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State Job Creation Strategies for 2011

The fundamental challenge in this recession is that the growth that preceded it was a mirage. Bubble era borrowing created a network of financial jobs, real estate jobs and construction jobs that collapsed with the end of the bubble. Many of those jobs will never return.

An extremely high proportion (75%) of job losses in this recession are permanent rather than temporary. States will need to nurture completely new industry sectors and the infrastructure to support those jobs, while the jobless will need retraining in new skills to participate in those sectors.

As this report will highlight, the first step is to fund jobs that support long-term economic competitiveness, notably by investing in people and physical infrastructure. While the economic climate for profit-making business opportunities is more limited, investments in education, health care, transit and energy efficiency can create immediate jobs while strengthening building blocks for prolonged growth.

The next step is helping the private sector leverage opportunities for job creation and technological innovation. Too often, some state leaders treat economic development as merely a bidding war between states to give away the most tax breaks or economic subsidies to big corporate bidders. Not only do most studies show such tax-giveaway approaches to be ineffective -- fundamentals like labor productivity and physical infrastructure are more critical in site selection for most global businesses -- but they end up devoting most state resources to a few large businesses while ignoring investments in start-ups and smaller homegrown firms that are the heart of long-term local prosperity.

This report on State Job Creation Strategies is a combination of two Stateside Dispatch articles published by Progressive States Network (PSN) on January 19th and 25th, 2010. For any questions on this report, please contact PSN's Executive Director and report author, Nathan Newman, at nnewman@progressivestates.org.


Table of Contents:

State Job Creation Strategies Part I: Finding the Money and Investing in Human Capital and Physical Infrastructure

- Direct Public Money to Investments in Economic Growth

- Invest in People- the Key Engine of Growth

- Creating a 21st Century Infrastructure in the States

State Job Creation Strategies Part II: Supporting Innovation, Industrial Clusters and Green Job Creation

- Job Creation Opportunities During a Recession

- State Venture Capital Funds

- Encourage Technology Transfer and Commercialization

- Strengthen Industry Partnerships & Clusters

- Clean Energy Industry Support

- Conclusion


State Job Creation Strategies Part I: Finding the Money and Investing in Human Capital and Physical Infrastructure

The fundamental challenge in this recession is that the growth that preceded it was a mirage. Bubble era borrowing created a network of financial jobs, real estate jobs and construction jobs that collapsed with the end of the bubble. Many of those jobs will never return.

An extremely high proportion (75%) of job losses in this recession are permanent rather than temporary. States will need to nurture completely new industry sectors and the infrastructure to support those jobs, while the jobless will need retraining in new skills to participate in those sectors.

The Private Sector Can't Do it Alone: As the Economic Policy Institute wrote recently, "it is likely that unemployment will remain above 8% even two years from now in the absence of bold and decisive action to create jobs." With the credit crunch and the reduction in consumer demand, small businesses are experiencing tough times. In 2008, for example, 43,500 businesses filed for bankruptcy, up from 28,300 businesses in 2007 and more than double the 19,700 filings in 2006.

What's needed: The first step is to fund jobs that support long-term economic competitiveness, notably by investing in people and physical infrastructure. While the economic climate for profit-making business opportunities is more limited, investments in education, health care, transit and energy efficiency can create immediate jobs while strengthening building blocks for prolonged growth.

Resources:
Progressive States Network - Take Action: Additional Federal Job Creation and State Fiscal Relief Needed
Economic Policy Institute - American Jobs Plan: A Five Point Plan to Stem the U.S. Jobs Crisis
Center for Labor Market Studies (Northeastern University) - The Great Recession of 2007-2009: Its Post-World War II Record Impacts on Rising Unemployment and Underutilization Problems Among U.S. Workers

Direct Public Money to Investments in Economic Growth

In the current economic and fiscal crisis, finding the funds for long-term investments is a challenge, but those investments will deliver both short-term jobs and long-term economic growth to turn state economies around. States need a balanced approach of revenue increases, bonds for long-term investments and tapping existing sources of state capital like state pension funds to marshal the capital needed for economic recovery.

Raise Revenues, Don't Cut Public Investments: The recession has made clear the hollowness of the bubble economy in many states, especially in some of the low-tax, low-investment Sunbelt states touted by anti-tax forces as exemplars of economic growth.

When measuring long-term economic competitiveness, states with some of the highest marginal tax rates on individuals -- from New York to Maryland -- were supporting some of the most innovative "new economy" industries in the country, according to a 2008 analysis by the Information Technology & Innovation Foundation. As we detailed last year, progressive tax increases to fund economic recovery are the better alternative to budget cuts. Many needed investments are in the fundamentals of education and infrastructure as well as in the nurturing of new sectors where private capital is unlikely to effectively step in. Increased tax revenue to fill in government and private sector gaps in investment is clearly needed.

Use State Bonding Authority: One obvious source for funding long-term growth projects are new bonds that can be paid back with the tax revenue yielded by greater economic growth. Especially where tolls or energy savings will directly return revenue to the state from bonded investments, legislative leaders are aggressively pursuing new bond investments.

