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And the Survey Says...
Misleading economic development numbers – and the system that tallied them – receive makeover by state officials

Sometimes numbers get crunched … and sometimes they just get a gentle tabulating massage. Any business journalist or analyst will tell you that the eyes can tend to glaze over as the deluge of enormous figures – dollars invested, jobs created, salaries paid – pours in via every available medium. More often than not, those numbers are re-entered and repeated many times over in stories, tables and charts depicting growth and investment.

But the numbers from the state’s annual survey of manufacturers in 2000, collected from some 6,000 businesses, looked a little funny – and not funny “ha ha.” (The Lane Report published an edited version of the list, “New and Expanding Manufacturers, 2000” in its July 2000 issue.) For instance, next to the name of a cigarette company, Commonwealth Brands of Bowling Green, the figure “$600 million” appeared under “$ Invested 2000.” Turns out it was more like $600,000.

Another firm had listed a $250-million investment in equipment. Oops again … it was $250,000. Two other entries for Forest Products Inc. of Corbin came to $390 million worth of expansions, which, as one colleague put it, “would have people in Corbin doing back flips.” That company wouldn’t return several phone calls from both Lane Report editors and Cabinet officials.

In the end, queries from The Lane Report motivated the Cabinet to reassess its entire survey, and to revise the total dollars invested in expansions downward by around 25 percent, from more than $2.9 billion to just over $2 billion. What’s more (or less), the total jobs added were 9,167, not the previously reported 12,764.

The culprit? Well, according to Kentucky Cabinet for Economic Development Commissioner for the Department of Business Development James Navolio, it’s not about bad intentions, just bad data management.

“This was just a good old-fashioned screw-up,” he says. “What happens is surveys come in and they get given to a data entry person, and the data entry person puts in the number. This was just a mistake that was made by a lower-level person and it didn’t get caught at the research level or my staff level. For example, here’s a company that has 35 employees that was entered with a $500-million expansion. Well, common sense would tell you that’s not true, so we now have a system in place to flag those things. It’s not going to happen again, and we have gone back and corrected the list.”

The Cabinet has also taken steps to correct the systems that allowed for such mix-ups.

“The biggest change is that more senior people are going to be looking at those responses when they come in,” says Navolio. “We mail out 6,000 surveys, and after repeat mailings, we get a 60-to-65-percent response rate. Then they have staff over in research who call the remaining 2,000. So all of the surveys sent out are eventually calculated into the final product. That’s a complete product, and that’s one reason it takes so long.

“What we’ve done is we’ve put a system in place. Business people don’t like to get forms from the government, so we hesitate to make the form more extensive than it is, but we have to in order to get the clarification we need. There are about 900 of the 6,000 that show expanded activity, and they’re all going to get personally looked at by people who will know whether there’s a flag, and they’ll all get calls. And then the 2,000 we don’t get back all get called anyway.”

“We’ve always taken pride in the quality of our information, and then we get this,” Navolio sighs. “We have a good system. We just had a breakdown and we fixed it. You all helped bring it to our attention, so we can thank you for that. We want to report accurate information. We think we do a good enough job with the way we do business that we don’t need to pad any numbers. Our breakdown was the person doing the job not having the savvy to catch it. We should do that, and we will.”

Real numbers, real dollars, real jobs
According to Forbes, “the economic downturn has stalled development plans across the country, leaving them with no job growth to show for millions in tax abatements and handouts.”

A study cited by the magazine from the Institute on Taxation and Economic Policy (ITEC) has found that 15 states are still doling out the dollars to companies that aren’t abiding by the letter of their agreements with those states. Two years ago in New York, according to the report, the state’s umbrella ED agency had doled out $130 million in loans and grants to 100 businesses for 80,000 promised jobs. “The Gannett News Service sought to interview the 100 companies to get their job creation numbers; 18 of the subsidized companies provided job creation figures and only four of those had met their job projections.”

