Jan | Feb 2014


taleof4states

A Tale of 4 States

Insights from Vermont, North Carolina, North Dakota and Montana Into Dealing
with Recession

by Mikel Chavers
In a world of recession-era bad news, state officials are no strangers to the doing-more-with-less mentality. But in a world of sobering news, there’s always a silver lining.
“Essentially, whatever fiscal measures states took—the economic downturn was so severe that it hit everybody across the board. So it’s a little hard at this stage of the game to draw too many lessons,” said Liz McNichol, senior fellow at the Center on Budget and Policy Priorities.
State tax revenues faltered in a big way—they were 8.4 percent lower in the 2009 fiscal year than in 2008, and dropped an additional 3.1 percent for the 2010 fiscal year, according to the Center on Budget and Policy Priorities. At the same time state coffers are seriously dwindling, the demand for state services isn’t increasing.
“Most states are not doing very well, still,” McNichol said.
That’s the bad news.
But there’s good news.
Montana, North Carolina, North Dakota and Vermont avoided some of the more drastic spending cuts, according to McNichol. Whether through luck of natural resources or through the way policymakers dealt with the recession—or a combination of both—each state was able to weather the economic downturn well, according to McNichol. She tracks the states and their budgets.
Here are case studies that tell the story of what sets these states apart and offer a look at the silver lining.

 

 

1 VERMONT | Helping Small Business Grow, Even in a Down Economy

In a down economy when many small businesses are loan-shy, the Vermont Butter and Cheese Creamery was able to secure a loan to finance an upgrade to the latest refrigeration system. The loan was made through the Vermont Economic Development Authority.
Because the authority uses state funds to buy down loan rates, it can offer businesses a deal even when other banks are less likely to award loans in a tight economy. With a 2 percent interest rate on that loan versus the typical commercial rate of 3.75 percent, combined with a longer, more favorable term, the loan was a deal Bob Reese, president of Vermont Butter and Cheese Creamery, couldn’t pass up.
“The banks see some of the loans as riskier in the recession,” said Jo Bradley, chief executive officer of the Vermont Economic Development Authority. “We are called on more to be part of the projects.”
The loan paid for the new refrigeration system that makes it possible to cool more pasteurized milk—a key ingredient to make the company’s specialty artisanal cheeses. The new system saves six hours a day in processing and cooling time, according to Reese. So bring on more crème fraîche, fromage blanc, goat cheese, feta and bonne bouche. Armed with a favorable loan from the Vermont Economic Development Authority, Reese is expanding business and making more cheese, more efficiently.
“They’ve always been able to make the numbers work a little easier—especially in light of the economy,” Reese said of the authority’s more favorable loan rates. The loan has helped his business grow by more than 30 percent this year, he said. It also means his company continues to grow thanks to the latest machinery and Reese will be able to add 10 more employees over the next two years.
Many other Vermont small businesses are getting the same type of help through the Vermont Economic Development Authority. In fact, it’s been a record-breaking year in terms of loan volume for the organization that’s supported by state funding. The authority closed 322 separate loans in the 2010 fiscal year, breaking the previous year’s record of 315 loans. The loans represent a nearly $80 million investment by the Vermont Economic Development Authority.
Most of the loan volume this year was for Vermont’s small businesses. That’s important because small businesses really took a hit when the economy took a nosedive, according to Bradley.
“The small business sector continues to be very important in the state and the national economy—and I think small businesses were stressed this year,” Bradley said. “They were the sector that really bore a lot of the brunt of what happened in the economy.”

 

 

2 NORTH CAROLINA | State Lands Facebook, Other Data Centers

You could say Facebook officially “friended” North Carolina. In November, the social networking giant announced plans to build a $450 million data center near Forest City, N.C., in Rutherford County.
Facebook’s new data warehouse is expected to create more than 250 construction and mechanical jobs during its 18-month building phase. When it’s up and running, the data center will employ 35 to 45 full-time and contract workers, according to the North Carolina Department of Commerce.
Facebook isn’t the only data giant to locate in the state. In fact, the state is becoming something of a data center hotbed to the west of Charlotte, between that city and Asheville, in the foothills of the Blue Ridge Mountains. That hotspot is becoming a destination for data center projects, including plans by Apple, Google and IBM to locate data centers there.
“We’ve kind of emerged there with a data center, technology corridor,” said North Carolina Department of Commerce Deputy Director Dale Carroll.
The area was heavily concentrated in furniture manufacturing—the old economy of the state. Because of that legacy, electrical infrastructure and the water resources are readily available, Carroll said.
But as furniture manufacturing has shifted overseas, the state is reinventing its economy and leveraging its existing assets.
“So having that electrical reliability, this large electrical infrastructure and the transmission grid (is) something we can now make use of for these technology companies,” Carroll said.
The data centers represent not only multi-million dollar investments; they also represent huge physical footprints. It’s not uncommon for a data center building to be anywhere from half a million to a million square feet under a roof, according to Carroll.
To attract the multi-million dollar investments, North Carolina passed tax incentives this year to sweeten the deal for data centers. Senate Bill 1171 puts a special sales tax exemption on electricity sales, because the centers are large energy users with rows and rows of servers. And, because the facilities are very large construction projects, the legislation also provided for a sales tax exemption on construction materials.
Turns out, many businesses are more than just Facebook “fans” of North Carolina. The attraction goes far beyond the Internet or social networks. In October, Forbes magazine announced North Carolina is the third best state for business in America.
“This shows that the hard work of the past year has paid off—(including) our investments in education to build the work force of tomorrow, policies that create a more business-friendly climate, and our aggressive recruiting,” Gov. Beverly Purdue said in a press release.