The American Recovery and Reinvestment Act (ARRA) plan provides a two-year 35% tax credit for state Build America Bonds, which is yielding record low interest rates for states that are issuing bonds. For example, Washington state received an interest rate equivalent to 3.52 percent on $500 million in bonds issued in October. To help municipal governments take advantage of lower interest rates and lower issuance costs, nearly a dozen states have created "state bond banks" to pool the loans of local governments.

A few examples of recent state bond discussions around the country include:

  • The Ohio House of Representatives has approved placing a $950 million bond issue on the May 4th ballot to renew for another five years the state’s largest economic development project, the Third Frontier, which invests in research and commercialization of technology in five industries sectors and created 41,300 jobs from 2003-2008.
  • Last week, the Washington House of Representatives Capital Budget Committee approved sending $861 million Jobs Act Bonds to voters in November to fund schools and colleges to fund energy upgrades. The sponsor, Rep. Hans Dunshee, estimates it would create 38,000 jobs and generate energy savings that will cover much of the interest costs.
  • Minnesota legislative leaders are proposing $1 billion in bonds to build and repair facilities around the state.

Use Pensions Funds for In-State Investments: Unwilling to rely on uncertain global investment markets to fuel economic growth, states are increasingly choosing to directly invest in local state businesses. Instead of giving away corporate welfare and subsidies, states can offer needed capital to create a financial stake in firms. If these businesses are successful, they return equity to taxpayers that can be reinvested in other projects.

One study found that the California Public Employees' Retirement System's in-state investments fed an estimated $15.1 billion into in-state economic activity in 2006 and created 124,000 jobs-- more jobs than the construction or motion picture industries. Other examples of in-state pension investments include:

  • Florida Governor Charlie Crist recently signed an economic stimulus plan for the state that redirects $1.95 billion of the state's pension fund into direct investments in Florida's economy.
  • Washington state held $1.4 billion in Washington-based investments at the end of 2008, using the money to leverage additional capital from other sources to invest in the state.
  • New York held $403.6 million as of March 2009 through its Common Retirement Fund with another $500 million available to invest in New York-based businesses.
  • The Invest Michigan! Fund features The Michigan Opportunities Fund and the Growth Capital Fund and is capitalized with $300 million from the state's pension fund.
  • In Indiana, the public pension funds collaborated with state universities and various health-based companies to launch the Indiana Future Fund, an investment fund designed to benefit Indiana companies, especially in the life sciences and high technology arena.

Avoid Privatization as a Funding Source: Given budget deficits, some states are being lured by the supposed "free lunch" offered by selling or leasing public assets to private firms with the promise of upfront private investment. Unfortunately, as we have detailed repeatedly (see here and here and here), privatization of public assets are inherently likely to ripoff the public to the benefit of private interests.

As detailed in a U.S. PIRG report last year, governments can issue tax-free bonds at lower rates than private investors and as a result, "deals based on private capital are inherently more expensive than public financing." In 2008, Missouri was planning to use some form of privatization with investors to fund an ambitious plan to repair or replace 802 bridges. Now, the Missouri Department of Transportation is funding the entire project through the sale of government bonds.

Don't Waste Money on Direct Subsidies to Businesses: One general caution for states is to limit grants, tax credits and other giveaways to business. Instead, use either direct equity investments or loans that are repaid in order to replenish the supply of public capital over the long-term.

States waste money competing for firms to cross the border from another state, rather than working to foster entrepreneurship and new jobs. A recent Good Jobs First report on high-tech deals by states notes that many are extremely costly. The poster children for bad deals are North Carolina's large subsidies to Dell Corporation, who took the money, but then sent the 900 jobs off-shore four years later and New York giving microchip maker AMD (later Global Foundries) $1 million in taxpayer funds for each job being created by the firm upstate. As the report states:

Tax reductions, exemption or credits “exert a very small marginal influence on corporate investment decisions because other cost factors such as labor, occupancy and other key inputs are far larger than taxes (or tax breaks)... For the vast majority of companies, tax breaks are windfalls, not determinants, and are therefore wasted."

Redeploy Wasted Corporate Giveaways to Real Public Investments: If states do a thorough review of ineffectual subsidies, costly contracting out, and tax credits, they can generate additional revenue that can be used for more effective job creation efforts. Progressive States Network has worked with allies to outline model Corporate Transparency in the State Budget legislation and set up a supporting campaign webpage to help achieve that goal.

As we will discuss further, states can better invest scarce public dollars in upgrading the quality of the workforce and infrastructure, rather than engaging in costly bidding wars with other states for jobs.

Resources:
Information Technology & Innovation Foundation - The 2008 State New Economy Index: Benchmarking Economic Transformation in the States
U.S. PIRG - Private Roads, Public Costs: The Facts About Toll Road Privatization and How to Protect the Public
Council of Development Finance Agencies - State Bond Banks: Municipal Borrowing Made Easy
CALPERS - CalPERS - An Economic Engine
Good Jobs First - Growing Pennsylvania's High-Tech Economy: Choosing Effective Investments
Progressive States Network - Corporate Transparency in State Budgets

Invest in People- the Key Engine of Growth

In a global economy where the quality of the workforce increasingly determines the standard of living, investing in an educated and healthy population is key to promoting state economic growth.

