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58th Annual Meeting of the Southern Legislative Conference

Economic Development, Transportation & Cultural Affairs Committee Chair's Report


Little Rock, Arkansas

August 14 to August 18, 2004

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October 12, 2004

 

TO:     Members of the Executive Committee

FR:       Representative Frank McDaniel, Alabama
Chairman, Economic Development, Transportation & Cultural Affairs Committee

RE:       Report of Activities of the Economic Development, Transportation and Cultural Affairs Committee at the 58th Annual Meeting of the Southern Legislative Conference in Little Rock, Arkansas, August 14-18, 2004

     The Economic Development, Transportation and Cultural Affairs Committee convened once on Monday, August 16 and twice on Tuesday, August 17.  The following is a synopsis of the substantive issues presented to our Committee on these two days.

PROGRAM SESSION

Monday, August 16

I.          The Successor to TEA-21 (SAFETEA):  Implications for   Southern Legislative Conference States

Johnny B. Bradberry - Secretary, Department of Transportation and           Development, Louisiana

Dan Flowers - Director, Highway and Transportation Department, Arkansas

Janet Oakley - Director of Policy and Government Relations, American Association of State Highway Transportation Officials (AASHTO), Washington, D.C.

Background

     Federal transportation legislation has enormous implications for states and plays an integral part in enhancing the transportation infrastructure capabilities at the state and local levels.  The Transportation Equity Act for the 21st Century (TEA-21), the six-year, federal highway and transit program funding mechanism, expired on September 30, 2003, but the U.S. Congress and the Bush administration have not reached agreement on the funding level for new reauthorization legislation.  Consequently, in late July 2004, Congress enacted another extension (the fifth such extension) to keep federal highway and transit programs operating through September 30, 2004.  The panelists referred to this issue and other key transportation trends in the region during their presentations.

Secretary Bradberry’s Presentation

     Secretary Bradberry began his remarks by indicating that he came to his current position in April 2004 from the private sector, where he had been for more than two and a half decades.  At the outset, he provided an overview of Louisiana’s transportation system and the Department of Transportation and Development.  In terms of responsibility, the system includes 16,705 miles of roadway and 894 miles of interstate; 14,000 bridges, including 111 movable bridges; 62 general aviation airports and seven commercial airports; 22 shallow and deep draft ports, 470 dams and the offshore Oil Terminal Authority.  While these resources encompassed $40 billion to $50 billion in infrastructure, the department also had operational responsibility for mowing 3.6 million acres of land, collecting 71,000 cubic yards of litter, operating 14 ferries, more than 3,000 railroad crossings, 20 rest areas, 11 weigh stations, 3,026 traffic signals and establishing more than a million traffic signs.

     In terms of the department’s organization, according to Secretary Bradberry, he is assisted by a deputy secretary, an under secretary for management and finance, a chief engineer and three assistant secretaries handling public works and inter-modal transportation; planning and programs; and, operations.  In total, the department has 5,231 employees.  The department’s budget for fiscal year 2004/05 was $1.52 billion, with the two largest categories being expenditures involving capital outlay for highways ($909 million) and operations ($418 million).  In terms of revenue categories, the two largest included federal funds ($580 million) and trust funds ($560 million).

     Secretary Bradberry listed several challenges facing the department and divided these into five major categories.  First, the constraints imposed by limited financial resources.  He indicated that the state needed an additional $10 billion to meet its essential needs given the number of non-federally funded roads, aging infrastructure and the continued decline in the state’s transportation trust fund.  Second, the perception of the department among the state’s residents was another challenge.  In order to improve the department’s perception, it is important to build an offensive plan that would earn the public’s trust.  Third, he listed the challenges associated with initiating a “cultural shift” at the department.  In this regard, he stressed the need to run the department like a business while institutionalizing change in the department’s workforce.  These cultural shifts would lead to a much more effective and efficient operation that would benefit the state as a whole.  Fourth, he considered the challenge of developing a total transportation infrastructure that focuses on all transportation modes.  Secretary Bradberry noted that in the current, complex global economy, developing and enhancing inter-modal transportation techniques was critical.  Finally, Secretary Bradberry mentioned the challenge of improving coordination with other agencies, particularly the state’s departments of economic development, natural resources and environmental quality.  His agency has to work in tandem with these other key agencies to ensure an improvement in the quality of life for all the state’s residents.

     Secretary Bradberry noted that in 2000, the state began working on a statewide transportation plan.  This plan, three years in the making, was adopted in 2003, and its main objectives were twofold: one, address the state’s transportation needs and, two, support economic growth throughout the state.  He indicated that he had carefully reviewed the plan and saw no reason to discard it, but that his focus will be to enhance it.  The plan included extensive technical analyses along with significant stakeholder involvement.  While the former included a travel forecasting model, the latter included seven advisory councils and two statewide conferences to solicit input from the entire spectrum of interested parties.  Importantly, the plan addresses all modes of transportation, including passenger and freight transport.

     In terms of emphasis areas, Secretary Bradberry listed the following as critical for building up the state’s transportation system:

·        Highway pavement and bridge preservation;

·        Highway operations, including intelligent transportation systems, rest areas, signs and signals;

·        Highway safety;

·        Major highway corridors, i.e., “mega” projects;

·        Connections to ports, airports, truck and rail facilities;

·        Improving existing airports;

·        Port modernization and expansion;

·        New program for freight railroad improvements; and

·        Basic transit service for elderly, handicapped and poor.

