively easy to access:

“START-UP NY offers new and expanding businesses the opportunity to operate tax-free for 10 years on or near eligible university or college campuses in New York State.

 Partnering with these schools gives businesses direct access to advanced research laboratories, development resources and experts in key industries. 

To participate in START-UP NY, your company must meet the following requirements:

  • Be a new business in New York State, or an existing New York business relocating to or expanding within the state
  • Partner with a New York State college or university
  • Create new jobs and contribute to the economic development of the local community”[16]

The State Comptroller found[17] that between October 2013 and October 2014, ESD committed $45.1 million to advertise the program, generating more than 15,000 applications during the period.  However, despite the heavy advertising for the program, which continued after the period examined in the Comptroller’s report, the program has had almost no job creation impact.

Empire State Development has issued two reports on the program’s progress.  In 2014, companies assisted by the program created 76 jobs, while in 2015, assisted companies created 332 jobs.  The state tax benefits provided per job through the program were even smaller than those offered by the Excelsior Jobs Program, averaging $1,121 per job created (not including local property tax exemptions).[18]  And, because Start-Up NY has no requirement limiting assistance to companies that would not create jobs in New York without the tax credits offered, it is likely that the jobs reported substantially overstates the program’s actual impact on job creation.

starupny

The reality is that Start-up NY is extremely complex, the value of benefits to participating companies is small, the program is available in very small areas, and its requirements are difficult to meet.  One economic development professional described it as “the worst program I ever saw.  I was glad I never had to explain it to a client.”[19]

Effective Approaches to Job Creation and Retention

 The tax incentive based approaches used by the State in its Empire Zones, Excelsior Jobs, and Start-Up NY programs have not met the claims made by the governors that championed them.  But, other economic development efforts of state and local governments have been shown to be effective.  Among them are:

  • Regional Economic Development Councils: Regional councils are required to create strategic plans, set clear goals, and disclose progress in meeting established goals as a condition to receive funding for proposed projects.  While Regional Council strategies and reports vary in quality, some are well grounded and provide good disclosures of project performance.[20]
  • Project Based Assistance: Assistance from the State and localities for plant and equipment capital costs and for customized job training that employs a “but for” test can be effective in inducing companies to create and retain jobs because the amount of assistance offered may be large enough in relation to project size to affect company decisions.  ESD, for example, uses “but for” tests in making grants, employs benefit/cost benchmarks, and monitors company performance in meeting performance goals.
  • Develop Long Term, Well Integrated Industry Development Strategies: For example, New York, through Empire State Development and other agencies, provided substantial assistance to the development of nanotechnology research and development capacity at the College of Nanoscale Science and Engineering, and with local partners, significant financial assistance to the development of the Global Foundries chip-fab facility.  In Buffalo, the State has assisted in the region’s effort to enhance its bioinformatics and life sciences concentration at Roswell Park and related institutions.  Efforts like these take an integrated approach to industry development.
  • Recognize that Retaining Existing Jobs Should be as High a Priority as Job Creation: Because decisions of existing businesses about expansion, contraction or closing can have large effects on a state’s economy, state and local economic development agencies need to focus on understanding the needs of local business and assisting them, where appropriate.
  • Support Entrepreneurship: Evidence shows that entrepreneurial training programs increase business startups.[21]  New York has an existing program, the Entrepreneurial Assistance Program, that focuses on minorities, women, dislocated workers, public assistance recipients, disabled persons and public housing residents.  While the focus on disadvantaged workers is commendable, broader availability could increase the program’s reach.

New York State’s Economic Condition

 There has been longstanding concern about the impact of the decline of manufacturing, particularly in upstate New York.  The region’s population growth has been very slow, while its central cities have seen significant population declines.  Compared to thirty years ago, the residents of upstate central cities are far more likely to live in poverty.  These are all significant concerns.  But, even upstate, the region’s overall economic health is as good as, or better than the average for nearby states.[22]

realgdppc

Each of the Metropolitan areas in New York State, including those in upstate New York had greater growth in real gross domestic product per resident than the average for metropolitan areas in nearby states.  But, the growth of poverty in New York metropolitan areas was below the average for nearby metropolitan areas.

poverty

Private sector wage growth in New York State presented a more mixed picture – Buffalo, Albany, and New York City did better than regional average, while Syracuse and Rochester did worse.

wage

Conclusion

While the economic condition of metropolitan areas in New York State, including those in upstate New York, improved relative to nearby areas, in most cases, some places in the state are in very poor economic condition.  Upstate cities continue to lose population and have increasingly great concentrations of low income populations.  Upstate downtowns have large amounts of vacant commercial space, and upstate cities suffer from blighted, abandoned housing.  Minority group residents of upstate cities have average household incomes that are about one third of white suburban residents.

If the lives of residents of central cities are to be improved, New York must address the factors that create concentrations of economically disadvantaged people.  These include:

  • Schools with high concentrations of economically disadvantaged children. Evidence demonstrates that children from disadvantaged families perform substantially better in schools that have higher percentages of students who are not disadvantaged:  http://policybynumbers.com/why-critics-of-upstate-city-school-performance-miss-the-largest-cause
  • Single parent families face significant obstacles to success, that also damage the prospects for their children: http://policybynumbers.com/category/single-parent-families.
  • Racial segregation is highly related to poverty and poor student performance. http://policybynumbers.com/income-student-achievement.
  • Cities have high concentrations of low income residents living in blighted neighborhoods, because most cannot afford to live in better quality housing. More housing vouchers, additional income supplementation, particularly for part-time workers, and increased job accessibility for low skilled workers would help central city residents find better places to live.
  • Cities need help in tearing down vacant housing, cleaning up and reclaiming vacant industrial sites and rehabilitating blighted neighborhoods.

But, the focus of highly publicized and expensively marketed economic development initiatives in New York State has been on ineffective programs that have led to negligible job creation.  By all accounts they have not succeeded in “supporting significant potential for private sector economic growth” nor do they “give New York an edge, like we’ve never had before.”  While many existing economic development efforts at the state and local level produce tangible results, few of them focus on the places in New York State that have done the worst, from an economic perspective. Given the growing bifurcation of the economic conditions of city and suburban residents, more attention should be given to them.

[1] http://www.gao.gov/products/GAO-10-464R,

[2] http://edq.sagepub.com/content/23/1/44.short

[3] Findings of many of these studies are summarized here:  http://www.cbcny.org/sites/default/files/report_ez_12012009.pdf

[4] http://taxfoundation.org/sites/default/files/docs/location%20matters_0.pdf

[5] The Tax Foundation calculated state and local tax costs as a percentage of net profits.  But since companies seek to minimize overall costs, I compared taxes to total costs. (operating expenses, interest, taxes and preferred stock dividends, but not common stock dividends).

[6] Depending on the capital or labor intensiveness of a manufacturing process, the productivity of labor and labor demand and supply factors.

[7] Peter Navarro, “The Economics of the China Price,” https://chinaperspectives.revues.org/3063, p. 3.

[8] “Governor Paterson Announces Excelsior Jobs Program Launch”  http://readme.readmedia.com/Governor-Paterson-Announces-Excelsior-Jobs-Program-Launch/1717095

[9] https://www.tax.ny.gov/pit/credits/excelsior.htm

[10] http://esd.ny.gov/reports.html

[11] http://www.upjohn.org/publications/upjohn-institute-press/state-enterprise-zone-programs-have-they-worked

[12] http://www.osc.state.ny.us/audits/allaudits/093016/15s15.pdf

[13] Ibid., p. 7.