Invest in Education: One of the largest successes of the recovery plan has been preventing massive teacher layoffs and creating or preserving 250,000 education positions. Additional federal help will be needed to stave off reductions in the coming years, but it is a marked success that despite the largest downturn in post-war history, the core educational infrastructure of our nation has been preserved.

Why this is so important is highlighted by a number of recent studies that emphasize that investments in education have clear dollar returns to state governments.

  • Each new high school graduate yields a net public benefit of $127,000 or 2.5 times the cost of needed public investments, according to a Columbia Teachers College report. In fact, cutting in half the number of high school dropouts would yield $45 billion in extra tax revenues. High school graduates themselves will earn $117,000-$322,000 more in their lifetimes than dropouts, with female college graduates, for example, earning $800,000 more than dropouts.
  • As we detailed last spring, early education investments in particular show long-term economic payoffs. A recent Cornell University study found that funds spent in the early education sector have a more stimulative effect on the economy than most other spending. Early education programs help parents take advantage of opportunities in the workforce and child care improves parents' productivity at work. One study by the business-backed Committee for Economic Development, estimated that for every dollar invested in pre-school, there was an expected return of $2 to $4 in future societal benefits.

Part of youth education is giving them entry-level job training. The federal recovery plan helped revive summer youth job programs across the country, offsetting massive youth unemployment in the private sector. States can also take action, as did the Idaho Labor Department, which recently sponsored its first youth employment program in over a decade.

Support Worker Retraining: While training can't create jobs, it can ensure that workers who are unlikely to be reemployed in their old industry sectors have a chance to be reemployed somewhere else -- and that vibrant industries have the skilled workforce needed to expand in a state.

A Michigan Council for Labor and Economic Growth study found that a five percent increase in college-educated adults would boost economic growth by 2.5% over ten years and real wages by 5.5%. Similarly, studies show that just helping workers get their GED significantly boosts their employment in the long-term. Notably, a study by the National Skills Coalition (formerly the Workforce Alliance) found that even as unemployment mounted in summer 2009, 60% of employers still had trouble finding qualified applicants for the vacancies they did have -- emphasizing the lack of fit in skills between those laid off and the sectors where growth is likely to occur.

In our Dispatch Averting Layoffs and Revitalizing the Manufacturing Economy, we highlighted a range of best practices through which states can both work to avert impending layoffs and use rapid-response to help employees get new jobs or enter retraining programs as quickly as possible. These include Rapid Response programs used by some states to on-site contact with employees before layoffs, accessing training programs like Trade Adjustment Aid, working with communities to tailor training and placement programs, as well as promoting Peer Networks to train groups of workers during layoffs to collect information from fellow workers, help connect them with community services, promote job referrals, and work with community leaders.

Fund Health Care and Support the Safety Net: Health care and other safety net spending is not just a public expense; it is also an investment in economic growth. A healthier workforce means greater economic growth potential and more years of productive labor. And the health care industry is itself a source of good quality jobs.

A few years ago, a Commonwealth Fund study estimated that labor time lost due to health reasons totalled $260 billion per year. And unhealthy workers often have lower productivity at work. In fact, because people are living and working longer, long-term economic growth is likely to be far higher than many current government projections, according to a recent study by North Carolina State University. "Spending on health care productivity, biomedical research and universal health care should be considered an investment that will eventually lead to increased economic growth," argues co-author Dr. Al Headen. The payoffs are likely to be more taxes paid, more consumer spending and far lower public expenditures on programs like Medicare than currently assumed.

Another remarkable accomplishment of the federal-state partnership in the last year has been not only preservation of basic health care spending for low-income families, but the expansion of SCHIP programs for children and COBRA subsidies for the unemployed. This is in sharp contrast to the recession in the early part of this decade when literally millions of people lost publicly funded health coverage. Maintaining health programs will continue to be a challenge for states -- and new federal funds are a key part of that solution -- but it should be considered a key part of long-term investments in a healthy workforce.

Integrate New Immigrants into the Economy: As we emphasized last week, keeping an estimated 12 million people in the shadows of the economy is bad for them, bad for native workers and bad for the U.S. economy. A recent report estimated that immigration reform that integrates new immigrants into the U.S. economy would create $1.5 trillion in added GDP over ten years and newly legalized workers would increase tax revenues by up to $5.4 billion in the first three years. Another study by the CATO Institute found that legalization would boost the incomes of U.S. households by $180 billion annually by 2019.

Across the board, the goal should be to maximize the productivity of all workers in our economy and produce the most economically competitive workforce in the world.