     Secretary Bradberry noted that under the previously mentioned statewide transportation plan, 2000 through 2030, his department had four possible revenue scenarios.  Accordingly, with 2030 being the horizon year, the revenue scenarios are:

·        Scenario 1(A) = Baseline scenario

·        Scenario 1(B) = Inflation adjustments in years 11 and 21

·        Scenario 2 = Requires increase of $250 million annually; inflation adjustment in years 11 and 21

·        Scenario 3 = Further increase of $150 million annually ($250 million + $150 million = $400 million); inflation adjustments in years 11 and 21

     Secretary Bradberry discussed the potential impact of the proposed federal transportation reauthorization legislation on his state, noting four major priorities that Louisiana would prefer in the new authorization legislation.  Specifically, it should be a well-funded bill; Louisiana prefers the U.S. Senate version of the bill which includes a funding level of $318 billion over six years and provides the greatest level of funding equity.  Any increase under the new reauthorization to the state will be allocated within the outline of the previously referenced statewide plan with the priority areas being highway and transit programs and developing major highway corridors, i.e., mega projects.  While the state match to secure additional federal funds could be a challenge, given the continuing weaknesses in the state’s fiscal picture, this certainly will be a priority for his department.

     Secretary Bradberry provided a series of tables that presented details on Louisiana’s stake in the different reauthorization plans being discussed both within Congress and between the Bush administration and the different chambers in Congress.  For instance, federal highway program funds nationwide for the six-year period under the competing plans amounted to the following:

Federal Highway Program Funds
 

 

TEA-21

SAFETEA

Senate

House (TEA-LU)

House (TEA-Less)

NNationwide

$182.8 Billion

$201.6 Billion

$255.8 Billion

$298.7 Billion

$225.5 Billion

LLouisiana

$2.67 Billion

$2.84 Billion

$3.7 Billion

$3.71 Billion

$2.88 Billion

 

Federal Transit Program Funds
 

 

TEA-21

SAFETEA

Senate

House (TEA-LU)

House (TEA-Less)

NNationwide

$41.0 Billion

$45.8 Billion

$56.5 Billion

$69.2 Billion

$225.5 Billion

LLouisiana

$216 Million

$311 Million

?

$410 Million

?

Note:    Figures do not include earmarks

     Secretary Bradberry expressed his preference for the Senate version of the proposal currently being discussed by the different parties.  Not only does this version appropriate 93 percent of the total amount, it contains a minimum guarantee of 95 percent to Louisiana.  In contrast, he cited TEA-21, the current law, with a scope of 93 percent and a minimum guarantee of 90.5 percent; SAFETEA, or administration’s proposal, a scope of 93 percent with a minimum guarantee of 90.5 percent; TEA-LU, a scope of 74 percent with a minimum guarantee of 95 percent; and TEA-Less, a scope of 84 percent with a minimum guarantee of 90.5 percent.  He stated that the administration’s proposal and the two House versions were “bad” for the state. 

     Secretary Bradberry listed the year-by-year funding levels that Louisiana can expect under the administration, the House (revised) and Senate proposals.  Under the administration’s proposal, the state stands to gain $2.838 billion, while under the House and Senate versions, the state stands to gain $2.883 and $3.697, respectively.  Once again, he expressed greater satisfaction with the Senate proposal given that Louisiana’s share is significantly greater.  However, he cautioned that for Louisiana to qualify for the entire federal allocation with matching state funds, the state will have to raise its transportation operating budget from the current level of $418 million by more than $116 million in the first year (and even more in each additional year).  Toward this end, his department has considered a range of revenue enhancement options, which included increasing the gasoline and diesel taxes, automobile and truck registration, cigarette and alcohol taxes, driver’s license fees and imposing a special sales tax on fuel and even garnering additional revenue by increasing the statewide sales tax and channeling the proceeds to transportation.  His department has modeled scenarios for the next 30 years in the previously mentioned statewide transportation plan.

     In addition, Louisiana is considering tolls as a revenue enhancer and the state currently has two toll facilities.  A third enhancement is progressing with the application to the federal government already submitted (TIFIA) and a bond sale projected for this fall.  He noted that while construction will begin in late 2004, this toll facility is expected to be open to traffic by 2008.  According to Secretary Bradberry, the new toll road, titled LA-1, will be an elevated highway in the southern part of the state, i.e., the state’s energy corridor.  He indicated that 20-25 percent of the nation’s energy resources pass through this portion of the state and the viability of the toll road and the transportation infrastructure have huge national implications.  He did clarify that while tolls can finance a portion of any large project, very few can be completely funded with tolls.  He elaborated that there were “many potential projects if we have the authority to ‘toll’ the Interstate.”

     In closing, Secretary Bradberry provided a glimpse into his management philosophy, honed by years working in the oil and gas industry.  Specifically, he stressed the following attributes: individual leadership; making decisions and taking risks; maintaining total commitment and pride in one’s work; being proactive and not reactive; stressing teamwork; operating under a continuous improvement mentality; and never compromising on ethics, honesty or integrity, all will lead to positive results.  In sum, stressing these attributes will lead to process improvements; a raised level of urgency; focused customer satisfaction; managing available resources efficiently; always improving; and maximizing financial and human resources.

Director Flowers’ Presentation

     Director Flowers began his remarks by noting that Arkansas is fortunate to have a General Assembly that has been extremely supportive of the state’s highway department over the years.  He indicated that his presentation would cover two main areas: first, how Arkansas will be impacted under the new federal transportation reauthorization funds and, two, recent trends and developments at the Arkansas Highway and Transportation Department.