[14] Manufacturing firms continue to operate in New York and the United States because of other kinds of location advantages, such as labor productivity, the need to be close to markets, or insensitivity to production costs.

[15] https://www.governor.ny.gov/news/governor-cuomo-and-legislative-leaders-announce-agreement-start-ny-legislation-will-implement

[16] http://startup.ny.gov

[17] “Marketing Service Performance Monitoring” Audit 2014-S-10. http://osc.state.ny.us/audits/allaudits/093015/14s10.pdf

[18] The small benefits provided by the program may reflect the fact that many of the firms participating in the program are start-ups, and have little taxable income.

[19] Communication with this writer.

[20] See for example:  http://regionalcouncils.ny.gov/themes/nyopenrc/rc-files/centralny/final%20CNY%20REDC%20plan%20single%20pages.pdf

[21] Benus, J. M., Wood, M. and Glover, N. “A Comparative Analysis of the Washington and Massachusetts UI Self-Employment Demonstrations,” Report prepared for the U. S. Department of Labor by Abt Associates.

[22] Source for this and following tables: U. S. Cluster Mapping Project. http://www.clustermapping.us/region/economic/syracuse_auburn_ny

 




SolarCity: The Risk Embedded in Buffalo’s Billion

.pdf version here:

Note: This post is also published on The Empire Center website.

The decision by the nation’s largest solar panel provider to locate a state-of-the-art manufacturing plant in Buffalo, and to create other jobs in Western New York, could be a needed shot in the arm for a city and a region that’s been declining economically for many years. But there are significant risks and unanswered questions associated with the state government’s willingness to commit the bulk of its “Buffalo Billion” resources to the massive SolarCity factory on the site of the former RiverBend steel plant.

A review of key documents for the project reveals the following:

  • State taxpayers will be exposed to an unusually high degree of risk by the unprecedented structure of the SolarCity deal, under which Fort Schuyler Management Corp., a non-profit subsidiary of the State University’s College of Nanoscale Science and Engineering, is building the factory for the company, and will retain ownership. SolarCity’s up-front capital investment in the project is thus limited, weakening its incentive to remain in Buffalo after its dollar-a-year lease of the building expires in 10 years.
  • The project’s net employment impact has been greatly overstated. Some of the promised 5,000 new jobs to be generated in New York by the SolarCity project will be sales and installation positions that would be created in the state even if the same factory was successfully constructed and operated anywhere else in the world, while others will be jobs at other companies that are not parties to the jobs agreement between SolarCity and FSMC.
  • The relationship between CNSE/FSMC and Empire State Development leaves a number of open questions around the job requirements associated with the project and the responsibility for ensuring that job creation promises will be met.
  • Although FSMC is a state-created entity, controlled by the State University and CNSE, it lacks fundamental mechanisms to ensure transparency and public accountability, including publicly disclosed decision processes, criteria, and analyses of project fiscal and economic benefits and costs.

SolarCity is one of three high-tech companies ultimately controlled by Elon Musk, the visionary entrepreneur who also founded Tesla, a maker of high-performance electric cars, and SpaceX, which makes rockets and spacecraft.

After a series of financial maneuvers designed to improve SolarCity’s financial condition, Musk recent announced that Tesla would acquire the solar panel company. It remains to be seen how or whether the Tesla-SolarCity merger will ultimately affect the Buffalo project.

The Use of Business Location Incentives

The use of financial incentives by governments to attract businesses has long been controversial.

From a critical perspective, incentives can be seen as inefficient and prone to favoritism, because they offer benefits to particular firms chosen by a government agency. Incentives are inherently unfair to competitors who do not receive them. The existence of economic development incentives encourages businesses to game the system by claiming that, without government assistance, they might not locate within a state or expand or otherwise upgrade operations. And by offering targeted incentives to selected companies, governments avoid changes in tax policy that would be more costly, politically as well as fiscally.

From the perspective of elected officials, incentives are often viewed as a necessary evil. By offering incentives to particular businesses that promise to create or retain jobs, the state can avoid giving expensive tax breaks to all businesses. The discretionary nature of such programs reduces the overall cost of business retention and attraction compared to a universally available tax break. And, because most states (and localities) use some form of incentive as an attraction and retention tool, no one dares unilaterally disarm.

However, public money should not ultimately supplant private investment. The purpose of economic development agencies is to encourage private sector businesses to invest their own resources to create or retain jobs. These agencies do so by providing financial assistance for capital projects and worker training. In determining whether to provide assistance, and how much to offer, these agencies must assess how much assistance is necessary, the return on public investment that would result, and the risk that promised outcomes will not be achieved. As public agencies, they must operate in a relatively transparent fashion, providing public information about project assistance, benefits and costs, and company compliance with investment and job commitments.

The largest incentive package in New York’s history—packaged a decade ago by Empire State Development[i] for the AMD/GlobalFoundries semiconductor chip fab in Malta—was consistent with these guidelines. It involved State grants totaling $650 million (and more in potential tax breaks) to create a promised 1,200 jobs.

To be sure, the state’s subsidy of the GlobalFoundries plant was criticized in some quarters as “corporate welfare” and an unprecedented “giveaway.” However, the company’s initial investment of $1.7 billion was much larger than the state government’s.[ii] In seeking to become the site of a planned new chip fab plant—of which there are only a handful in the world—New York faced competition from the State of Saxony in Germany, where the company had an existing facility, and which had made an equally large offer.

The GlobalFoundries plant was paid for and equipped by the company itself, with the state providing a grant equivalent to 27% of the total cost. Ten years later, the plant has been expanded to directly employ 3,600 people, with a total investment for building and equipment of $6.9 billion.[iii]

A Nice Deal if You Can Get It

Governor Andrew Cuomo has favored a new model of economic development financing while championing a number of high-profile, high-technology projects, managed by the State University of New York’s College of Nanoscale Science and Engineering (CNSE) through a non-profit subsidiary, Fort Schuyler Management Corporation (FSMC). The state sends money through the Empire State Development Corporation to FSMC, which builds manufacturing facilities at no capital cost to the companies that will use them.

Fort Schuyler Management Corporation is one of several private non-profit organizations created to facilitate SUNY’s mission. FSMC, for example, was created by the SUNY Research Foundation and the Institute of Technology Foundation at Utica/Rome, Inc (ITSC). Although FSMC and ITSC are private, 501(c)3 corporations, not public entities, each has a Board of Directors whose members largely come from the ranks of SUNY administrators.

The largest of the technology projects—SolarCity, a solar panel manufacturer—like other CNSE/FSMC developments, is financed in a completely different way than earlier business attractions in New York state.[iv] The CNSE/SUNY-related 501(c)3 non-profit is building and equipping the solar panel factory at a total cost to the state of $959 million, including $200 million for environmental remediation of the former steel plant site on which the factory is being built. Fort Schuyler will continue to own the facility once it is completed.