Resources:
Progressive States Network - Early Education Investments: Economic Importance and Policy Implementation
Columbia Teachers College Center for Benefit-Cost Studies of Education - An Excellent Education for All of America's Children
Workforce Alliance - Job Training is Key to Success of Jobs Bill: Analysis and Recommendations
Progressive States Network - State Action for the Unemployed
National Employment Law Project - Rapid Response Training Overview
Michigan's Human Resource Development Institute - Peer Networks
Commonwealth Fund - Health and Productivity Among U.S. Workers
Council for Labor and Economic Growth - Transforming Michigan’s Adult Learning Infrastructure
Center for American Progress and the Immigration Policy Center - Raising the Floor for American Workers: The Economic Benefits of Comprehensive Immigration Reform
Cato Institute - Restriction or Legalization? Measuring the Economic Benefits of Immigration Reform
North Carolina State University - Study Shows Health Care Spending Spurs Economic Growth

Creating a 21st Century Infrastructure in the States

“As a country, we’re deluding ourselves if we think we have put enough into infrastructure," notes the Urban Land Institute. "We’ve been under-investing for 30 years.” As a percentage of gross domestic product, infrastructure spending actually has been declining since 1959. A 2009 American Society of Civil Engineers (ASCE) assessment calculates that $2.2 trillion is needed for infrastructure repairs and upgrades just in the next five years. In contrast, China has committed $259 billion to its plans for building the world's largest high-speed rail system -- with trains going up to 218 mph -- and plans to add another half trillion dollars in the next few years for a total investment to $730 billion by 2012. That's more than the entire 2009 federal recovery plan.

The ARRA plan had $132 billion for infrastructure of all kinds, from roads to transit to smart energy grids, but that's only a tiny part of what is needed for the U.S. to retain global competitiveness.

More and Better State Transit: Focus on repairing existing infrastructure, strengthening gateway infrastructure in ports and cities which are the focus of global shipping and travel, and reconfiguring suburbs to better integrate regional economies.

  • Public Transit Investments are a Key Job Creator: One clear lesson from the recovery plan, according to a recent U.S. PIRG report, is that money spent on public transit yields nearly twice the jobs compared to similar amounts spent on highway projects. This result is due to the fact that public transit spends less money on real land costs and supports vehicle manufacturing and maintenance jobs. It also helps low-income workers to save money in getting access to jobs where transit integrates communities. One innovative, lower-cost transit approach is bus rapid transit (BRT), which builds separated lanes for larger buses that can move at speeds approaching subway lines. Pioneered in Ottawa, Canada and Adelaide, Australia, similar systems are spreading to Latin America, China, India and Mexico. In the U.S., Los Angeles and Boston have adopted BRT principles and Chicago will be inaugurating BRT service in 2010.
  • Integrate Transit with Land Use Planning: Building transit in the middle of sprawl does little to ease congestion; instead transit funding needs to be linked to development planning that integrates transit with access to jobs and retail. The Denver region is a notable success story in using transit and land use zoning to reclaim its urban downtown, adding a 122-mile light rail system, instituting a Bus Rapid Transit system to connect to nearby Boulder, and linking the urban core to multiple town centers in the surrounding suburbs.
  • Strategically Apply User Fees to Fund Infrastructure: The Urban Land Institute emphasizes that more of the costs of transit infrastructure will inevitably need to be borne by consumers in the form of higher gas taxes, tolls and congestion pricing in urban areas. This needs to be combined with targeted tax relief to ease the burden on low-income families. The reality is that gas taxes in the U.S. are far smaller than European economic competitors, who use those revenues to fund far more robust transit upgrades across their continent.

Broadband and Smart Grid Investments: Despite the U.S. playing a key role in creation of the Internet, a study by the International Telecommunications Union found that the United States now ranks 17th in global broadband penetration. Lack of affordable broadband access undermines the international competitiveness of our communities and workforce. The $7.2 billion of direct broadband funding in the federal recovery plan and pockets of other funding for digital infrastructure throughout the ARRA emphasized broadband as a catalyst for spurring job creation and economic growth.

A number of state legislators have created Broadband Strategy Councils to focus on using federal and internal state funds to increase access to and adoption of affordable broadband. Beyond investing in physical infrastructure, increasing digital literacy is a key investment as well. During the 2008 legislative session Washington state passed SB 6438, which created a statewide high-speed Internet development process and established the Community Technology Opportunity Program (CTOP) that will provide resources for capacity-building and grant-giving to Community Technology programs that provide hands-on technology access and training to residents.

Water Systems: Many cities and regions are using old water systems desperately in need of repairs and upgrading. Nationwide, the U.S. Environmental Protection Agency (EPA) projects a $224 billion funding gap between 2000 and 2019 between what states are spending and federal requirements for water quality. Part of the solution are new policies to reduce wasteful water use, since per capita domestic water consumption in the U.S. is more than twice as much as most global competitors-- and more than four times the use by citizens of Great Britain and China.

In California, where some water bills can approach $500 a month, jurisdictions began to require retrofitting homes on resale. Development needs to be restricted in areas lacking water systems, since such growth just dumps costs on government and leads to underfunding water systems in established areas.