     Director Flowers stated that even though almost a year had passed since the expiration of TEA-21, the country has been operating under extensions that have provided a fraction of the total investment necessary to fund these essential transportation programs.  This has created a great deal of uncertainty and undoubtedly slowed many important projects.  Yet, he acknowledged, members of Congress and their staff are working hard to resolve this issue and reach agreement on a suitable level of funding for the next round of transportation funds.

     According to Director Flowers, Arkansas--like probably every other state--supports the highest, sustainable level of funding under the new reauthorization agreement.  Arkansas is a donor state that would like to see the minimum guarantee increase from 90.5 percent to 95 percent.  Arkansas does not want to see an interruption in funding, like the state experienced in one year in the past TEA-21 authorization process, when there were questions related to the revenue aligned budget authority.  He also noted that Arkansas would like to see the budget fire-walls retained to preserve the 80-20 split with transit.  Director Flowers stressed the importance of environmental streamlining to ensure the speedy implementation of transportation projects.  He added that while Arkansas did not want to get out of any of these environmental requirements, the environmental approval process must move much faster to avoid the seven to 10 years it has taken in the past.

     In terms of the two major proposals currently under discussion in Congress, Director Flowers indicated that, like Louisiana, Arkansas favored the Senate version.  He cited the availability of additional funds, better minimum guarantees and favorable structural details in this proposal.  The House proposal, he noted, has a lot of earmarks.  In terms of the Senate plan, Arkansas stands to gain $2.6 billion over six years and, under the House plan, the state stands to secure $2.5 billion.  Both of these proposals were 25.4 percent and 21.6 percent, respectively, more than the funding level of $2.1 billion Arkansas secured under TEA-21.  He commended both proposals for including opportunities for states to embark on innovative financing techniques including tolling, bonding, public-private finance and loans.

     Director Flowers expanded on the activities of his department in recent years.  The mission of the department was to provide a safe and efficient, aesthetically pleasing, and environmentally sound inter-modal transportation system for the user.  The department (along with the Highway Commission, which technically oversees the department) is responsible for 16,369 miles of roadway and 7,042 bridges.  He indicated that the state highway system comprises only 17 percent of the state’s total public road mileage and added that the state highway system carries 80 percent of the total traffic and 96 percent of all heavy truck traffic.  Truck traffic through Arkansas is particularly heavy, Director Flowers stated, with the weigh stations around Memphis on the Arkansas side having some of the highest volumes in the country.  Furthermore, certain parts of the highway system between Little Rock and Memphis involved 60 percent truck traffic.  According to Director Flowers, even though Arkansas had the 12th largest highway system in the country, the state ranked 41st in the nation in terms of revenue per mile.  He noted that this lack of resources was the most important obstacle stalling continued system improvements.

     Director Flowers indicated that in 2003, the department commissioned a needs study to obtain a comprehensive review of the state’s highways.  The results of this study illustrated the urgency for the state to secure additional resources in meeting these essential needs.  The study included four major elements: Capacity Improvement Needs; System Preservation Needs; Arkansas’ Congressionally-Designated High Priority Corridors; and Economic Development Connectors.  Given the tremendous economic growth experienced in many parts of the state in the last decade or so, the need for capacity enhancements remained critical.  He indicated that every road in the state will need some form of maintenance in the next 10 years and listed several high priority corridors that need to be developed in the next few years.

·        I-49, an important artery that the state shares with Louisiana, connects Kansas City (through Arkansas) to New Orleans and, in particular, the port of New Orleans.  He estimated that Arkansas would need $2 billion to enhance the quality of this interstate.

·        The proposed I-69 also is a crucial artery that wends its way from Port Huron, Michigan (through Arkansas) to the Lower Rio Grande Valley; the estimated cost of completing the portion of the highway through the state is $1.6 billion.

·        Highway 412 from Tulsa (through Arkansas) to Nashville is yet another important artery and the portion in Arkansas would cost about $1 billion to upgrade and complete.

     He observed that all these arteries are Congressionally-designated high priority corridors, an indication of their importance to the trade and commerce of the national economy.  Another element highlighted in the needs report, and stressed by Director Flowers, involved economic development connectors.  According to him, local government officials often inform him that it is exceedingly difficult to attract major economic development projects to their districts without a four-lane connection to an interstate.  Director Flowers stated that the needs study estimated the cost of constructing these four-lane connectors to interstates from all Arkansas cities with a population greater than 5,000 people.  Cumulatively, the total cost for needs and other improvements listed in the 2003 report stood at $16.1 billion, with anticipated funding for these projects totaling $4.3 billion.  The almost $12 billion shortfall ($11.8 billion), Director Flowers noted, will be an obstacle in promoting the economic development growth path of the state.

     According to Director Flowers, Arkansas’ primary highway network extends to about 8,400 miles; one half of this network carries 92 percent of all the traffic in the state, an indication of the disproportionate wear and tear on these portions of the system.  This is the backbone of the state’s grid system, and it is the goal of the department to develop these essential arteries into four-land highways in the future.

     Director Flowers commented on the state of Arkansas’ highway trust fund.  Unlike the general fund, which has in recent months seen a marked improvement in terms of growth, revenue growth of the state’s highway trust fund has been essentially flat for a number of years now.  The lack of revenue growth had hampered the capacity of the state to embark on a series of essential highway and transportation projects.

     Director Flowers indicated that his state had been very successful in leveraging additional funds through a number of innovative financing techniques, including bonds, GARVEE bonds and loans.  He cautioned states on securing loans against future federal transportation funds; Arkansas secured a loan from the federal government to build a portion of I-40.  Since this loan was due about the same time that the TEA-21 expired and Congress had still not passed the new reauthorization bill, Arkansas faced difficulties in locating funds to meet the loan obligations.  Director Flowers encouraged states to factor this possibility into their calculations when seeking loans from the federal government.  In terms of tolls, he mentioned that residents are universally opposed to tolling an already existing highway; yet, they are certainly more amenable to tolls on a new highway.