The SolarCity project originally promised 1,450 jobs at the manufacturing facility. In late 2015, however, the commitment was reduced by almost two-thirds to 500 jobs, which must be maintained for five years after creation. Specifically, SolarCity promises[v] to “employ and hire as [SolarCity] employees, personnel for a minimum of 1,460 jobs headquartered in the City of Buffalo, New York, with…500 of such jobs for the manufacturing operation at the manufacturing facility over the initial two (2) years of the collaboration commencing on the Manufacturing Facility Completion date…[SolarCity] commits to the retention of these jobs for a period of no less than five (5) years.”[vi]

In addition, the company promises, “in addition to the 1,460 jobs [above], to employ for a minimum of 2,000 jobs over the five years of the collaboration following manufacturing completion to be located in New York State. [SolarCity] commits to the retention of these jobs for a period of no less than five (5) years.”

Finally, SolarCity promises to employ 5,000 people in total in New York state (which may include sales and installation support jobs) by the 10th anniversary of the factory completion date.

As long as SolarCity meets the agreed-upon job requirements, it has access to a fully equipped facility, totally free of capital costs. (It is also eligible for significant tax breaks)[vii]. As a result, no private capital dollars towards the cost of the facility and its equipment are leveraged by the state’s contribution of more than $900 million in public dollars. In effect, they are a gift to SolarCity from the people of the State of New York, for a lease cost of $1 per year.

Here is the language of the Memorandum of Agreement[viii] (MOA) governing the project:

[Fort Schuyler Management Corporation] is responsible at its cost to achieve manufacturing facility completion, including to acquire all manufacturing equipment and to provide for all manufacturing equipment to be delivered to the manufacturing facility. Once manufacturing facility completion has been achieved, including all manufacturing equipment has been acquired and delivered to the manufacturing facility, [SolarCity] is responsible at its cost to achieve manufacturing equipment commissioning and full production output, provided however, that the cost of manufacturing equipment commissioning shall be funded by [Fort Schuyler Management Corporation].

[SolarCity] shall lease the manufacturing facility and manufacturing equipment for the manufacturing equipment from [Fort Schuyler Management Corporation] for a period of ten years for the sole consideration of one dollar $1.00 US per year….

To understand the value of this gift, recognize that for SolarCity to undertake the project itself, it would have two alternatives. It could go to the credit market and attempt to sell bonds, perhaps at junk bond interest rates, given the young company’s limited track record. Or, it could sell part of itself, by issuing additional stock. Either approach would result in existing owners holding a smaller portion of the company.

Because SolarCity has access to free capital from New York State to construct and equip the manufacturing facility that it will operate, the financial risk to the company’s operations is greatly reduced. As long as it meets the contractual employment target for ten years, it need not worry about paying substantial fixed costs.

Through Fort Schuyler, New York State will face significant risks, however. And unlike the company’s shareholders, FSMC and New York State will not receive a direct financial benefit from any profits that SolarCity generates.

Shifting Risk to New York State

The first risk that New York faces is that the company will be unable to meet its employment objectives or fail outright, despite the state’s huge investment. The SolarCity MOA contains a rigid set of job creation and retention requirements for a ten-year period that will be difficult to enforce.

The MOA’s recapture requirements provide that in any year that the company fails to meet its employment mandate, it must pay a penalty of $41.2 million. Because of the long 10-year term of the job creation and maintenance requirements, it is quite likely that a significant recession could occur during the contract period. But because the job maintenance requirements do not include any tolerance for such an event, there is a significant likelihood that the company will be in default at some point during that period.

A 30 percent federal tax credit for residential solar installations is scheduled to begin ramping down after 2019, hitting 22 percent before expiring after 2021. But even assuming that credit is extended, SolarCity plant’s output is likely to be highly cyclical. During recessions, consumers tend to postpone discretionary spending, including home improvements such as solar panel installations. Imposing the required penalty at a time when the company is faced with reduced revenues because of a recession may weaken the company’s financial position to a significant degree, creating pressure on FSMC to renegotiate the agreement to reduce employment targets. Or, if the employment penalties are imposed, the company’s long-term health may be weakened.

Similarly, since SolarCity operates in a competitive environment, it may find it to be difficult to maintain its market position over a full 10 years—a relatively long period, particularly for firms operating in environments where technology is rapidly evolving. For those reasons, economic development agencies typically offer smaller amounts of financial assistance to companies and impose contractual job requirements for shorter time periods—in many cases five years. Even with these shorter job commitments, contract enforcement policies often provide some leeway for adverse events affecting assisted companies.

It should be noted that SolarCity’s operating position has not been robust. The company has lost more than $50 million in each of the last four years and, as of late June, was is in the process of awaiting a cash transfusion in the form of a proposed acquisition by Tesla Motors, another company founded by Elon Musk. While net losses are not uncommon in emerging technology companies bringing new products to market, the nature of these ventures is inherently riskier than that of more established operations.

The contract also contains provisions providing for recapture if the company totally ceases operations, as in the event of bankruptcy. But if that occurs, Fort Schuyler will be one among a large group of creditors, none of whom is likely to be made whole.

Proponents of the approach used to finance SolarCity might argue that state ownership of the facility provides a significant advantage to state taxpayers. But in fact, public financing and ownership of the entire facility create a significant liability for the Fort Schuyler Management Corporation and potentially to New York taxpayers.

Assume, for example, SolarCity meets all of its commitments, occupying and operating the new plant for 10 years—but, in year 11, the company decides it would be more profitable to make the solar panels in China. Having met its commitment to New York, the company can walk away from the facility, having risked no capital of its own to build and equip it. Because SolarCity has no capital investment at stake, leaving it would not affect the company’s balance sheet in a negative way. Nor would it face the task of disposing of the property, or of paying the cost of remediating any new environmental impacts.

Under this scenario, Fort Schuyler would be stuck with a facility that was designed and equipped for a specific purpose, for which it would be unlikely to find a tenant. Like the many abandoned industrial sites in Western New York, it would require demolition and potentially an environmental cleanup, the cost of which could be borne by New York taxpayers.

Changing and Inflated Job Commitments

The language of the MOA makes clear that 2,000 of the required jobs in the first five years are not manufacturing related, but are instead in part “to support downstream solar panel sales and installation activities within New York State.” In other words, SolarCity can count these salespeople and solar panel installers towards its promise to locate 3,400 jobs in New York within five years of completing the new factory. But salespeople and solar panel installers are not moveable employees—they must be located near the markets that they serve. If SolarCity built the same plant in Pennsylvania, it wouldn’t employ fewer installers or salespeople in New York.

Similarly, the agreement with SolarCity specifies that the company must commit to employ 5,000 people total in New York state by the 10th anniversary of the factory completion date. But, in addition to the sales and installation support jobs that are included in the first-five year requirements, the agreement allows support jobs at SolarCity contractors and suppliers to be counted toward meeting the contract requirements (Section 4.4 (c) of the Agreement).[ix] And the agreement makes the SUNY Research Foundation along with SolarCity responsible for attracting and retaining the jobs. As a result, many of the 5,000 jobs that SolarCity commits to at the end of 10 years may neither be at the facility that New York State ultimately is paying for, or at the company that it is assisting.

There are justifications for states to offer economic incentives to companies to encourage them to locate employees in a state that they might not otherwise choose, but there is no real justification for giving incentive dollars to companies for employees whose locations depend on where their customers live. Nor should incentive deals count employment gains at companies not contracted by a state-related entity to create or retain jobs.

But given the shrinking job numbers at the solar panel facility, perhaps it is not surprising that SolarCity and CNSE/FSMC were anxious to find ways to make the impact of the project appear to be larger, including jobs that would not necessarily be located in New York state, and jobs at other companies in New York that contract with and supply the company.