Kentucky’s Department of Economic Development was not one of the 122 state and city agencies analyzed in the report. But it might as well have been. As the report says, “In a version of ‘garbage in, garbage out,’ many auditors have found state agency data to be so poor or unverified as to effectively preclude program evaluation.” The study cited around a dozen states that do little if any follow-up to verify company-submitted data.

Some more of that unintended garbage surfaced during the course of composing this article. A press release from the Cabinet announced that a Louisville company had apparently added UPS-type numbers of jobs in 2000, causing it to be listed seventh in the nation in job-creating projects by Area Development magazine … and causing the state to rank eighth in number of jobs created in 2000, with 8,500 new positions. The magazine went on to note that the Mid-South region (West Virginia, Kentucky, Tennessee, Alabama, Louisiana and Mississippi) accounted for nearly 38,000 jobs, and jumped from fifth to third in job creation since 1999.

Or maybe not. The report cited Louisville company Electronic Design and Research, an industrial instrument maker that created 3,000 new jobs in 2000. A phone call to the company revealed full employment of around 10 to 15 employees. While they’re engaged in export of biomedical and industrial instrumentation, including several of their own patents, the largest funding they’ve received over the years was three awards from the SBIR totaling $120,000. Laudable, but not earthshaking.

“Of course the conversations that we had revolved around ‘How would you have a company in Kentucky add 3,000 jobs and we wouldn’t know about it?” says Navolio with a rueful grin. “That’s absurd to think that could happen and we not know about it.”

Study of the actual questionnaire shows that company president Vladimir Shvartsman did indeed write that EDR’s expansion in 2000 involved $20,000 in new equipment and an additional 3,000 employees. But there was a line left blank at the top for the amount invested in building expansion. Was it possible that the “3,000” figure was merely written in the wrong space?

Yes.

Secretary Navolio was asked if the fierce competition between companies has made it harder to procure real information from them when it comes time to communicate their intentions to the state.

“Not really,” he answers, pointing out that the state’s successful incentive programs are a completely different matter from the besmirched survey. “Our incentive applications ask for very confidential and proprietary material. It’s required by law. We’ve won many court battles, and we’re back in court again over it. The attorney general has tried to get access to that information … why, I don’t know. We’ve had courts tell us we don’t have to release that information. If we ever get in the business of violating the confidentiality of a company that is seeking to do business in Kentucky, we might as well close our doors.”

He cites a case from several years ago involving an application from General Electric, when Whirlpool in Evansville, Indiana filed a suit to get the application.

“The court ruled that we couldn’t release that information. So we understand confidentiality. The overwhelming majority … way over 90 percent of the projects we work on … remain confidential. And in some cases we don’t even know who the company is, because they’re represented by a consultant.
“The kind of stuff we ask for on the survey, we don’t have trouble getting from companies … they just have trouble putting it on the right line sometimes,” he says.

As for the unfortunate gaffe in Louisville, Mike Bosc of Greater Louisville Inc. can laugh too, though such announcements are the stuff of economic developers’ dreams.

“Hey, too bad it’s not true,” he says. “We’d be the hottest economy in the world right now. But those little decimal points mean a lot.”

Fierce interstate competition
There’s no denying that the United States are anything but when it comes to battling one another to land huge corporate headquarters or manufacturing projects. One hears tales about state ED departments doing things like one Southeastern state did in the wake of California’s power problems: sending packets containing flashlights and batteries to companies in the troubled region, along with plenty of material extolling the cheap and plentiful power in their particular state. It’s no-holds-barred, economic warfare out there. But then again, just as regions within states have begun to collaborate (i.e. the regional industrial parks in Kentucky), might the time be nigh when ED efforts from different states would coalesce in order to strengthen particular regional economies?

“I’m an old guy, and I don’t expect to see it in my lifetime,” says Navolio. “The competition between states is pretty fierce. There are areas where regional cooperation is pretty good, and the two that come to mind are Louisville and Northern Kentucky. The Northern Kentucky guys work closely with the Cincinnati Chamber, and the Louisville people work well with the Southern Indiana Regional Development people.