     Arkansas is considering tolls in a few places in the northwest corner of the state and in the central part of the state, in northern Pulaski county.  While Arkansas had not seen any major activities with regard to public-private partnerships to build roads, there have been several partnerships between the state and local governments.  The city of Jonesboro in northeast Arkansas committed $20 million for a road project in partnership with the state.  Also, Arkansas has had success with GARVEE bonds to carry out the state’s interstate rehabilitation program.  This five year program, begun in 1999, involved $1 billion and included rebuilding 50 percent of the state’s interstates.  While 50 of these projects were contracted out, 37 projects have been completed.

     Director Flowers remarked that Arkansas is very proud of its efforts in re-paving highways throughout the state.  His department has been very diligent in providing a great deal of information to the public regarding lane closures and other projects and, consequently, the state was awarded a total of nine national and regional awards for involving the public in its projects.

Ms. Oakley’s Presentation

     Ms. Oakley indicated that her presentation would cover three broad areas: the current status of the federal transportation reauthorization legislation; some of the key policy issues; and the outlook for the future.  She stated that when she was invited in the spring to speak at the SLC meeting in mid-August, she was confident that she would be reporting on the status of the actual legislation.  However, this is not the case and given that the different parties have not reached agreement on the modalities of the legislation, Congress recently authorized a fifth extension of the program before leaving on its 2004 August recess.

     According to Ms. Oakley, the bill currently is in conference with conferees from both chambers debating and negotiating the actual details.  There are 73 conferees with 52 members of the House and 21 members of the Senate involved in the process.  She indicated that all but 15 states are represented in the conference committee.  Interestingly, unlike during the previous TEA-21 negotiations, when then-Congressman Bud Shuster from Pennsylvania and the late-Senator John Chafee from Rhode Island directed the bill’s progress, these two states are not even represented in the current conference committee.  She stated that a majority of the conferees are from donor states with a number of the key legislative leaders in Congress included in their ranks.  According to Ms. Oakley, while the House Speaker is constantly supervising the discussions, the White House continues to oversee every move of the discussions.  She noted that while the discussions have been quite contentious, conferees are plodding ahead with their deliberations.

     Ms. Oakley stated that the biggest obstacle to reauthorization is finalizing agreement on an appropriate level of funding.  She added that the disagreement extended beyond the funding levels to donor-donee issues and the specific programs and projects that should be covered under the new reauthorization.  She indicated that there could be no movement on ironing out the details on the projects until consensus is reached by the different parties on the level of funding.

     While the level of funding and how the funds will be distributed has dominated the discussions, negotiations about the donor-donee issue also have been nettlesome.  Ms. Oakley indicated that the donor states are seeking a 95 percent return on their contributions; in fact, under TEA-21, 26 states were below 100 percent on their return on investment while, 20 states were below 95 percent.  She noted that there was a great deal of push from the Senate to reach the 95 percent mark; this was achieved with the Senate’s opening bill, which amounted to $318 billion.  This level of funding would guarantee a 95 percent return to every state by the end of the sixth year.  Another provision included in this Senate bill, according to Ms. Oakley, was a guarantee that every donee state will secure 110 percent of what they received under TEA-21.

     In contrast to the Senate version, Ms. Oakley stated, the opening bid submitted by the House was much smaller, i.e., $275 billion.  While this funding level will not guarantee states the 95 percent return, the House bill did include a re-opener provision that would halt funding by September 30, 2005, unless another provision is introduced to guarantee the 95 percent return by the end of fiscal year 2009.  According to Ms. Oakley, the Bush administration’s opening bid was significantly smaller than both the Senate and House versions, i.e., $256 billion.

     After these opening bids were submitted in June and July of this year, there was a series of offers and counteroffers, both public and private, among the two Congressional chambers and the White House.  She indicated that the White House and House leadership were willing to inch their funding levels up, while Senate Republicans expressed willingness to inch their funding level downward.  At the point of recess, the Senate offer stood at $301 billion (with $289 billion guaranteed) and the House offer stood at $299 billion (with $284 billion guaranteed), noting that the important figure here was the guaranteed level and consequently, there was only a discrepancy of $5 billion.  Ms. Oakley was quick to point out that while this $5 billion figure might appear to be a small hurdle, they were still far apart.

     She compared both the Senate and House versions to the TEA-21 funding levels.  Given that the TEA-21 guaranteed $211 billion, both versions appear to be a substantial improvement in raw dollar figures.  They constituted an increase between 34 percent and 40 percent and, even though TEA-21 represented an increase of about 40 percent over the previous ISTEA, they were pretty good offers.

     According to Ms. Oakley, while the funding levels were critical components of the legislation, the structural aspects of the legislation were also very important.  For instance, the highway-transit split, the donor-donee split, all were very contentious issues that had to be resolved.  She mentioned the fact that the issue of allocating funds for core highway programs could be explosive, particularly since states and local governments rely on these funds to build, operate and maintain their highway systems.  Under the House version, according to Ms. Oakley, the core highway program will see serious erosion and states like Louisiana and Arkansas will not be able to meet their demands.  Specifically, the House bill funds only 81 percent of core highway programs while the more expansive Senate bill funds about 90 percent.  She concluded that despite the increase in the overall funding level, there was no major increase for core highway programs.