What is the Real Value of the Project and Who Will Enforce Employment Requirements?

 One of the more curious aspects of the SolarCity project and others managed by FSMC, including a light-emitting diode manufacturing facility in the Utica area, is the funding mechanism and the assignment of compliance responsibilities.

Empire State Development’s board package for April 21, 2016[x] for SolarCity includes a cost-benefit analysis for the project. ESD’s analyses are rigorous, and are based on a widely used economic model. The published result was surprising: an economic return of 54 cents for each dollar invested in the project. In other words, for every two dollars invested in the project, the state is expected to lose one dollar. There is an explanation for this, however, because the analysis published by ESD includes only the impact of construction-related activity, not the ongoing employment at the facility.

It appears that ESD’s analysis did not include the impact of ongoing employment because ESD’s contractual relationship is with Fort Schuyler Management Corporation, not SolarCity. Since ESD has no relationship with SolarCity, it is not a party to job commitments or enforcement of them.

To date, FSMC has published[xi] few relevant documents on its website. Since FSMC is a private, non-profit corporation, it initially claimed not to be subject to the public meetings and freedom of information requirements that state entities must meet.[xii] FSMC does not publish cost-benefit analyses of its projects, so we have no idea if the project will generate a positive economic return to the state if it is executed as the contracts specify over 10 years.

But, it turns out that the Memorandum of Agreement on Fort Schuyler’s website provides that “Once the process is complete, ESDC’s role evolves into acting as compliance agent on behalf of the State of New York, with all expenditures being submitted as invoices to ESDC…. Furthermore, ESDC requires quarterly or yearly reports on employment and investment targets as outlined in the GDA, and reserves the right to withhold funding if targets are not met on a pre-determined schedule.”

So ESD is responsible for contract compliance between CNSE/FSMC and SolarCity, even though ESD not a signatory to the Agreement. This is necessary because, as noted, FSMC is a separate, private entity that owns the facility and equipment that will be leased to SolarCity. Though the contractual jobs commitment is between Fort Schuyler and SolarCity, FSMC would have a perceived conflict of interest if enforcing the contract’s job-creation provisions affected the company’s ability to meet other contractual commitments with Fort Schuyler.

ESD’s board ultimately is providing state funding for the plant. The directors’ materials for the SolarCity project, dated April 21, 2016, include this statement: “Although there is no job creation or retention requirement for this project, this effort is expected to create more than 5,000 jobs …”.[xiii] In a separate reference to the project, page 10 of the same ESD board materials states: “There is no recapture based on the created jobs.” Thus, at this point, ESD’s board actions do not reflect the terms of the agreement between SolarCity and CNSE/FSMC.

The fact that a state-related entity owns SolarCity’s manufacturing facility and its equipment complicates the enforcement of job requirements. The language contained in ESD’s latest board action suggests that unresolved issues exist regarding the means by which job-related contract enforcement will be implemented.

In the same regard, the contract between Fort Schuyler and SolarCity does not make clear which entity, the public Empire State Development Corp. or the private non-profit FSMC would receive and retain any repayments made in the event of the failure of SolarCity to meet contractual requirements. Repayment provisions in earlier contracts by Empire State Development, such as that with AMD/GlobalFoundries, provided that repaid money would be returned to a state entity.

Undiversified Risk for Western New York and New York Taxpayers

The commitment of three-quarters of a billion dollars of state money to a factory and equipment for SolarCity, and an additional $200 million for cleanup of the former steel factory site on which it is located, is being done in pursuit of a worthy goal. The Western New York economy, and that of Buffalo, in particular, continues to be among the weakest in New York state. For that reason, the decision to put a particular focus on the area’s needs is sensible.

But, the approach taken raises risks and questions in several ways:

  • First, by committing a huge portion of “the Buffalo Billion” to one project, there is a great risk that most of the dollars available to help the region’s economy will go to waste.
  • Second, by choosing to build and equip the SolarCity facility without cost to the company, New York and SUNY/CNSE fail to leverage any private sector capital investment in the building and its equipment. In effect, since Fort Schuyler owns the means of production managed by SolarCity, this is a form of socialism for the benefit of a particular company.
  • Third, because the company has not invested its own capital in the facility, it has less reason to remain in Buffalo after the lease period ends than if it had invested its own money.
  • Fourth, because Fort Schuyler owns the building and equipment, this state-related entity has assumed the liability that will result from its ownership if SolarCity fails or leaves after the lease term.
  • Fifth, because the agreement between SolarCity and CNSE/FSMC inflates the company’s job commitment with local sales and installation jobs, and jobs that are not at SolarCity, the project job impact is overstated.
  • Finally, the relationship between CNSE/FSMC and Empire State Development leaves a number of open questions around the job requirements associated with the project and the responsibility for ensuring that job creation promises will be met.

Every time government assists a business, by providing a financial incentive, it assumes risks. Companies operate in a competitive market in which the demand for their products or services may decrease or disappear. This can be the result of a variety of factors ranging from poor management, to changes in consumer tastes, to the development of newer technologies that obsolete existing products. The locations of markets may shift, or the cost of production in a particular location may become increasingly uncompetitive because of factors like labor and materials costs in other locations, exchange rates, or the cost of shipping. Finally, assisted companies may game the state, by asserting the need for incentives to retain or create jobs within New York’s borders, or by claiming that they will hire or retain more employees than they actually intend to.

Because the SolarCity project is being carried out by a private non-profit corporation, accountability safeguards used by public agencies have not been implemented. While state entities like Empire State Development provide public records of decision processes, and full information about project benefits and costs, this information has not been available until recently for SolarCity and other FSMC-managed developments, and even now does not provide project benefit/cost information. This is true, despite the fact that the SUNY related non-profits are owned and directed by boards of directors whose members are largely representatives of New York State agencies.

Economic development carries inherent risks. Decision makers must evaluate them when deciding how many public dollars, if any, to commit to a project. And, they must consider, when helping a company make a large capital investment, how much risk they are willing to assign to taxpayers, and how much can be avoided by structuring assistance packages and compliance requirements. In this case, the public has little information about how decision makers evaluated risks and benefits, and why a SUNY related entity (FSMC) chose to assume so much of the cost and risk associated with the development of the solar panel manufacturing facility for SolarCity.

All of this suggests some recommendations:

  1. Despite their “private” status, FSMC and other non-profits operated by SUNY should be subject to the same transparency requirements as public entities. They should publish meeting proceedings and board materials on their websites; and they publicly disclose all available information about benefits and costs, and about criteria used in making project decisions.
  2. The decision of FSMC to keep ownership of manufacturing facilities and equipment should be reconsidered, because public ownership creates a significant liability for FMSC and New York State in the event that the company fails or decides to terminate the lease at the end of its term.
  3. To ensure a reasonable return for taxpayer-funded assistance, and to maximize company stakes in assisted projects, public investments should seek to leverage private capital investment in plant and equipment, not replace it. Companies that receive public assistance should be required to make a significant capital contribution to the cost of facilities and equipment.
  4. Job commitment requirements should be constructed to provide real benefits to New York state. Companies should not include local sales and installation forces in commitment numbers, and should not include employment at companies that are not part of the assistance agreement with the state related entity.

