ECONOMIC DEVELOPMENT
Prepared for the City of Sparta, Tennessee
By: Don Darden, Municipal Management Consultant
The University of Tennessee Municipal Technical Advisory Service
February 2004
I.
Introduction. MTAS was requested by the City of Sparta, Tennessee to
develop a training program on economic development for presentation at the
city’s annual planning conference to better inform the city board and other
community leaders about the importance of economic development, to learn
more about the issues and concerns involved with job creation, and to better
understand how an effective economic development program may function in
relation to public services provided by the city.
II.
Industrial and Economic Development. There is a subtle, but important
distinction between what is commonly called “industrial” and “economic”
development. Industrial development, at least in the traditional sense,
generally refers to the process of creating manufacturing jobs. And, so, it
would be concerned with such things as acquiring land, developing buildings,
improving infrastructure—water, sewer, streets, electricity, gas, etc. to provide
the resources needed to help locate firms that will add to employment and
ultimately to the community’s tax base. Economic development, while often
used interchangeably with industrial development, has, I think, come to be a
more general process of creating wealth in a community. It is concerned with
increasing manufacturing and service jobs, developing retail, and
concentrating on those activities that make the city a better place in which to
live. It often includes education and workforce development, cultural and
recreation facilities and services, health care, and housing. The best example
of the distinction between industrial and economic development that I am
aware of is in the City of Winchester, Tennessee. Here Franklin County does
industrial development, and the city is developing recreational facilities, in
conjunction with Tim’s Ford Lake, that include fields for soccer, baseball, a
golf course, outdoor arenas, restaurants, and cabins. The city is not attempting
to recruit manufacturing jobs, but is instead focused on increasing tourism in
such a way as to make Winchester a destination point for the tourist. It hopes
to gain added sales tax revenue, an improved city, and to add people to the
population base who will need shopping, educational, and other recreational
services that will ultimately expand the tax base in the City of Winchester.
III. Structural Changes in the Economies of Tennessee and the United States. For
the past four decades, Tennessee’s manufacturing jobs have decreased by 43 percent.
That does not mean that there are 43 percent fewer jobs in Tennessee than there were in
1960. As manufacturing jobs have declined, service jobs have increased, and the increase
in service jobs has surpassed the decline in manufacturing jobs. Table 1 shows gains and
losses in manufacturing and service jobs for Tennessee during calendar year 2003.
Source: The Nashville Tennessean, January 23, 2004.
We have seen many manufacturing firms close their doors and relocate to Mexico, South
America, and South East Asia. In Warren County, Carrier Air Conditioning recently
announced that it is closing its manufacturing plant and relocating elsewhere, possibly to
Mexico. The average wage at Carrier is $17.00/ hour, plus benefits. In Mexico this labor
cost is considerably less. It is doubtful that any incentive would even come close to
equaling the estimated savings in labor cost. I will be the first to admit that if you are one
of the 1,300 workers losing your job at Carrier, it is not very consoling to point out to you
that you are simply caught up in a re-structuring of the American economy.
In Tennessee more than 80 percent of new jobs are in services. The Nashville
Tennessean reported on January 23, 2004 (from information released by the Tennessee
Department of Labor and Workforce Development) that for the year 2003 Tennessee’s
economy lost 6,800 manufacturing jobs. There were also job loses in Information of
1,200, Construction 4,600, and Trade, transportation and utilities, 500. As for
employment gains, 8,900 jobs were added in Educational and Health Services, 500 in
Financial activities, 3,100 in Government, 2,600 in Leisure and hospitality, and 4,000 in
Professional and business services. When you add the pluses and minuses, it can be seen
that there has been an increase of 6,000 jobs to Tennessee’s economy during calendar
year 2003. We see a lot of attention in the news media about the loss of manufacturing
jobs, and almost nothing is ever said about replacing manufacturing jobs with service
jobs
In the United States 90 percent of new jobs are in the service sector, and within five years
experts predict that 95 percent of new jobs will be in services. Although there has been a
corresponding decline in manufacturing jobs and an increase in the service sector, there
has been a net loss in jobs in the United States. Table 2 shows the decline in
manufacturing jobs. It can be seen from Table 2 that manufacturing jobs increased from
1960 to 1980 and have decreased from slightly more than 18 million jobs in 1980 to
about 14.5 million jobs in calendar year 2003.