     When Congress passed its fifth extension of TEA-21 on July 23, 2004, it accomplished two tasks: one, it extended the highway safety, transit and motor carrier programs through September 30, 2004 and, two, the federal-aid highway program extension was only extended to September 24, 2004.  According to Ms. Oakley, apparently this was to allow Congress to readdress the issues of project funding and minimum guarantee before the extension of that program expires on September 30.  In addition, while the bill that passed allows the Federal Highway Administration to distribute a total of $31.9 billion in obligation authority for fiscal year 2004, additional obligation authority may be distributed on or about September 24, depending on Congressional action.

     In terms of other structural issues, Ms. Oakley indicated that AASHTO would be advocating streamlining the environmental approval process to make it speedier.  While generally 90 percent of the highway construction projects are not controversial, they are held up due to the many hoops that states have to jump through in terms of complying with 40+ statutes and regulations.  She also anticipated a proliferation of new programs under the reauthorization program because there is a perception that this is where the deep pockets lie to leverage dollars.  Unfortunately, she noted, this results in state highway funds being dissected and diluted from their core programs, even though these other programs all are worthy efforts.  In this regard, Ms. Oakley mentioned, high risk rural roads, safe routes to schools, projects of national significance, inter-modal gateways, dedicated truck lanes, high priority projects, all act as diverting funds away from these core highway programs.  She indicated that this is a move to general revenue sharing and this is of some concern to AASHTO.

     In terms of outlook, with the two offers currently being about $5 billion apart, conferee staff have been instructed to try and reach a consensus; it is possible that the conferees could clinch an agreement in September with the right combination of funding that would solve a host of the contentious issues.  Similarly, there is the real possibility that there could be a sixth extension with six month, two year and three year extensions, all possibilities.  She noted that the pressures of the presidential and Congressional elections in November also will play into the calculations of conferees.

     In the near term, given the pressures of the elections later on this fall, the potential for a fight between authorizers and appropriators over who will have the final say in the fiscal year 2005 funding level remains real.  In the longer term, it is becoming increasingly clear that it might be difficult to adopt a bill under the parameters established by the two chambers.  Regardless of the November election results, deficit reduction will play into calculations of the reauthorization effort.  Given that a gasoline tax increase is unlikely in the current environment, Ms. Oakley indicated that a well-funded bill will be a problem.  In closing, she cautioned that states should hold out for a well-funded bill and that AASHTO will press for that result.

BUSINESS SESSION

Tuesday, August 17 

I.                   Economic Development in Fiscally Austere Times

            Matt Kisber -  Commissioner, Department of Economic & Community Development,                                                 Tennessee

            Larry Walther - Executive Director, Department of Economic Development, Arkansas

Background

     State economic development efforts to attract, retain and maintain corporate interests have to continue even in fiscally austere times.  Our presenters head the economic development agencies in their states (Tennessee and Arkansas) and discussed their states’ recent efforts in this area.

Commissioner Kisber’s Presentation

     Commissioner Kisber’s presentation was entitled “The Third Way,” and he began by noting that there were two types of people in the world: those who divide people into two types and those who do not.  According to Commissioner Kisber, these past four years have seen state governments confronting plunging revenues, rising unemployment levels and increasing expenditures in such categories as healthcare, education and infrastructure.  Despite these tremendous budget pressures, state governments were forced to devise innovative ways to attract and retain corporate investment within their jurisdictions.  In devising an appropriate plan, Tennessee has devised a Third Way to deal with this critical task of slashing costs while promoting economic development opportunities throughout the state.  Commissioner Kisber noted that in government, we are too often limited by an inflexible set of existing parameters.  Innovation within government often appears as a single alternative to existing practices.  According to Commissioner Kisber, to identify the third way, relevant parties must often gain a different perspective with an entirely different point of view.  In terms of its operations, Commissioner Kisber indicated that it was necessary for his agency to approach dealing with all the important forces (legislators, media, consultants, competitors, political base, taxpayers, rank- and-file employees, external partners and advocates and internal policy) with a completely different point of view.

     Commissioner Kisber listed six major benefits of identifying and adopting the third way and these included an appreciation of creative thinking; engagement of stakeholders at all levels; complete evaluation of existing processes; a new set of operating rules with “no sacred cows”; an energetic participation from both within and without the agency; and the quick identification of roadblocks along with measures to remove these obstacles.

     In terms of highlighting the effectiveness of the third way, Commissioner Kisber described four case studies that his agency had implemented recently.

Case Study #1 – The Ad Agency:  Under the old way, Tennessee’s Department of Economic and Community Development (ECD) had one advertising agency that managed concept, strategic planning, creative, production and printing.  While this was a turn-key, one-stop solution, it was very expensive.  Under this system, the department’s management largely delegated policy making and communication methods to the advertising agency.  Changing this scenario in order to slash costs, under the former philosophy would have entailed locating and hiring a new advertising agency.  However, under the third way, a more innovative strategy was devised and this has proven to be very successful.  This third way approach involved developing a new creative services division within the department to manage all strategic planning, marketing, creative, design, production and printing.  Consequently, outside contracting costs were reduced given that the new unit involves state employees already on payroll.  The department also has complete control over the entire process as opposed to ceding authority to an external agency.  Furthermore, the resources and technical capabilities of the department’s creative services unit were opened out to other state departments and agencies in Tennessee, thereby developing an entirely new revenue stream for his department.