[i] Empire State Development is New York’s lead economic development agency. The author was a senior executive there between 1995 and 2007.

[ii] A portion of the state’s indirect subsidy (for GlobalFoundries) took the form of promised corporate tax breaks, whose value has likely been diminished by the Legislature’s 2014 vote to phase out all corporate taxation of manufacturing companies.

[iii] http://www.globalfoundries.com/newsroom/press-releases/2012-press-releases/2014/03/01/globalfoundries-extending-fab-8-to-meet-strong-customer-demand

[iv] Other projects managed by FSMC are financed in much the same way. They include a hub for nanotechnology related film and television in Syracuse, and a computer chip commercialization center in the Utica area.

[v]http://static1.squarespace.com/static/547d03b1e4b04c7d4872dd01/t/56d73336ab48def0679be13a/1456943926737/Riverbend+-+Ninth+Amendment+signed.pdf

[vi] In these quotations, “SolarCity” has been substituted for the name of the predecessor company, “Silevo,” which had the original agreement with CNSE/FSMC.

[vii] The agreement with SolarCity provides that the property be included in a Start Up zone, eligible for generous tax incentives. See Section 4.8 of Amended and Restated Agreement…

[viii]http://static1.squarespace.com/static/547d03b1e4b04c7d4872dd01/t/56d73267ab48def0679bd8e5/1456943719940/Silevo+Amended+Restated+Agreement+-+fully+executed+%289-4-14%29.pdf

[ix]http://static1.squarespace.com/static/547d03b1e4b04c7d4872dd01/t/56d73267ab48def0679bd8e5/1456943719940/Silevo+Amended+Restated+Agreement+-+fully+executed+%289-4-14%29.pdf Note that the fact that some of the jobs counted towards the job creation requirement are not at entities that are part of the agreement may make it difficult get data from them to verify claims about employment levels at their locations.

[x] Available on Empire State Development’s website at: http://esd.ny.gov/PublicMeetings_Notices/2016/04212016_ESD_BM_materials.pdf (pp. 60-96)

[xi] Note that after public pressure, in a press release dated June 22, “Fort Schuyler Management Corporation Board of Directors Unanimously Votes to Open Meetings to Public” FSMC agreed to open its meetings to the public, agreed that it was subject to FOIL, and agreed to publish documents online.

[xii] To the contrary, Robert Freeman, the head of New York’s Committee on Open Government has opined that FSMC is subject to the State’s Freedom of Information Law.

[xiii] http://esd.ny.gov/PublicMeetings_Notices/2016/04212016_ESD_BM_materials.pdf  (pp. 67-69)




The Minimum Wage Debate – Part II

The Albany Times Union carried an article on March 24 detailing the connections between researchers who produced the reports for and against a minimum wage increase that I discussed in my post “A $15 Minimum Wage for New York – Benefits and Risks.”  The article points out that one of the authors of the study favoring the minimum wage, Ken Jacobs, was closely connected with the campaign to increase the minimum wage.

“In May 2014, an advocate for hiking the minimum wage in New York emailed a University of California labor economist with a list of talking points “we’d love you to cover.”

The economist, Ken Jacobs, was set to testify before the New York state Senate’s Labor Committee about the benefits of municipal minimum wage hikes in California.

“That works for me,” replied Jacobs, chair of the Berkeley Center for Labor Research and Education. “I will work on it tomorrow.”

During his trip to New York, a progressive public relations firm working for higher wages set up a meeting for Jacobs at The New York Times editorial board. Jacobs assisted an advocate rounding up New York union support, according to emails.”

“In one April 2014 email, the relationship between academic and funder seemed explicit: Jacobs explained he was seeking grant money to support his unit’s research “for local groups engaged in work to raise the minimum wage” in California. Jacob added that his Center would provide “testimony/media work.”

The article also points out that

“Two officials at the business-backed American Action Forum, another Washington, D.C.-based group, penned a November study on the $15 wage in New York. That nonprofit’s funders, according to tax records, include the U.S. Chamber of Commerce Foundation, which paid the Action Forum $129,000 in 2014 to produce policy research.”

The Times-Union article points to a fact that has long been recognized, that the funding of public policy research is rarely truly independent.  None of this proves that the research intentionally intends to mislead, but it does illustrate the connections between political and financial interests and those who study important policy issues.

The kind of financial support that has been provided by labor and business interests in this case is found in the financing of other kinds of research studies.  Pharmaceutical and food safety research are examples.  There has been widespread publicity about the financial connections between researchers and the drug companies that could benefit from positive findings about the effectiveness of a drug.

Why is this pattern so prevalent?  The first reason is that the stakes attached to the outcomes of policy decisions, like those of decisions about food safety or drug efficacy, are high.  For employers, a hike in the minimum wage could cut profits, or, for some small businesses, threaten their existence.  For labor, a hike in the minimum wage could improve the lives of low wage workers.

The second reason is that the entities that do research operate like businesses.  Many years ago, I taught at a college, and one of the things that was made clear to me was that colleges and universities have limited resources to support research, and that if research is costly, faculty should look to outside entities to help pay the cost.  From the institutional perspective, outside funding provides the resources for additional personnel and needed equipment.

Similarly, consulting firms are driven by the same logic. In the end, someone has to pay the cost of salaries and facilities.  Very often the funding needed by these firms is most available from groups in society that have policy agendas.  Some, like American Action Forum, appear to have been created to serve particular interest groups.

None of this means that the results reported by researchers on each side are falsified.  They represent real differences of opinion among economists who understand the impact of policy changes differently.  But the funding of policy research by competing interests can lead to the exaggeration of differences in conclusions about policy outcomes.

In my earlier piece, I pointed out that the Congressional Budget Office (one entity that does not receive funding that comes from a group for or against the minimum wage increase) in its research presented a range of possible outcomes – in the case of a federal minimum wage increase, they projected the possible loss of a few to a million jobs, with a center point of 500,000 jobs.

But neither the American Action Forum, or the the Center for Wage and Employment Dynamics at Berkeley presented a range of possible outcomes.  Instead, each presented point estimates of impacts leading to sharply different conclusions about the employment costs of a minimum wage increase, suggesting a greater degree of certainty about conclusions than may be warranted.

Finally, it should be noted that readers might conclude from the Times Union piece that the competing studies presented by business and labor interests “fog” the real answer to the employment impact question, in the way that tobacco companies funded studies in an attempt to shed doubt on data that showed that smoking is harmful to health.

In fact, that conclusion would be incorrect.  The reality is that there is no consensus, and that in this case the competing studies represent real differences of opinion between experts.




A $15 Minimum Wage for New York: Benefits and Risks

Recently, a friend and colleague from the time when I worked at Empire State Development suggested that I take a look at Governor Cuomo’s proposal to raise New York’s minimum wage to $15 from $9.00.  Like others, I’m sure that he wanted to cut through the competing claims about the impact of the proposed increase.

A columnist for the Albany Times-Union, Fred LeBrun, expressed the confusion felt by many, writing, “The truth is I don’t really know what the impact will be. I’m not sure anybody does. Predictions vary wildly. Nor are the Cuomo administration and the Democratic Assembly making any serious effort to find out.”  The reason for LeBrun’s confusion and frustration is that there is no certain answer to his question, nor can there be at this point in time, given the complexity of the factors involved in estimating the benefits of a minimum wage increase, and the lack of solid data available at the state level.