This has enormous implications for any economic development program. First of all, we
still have people arguing the merits of manufacturing over services. I have heard experts
maintain that one manufacturing job creates five service jobs, and for that reason, that is
the direction that we should be working toward. I agree that manufacturing jobs are
great, but in reality over 90 percent of new jobs are in services. This I think means that
the economic developer should not expend all, or even a significant part, of his time on
recruiting manufacturing, but this in no way infers that he should not work with existing
manufacturing companies. Another way to look at this is that if 90 percent of the
American people eat hamburgers, why would you open a restaurant that serves nothing
but chicken sandwiches? When the buffalo were eradicated from the Western plains, the
buffalo hunter had to chase something else. We do not need to spend all of our time
chasing smoke stacks. And, so, I think that it is unwise to construct speculative industry
buildings in cities or areas having a half dozen or more vacant manufacturing facilities.
Table 2
20000000
18000000
16000000
14000000
12000000
10000000
8000000
6000000
20
02
20
00
19
90
19
80
19
70
4000000
2000000
0
19
60
NUMBER OF MFG. JOBS
U.S. MANUFACTURING
EMPLOYMENT
YEAR
Source: U.S. Department of Labor, February 2004
Service jobs have increased, and the U.S. Department of Labor projects that in the near
future 95 percent of all new jobs will be in the service sector. Table 3 shows service jobs
from 1960 to 2003.
Table 3
SERVICE JOB S
120000000
100000000
80000000
60000000
40000000
20000000
20
02
20
00
19
90
19
80
19
70
19
60
0
YEAR
Source: U.S. Department of Labor, February 2004
A review of Table 3 reveals that many more employees have been added to the service
sector than in manufacturing. In fact the service sector has experienced a significant
increase from 1960 to the year 2000. Since 2000 the number of service jobs have not
increased. The economy began a down turn in the year 2000, and in 2001 terrorist
attacks on the World Trade Center resulted in a trillion dollar loss to the national
economy. Not everyone agrees that the recession of 2001 was precipitated by terrorist
attacks, but I think that it is evident that the 9/11 attacks represent more than merely a
bump in the road. Expert economists seem to believe that the economy is improving
now. Tax cuts combined with low inflation and low interest rates have helped to increase
the number of jobs. It remains to be seen, however, if service jobs will continue to
increase in an improved economy.
There is something else that is very troubling for me, and that is that now we are seeing
more and more service companies relocating to third world countries. Highly skilled
workers have been recruited from Southeast Asia and elsewhere—workers with skills in
the sciences, medicine, and computer technology. Rather than recruiting such
professions to the United States, American companies are re-locating firms to other
countries to take advantage of their high technology skills and lower labor costs. Today
you can call your computer manufacturer about a software problem, and a person from
India is likely to answer the call. We could spend all day debating the causes for this
situation. We could say that it is the greed of the American worker; low tariffs on
manufactured goods; or NAFTA (North American Free Trade Agreement), and possibly
other reasons. The fact is, however, that regardless of the causes there are troubled
waters ahead in Tennessee, where 40 percent of the working population do not have a
high school education. Let’s take a look at some things that Tennesseans can do improve
our job plight.
IV. A Sound Economic Development Program. Every city in Tennessee should have
its own independently operated economic development program or affiliate with a larger
county or regional organization for the purpose of adding jobs and creating community
wealth. The essential ingredients for an effective economic development program are (1)
a professional economic developer, (2) an organized and adequately funded economic
development program, and (3) willingness on the part of the city, county, or area to
provide the resources to make the community a more attractive place to live. If your city
is missing any one of these three ingredients, not much is likely to occur to develop
additional jobs.
A.
Professional Economic Developer. In many cities a professional economic
developer is not held in high regard, and that is to say that there is sometimes the
feeling that anyone can do the job, because it does not take any special skills.
And we see industrial boards and chambers of commerce hiring retired persons to
do economic development on a part time basis, and all the while believing that
with just a little funding, no special skills, and a little effort, miracles will happen.
The fact is that a professional economic developer is a very highly skilled
individual. He must be a salesman, a person with skills in negotiating, public
relations, finance and budgeting, real estate, strategic planning, must be skilled in
the use of computers, and should have the communications skills to help lead the
community to improve those resources that potential job providers require and to
make the city a better place in which to live. Critical to the success of the
economic developer is the ability to develop and maintain working relationships
with the Tennessee Department of Economic and Community Development,
TVA, other federal and state agencies, development districts, the Tennessee
Industrial Development Association, and regional industrial development
associations. The very best that an economic development agency can do is to
employ a “Certified Economic Developer.” There are probably not more than a
dozen or so certified developers in Tennessee. They have demonstrated by
education, experience, and competence in economic development the ability to
successfully develop and operate an economic development program. If the
agency cannot afford a certified developer, the next best bet is to employ someone
with training in basic economic development or one who has graduated from an
extended economic development training program, such as the EDI at the
University of Oklahoma, at Georgia Tech, or elsewhere, and who has five to ten
years or more experience in economic development. An economic development
agency can easily become frustrated by employing a developer with no specific
economic development experience that may require a learning curve of from five
to ten years in order to become effective. In short, agencies can hire experience
or grow experience, but growing experience most often makes job development a
much longer process. A qualified economic developer can be the “spark plug” to
really make positive things happen in a city, county, or region.