Case Study #2 – Projects:  Under the old way, the state ECD office was viewed by local economic development concerns as a source of support.  For each project, the different concerned parties (city, county, utility company, state) interacted directly with site consultants and company executives.  An alternate way that might have evolved under the old philosophy would have entailed the ECD gathering information and handing it over to the local concern so that the state/ECD perspective would be included in the final submission.  However, under the third way approach, ECD’s business development division, in conjunction with creative services, develops a new project presentation format, which includes information from all parties, cohesively and attractively bound together in a single document.  Commissioner Kisber also mentioned that under this third way approach, the site consultants perceive that Tennessee is united from the state level down to local concerns in its business philosophy.  Further, user-friendly proposals give the accurate impression: strong leadership at the state level.

Case Study #3 – Reorganization:  According to Commissioner Kisber, ECD formerly was organized into divisions based largely on clientele with separate offices for existing industry and new business development.  Under this format, while the research division supported the state’s recruitment efforts, there was no focus on technology.  In a re-organization under the old philosophy, any number of new organizing principles could have been adopted including geographic, industry sector, size, etc.  However, under the third way, ECD experienced a comprehensive and introspective analysis from the inside-out, analysis that was compared to the review and recommendations carried out by a respected consulting firm.  He noted that the changes and results have been far-reaching and include the consolidation of divisions by function; relocation and reapportionment of physical space; addition and realignment of personnel to better serve strategic needs of the entire department; and emphasis on regional economies, an approach which means more time with local entities.

Case Study #4 – Partnerships:  In describing his final case study, Commissioner Kisber indicated that across the state, ECD was perceived as a sort of a fund pool for economic development projects.  Under this format, in order to achieve cooperation among the different economic concerns, funds were disbursed to different organizations with little regard for how they benefited the ECD mission.  Moving away from this model, under the old philosophy might have entailed simply cutting funding to these local organizations across the board.  However, the evolution of the third way approach has resulted in the ECD establishing protocols for all its partnerships based on essential criteria that include “what does this partnership accomplish, how does this partnership foster the core mission of ECD, what are the terms of the partnership and what are the returns on the economic benefit?”

     Commissioner Kisber noted that the department has been able to accomplish more with less by adopting the third way approach, a trend highlighted by the fact that the department’s operational budget shrank from $32 million in fiscal year 2003, to $29 million in fiscal year 2005, despite the addition of extra staff.  In closing, Commissioner stated that the third way entails a management style that only lives outside the box.

Director Walther’s Presentation

     Director Walther began his presentation by commenting that during Commissioner Kisber’s remarks he was struck by the many similarities between his department and the department in Tennessee.  As in Tennessee, he and his predecessor had both sought the input of agency employees at every level--not just senior management--to introduce essential structural reforms.  Director Walther indicated that his prior work experience had been in the private sector and, in that environment, thinking outside the box is often recommended.  Although this was not an easy task, it was important to step back and identify what needs to be accomplished.  Working toward those objectives was more manageable.  The question that was asked was “do your practices and procedures allow you to get to your goals effectively and efficiently?”

     One his first actions as director was to do just that: department employees literally went away to discuss their mission and how they hoped to accomplish this mission.  This retreat included economic developers from across the state talking about issues and determining how the department either helped or hindered their efforts.  After a welcoming introduction, he left the gathering in the control of an independent facilitator to elicit the most honest, comprehensive responses from the participants.  Based on this information, the department developed a strategic plan to enable the state to reach its full economic potential and beyond.  Director Walther went on to commend Commissioner Kisber and the department in Tennessee for their efforts in reorienting their business model to better fit the changing environment.

     Director Walther indicated that he intended to take a slightly different approach in his substantive remarks in describing Arkansas’ economic development efforts, stressing the absolute importance of education in a state’s economic development performance.  According to Director Walther, in this era of tight budgets, education has assumed increasing importance and relevance, a trend certainly reflected in his state.  Arkansas had issues regarding education and, in a special session that ended earlier this year, Director Walther stated the governor and the General Assembly laid the groundwork to accomplish much in this important area.  He expects them to continue this trend during the next legislative session in 2005.

     Before delving into his specific comments regarding the importance of education in economic development, Director Walther noted that there are good things happening in Arkansas now.  Job growth was improving and, compared to the same time the previous year, there were 63,000 more people working; unemployment levels had declined compared to the prior year; personal income levels had risen by 2 percent and housing values had risen by 5 percent in the last year; state exports had expanded by 21 percent compared to the same period a year before; 41,000 jobs were insourced from countries such as Japan, Mexico and Canada--certainly a positive development in the heated discussion over outsourcing--and, state revenues had increased (by 2.5 percent) in contrast to the same period last year.

     According to Director Walther, economic development is directly tied to education.  In this connection, Arkansas had great news last month when the state’s 4th, 6th and 8th grade students improved their benchmark scores in all six of the testing categories.  Some of these improvements were double-digit increases.  In his view, the greatest economic developers a state could ask for are dedicated and committed parents and teachers.  If the state can raise well-educated and healthy children, it will have an infinitely better chance of placing higher paying, high tech jobs throughout the state.  Director Walther indicated that his department sponsored a program called ACE, Arkansas Communities of Excellence, where community leaders are encouraged to form broad, internal coalitions and create strategic plans for the future of their communities.  He added that communities that work well together have a much better chance of attracting businesses to locate within their jurisdictions.

     Director Walther commented on the trend of communities around the country marketing their locales as great communities with an even greater quality of life.  Given that our cities and towns cannot afford to progress if we keep losing our talented individuals, he stressed that communities have to devise ways to enhance the quality of life in their own settings so that they create and retain high-wage, high-tech jobs in abundance.  This will act to retain the talented, smart individuals and preserve the fabric of our communities.