As with many political issues, there are sharply divergent perspectives to the costs and benefits of raising the minimum wage.  A well known Albany think tank, the Empire Center for Public Policy, released a report late last fall, “Higher Pay, Fewer Jobs,” written by Douglas Holtz-Eakin and Ben Gitlis of the American Action Forum, the policy arm of the American Action Network, a group that has provided substantial support for Republican candidates for Congress.  The report presents three models of the impact of the proposed increase in the minimum wage to $15, and finds that the proposal would reduce employment in the state by “at least 200,000 jobs, with proportionately larger employment decreases in upstate regions.”  The report also estimates that the proposal would increase wage earnings by $4.6 billion.

On the other side, the Center for Wage and Employment Dynamics (CWED), at the Institute on Labor and Employment at the University of California, Berkeley issued a report, “The Effects of a $15 Minimum Wage in New York State,” by Michael Reich, Sylvia Allegretto, Ken Jacobs and Claire Montialoux.  CWED has received funding from the Fiscal Policy Institute, a union funded think tank.  That report concluded that “a $15 statewide minimum wage would generate a 23.4% average wage increase for 3.16 million workers in the state, with a net value of $14.4 billion and would create an increase in jobs of 3,178.

Finally, Governor Cuomo, through the State Department of Labor issued a report in support of his proposal entitled “Built to Lead – Analysis: Raising New York’s Minimum Wage to $15.”  The report claims a benefit from increased wages of $15.7 billion and argues that, “A review of 70 studies on minimum wage increases found no discernible negative effect on employment.”

Problems Estimating Number of Employees Affected

Perhaps a good place to begin understanding how difficult it is to understand what impact an increase in the minimum wage might have is by looking at the question of how many people might be affected by the proposed change.  This is important, because the number of people affected impacts both the amount of wage benefits received in aggregate, and the number of people who might be affected by layoffs that could result from the proposed increase.  Here, there are differing estimates.
• Governor Cuomo’s report argues that 2.4 million people would benefit from a minimum wage increase.
• The Empire Center report estimates 3.1 million workers would be directly affected by the increase.
• The CWED report estimates that 2.4 million workers would be directly affected, with an additional 1.2 million indirectly affected.

How can there be such a large disparity in the estimates of the number of people affected?  The answer is that researchers seeking information about the number of people who would be receiving less than $15 per hour at the time of the proposed increase could not find data that directly answers the question, and had to develop estimates using other data that does not directly measure wage distributions at the state level.  In both cases, the authors used data from the Census Bureau’s American Community Survey, and because they used different techniques to estimate the percentage of the employed population from the available data, they arrived at significantly different answers.

Problems Estimating Possible Job Losses

The bigger problem associated with evaluating the effects of an increase in the minimum wage involves estimating the impact of the change on employment.  Until about 20 years ago, there was near unanimity among economists that there was a trade-off between employment and minimum wage increases, particularly for young and low skilled workers.  For example, a number of studies found that for a 10% increase in the minimum wage, teenage employment decreased by 1%-3%.  For adult workers, the impact was estimated to be smaller – perhaps 1% for a 10% increase.  Since almost 90% of minimum wage workers are 20 years old or older, the largest impact of a minimum wage increase is on adult workers, even considering the fact that a larger portion of teenage workers are paid at the minimum wage rate.

From the perspective of these studies, a minimum wage increase of $9 to $ 15, or 60%, as has been proposed by the Governor, would have a relatively large negative impact on jobs. In New York’s case, with roughly 9,000,000 workers, about 550,000 could be expected to lose their jobs, if the estimate is correct.

The report from the Empire Center presents three study models, one which is consistent with an analysis by the Congressional Budget Office, that estimates a loss of 200,000 jobs, a second by two economists, Jonathan Meer and Jeremy West, that estimates a loss of 432,500, and a third by economists Jeffrey Clemens and Michael Wither, that projects a loss of 588,800 jobs.

How is it possible that the Center for Wage and Employment Dynamics could conclude that increasing the minimum wage could result in a small increase in jobs?  The answer is that some more recent research has found no significant employment effect from increases in the minimum wage.  For example, Alison Wellington in “Effects of the Minimum Wage on the Employment Status of Youths: An Update.” found that a 10% increase in the minimum wage reduced teenage employment by only 0.6%.  In 1992, David Card and Alan Krueger studied the impact of a minimum wage increase in New Jersey on fast food restaurants by comparing their employment with those in nearby Eastern Pennsylvania and found that the wage increase was associated with slightly increased employment.  They also examined a set of more recent studies of a 1988 increase in the California minimum wage and the 1990 increase in the federal minimum wage and found no impact.  Subsequent studies have shown mixed results.  Some have shown employment decreases with increases in the minimum wage, others have not.

A better approach than providing a single estimate of job losses associated with increasing the minimum wage would recognize a variety of possible outcomes.  The Empire Center study does this to an extent, by presenting the outputs of several models.  But the study only presents one set of possible outcomes, reflecting the views of economists who believe that minimum wage increases are associated with job losses.  And, while the Empire Center presented a single estimate for job losses for the approach used by the Congressional Budget Office, the CBO itself said that a range of outcomes is possible.  In its study of a possible federal minimum wage increase from $7.25 to $10.10, it predicted a very slight job loss to one million jobs, with a central point of 500,000.  From my perspective, the best approach would recognize the uncertainty of any job loss estimate, and present a broader range of possibilities.

So, unfortunately for my friend, and for Fred LeBrun, who wanted to know what the impact of an increase to the minimum wage would be, there is no definite answer.  We do know that the proposal does have a positive economic impact on workers affected – estimates range from about $5 to $15 billion.  And, we know that it is not true that most beneficiaries would be teenagers flipping hamburgers at fast food outlets – in fact, they represent a small minority of workers who would be affected.  What we don’t know is whether there would be a significant trade off in lost jobs.

But, there are some significant reasons to be cautious about the impact of a proposal as large as the one that has been proposed by Governor Cuomo.  Many economists are concerned about the size of the proposed increase – an increase from $9 to $15 is much larger than previous increases, and is more likely to impose worker dislocations than a smaller increase – to $12 for example. Alan Krueger, former Chair of President Obama’s Council of Economic Advisors, and the author of the New Jersey study that found no negative impact of a minimum wage increase, wrote,

But $15 an hour is beyond international experience, and could well be counterproductive. Although some high-wage cities and states could probably absorb a $15-an-hour minimum wage with little or no job loss, it is far from clear that the same could be said for every state, city and town in the United States…Although the plight of low-wage workers is a national tragedy, the push for a nationwide $15 minimum wage strikes me as a risk not worth taking”




Should Teachers be Evaluated by Student Performance on Standardized Tests?

In January 2015, Governor Cuomo proposed changing the state’s teacher evaluation system to increase reliance on measures of student progress on statewide standardized tests, using a so called “Value Added Model.” In his 2015 State of the State address, he said:

“Now 38% of high schools students are college ready. 38%. 98.7% of high school teachers are rated effective. How can that be? How can 38% of the students be ready, but 98% of the teachers effective? 31% of third to eight graders are proficient in English, but 99% of the teachers are rated effective. 35% of third to eighth graders are proficient in math but 98% of the math teachers are rated effective. Who are we kidding, my friends? The problem is clear and the solution is clear. We need real, accurate, fair teacher evaluations.