B.
An Organized and Adequately Funded Economic Development
Program. Many smaller cities and counties may contribute from $500 to
$25,000 per year for industrial development, and when added jobs do not
result, they feel that their money is being wasted. If the program is free
standing, you can bet that the city or county is wasting their money. One
city in Northwest Tennessee recently reported a contribution of $10,000
annually for economic development—“and that is all our people can
afford, because we are a small city”, the Mayor advised the group. To his
credit, he indicated that he understands the need for a regional approach to
pool resources and develop an effective and sound economic development
program and offered to partner with neighboring cities and counties to
make such an effort a reality. If your city cannot afford a $250,000 to
$350,000 economic development program, then you need to consider
partnering with neighboring cities and counties so that your pooled
resources can adequately fund a program. A highly trained and
experienced economic developer may command an annual salary
comparable to the pay for an experienced city manager, and that is likely
double a teacher’s salary and more. There is also the matter of marketing
the city—developing a marketing strategy, including use of the Internet,
trade magazines, and other means of advertising, travel, support staff, and
limited entertainment. The developer needs the flexibility to commit
resources to make a deal. If a developer has the whole package together to
meet the requirements of a prospective employer and is $20,000 short, the
developer should have the support to make such a commitment without
having to arrange public meetings that may be held from five to ten or
more days in the future. A commitment on the spot can make the
difference.
I know of instances where businesses have bought cowboy hats and
quarter horses to successfully obtain construction contracts with Japanese
companies. As a former recruiter in East Tennessee, I was in an all day
meeting with a Japanese company, and the session went through lunch.
Finally, at mid-afternoon, I asked, “Would you gentlemen like lunch?” I
was thinking of taking them to Angelos, a private club and restaurant in
Morristown, or the Regas, a very nice restaurant in Knoxville, both within
30 minutes driving time. “What would you like for lunch?” I asked. The
interpreter, in unison with other officials responded, “Whopper Juniors!” I
sent the Public Works Director to Burger King, and we continued
working. I tell this story to show you that more often than not, we are
really talking about limited entertainment.
There are basically two components of an economic development
program, (1) recruitment of new businesses and industry, and (2)
retention of existing businesses and industry. All of the resources of an
economic development program should be directed toward these two
areas. As important as we think new business and industry is to a
community, 80 percent of new jobs developed are created by existing
industry. The majority of the economic developer’s time should be spent
in working with existing industries. The developer should make it his
business to know whether an existing firm is in a growing or declining
industry; about special training needs; additional financing, and tax
incentives for expansion. By developing a close personal relationship
with key company officials, the economic developer may be well ahead in
sizing up problems or opportunities for expansion. One official in East
Tennessee related to me that he met frequently with the president of a
manufacturing company that made military software—back packs,
helmets, and safety vests under government contract. The president
indicated that he was considering doubling the size of his plant facility to
meet new production requirements. The economic developer suggested
that the company purchase the speculative industry building next door,
rather than double the size of the existing plant. He pointed out that it
would be easier to sell a separate building in a declining job market than to
sell the back half of the existing plant, and the president purchased the
speculative building. Within this framework, let us look at the
requirements for a good economic development program.
1. A Strategic Plan. The importance of a strategic plan cannot
be overstated. If an economic development program fails to
develop a strategic plan, then it plans for nothing to occur. We
must develop overall goals and objectives and measure our
success in some fashion, such as the number of new jobs or
additional investment in the community.
2. A Marketing Strategy. This is sometimes developed in
conjunction with the strategic plan, but it is necessary for the
city to understand its resources and make some reasonable
determination as to how it may match up with different types
of industry. If your city has an abundance of hardwoods, it
might want to target those industries that use hardwoods in
their products. If your workforce is not skilled, efforts to
recruit companies requiring highly skilled workers might not
be successful. The best marketing plan is one that identifies
what an industry needs and then works to provide the resources
to meet that need.
