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Economic development - Reform or retrenchment?

We are approaching a moment of truth regarding the state's major economic development programs.

Few, aside from those managing or benefiting from them, dispute that the programs are not delivering as promised. One only has to look at the condition of the Upstate economy to realize that.

While state legislation provides for a raft of economic development programs, three of them account for the vast majority of the subsidies doled out to business. Between them, Empire Zones, industrial development agencies and some 10 electricity discount programs managed by the New York Power Authority grant tax breaks and utility discounts worth well north of $1 billion, perhaps approaching $2 billion a year.

A range of studies -- done by newspapers, the state comptroller and advocacy organizations -- long ago identified the shortcomings in these programs. The long and short of it is that they often fail to deliver jobs promised as a condition for getting public subsidies. All too often, the programs do more to fatten corporate bottom lines than they do to create good-paying jobs.

Yet there's been little reform. Until now, anyway.

All three are up for consideration this year in the State Legislature. This presents an unprecedented opportunity to fix the programs. Of course, it also provides a window of opportunity to those who want to preserve, and in some cases, extend the status quo.

Here's a run-down on where things stand and what we can expect to see in the months ahead.

Gov. Paterson has proposed sweeping change in the Empire Zone program. 

In essence, he wants to subject companies currently receiving benefits to a cost-benefit analysis, and those deemed not generating at least $20 in payroll and investment for every $1 in subsidies would get tossed from the program. The guv's budget people project this would shave benefits statewide from $1.2 billion to $600 million, thus helping to plug part of the budget deficit. Companies signing up in the future would be largely limited to manufacturers and financial services.

The business community here has gone ballistic over the proposed changes and they've enlisted politicians like Byron Brown and Robin Schimminger to carry their water. Never mind that a Buffalo News investigation, among others, found the program in Buffalo and elsewhere to be an undeniable failure. 

A reasonable argument can be made that the state should not be changing the rules of the game in mid-steam individual companies. But does the state not have the right, even an obligation, to revamp a  program that is so obviously failing to meet its mission? Why shouldn't companies face consequences when they fail to deliver as promised?

I can't help but notice in the stories I have read that none of the critics of the governor's proposal have offered a Plan B. No, they want things to remain just as they are.

As a result, I expect this to be a heated battle. The business community, here and elsewhere, will continue to argue that the program is a necessary tool, especially in these troubled times.

But a lot of powerful folks, including Assembly Speaker Sheldon Silver, have long argued that the program needs an overhaul. This year's budget crisis may just be the catalyst to change, be it good, bad or indifferent.

Also up for consideration, in a sort of Round Two, is legislation governing industrial development agencies. This issue never got resolved last year, despite the lapse of authorization to allow civic and non-profit organizations to use IDA benefits to build projects.

Reformers want more transparency, clawbacks to take away benefits from non-performing companies, payment of prevailing wages on construction projects using IDA financing and the payment of living wages to firms that occupy those buildings.

IDA officials choke on the prevailing and living wage provisions in particular, saying they would drive up costs beyond any savings that could be had through IDA financing.

Finding a middle ground this time around may depend on Paterson's willingness to dirty his hands. He backed off last year late in negotiations, when some felt a deal could have been hammered out.

The IDAs here in Erie County are giving serious thought to what would be a welcome step -- revising the criteria used to determine which projects receive financing. (The story was published in our Prospectus section of a couple of weeks ago and is worth a read.)

Finally, there are the electricity discount programs managed by NYPA at the direction of state law. 

Of particular interest to WNY is the pending expiration of contracts to more than 100 local companies that get dirt-cheap hydropower generated at the Niagara Power Project in Lewiston. Negotiations are expected to start later this year.

Some of the largest recipients have been getting the power since the plant opened when the Beatles were a bunch of no-names knocking around Liverpool. These power customers treat the power as a birthright.

But NYPA is under pressure to subject the companies to a more rigorous cost-benefit analysis because of the pounding it's taken in the press over wasteful subsidies. 

The major recipients, working in an alliance called Power for Economic Prosperity (PEP), are waging a behind-the-scenes campaign to get long-term contracts with little, if any change in the status quo. They're talking with state officials and local labor and business leaders in the hopes they can muscle something through. NYPA, however, appears intent on at least doing some homework to determine what it's getting for what amounts to some $200 million a year in discounts before sitting down to negotiate.

I can tell you first-hand how PEP is going to play the game because I sat in a year ago on a meeting they had with the editorial board of The Buffalo News. They're going to say to anyone who will listen that failing to extend the status quo endangers tens of thousands of jobs, that if you think the local economy is bad, just wait.

The argument is disingenuous, on several levels.

For starters, while power recipients employ more than 45,000, at least until the recession hit, some of the largest employers get a relatively small portion of their electricity from the NYPA deal. So a change in terms is not going to be game changer for them.

More importantly, the worst abuses involve two Niagara Falls chemical companies - Olin and Occidental - who between them gobble up close to 30 percent of the low-cost power but provide only about 1 percent of jobs.

As I reported in my 2007 investigation:

The discounted power last year saved Occidental and Olin an estimated $53 million, or an average of $126,155 per job.

I'm told some of the PEP companies are claiming in private that their profit margins in the local plants are so razor thin that even a slight bump in price, much less a cut in allocation, would prompt them to shift their operations elsewhere.

To which I say: If your viability depends on millions, perhaps tens of millions of dollars of subsidies, year after year, then you do not have a viable business. The government should not be propping you up but should instead cut the chord and invest the power in plants that offer growth potential.

Much like the Empire Zone crowd, I'm not hearing any talk from the PEP people about modifying the program to address problems. Nope, they've apparently circled the wagons.

Like Paul McCartney, they believe in yesterday.

Hit it, Paul.

The local discount program aside, NYPA President Richard Kessel is hoping to present a legislative package to reform all the other discount programs in an effort to make them, among other things, more uniform. Some of the programs, including Power For Jobs, have been operating with year-to-year extensions, as past governors, legislative and Power Authority leaders haven't been willing to tackle the issue. Kessel, however, appears willing to dive in, so that could be a catalyst.

In short, this could be the year we finally see IDA, NYPA and Empire Zone reform. But those benefiting from these programs are working hard to not only maintain, but extend the status quo, one that is part of the reason WNY's economy is hurting.

People, you need to be paying attention, particularly to what members of the WNY delegation are doing in Albany.



Economic Development | New York Power Authority | State government | Subsidies
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