We asked the State Department of Education for their ideas and they gave us their feedback and we accept their recommendation. To reduce the over-testing of students we will eliminate local exams and base 50% of the evaluation on state exams. Second, the other 50% of the evaluations should be limited to independent classroom observations. Teachers may not be rated effective or highly effective unless they are effective in the test and the observation categories. We will stop local score inflation, which is resulted in virtually all teachers being rated by setting scoring bans in the state law.”

The proposal was very unpopular with teachers and the unions that represent them.  Their opposition led to a boycott of the testing by significant numbers of students in many school districts.  Because of the controversy, the Board of Regents, apparently at the Governor’s behest, changed the rules to delay implementation of the rules for four years.

Some critics of the change in direction have argued that the Governor “caved in” to the unions.  For example, the New York Post, in an editorial on November 29th, titled “Did the teachers unions just break Andrew Cuomo” said:

For years, Cuomo has been hitting his head against the wall on getting a real state teacher-rating system. Every time he seems to make progress, it’s followed by delays, postponements and revisions that ensure nothing meaningful happens.

Now he’s reportedly set to give up — abandoning the effort to use student scores on state tests to help judge teacher performance. If so, teachers will be judged subjectively, probably by their own peers. Count on every teacher to rank as just peachy — and incompetents to keep on “teaching.”

Just as the teachers unions have demanded all along.

All of us want our children to have good teachers.  As a child, while most of my teachers were competent, I was was taught by a few individuals who had no business being teachers.  One of my teachers used test questions found in the text books that we used, and permitted us to use the answer keys in the back of the books to find the correct answers.  A music teacher gave my class “study hall” on a number of occasions, and put his head on his desk, to sleep.  That kind of “teaching” cheats children, by denying them the opportunity to learn.

But, is the use of student progress on standardized tests an accurate way to measure teacher effectiveness?  Unfortunately, the answer is no.

There are two basic statistical problems involved in the use of student performance on standardized tests to measure teacher performance.  The first involves the question of whether the students in a given classroom are representative of the entire student population in a school district.   Unless students are assigned in a random fashion across the district, variations in student abilities could affect their performance in systematic ways that are unrelated to the effectiveness of teachers.  The American Statistical Association points out:

VAM [the test based teacher evaluation method] scores are calculated from classroom-level hererogeneity that is not explained by the background variables in the regression model. Those classroom-level differences may be due in part to other factors that are not included in the model (for example, class size, teaching “high-need” students, or having students who receive extracurricular tutoring). The validity of the VAM scores as a measure of teacher contributions depends on how well the particular regression model adopted adjusts for other factors that might systematically affect, or bias, a teacher’s VAM score.

The form of the model may lead to biased VAM scores for some teachers. For example,gifted” students or those with disabilities may exhibit smaller gains in test scores if the model does not accurately account for their status.

Similarly, the Educational Testing Service, the developers of the College Board exams and others, says:

The fundamental concern is that, if making causal attributions is the goal, then no statistical model, however complex, and no method of analysis, however sophisticated, can fully compensate for the lack of randomization. The problem is that, in the absence of randomization, it is hard to discount alternative explanations for the results that are found. (This explains why many consider randomized experiments the gold standard in scientific work.

 Specifically, teacher effects based on statistical estimates may actually represent the combined contributions of many factors in addition to the real teacher contribution we are after. Thus the estimate could be fundamentally off target.

 Further, it is usually difficult to determine how off target an estimate is. Clearly, substantial discrepancies would seriously undermine the utility of inferences made on the basis of the analysis.

The second statistical problem stems from the small number of students that most teachers work with.  For example, elementary school teachers, with classes of twenty or thirty students, see only a small sample of all the students in a school district.  Because of sample variability, those small samples are unlikely to be accurately represent typical students in a school district.  Consider the idea of forecasting the result of an election from a sample of 25 voters – the likelihood of an accurate result is small.  For that reason, researchers seek large sample sizes to ensure accuracy.  ETS describes the problem this way:

With a relatively small number of students contributing to the estimated effect for a particular teacher, the averaging power of randomization can’t work for all teachers in a given year. Suppose, for example, that there are a small number of truly disruptive students in a cohort. While all teachers may have an equal chance of finding one (or more) of those students in their class each year, only a few actually will — with potentially deleterious impact on the academic growth of the class in that year. The bottom line is that even if teachers and students come together in more or less random ways, estimated teacher effects can be quite variable from year to year.

Teacher performance is important.  As parents, we want our children to have every opportunity to succeed  Incompetent teachers can limit that opportunity, so it is important that the people who teach our children are capable of teaching effectively.  Teacher evaluation is an important way in which administrators can help ensure that teachers are competent.  But the mindless use of unreliable teacher evaluation methods cannot ensure teacher competency.

So, while it is easy to characterize the Board of Regents decision to postpone implementation of the proposal as a political decision that reflects the power of teacher unions, in fact, the decision reflects the reality that the use of student performance on standardized tests as the primary way to evaluate teachers is not a good way to measure their effectiveness.

 




Can Charter Schools break the Poverty-Poor Student Performance Link?

In an earlier post, I argued that school based solutions to the problem of the poor performance of students in central city schools were not likely to succeed because they ignored the impact of the concentration of disadvantaged students on student achievement.  The data showed that 79% of the variation in performance in school performance in upstate New York metropolitan areas was related to the concentration of economically disadvantaged students within them.

Discussions about the benefits of charter schools tend to be heated – inflamed by ideological differences.  But whatever one’s feelings are about the virtues of preserving public education, or of competition in improving educational opportunity, before making judgements, we should examine the available data about their effectiveness.

At the outset, it should be noted that evaluating the true impact of charter schools is difficult.  Ideally, the performance of charter and public schools should be compared by selecting and assigning students at random and following their progress over a period of years.  But, in reality, students in charter schools are not selected at random, and matched samples of public school students are not available for comparison. Published analyses on the subject have pointed out the need to adjust performance comparisons of students at public and charter schools for selection bias, because charter school students are to a large degree self-selected.

Where competent analyses comparing charter and public schools have been done, the findings have been mixed. One review of the available studies concluded:

“Taken in the aggregate, the empirical evidence to date leads one to conclude that we do not have definitive knowledge about the impacts of public charter schools on students and schools. But in reviewing the existing evidence, one is also struck by the fact that the impacts of charter schools appear to be very contextual. Some public charter schools are better than others. Some are very successful in meeting student needs, and others are not very successful…. Consequently, the impacts of public charter schools should not be painted with one broad brush stroke. Each should be judged on its own evidence and performance.”

Other studies  have found significant advantages for charter schools in central cities. Atila Abdulkadiroglu, Joshua Angrist, Susan Dynarski, Thomas J. Kane and Parag Pathak, in “Accountability and Flexibility in Public Schools: Evidence from Boston’s Charters and Pilots” found:

“A consistent pattern has emerged from this research. In urban areas, where students are overwhelmingly low-achieving, poor and nonwhite, charter schools tend to do better than other public schools in improving student achievement. By contrast, outside of urban areas, where students tend to be white and middle class, charters do no better and sometimes do worse than public schools.”

My research is based on a reanalysis of state education data on the performance of students on the 2015 Statewide Student Assessment.  It cannot provide a controlled analysis of the performance of charter school students, compared with those in public schools.  For that reason, the data available to me cannot produce conclusive evidence about the effectiveness of charter schools.