“I don’t see it, and I don’t know really that it’s necessary,” he says of state collaboration. “States do have their individual economies, they do have their own individual taxing structures and advantages. I think the competition’s healthy. I don’t want to get too philosophical, but I think it keeps government from getting tyrannical. You can imagine if we didn’t have state governments and the federal government was the be-all and end-all … they’d just do what they want to do. Well now the state governments have the ability to at least say, ‘We have this advantage over one of our neighboring states, here are the differences and here’s why it more beneficial for you to locate here than in another state.’”

“Secretary Strong, with other individuals, has formed a group of the southern states economic development people. The idea originally was that it would be some kind of Southeastern marketing piece that we could use around the world. For whatever reason, it hasn’t gotten really strong. So it could happen, but I don’t see that it could get to the point where we’ll go to Tennessee and agree on the way we report things, or we’ll go to Ohio and agree on incentive packages for the region.”

But what about at least agreeing on how data is reported, so companies could make comparisons based on standard notions?

“It’s nowhere near uniform, and I don’t know that it ever will be,” says Navolio. “I know of one state – and the guilty shall remain nameless – that reports their expanded industry based on building permits. If you have a building permit for a motel that’s going to employ 40 people, they list it. We don’t. That new motel or restaurant is what the effect of a new manufacturing job is. We don’t list those. We leave it to economists like Paul Coomes at U of L, or Dr. Haywood at UK, to figure out what the impact is of a new manufacturing job. Some states count all those jobs, but we don’t count anything retail or anything ancillary, and we don’t think we should, because we don’t have anything to do with that. That’s a natural function of the economy. What was it the Governor said? ‘If there’s enough need for hamburgers, somebody’s going to build a hamburger stand.’

“We don’t create jobs,” he adds. “All we can do is create an atmosphere for these jobs to be created, help companies to grow and prosper, convince companies that this is the best place for them to do business for a lot of reasons. Then they come in and create the jobs … they’re the ones investing the real money.”

Up to speed with a new partner
One step the Cabinet has taken recently to boost its capabilities is the selection of newly formed Rosetta Advertising and Public Relations to handle the its PR and ad needs, as well as providing research, marketing, Internet and other communications services. The agency, which also serves clients like Amazon.com, Kentucky Baptist Homes for Children and Cleveland-based NCS HealthCare, was just created in January through the three-way merger of Indianapolis-based Dittmer Wildey Public Relations, Louisville-based Kuvin Dennis Public Relations and Miller & White Advertising, with offices in Terre Haute and Indianapolis.

“We’re really impressed with them,” says Navolio. “We’ve only had them for three months, and we threw something at ‘em a few weeks ago that had an extreme timeline and they performed magnificently on it. It’s a young firm, they’re bright, they’re aggressive, and they know what they’re doing.”

“When we started with them, we were right at the verge of needing most every marketing piece that we have re-done,” says Cabinet Director of Communications and Media Relations Terri Bradshaw. “So we just kept throwing things on them, and they continually come through. They’re working now on redesigning our website, which is something we’ve really been focusing on. They’re starting with a lot of research, so we can be sure to spend our marketing dollars in the right places.”

Of course, there’s one area that Navolio calls a “no-brainer,” and that’s the automotive sector. While all industries have their cycles, Navolio points out that the auto sector, in Kentucky at least, is more “anti-cycle” than it is in Ohio or Michigan, mainly because the products Kentucky plants make sell well.

“When you’re the third-largest producer of cars and light trucks in the country, you obviously have a niche, and that sector continues to grow,” he says. “We know that Automotive News is the Bible of the automotive industry. There isn’t anybody above the level of shop foreman who doesn’t read it. And I can tell you that we have manufactured some leads out of things we’ve learned from Automotive News. So we formed an alliance with them three years ago, and we’re a sponsor of their events and an advertiser in their publication. They’re the largest single recipient of our advertising dollars by a long shot, and we don’t need any research to tell us that.”