3. A Program that is Adequately Funded. If your city cannot
adequately fund an economic development program, do not
waste public money by paying what you can for an ineffective
program. A regional approach with pooled resources is the
best way to develop a program that is adequately funded to do
the job.
4. Identify General Location Determinants. Location
determinants are determined by an industry’s needs. Often we
identify such things as the city’s location, access to adequate
transportation, financing, a trained workforce, utilities—water,
sewer, gas, electric, streets, telecommunications, housing,
cultural and recreational amenities, etc. Keep in mind that a
company looking to locate in Middle Tennessee will find
several communities with buildings, water, sewer, gas, electric,
streets, telecommunications, and other basic infrastructure. If
its primary concern is the quality of the workforce, then it is
likely that the decision to locate or not will turn on that key
factor. If your community does not have adequate housing that
is reasonably priced for managers and supervisors, they are
likely to look elsewhere. It is recommended that every
community analyze general location determinants to determine
how well the community measures up and to enable a timely
response for information about particular determinants. These
are what I consider general location determinants:
(a) Location. Location is important for suppliers and
markets. Firms want to be within reasonable distance
to their suppliers and the markets they serve.
(b) Transportation. Cities on or near Interstates and four
lane highways and with air, rail and water
transportation are generally preferred over areas that
are more remote.
(c) Financing. Financial assistance with land, facilities,
and equipment should be identified. In Tennessee there
are small business loan programs with low interest
loans administered through the State of Tennessee,
TVA, development districts, the Rural Electrification
Administration (generally available through electric
cooperatives), and local banks and financial
institutions.
(d) Land and Buildings. This includes adequate land for
the industry and sometimes for future expansions.
More than one-half of firms looking for a new location
settle on an existing building. This shortens start up
time considerably, and it is the primary reason that so
many cities have developed speculative industry
building programs. In today’s economy cities might
consider development of business parks with shortterm leases for office space. You might have a dozen
or more tenants in one building.
(e) Utilities. Analyze the use and capacity of existing
utility facilities. If you are at 90 percent usage of your
(f)
(g)
(h)
(i)
water or wastewater plant and a company is a high user
of these services, you may have trouble.
Telecommunications. Find out what
telecommunications services are available in your city
and include that information in any promotional
materials.
Housing. If the average price of housing in your city
is $36,000, and company officials are looking for
houses ranging in price from $110,000 to $450,000,
your city could be eliminated as a home for the new
industry.
Education. This is perhaps the most important
economic development factor. It has been said that
education equals economic development. Advertising
materials should include statistics on enrollment in
elementary, middle, high school and test scores for
standardized tests; availability of community colleges,
technical schools, and colleges and universities; percent
and number of adults with college degrees, including
associates, bachelors, masters, and doctoral.
Workforce. This factor is closely related to education.
It has to do with the skill levels of your community’s
workers. As we develop more and more service jobs,
they will be unskilled, semi-skilled, or highly skilled,
depending on the training and skills of our workers. If
we do not equip our people with job skills, I think that
it is pretty much assured that their future will be in low
skilled jobs at fast food restaurants, retail stores, clerks,
and in low paying assembly jobs.
The National Association of Manufacturers recently
surveyed over 6,000 manufacturing firms and found
that manufacturers report their biggest problem with
workers is their lack of basic education skills—writing,
mathematics, and reading. Workers have to have basic
skills before they can advance to higher skill levels.
(j) Shopping and Eating Facilities. This factor has to do
with community livability. People who are from larger
cities and are accustomed to shopping in malls and
eating in family restaurants may not be impressed with
a steady diet of fast foods. Now, I realize that every
community cannot have shopping malls and Red
Lobster restaurants. If you do not have these resources
available, then you need to advertise a trade off such as
a low crime rate, great schools, outstanding recreational
opportunities, etc. A business manager might be willing
to drive 30 minutes for shopping and dining out, if he
can have other city resources that are important to him.
(k) Recreation. Describe recreation facilities and services
available. Golf courses, baseball, softball, basketball,
parks, fishing, swimming, hunting, community centers,
and access to major sporting events.
(l) Medical Services. You would not want a plant
manager and his wife to drive through your city and not
be able to find the local hospital. Advertise it and its
equipment and level of care. Publish in promotional
materials the names and kinds of physicians that are
available and include regional hospital facilities and
services as well.
(m) The Internet. The Internet is a vitally important
information tool. Professional industry and business
recruiters are proficient in its use, and they can look
your city over through a database that you may be
unaware of and can discard your community without
you even knowing it. It is an important research tool
that is necessary for office work across the nation.