Because publicly available data is cross-sectional, it provides information about the performance of students at a given point in time, but unlike longitudinal studies, it does not directly measure their gains over a year or years.  For that reason, when a  cross-sectional study finds out-performance, or under-performance, there is the danger of making an attribution error, because we don’t know whether the out-performance or under-performance was a characteristic of the student population that was unrelated to the effectiveness of the schools being evaluated.  For example, the students at out-performing schools might have characteristics related to their selection that would predispose them to perform better than other students.

With those limitations in mind, it is worth looking at the New York State Education Department data on student performance from the 2015 Statewide Student Assessment, controlling for the concentration of poverty in schools, to see whether students at charter schools do significantly better than those at public schools with similar concentrations of disadvantaged students.  The chart below shows the performance of students in public and charter schools in all counties in metropolitan areas, except for the City of New York:

Public Charter Outside NYC

Note that data was available for only 33 charter schools outside New York City, so conclusions from this group of schools must be regarded as tentative.  Still, a few things stand out.  First, the performance of charter schools was quite varied – several charter schools were among the worst performers compared to schools with similar concentrations of disadvantaged students, while a number of others, particularly those with high concentrations of disadvantaged students performed better.  Second, for charter schools, unlike public schools, student performance was not related to the concentration of poverty.

As a group, students at charter schools did slightly better than at public schools with the same concentrations of disadvantaged students. However, the fact that 24% (8 of 33) schools exceeded the percent of students predicted to pass by 20% or more, based on the concentration of poor students, is significant.  Only 1.9% of public schools outside New York City had student performance reaching that level.   And, as Abdulkadiroglu, et. al. found, the benefit from charter schools was most significant for students in schools with high concentrations of poor students.

The performance of the better charter schools in urban counties outside New York City was significantly better than average schools with high concentrations of disadvantaged students, but not as good as at schools with few poor students.  Most of the better performing charter schools had about 40% of students passing the Statewide Assessment, compared with as many as 60% in schools with few disadvantaged students.

School Performance in New York City

The concentration of disadvantaged students in New York City schools is associated with 52% of the variation in student performance between the schools.  Compared to public schools in urban counties outside New York City economic disadvantage is a less powerful predictor of student performance in City schools – 52% vs. 79%.  For charter schools, the relationship between the concentration of poverty and student performance was very weak – explaining only 8% of the difference in student performance.  As with other counties, the performance of charter schools was quite heterogeneous. Students at charter schools in New York City as a group did better than those at public schools with similar concentrations of disadvantaged students.  At the same time, a number of Charter schools performed less well than the average of public schools with the same concentration of poor students.

The weaker relationship between the concentration of poverty and student performance in New York City schools appears to be in part a consequence of the city’s policy of creating specialized schools with selective admission criteria.  For example, the Medgar Evers College Preparatory School includes questions about student performance on the Statewide assessment in its application form.  Another example is the TAG Young Scholars School, which describes its admission policy this way:  “Prospective students must be tested by The New York City Department of Education to determine whether they qualify for a seat in one of the City’s Gifted and Talented programs.” Note that while charter schools often use lotteries to select students, they are not permitted to use test performance as a selection criterion.

These selective public schools raise the issue of causal attribution, since unlike schools that do not choose students based on test scores, it is likely that student bodies enter the selective public schools at higher levels of performance than students at other public and charter schools, and that their better performance may primarily be a result of selection criteria, rather than teaching at the schools.

Public Charter NYC

Some charter schools and public schools in New York City did as well as schools with low percentages of disadvantaged students.  Some of the best performing public schools with high concentrations of disadvantaged students use test performance as one criterion for admission.  Since charter schools are not permitted to exclusively serve high performing populations, the performance of the best charter schools is more remarkable.  At 34 of 148 (23%) of charter schools, 20% or more students than were expected to pass based on the concentration of disadvantaged students passed the statewide assessment. Among public schools in New York City, including those that have selective admissions, 8.9% of schools exceeded their predicted performance level by 20% or more.

While this data cannot prove that the excellent performance of some charter schools was the result of the schools themselves, rather than some other factor, it is consistent with studies that have shown charter schools to be advantageous for disadvantaged students in central cities.

Implications

Much of the discussion about the performance of schools, and how to improve outcomes, has focused on the common core and its testing requirements.  The purpose of these requirements was to provide a universal set of assessment tools that would provide comparable data about student progress across systems.

The results of the testing have been disappointing to many, since, as the figures above show, large percentages of students did not achieve passing grades.  For example, Governor Cuomo’s 2015 The State of New York’s Failing Schools report stated, “It is incongruous that 99% of teachers were rated effective, while only 35.8 percent of our students are proficient in math and 31.4 percent in English language arts. How can so many of our teachers be succeeding when so many of our students are struggling?”

Governor Cuomo’s proposal to improve student performance included the creation of a teacher evaluation system that relied more heavily (50%) on the performance of students in standardized tests, a process to make it easier to remove substandard teachers, and a process to place under-performing schools in receivership.  Several of the proposals have problems.  Teacher evaluation systems that rely heavily on the progress of students on standardized tests suffer from statistical defects that result in low reliability of results – a subject for a future blog post.  The process for identifying under-performing schools does not effectively identify schools that are under-performing relative to the concentration of students in poverty within them.

Most significantly, by focusing almost exclusively on accountability for under performing teachers and schools, the proposal does not offer a strategy for overall improvement of New York’s schools.  Accountability focused methods focus on remedying or removing the worst five or ten percent of schools and teachers in the system, but do nothing to help the great majority achieve better results.

If New York’s education system is to make strides in improving student outcomes, it must encourage schools and teachers to adopt known classroom teaching strategies and effective curriculum choices that have the potential to improve overall outcomes.  Since a significant number of charter schools have achieved excellent student outcomes, it would be helpful if the strategies they use could be considered for adoption in schools that do not perform well.  The state should focus on finding ways to encourage the use of effective strategies, by disseminating information and incentivizing their adoption.

Considerable research has been done on the strategies employed by effective charter schools in improving student performance.  For example, “Getting Beneath the Veil of Effective Schools: Evidence from New York City,” by Will Dobbie and Roland G. Fryer of Harvard University found that:  “traditionally collected input measures – class size, per pupil expenditure, the fraction of teachers with no certification, and the fraction of teachers with an advanced degree – are not correlated with school effectiveness.  In stark contrast…an index of five policies…explains approximately 45% of the variation in school effectiveness.”  They are consistent with the approaches used by “no excuses” model charter schools that emphasize selective teacher hiring, extensive teacher feedback, increased instructional time, and a focus on discipline and academic achievement.

For most schools in cities with high concentrations of disadvantaged students in central cities, academic performance remains poor. In some of these schools less than 10% of students received passing grades on the statewide assessment, and the overwhelming majority of schools with concentrations of disadvantaged students of 90% or more had less than 20% of students passing.

But almost one quarter of charter schools and a few public schools have broken the link between poverty and poor school performance.  At these schools, more than 40% of students passed the statewide assessment, despite very high concentrations of poverty within them.

Accountability based approaches aimed at weeding out ineffective teachers, or taking control of schools from boards of education will benefit only a small minority of students statewide.  Instead, we should focus on making use of what works in improving student performance at the best charter schools, encouraging poor performing schools to adopt effective techniques.