As Bradshaw points out, the state’s website (www.thinkkentucky.com) is going to be a focal point, no matter what the industry sector may be.

“That’s our GIS system,” Navolio explains. “Understand that three years ago, we didn’t have anything. Now anybody in the world can get on there and know anything they want to know not only about the state, but any community in the state – pictures of available buildings, site maps, those kinds of things. It works worldwide … Gene Strong and I have been in offices in Germany where we called it up and it worked like a charm. So what Rosetta quickly realized was that we had this great GIS system, so their philosophy that’s starting to evolve is to drive people to the website.”

Navolio and others of his vintage have experienced a quick learning curve when it comes to such “new economy” elements injected into the old economic development game. What used to take months … as well as hundreds of pounds of paper … now takes days, as companies do their sifting and winnowing with online resources.

“I can remember the days when an economic development project like, say, a Dana plant, took 18 months from the time they said they had a project to the time they made a decision,” he says. “Now the first half of the process is lopped off, because they’re doing it on the website. We don’t get as many of those calls anymore saying ‘Send me your ten best.’ We get the call saying ‘I want to look at these three particular sites.’ So it’s really simplified the process and compressed the time frame.”

Kentucky’s GIS site has been lauded by a number of people in both industry and the press. This recent hiccup notwithstanding, the overall quality of information produced has been exceedingly high, as has the speed of its delivery. Now the Cabinet is on the cusp of a new level of collaboration with each and every individual community in the Commonwealth.

“We now have the ability to take information from the Bureau of the Census or some federal or state agency and get it instantaneously into every community’s data,” says Navolio. “We’re working on a project right now that links us with every community website in the state. The advantage to the communities is that they can do away with their research departments, because our research department has put it in that GIS system, and it’s community-specific. It’s mostly the larger communities that use it, but we’re trying to get everyone on it. It’s a phenomenal system, and the communities that realize it have a tremendous advantage over those that don’t.”

Expansions remain the key
As Navolio and others have said in the past, it’s taking care of the companies already located in the state that sustains both growth and stability.

“The simple way to look at it is that we spend as an agency about twice as much money on taking care of existing businesses as we do on new businesses,” he explains. “There are a lot more new jobs created by expansions than there are created by new companies. The new ones get all the attention … when Toyota came, the press coverage was phenomenal. And they created 3,000 jobs. But every time they created another 1,000 jobs with an expansion, the press virtually ignored it. So a lot of people don’t know that Toyota has 8,500 people making cars in Georgetown. They remember the original deal with 3,000 jobs and an $800-million investment. But Toyota’s now got 8,500 people, and the investment last time I saw it is up to around $3.4 billion.”

Despite his department’s friendly competition with J.R. Wilhite’s folks on the expansion and retention side of the office – “I just tell him, ‘You’ve never been able to expand one that we didn’t locate,’ jokes Navolio – he knows that expansions, media coverage or not, are what really make the economy go. And he points to Hopkinsville as an example of a model community for both new and expanded business.

“There’s a city that’s just phenomenal,” he says. “It just keeps going, and it has for the last 10 or 15 years. They don’t stop. They have an advantage in that they have Fort Campbell right there. Between 1,000 and 1,500 people per year retire from Fort Campbell, and a lot of them want to stay in the area. What you’ve got with military retirees or maybe kids who joined the military when they were 18 and retired at 38 with their pension, they want to have something to do. And most of these people are well-disciplined and well-trained … they make a great workforce. So their unemployment is way below the state average, but companies still want to go there because of the quality of life and the quality of the workforce. They’ve had very good local leadership for a lot of years, and it’s just an unbelievable town.”

As for the unbelievable figures, he and his colleagues aren’t sweating it. They’ve taken appropriate measures to make an already strong system even stronger, and the very real projects just keep coming.

“We’re going to announce another great project down in Hopkinsville next month,” he says. “So it just keeps going.”

Adam Bruns is associate editor of The Lane Report.
editorial@lanereport.com

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