Many occupations use it all day every day. As long as
a community has fast Internet access, location is not a
factor in its use.
It is important for a city to have a good web site. The
web site should be well organized and should open
within 20 seconds. The site should be linked to the
State of Tennessee’s web site, the ECD web site
(specifically), TVA, MTAS (MTAS maintains up to
date web site addresses that are often used by state and
area agencies), development districts, the chamber of
commerce, industrial board, local school systems, and
local utilities, if administered separately, It is estimated
that 90 percent of the hits on a web site are the result of
links. Research shows that most users will not wait
more than 20 seconds for a site to open. They simply
go on and do not re-visit the site. The site should be
well organized and should include statistical
information on everything that has been mentioned thus
far. I look at web sites in Tennessee occasionally. I
opened one site and there was a picture of the Mayor
and no information. At another site I observed a
picture of the chamber building and no additional
information. You do not need a web site, if all you are
advertising is a picture of the Mayor, County Mayor, or
the Chamber of Commerce or City Hall. The site
should be professionally done and should be updated at
frequent intervals.
(n) Incentives. Without getting into the debate about the
need for incentives, I would simply point out that
incentives are not important when a company initially
makes a decision to relocate. At the point where the
company develops its short list of locations, say two or
three locations, and then cities have to offer incentives
to remain competitive with other locations. At least
one State, Oklahoma, gives cash rebates to companies
for added payroll. Although questionable, one city in
Tennessee gave a cash contribution of $1.5 million for
a company to locate there. Most discussions on
incentives usually revolve around “tax abatements”
and “in-lieu of taxes.” Tax abatement is not legally
authorized in Tennessee. That is to say that a city may
not require a 40 percent assessment on the market value
of one business and 20 percent on the value of another
business, or some similar arrangement, regardless of its
purpose. An in-lieu of tax payment may be legally
authorized in Tennessee. Here you have an industrial
board that is tax-exempt actually owning property and
leasing it to an industry for some period of time. At the
end of the lease period, the property is transferred to the
industry for some nominal fee. Industrial boards often
enter into contractual arrangements with industry in
which the industry agrees to pay a payment, or part of a
payment that it would have paid had it been required to
pay taxes. This is referred to as an “in lieu of tax
payment.” I have used such arrangements in
consideration of start up costs that industries often
experience. I think that it is reasonable to use a three to
five year program, but I would not recommend in lieu
of tax programs for more than five years.
As previously mentioned, there are loan programs
through various federal, state, and regional agencies to
make low interest loans. The Economic Development
Administration and Appalachian Regional Commission
may make both loans and grants for job creation
projects of over $1 million. Some cities in Tennessee
make loans for economic development in violation of
Article 2, Section 29 of the Constitution of the State of
Tennessee which provides in part: “…But the credit of
no county, city or town shall be given or loaned to or in
aid of any person, company, association or corporation,
except upon an election to be first held by the qualified
voters of such county, city or town, and the assent of
three-fourths of the votes cast at said election.”
III.
IV.
Provide Resources Necessary to make the Community a more Attractive
Place in which to Live. If two communities have the same basic
infrastructure, then community livability may become an important factor.
The city that commits itself to improving streets, sidewalks, education,
shopping, recreation, codes enforcement and takes pride in the appearance of
the city will win out in the long run. Cities not willing to make such
investments are not likely to expend the resources to develop an effective
economic development program with the purpose of creating community
wealth.
Summary. In closing, I would like to note that economic development is
every bit as complicated as managing the affairs of a city. Its success is
highly dependent on (1) a highly trained economic developer, (2) an organized
and well-funded economic development program, and (3) a city that is
committed to providing the necessary resources to make it a more attractive
place in which to live. If you do not have a highly trained economic
developer, then you need one. If you cannot adequately fund your own
economic development program, then by all means help to establish a regional
program where cities and counties can pool their resources. And finally, make
the investments that are needed to make your city a better place to live. It
concerns me greatly that we are a low wage, low tax state and spend a great
amount of time extolling the virtue of no new taxes, while Virginia, North
Carolina, and Georgia make investments in education and technology to
ensure their success in the 21st Century. The importance of public service is
to make our communities a better place to live, work, and play. If we are
unwilling to make the investments, I am afraid that many Tennessee
communities may dry up, and our children and grand children will be working
in Virginia, North Carolina, Georgia and elsewhere, while those of us left
behind will be destined to a life in low skill occupations.