Infrastructure Projects Already Approved: Some notable examples of integrated infrastructure investment programs around the country include:

  • Illinois Department of Transportation has $3.1 billion in committed projects in 2009. In addition, Illinois is creating a major “inland port” with the development of Union Pacific's new intermodal facility in Joliet that will create an estimated 7,000 jobs.
  • Iowa's I-Jobs program approved last year has created a three-year, $830 million investment in Iowa’s infrastructure using existing gaming revenue to make improvements to public buildings, community colleges, veterans homes ($285 million), disaster recovery and prevention ($165 million), transportation infrastructure ($115 million), universities infrastructure ($115 million), environment and water quality ($80 million), and telecommunications and renewable energy ($35 million).
  • Oregon's Job and Transportation Act invests more than $1 billion to address all sectors of Oregon's transportation system, including roads, bridges, bike and pedestrian facilities, mass transit, railroads, ports and airports. Green aspects of the bill included multi-modal transportation, increased transit funding, planning for greenhouse gas reduction scenarios, a congestion pricing pilot project, and an urban trail fund for non-motorized vehicles and pedestrians.

The key to long-term growth is moving infrastructure investments from one-off projects towards integrated investments that connect them into a holistic plan for growth. As Robert Puentes of the Brookings Institution said this past year at a Congressional hearing, "the problem is that there is too little integrated decision making that crosses disciplines and joins-up solutions in infrastructure investments." To achieve maximum effectiveness, transit and other infrastructure investments need to be coordinated not only with each other, but also with land use and housing decisions.

Resources:
Urban Land Institute - Infrastructure 2009: Pivot Point
American Society of Civil Engineers - Report Card for America's Infrastructure with State and Local Report Cards
U.S. PIRG, Smart Growth America, CNT - What We Learned from the Stimulus: And How to Use What We Learned to Speed Job Creation in the 2010 Jobs Bill
Progressive States Network - Making Broadband a Key Part of States' Economic Recovery

State Job Creation Strategies Part II: Supporting Innovation, Industrial Clusters and Green Job Creation

Competing globally for jobs starts with policymakers instituting fundamental investments in education, human capital and physical infrastructure that make their state a productive environment for economic innovation.

The next step is helping the private sector leverage opportunities for job creation and technological innovation. Too often, some state leaders treat economic development as merely a bidding war between states to give away the most tax breaks or economic subsidies to big corporate bidders. Not only do most studies show such tax-giveaway approaches to be ineffective -- fundamentals like labor productivity and physical infrastructure are more critical in site selection for most global businesses -- but they end up devoting most state resources to a few large businesses while ignoring investments in start-ups and smaller homegrown firms that are the heart of long-term local prosperity.

Instead, state policymakers should move away from a tax giveaway mentality towards an approach that step-by-step supports an ecology of local investment, technological innovation and mutually-interdependent industries that together encourage ongoing entrepreneurship and firm growth. Elements of such a strategy include:

  • State-backed venture capital institutions that can not only supply needed capital for start-up firms, but help leverage additional private investments to expand the capital available for innovative start-ups in a region.
  • Leverage technology transfer from universities and government labs to translate basic research into commercial products and the technical assistance that can launch firms builds on that innovation.
  • Nurture regional industry partnerships and industrial clusters where firms thrive together based on shared investments in the skills of the regional workforce and strategic support for specialized local firms.
  • Encourage green innovation that will yield a range of new jobs in the emerging green sector.

Each of these steps emphasizes building partnerships between government, business, community and labor institutions to make continual learning and innovation an integral part of regional economies.

Job Creation Opportunities During a Recession

While policymakers might despair of encouraging new job creation during a recession, the seeds of future innovation and growth are often sown during recessions, as entrepreneurs analyze the failures of the previous boom and launch new ventures.

In fact, well-over half of the Fortune 500 list of top companies and just under half of Inc. magazine's list of top small firms were founded during recessions or bear markets on the stock market, according to a 2009 Kauffman Foundation study. Unemployment often encourages people to found their own firms during recessions, so making sure they have the support to thrive is critical. New immigrants are an especially strong source of such job creation-- thirty-one percent of the engineering and technology companies founded from 1995 to 2005 had an immigrant as a key founder.

Innovation Economics Versus Neoliberal Economics: Notably, innovation and entrepreneurship in states seem to have little to do with low taxes or weak regulatory protections for workers and consumers. While the same right-wing economic pundits who supported the bubble economy continue to promote low taxes and weak regulation lines for state economic development, the reality is that innovation in states actually requires high state investments and engagement for success.

The Information Technology and Innovation Foundation compiles a State New Economy Index to measure how much states have moved towards generating high-value "knowledge jobs" likely to survive in global competition, built export-oriented manufacturing and services, sustained fast-growing "gazelle" firms and moved their people and firms into the digital economy with a high percentage of jobs in high-innovation technology sectors. States ranking high on the index such as Maryland, Washington, and Massachusetts, included high revenue, high state investment models, which generally had higher growth in state per-capita incomes between 2002 and 2006 than many supposed "low tax" states that often fail to create long-term high-value jobs.

Instead of chasing after "low road" employers looking for weak labor standards -- which such firms can find even more easily overseas -- long-term job creation in the United States is dependent on investing seriously in high-innovation environments.