 

 

3 NORTH DAKOTA | Attracting Export Business in Faraway Places

When officials from the North Dakota trade office stepped off the plane in Kazakhstan, a former Soviet republic, they swore they were still in North Dakota. With similar climates and heavily agricultural-based economies, the representatives from both places separated by thousands of miles seemed destined as kindred spirits and business partners.
And that’s just what happened.
Since the trade office was established in 2005, the state’s exports have exploded, increasing by 10 percent a year. Through trade mission trips and other networking efforts spearheaded by the North Dakota Trade Office, the state’s companies are now exporting to countries all over the world, including Kazakhstan.
In October, Bismarck-based Global Beef Consultants sent its first shipment of cattle to Kazakhstan. The state trade office helped facilitate the export deal between the North Dakota company and the government of Kazakhstan. In the deal, thousands of cattle will be shipped to the post-Soviet era nation.
North Dakota Department of Commerce Commissioner Shane Goettle said the reason for the state’s trade office success with exports is straightforward. “We are a small, highly networked state,” Goettle said. “We go to the markets, we talk to the buyers ourselves (and) we invite them back here.”
That kind of effort is good for the state’s gross domestic product. When more North Dakota companies export and grow their international business, it means more money for the state. The state taxes on the increased exports more than cover the annual expenses of the export office, according to Dean Gorder, executive director of the trade office.
The trade office, though supported by state funds, is actually a private corporation working on contract with the North Dakota Department of Commerce. That helps cut through bureaucratic strings, bringing a decidedly business approach to help North Dakota companies excel in exports, according to Gorder.
That approach is really powering up exports for companies that have never taken the plunge into exports and for companies already exporting, but not as much as they’d like to.
“There’s been a significant amount of companies that were not exporters that are now (exporting) specifically due to the trade office efforts,” Gorder said.
Take WCCO Belting Inc., for example. The 57-year-old family business was already dabbling in exports but wanted to take it further.
“We used to do it the old-fashioned way—do our own research, our own trips … we just did it the hard way,” said Thomas Shorma, CEO and president of WCCO Belting Inc. But with the help of the trade office, “in each country we had multiple, pre-qualified meetings with potential buyers with interpreters,” Shorma said.
New business was ripe for the taking.
In fact, because of a North Dakota Trade Office trip, Shorma landed more customers in Kazakhstan and also developed a customer in Belarus just by being at a farm show in Kazakhstan.
The North Dakota Trade Office also connects companies with suppliers, freight forwarders and other service providers. Because of help from the trade office and the U.S. Commercial Services, in 2009 customers outside the U.S. generated more than 60 percent of WCCO Belting Inc.’s total revenues, Shorma said. The company also added more than 100 new employees over the last two years just to cover export growth, he said.3

 

 

4 MONTANA | A Top State for Entrepreneurship

Montana’s beautiful mountain vistas and rugged terrain—ideal for outdoor recreation—may attract the self-starter types, but really fostering entrepreneurs is more a matter of sound policy and state efforts.
“People want to locate in Montana. The high quality of life makes it very attractive as a place to live—and entrepreneurial people can choose where they want to live,” said Evan Barrett, chief business development officer for the state. “The secret weapon is the quality of life and then the thing that feeds it is the research sector growing.”
Montana also is one of the few states keeping the budget in the black in the recession.
That said, “it’s a little hard to tell other states that they ought to be like Montana”—because the state’s success in the recession is “more of a result of their geography,” said Liz McNichol, senior fellow at the Center on Budget and Policy Priorities. McNichol tracks state budget issues.
But states can draw a lesson from Montana’s entrepreneur-friendly policies.
Those policies landed Montana as the first in the nation for entrepreneurship and the state also gets high marks for economic growth, according to the U.S. Chamber of Commerce report, “Enterprising States: Creating Jobs, Economic Development and Prosperity in Challenging Times.”
“Job creation is really about private investment,” Barrett said. “We don’t have enough money in Montana to drive it by public sector investment alone.”
Instead, state officials strive to create a business climate.
The knee-jerk reaction is to set taxes low. But that isn’t the number one attractant for companies, Barrett said. “You find that taxes for most companies are fifth or sixth on their list. They aren’t number one. Taxes aren’t the number one issue for economic development.”
What’s a much larger driving issue is the investment in work force and education—and that’s where Montana excels. Led by Gov. Brian Schweitzer, the 2011 president of The Council of State Governments, the state “continues to put more money in higher education and K–12 while other states are cutting,” Barrett said. “We’re continuing to make an investment in the future even in this tougher economy.”
In the last two years, the state froze college tuition increases, for example.
“Montana has taken a lot of policy positions that have moved us very strongly into the key university-driven research and in research and development activity in general,” Barrett said. “We are a friendly-to-research state—and that makes a big, big difference.”