     In the light of these goals, Director Walther posed the question “how do we accomplish all this in era of fiscal austerity”?  He listed several factors that would be important in this effort.

·        Provide personal and individual leadership at the state and local levels.  Business happens when people meet and trust each other.  He noted that state legislators played a vital role in this regard and mentioned that last year, the General Assembly passed the 2003 Consolidated Incentives Act that equipped his department with the tools to compete with other states in the South for business.

·        Education has to be made the overarching priority with its importance constantly being stressed in the contemporary knowledge-based society.

·        Local leaders have to create and maintain critical infrastructure that is so important for future economic development.

·        Keep thinking big.  A few years ago, Marian, Arkansas, was thought of as too small to be in serious contention for an automobile assembly plant.  But, this city was a close second last year to clinch an agreement with Toyota Motor Company to construct an assembly plant to build the Toyota Tundra.  [San Antonio, Texas was awarded the plant].  Then, a few months ago, Hino Motor Corporation, a major auto parts supplier in the industry, announced they would locate a $160 million facility in Marian.  The governor, the department, officials in Marian and other policymakers worked hard to make this event a reality.

·        Performance matters above most else.  In Arkansas, incentives are provided to companies based on their performance, i.e., companies must live up to the terms of their agreement before they are awarded incentives by the state.

·        Think globally.  To take advantage of this complex global economy, Arkansas has international trade offices in Japan and Mexico.  Not only do companies from these countries have a valuable presence in Arkansas, they are a part of a growing nexus of international trade links on which the state continues to build.

·        From a marketing standpoint, Arkansas does not have the dollars to advertise aggressively in the big, national newspapers and journals.  Instead, we stress the personal relationships and we work that much harder at nurturing these relationships.  Director Walther mentioned that on a recent trip to Japan and Taiwan, where he and other key state officials accompanied the governor, met with a number of company officials that already have an Arkansas presence and others that they invited to establish operations in the state.  He noted that while the trip lasted 10 days, it cost less than three-fourths of a single advertisement in one of Japan’s largest daily newspapers.  Advertising is important, but we believe face-to-face time is more important.

     In closing, Director Walther stressed that states and localities have to preserve the delicate fabric of local communities through accentuating education.  Even though this approach could take years to reach its full impact, he reiterated that we have to start so that today’s 6th graders will be the engineers, programmers and doctors of 2020.  He encouraged policymakers to create an environment that will keep children within their communities and in their states as they graduate to the next phase of their lives.  Devoid of this emphasis on education, Director Walther noted that budgets become meaningless and international business only a dream.

II.        Legislative Roundtable Discussion

Alabama—The automobile industry has been a huge success in Alabama.  About 10 years ago, Mercedes decided to establish an assembly plant in Vance to manufacture the M-Class vehicle, which has proven to be a very popular automobile.  In fact, Mercedes recently announced plans to double the size of the facility.  Honda also has an assembly plant in the state, in Lincoln, to manufacture the Odyssey mini-van, the Pilot and V-6 engines.  Honda expects to double production levels for the Odyssey mini-van.  Hyundai, the latest addition to the state’s automobile assembly plants, soon will begin production near Montgomery at a $1 billion facility.  Toyota’s plant near Huntsville manufactures V-6 engines for the Tundra truck and, like the other manufacturers, announced expansion plans at this facility.  A key attraction for these automobile manufacturers has been the role of the Alabama Industrial Development Training program in training and preparing workers.  In terms of the state’s fiscal situation, Alabama’s new governor, who came into office in January 2003, soon realized that he faced a $675 million deficit in fiscal year 2004 and decided that he would seek the approval of the voters at a referendum in September 2003 for a comprehensive tax package, covering the entire spectrum of taxes, to raise $1.2 billion.  (There are two budgets in Alabama, an Education Trust Fund and the General Fund.)  The referendum was rejected 2 to 1, and when the Legislature went into session in early 2004, even though the projected shortfall had declined to $600 million, lawmakers still faced significant challenges.  During the session, lawmakers were alerted that the Education Trust Fund, which includes the gross taxes (sales and income) was about $236 million ahead of where it was originally estimated to be.  Even though this fund was in better shape than expected, the general fund was in very “poor shape,” just as it has been for many years now.  Lawmakers raised about $50 million in fees and about $99 million in cigarette taxes.  Yet, given that healthcare costs are growing at about $200 million per year, the state faces some serious problems in overcoming these issues.

Arkansas—One of the state’s key problems is the fact that 50 percent of the highways in the state handle 85 percent of the vehicular traffic, a fact that places tremendous burdens on the state’s highway infrastructure.  This requires extensive maintenance and expansion efforts and the state continues to devise innovative ways to resolve the funding related to this development.  In fact, the state probably will see a bond issue shortly to raise funds to accomplish this task.  Education was the key issue during the special session that finished at the beginning of this year.  The General Assembly was called into special session late in 2003 to deal with a state Supreme Court ruling that required the state to fund education before all other state programs, the only state in the nation required to do so.  The special session, which lasted a record 61 days, ended on February 7, 2004, and passed bills which increased the state sales tax from 5.125 percent to 6 percent (effective March 1, 2004), and expected to generate $360 million in its first year, the state’s largest ever tax increase; applied sales tax to 15 services not currently taxed, including tattooing and electrolysis; created a formula for the distribution of funds to schools; raised teacher salaries; and consolidated school districts with fewer than 350 students. 

Florida —No report.

Georgia—No report.