Resources:
Kauffman Foundation - The Economic Future Just Happened
Information Technology and Innovation Foundation - 2008 State New Economy Index
Kauffman Foundation - Better, Faster, Cheaper: The New Bootstrap Job Creator

State Venture Capital Funds

There is a critical role for states to take as funders of innovation, especially at the early stage of firm development when private sources of capital are especially reluctant to step up these days. The National Venture Capital Association reports that venture investing in early-stage businesses is down 71 percent over the last 12 months. This has created a funding “gap” that is preventing the growth of small businesses, and subsequently hurting job creation.

Fortuitously, states for the last decade or so have been creating a wide array of innovative state-backed venture capital funds and supporting early-stage "angel" investments to get firms off the ground, so states increasingly have the tools in place to promote investments in innovation from the earliest stages.

State Venture Funds: Instead of merely handing out tax credits or subsidies with no direct return to the taxpayers, states are increasingly making direct equity investments in local firms-- a tool that not only promises payback to taxpayers if firms become profitable, but also creates greater accountability for the public funds invested.

As of 2008, states had over $2.3 billion invested in state-supported venture capital funds -- see this state-by-state chart of various kinds of state funds, courtesy of the National Association of Seed and Venture Funds (NASVF). A few examples include:

  • Indiana Future Fund: The Indianapolis Star has described the Indiana Future Fund (IFF) as "the life blood of 14 Indiana life sciences companies, and it continues to provide the foundation for Indiana's venture capital growth." The IFF helped bring in more than $160 million to Indiana start-ups from private venture capital firms across the country.
  • Start-Up Kentucky uses public funding to provide seed capital investments for high-tech start-ups in the state.
  • In Illinois this year, the Governor proposed tools to help small businesses thrive, such as bolstering start-up and micro-businesses by creating Angel Investment Tax Credits and expanding venture capital funding for seed and early-stage firms.
  • Florida has set aside $250 million of its $110 billion pension fund for awards of between $5 million and $20 million to growing later-stage life-science and other tech companies. That money will come from the state-created Florida Growth Fund, a venture capital fund managed by Philadelphia private equity firm Hamilton Lane.

Supporting Angel Investments: Since many traditional venture capital firms now only invest in more established firms, start-up companies at the earliest steps of formation often have few options for finding capital. States increasingly are stepping up to support so-called "Angel Capital" - the capital invested by (usually) wealthy individuals in a region’s businesses -- as a key part of supporting entrepreneurship. States can help encourage networks for local investors to work together and jointly support start-ups in their states through "Angel Networks":

  • The Wisconsin Angel Network, part of the Wisconsin Technology Council, is funded for two years with $300,000 from the Wisconsin Departments of Commerce and Financial Institutions and the Wisconsin Technology Council.
  • Washington: The Washington Technology Center (WTC) Angel Network was formed with a $250,000 grant from the United States Economic Development Administration that was matched by the WTC.
  • Pennsylvania: The Pennsylvania Angel Network, a nonprofit organization, began with $350,000 from the Pennsylvania Department of Commerce and Economic Development to fund its first two years of operations.

Resources:
National Governors Association - State Strategies to Promote Angel Investment for Economic Growth
National Association of Seed and Venture Funds - U.S. State-Supported Venture Capital Funds

Encourage Technology Transfer and Commercialization

Government funding of basic research has been a wellspring of innovation for years; from the government's creation of the Internet, to funding for life sciences at universities, to more recently, green technology investments.

Federal, state, university, and nonprofit investments in research and development play a crucial role in promoting innovation; for example, in 2006, 77 of the 88 U.S. companies that produced award-winning innovations were beneficiaries of federal funding.

While quite a bit of funding for innovation comes from the federal government, the Information Technology and Innovation Foundation report notes that "The challenge for... states is to continue to find ways to translate these inputs into commercial outputs in their states." They are making progress. Between 1991 and 2004, the number of patent applications filed by United States universities increased from 13.7 applications per institution to 57.8, licensing income increased from $1.96 million per university to $7.06 million and new university-based start-ups increased from 212 in 1994 to 462 in 2004.

And state governments are increasingly seen as key partners for start-up firms looking to commercialize technology. With venture and Angel investors becoming scarcer in the recession, Entrepreneur Magazine has spotlighted universities and government-backed business incubators as a key tool for start-up businesses to find help in getting investments.

Overcoming the "Valley of Death": In a recent report, Excell Partners, a seed-stage venture capital fund with ties to the University of Rochester, noted New York state fares well in attracting billions of federal research dollars for its universities. But the state can do more to capitalize on business opportunities that emerge from the research, by helping firms at the earliest level of development before they are generating revenue, filing patents and assembling management teams. States can help firms at this early development point, with what analysts call the “Valley of Death,” as firms move from university spinoff to early-stage revenue-generating companies, since venture capitalists only tend to take an interest once revenue starts to be generated.

Dedicated Technology Transfer Investments: By concentrating investment funding on the commercialization of university and other basic research technology, states can help turn research into viable business models.

  • Pennsylvania’s Ben Franklin Technology Partners, established by the Pennsylvania General Assembly 25 years ago, has served as a statewide resource for technology commercialization for entrepreneurs. Since its inception, it has invested in 3,000 companies in the state, often at their earliest stages of development, where state investments helped them secure additional private angel and venture capital investments. A recent report estimated the institution boosted the state economy by $9.3 billion between 2002 and 2006 and helped create 32,382 "job years" that would not have existed without it.
  • Since its creation by the state, the Maryland Technology Development Corporation (TEDCO) has provided direct capital funding of $7.9 million to 132 companies to encourage tech transfer from state universities. That initial investment has helped leverage additional funding from angel and venture investors, federal awards and other resources exceeding $298 million for those Maryland companies. For five years, TEDCO was recognized by Entrepreneur magazine as the most active early-stage investor in the nation, beating out all private sector and other institutional funds as the most active early stage funder of entrepreneurs.
  • Similarly, by distributing $33 million in economic development funding over the last five years, the Kansas Bioscience Authority (KBA) has helped the state become a national leader in biosciences, creating 1,164 jobs, encouraging $110 million in capital improvements, supporting research worth $44 million and attracting an outside equity investment of $29 million. More than five years ago, the State Legislature enacted the Economic Growth Act, giving the KBA $580 million over 15 years which helped the state attract a $650 million federal lab and launched a massive campaign to garner a prestigious National Cancer Institute designation for the Kansas University Cancer Center.

Technical Support for Tech Transfer: Beyond direct financial investments, states can make a difference just by providing technical assistance to entrepreneurs looking for help in launching technology start-ups. For example, the University of Oklahoma Office of Technology Development is working with the private nonprofit entrepreneurial consulting and services firm i2e to speed tech transfer and create start-up companies around OU technologies. Florida's Institute for the Commercialization of Public Research received $600,000 this fiscal year to link entrepreneurs with investors and companies to commercialize technologies based on publicly-funded research. However, Florida's refusal to raise new revenues means that lawmakers may fail to revive a $250 million economic development fund that helped the Sunshine State to attract six research institutes before it was eliminated last year through budget cuts.

Business Incubators and Science Parks: Other key support states offer are physical and institutional spaces for entrepreneurs to setup shop until they are ready to be independent. 300,000 workers in North America are employed at a university research park and generate an additional 2.57 jobs in the broader economy, according to a report by the Association of University Research Parks. These research parks encourage businesses to take advantage of university research assets and employ university graduates, thus helping to nurture start-up firms and ideally integrate them into the broader local economy.

A recent study for the U.S. Department of Commerce: Economic Development Administration found that business incubators create up to 20 times more jobs than traditional infrastructure projects, and they do so at a fraction of the cost: $144 to $216 for each incubator-related job, compared with $2,920 to $6,872 for construction-related jobs.

Resources:
Pennsylvania Economy League - A Continuing Record of Achievement: The Economic Impact of Ben Franklin Technology Partners 2002-2006
U.S. Department of Commerce, Economic Development Administration - Construction Grants Program Impact Assessment Report
Information Technology and Innovation Foundation - 2008 State New Economy Index
Batelle and the Association of University Research Parks - Characteristics and Trends in North American Research Parks

Strengthen Industry Partnerships & Clusters

Beyond supporting individual technology firm start-ups, states are increasingly looking to support interrelated "clusters" of firms that reinforce innovation in a region around specialized industries, much as the car industry grew up in Detroit, the film industry in Los Angeles, finance in New York City, and as a paradigm of the high-tech economy, Silicon Valley became a source of ongoing computer-related innovation.

States can play a critical role in promoting such clusters beyond supporting university research and funding new start-ups by identifying key local assets, facilitating relationships among firms, deepening the talent pool, and encouraging investments that reinforce those cluster needs -- a point emphasized by the National Governors Association in their report, Cluster-Based Strategies for Growing State Economies. States need to avoid endorsing the latest technology fad and handing out tax credits without real returns or accountability provisions. Instead, they need to carefully assess their own local strengths and support the specialized industries that can give their regional businesses a unique advantage in the global economy.

Pennsylvania-- An Innovation of Industry Partnerships: As Good Jobs First notes in a recent report, “ Pennsylvania, by virtue of its longstanding programs to foster early-stage companies, its new efforts to integrate its workforce strategy... through training consortia -- 'Industry Partnerships' -- linked with key regional clusters...and to broadly diffuse the adoption of process technologies in manufacturing production" appears to have one of the most balanced approaches in promoting its high-tech economy.

In Pennsylvania, the Strategic Early Warning Network (SEWN), created by the nonprofit Steel Vally Authority under a mandate from the State of Pennsylvania back in 1993, created a system that saves firms through early intervention.