Kentucky—The state currently does not have a budget because the governor and the Senate could not agree with the House on the details of a tax proposal submitted by the governor.  Kentucky has a new governor who took office in January this year.  Given that the governor campaigned on a “no new taxes pledge,” he submitted a proposal that he labeled revenue neutral, which included higher taxes on cigarettes, alcohol and telecommunications services with a lowering of personal income taxes.  In response, the House prepared a budget which included a raise in teacher and state employee salaries of 3 percent in the first year and 4.5 percent in the next year.  The governor and the Senate did not agree with the extent of these raises and consequently there is a deadlock on clinching a budget agreement.  The state’s failure to enact a budget has resulted in court action, with the attorney general filing suit against the governor given that the state constitution is explicit about the governor’s authority to spend without an appropriation.  It should be noted that Kentucky, like a number of other states, is doing much better financially than in prior years and recently recorded six consecutive months of revenue increases.  However, the state’s road revenue growth levels have been very flat in comparison to the general fund.  Experts have not reached a conclusion about the reason for this discrepancy, though it is possible that the very high gasoline prices have resulted in motorists driving less, causing a drop-off in the contributions to the state road fund from gasoline taxes.  A legislative issue that came up during this past session dealt with the right-of-way on state and county roads.  Given the tight financial situation of both the state and counties, the state is not in a position to purchase the right-of-way when expanding and widening roads.  The passage of legislation to ease—to an extent—the liability issues concerning the lack of right-of-way was a solution.

Louisiana—No report.

Maryland—The state faced a $900 million shortfall when the session began in 2004.  Maryland also has a new governor who had signed a “no new taxes” pledge, though this pledge did not extend to fees.  Marylanders saw a number of their fees increase drastically to the point that some analysts contend that these fee increases were greater than the proposed tax increases.  The governor’s proposal to raise additional revenue by authorizing video slot machines in the state was supported by the Senate, but not the House.  This issue will definitely come up again in the 2005 session.  Transportation is a major problem in Maryland, particularly in the vicinity of the Washington, D.C., area.  The state pays for a number of the services provided to employees of the federal government and does not get reimbursed for any of these services.  In fact, there are estimates that show 60 percent of those who ride the subways in Maryland are federal employees; yet, Maryland does not get any additional funding for providing this service.  Homeland security costs faced by the state also have increased in recent years while the federal No Child Left Behind Act has also generated additional costs for the state.  On the economic development front, Maryland is very active in promoting biotechnology as a tool for economic growth.

Mississippi—Trends similar to Kentucky and Maryland are evident in Mississippi, which also has a new governor that campaigned on a “no new taxes” pledge and tort reform.  Mississippi had a contentious 125-day regular session followed by two special sessions of 11 days and 1 day, respectively, this year.  While the legislative accomplishments of these sessions remain debatable, some members would stress that further tort reform was accomplished.  Given the governor’s no new tax pledge, Mississippi raided its tobacco settlement monies and transportation trust fund monies to achieve a balanced budget.  There also were extra revenues flowing in and these have been called assessments and not taxes or fees.  Importantly, Mississippi has kept up with its multi-year pledge to raise teacher salaries, while the 14 community colleges scattered throughout the state continue to offer valuable workforce training and development courses.

Missouri—No report.

North Carolina—No report.

Oklahoma—No report.

South Carolina—No report.

Tennessee—Like a number of other agencies, the state’s transportation department has been transformed to a new way of doing business under the leadership of the new governor.  This has extended to how the state plans projects, awards contracts and interacts with the public.  The prior administration faced significant criticism over large-scale projects, such as the I-840 circle around Nashville and, consequently, the new administration suspended work on 15 major highway projects to review and reassess their feasibility.  A concerted effort was made to solicit the input and contributions of the communities involved in these projects, and it is likely that the department will proceed with all 15 of them after some fine-tuning.  In terms of the state’s fiscal situation, Tennessee faces a much improved situation now after several lean years in the recent past.  Two years ago, Tennessee introduced a large tax increase package and the state’s tax structure is such that it does very well during the recovery phase of the growth cycle.  Tennessee is reaping the benefits of this effort now and even has contributed portions of this extra revenue to the state’s rainy day fund.

Texas—No report.

Virginia—No report.

West Virginia—No report.

III.       Nominating Committee Report

     The Nominating Committee, chaired by Representative Charles Young, Mississippi, presented its recommendations for Committee Chairman and Vice Chairman for 2004/2005.  Representative Young announced that there was a single name submitted for Chairman and a single name submitted for Vice Chairman.  Consequently, Representative Hubert Collins, Kentucky, was elected Chairman, and Representative Johnnie Bolin, Arkansas, was elected Vice Chairman for the upcoming year.

IV.              Technical Tour

     The Committee met for the third time for its technical tour.  Initially, the Committee walked to the Old State House Museum for a guided tour and lunch.  The Old State House Museum is the oldest standing state capitol building west of the Mississippi River and is a National Historic Landmark.  Then, Committee members boarded a bus for a drive through downtown Little Rock with Ms. Sharon Priest, the executive director of the Downtown Partnership and former secretary of state, pointing out key rejuvenation efforts including the Clinton Presidential Library, the Federal District Courthouse Expansion, River Rail Street Car System, Heifer International Global Village, First Security Center, Winrock International Headquarters and other key installations.  Then, the Committee drove to the Little Rock Port Authority for a presentation and tour of the facilities.  This visit included a presentation on the facility’s impressive multi-modal transportation capacities to facilitate the smooth transfer of cargo using different modes of transportation including rail, barge, truck and air.

SLC Staff Contact:    Sujit CanagaRetna, phone: (404) 633-1866; e-mail: scanagaretna@csg.org

 

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