  • The key is not to wait for a mass layoff notice, but to establish programs that monitor key sources of business information for economic danger signs that can predict plant closures -- and proactively allow states to reach out to firms in trouble and implement response and prevention strategies.
  • SEWN works with firms on everything from financial restructuring to dealing with owner succession issues to cost management to promoting new labor management cooperation to improve productivity.
  • Back in early 2008, SEWN targeted a large number of small auto suppliers in the state, employing 23,000 workers in Pennsylvania, who SEWN knew would be facing a crisis with the large scale cutbacks by the Big Three automakers.

Beyond short-term interventions, Pennsylvania has built 90 Industry Partnerships (IPs) to promote longer-term strategic cooperation among regional firms. The IP program has engaged more than 6000 businesses. The main goals have been to connect training and education to the needs of industry sectors, to help companies adopt high-performance organizational approaches, and to expand opportunities for workers in those industries. The industry partnership program has been supported by $5 million in state funds to identify industry clusters and build the IPs in the first place, plus an additional $15 million for training through the IPs.

Other Efforts in Building Industry Partnerships: The National Fund for Workforce Solutions is a a new collaboration to encourage more public support for industry partnerships across the nation. Regional collaboratives include:

  • SkillWorks in Boston is a collaborative of local philanthropies, the City of Boston and the Commonwealth of Massachusetts that is working with employers in the regional economy to upgrade the workforce in the region.
  • Baltimore Alliance for Careers in Healthcare is designed to map careers for seven area hospitals, provide career coaching to reduce employee turnover and provide entry-level and bridge programs to expand the pipeline of underrepresented populations into the industry.
  • Washington State Industry Skill Panels are public/private partnerships of business, labor and education, funded by the state Workforce Board and convened by regional Workforce Development Councils in order to provide workers with better skills, employers with more efficiency and less turnover, and address the educational needs of key industry clusters in the states. Washington has seven active ISPs, including Building Manufacturing and Regional Advanced Manufacturing.
Resources:
Keystone Research Center - Pennsylvania's Industry Partnership Strategy
Steel Valley Authority (SVA) - Early Warning and Layoff Aversio
Seattle Foundation and SkillUp Washington - Creating Stronger Workforce Partnerships in Manufacturing
National Fund for Workforce Solutions - The National Fund for Workforce - Information for Policymakers
National Governors Association - Cluster-Based Strategies for Growing State Economies

Clean Energy Industry Support

Building a green economy is one of the largest areas of entrepreneurial energy these days and states are designing a wide range of programs to encourage firms in their states to become leaders. Since energy savings are an inherent source of potential revenue, the opportunities are large, but the need for technical, regulatory and financial assistance is also clear. The following are a few of the programs states are promoting in this area, although the Apollo Alliance extensively tracks clean energy programs in the manufacturing sector:

  • New York: The passage of Green Jobs/Green Homes NY produced a job creation program that will foster energy savings and revitalization of distressed areas. The program will create an estimated 14,000 jobs and reduce energy costs for about 1 million homes and businesses across the state. Using an innovative revolving loan fund, the program will "provide up to $13,000 for residential homes and $26,000 for businesses to retrofit for increased energy efficiency."
  • Pennsylvania: Building on the state's industry partnerships discussed above, this program will concentrate on upgrading workforce skills by developing industry-recognized credentials, participating in curriculum development at all levels and helping workers respond to changing industry needs. This will involve multiple partnerships, including the 3 Rivers Clean Energy Partnership, which will help train workers for jobs in the clean energy industry and the Electronics Manufacturing Partnership, which will help firms become more environmentally conscious.
  • Washington: Last year, the Washington Department of Ecology proposed a Lean and Green Assistance Program aimed at improving environmental performance and providing technical assistance to companies across the state. From 2007 to 2008, three Lean and Environmental pilot projects were undertaken, effectively saving businesses over $1.5 million and reducing pollution by more than 800,000 pounds according to the EPA.
  • Kansas: The Economic Revitalization and Reinvestment Act (SB 108), enacted in April 2009, provides for $150 million in bonds to be issued by the state’s development finance authority to fund manufacturing projects through long-term loans to eligible wind and solar energy businesses in amounts not exceeding $5 million per project. Companies’ tax withholdings will be placed in a specially-created state economic revitalization fund during the period of the loan to pay off the principal and interest of the loans.
  • Michigan: The state backed the Michigan Manufacturing Diversification Program, a loan program to help parts of the auto supply chain retool and join the clean energy supply chain. This support includes, for example, helping companies eliminate chemicals from processes that clean steel for manufacturing and funding re-purposed factory conveyor belts for solar panel manufacturers.
  • Wisconsin: The Clean Energy Business Loan Program uses $55 million in ARRA State Energy Program to fund low-interest loans to businesses that promote major renewable energy production projects, the manufacture of clean energy products, advanced manufacturing of clean energy components, retooled supply chains, and energy efficiency programs at firms.

Conclusion

Job creation is not a single program for state policymakers, but a nexus of commitments. This includes fundamental investments in education and infrastructure, creating an environment where innovation is supported every step of the way, university research funding and first-stage commercialization investments, and building industry partnerships that can sustain networks of interdependent firms in a sector.

The good news is that recessions have often been the birth point for some of the most important current firms in our economy. The right decisions today could mean decades of economic growth in the future.