Tennessee Economic and Community Development Commissioner Bill Hagerty says 2013 will see the administration of Tennessee Gov. Bill Haslam advance basic changes the administration made in the previous two years.
Hagerty talked with the editorial board of The Memphis News this month about the retooling and decentralizing of the state’s jobs engine as well as the local debate about government incentives.
This is an edited transcript of Hagerty’s conversation.
Hagerty: The story for 2011 and 2012 has been remarkably strong in a tough environment. We’ve had two back-to-back record years in terms of performance in our department against a pretty tough macro economic environment. We still have a lot of ground to cover though. The unemployment rate is still unacceptably high and we still see a lot of opportunity to perform better. We also look with concern at some of the recent surveys. Ohio State just put out a survey in December. It was a survey of middle-sized businesses. What the businesses said was that while they are still growing, they are growing at a slower pace in the last quarter of 2012. And they expect to grow at an even slower pace in 2013. Does that mean we are heading into recession? No. But it means more muddling along. The governor set a higher bar for us in 2013 that we had in 2012. We are going to have to be at bat more often to make things work.
TMN: What is different about your approach in the last two years?
Hagerty: What we’ve done is focus on the strategic reasons for companies to be in Tennessee as opposed to using incentives to get them to do something that is not strategic. The result is we have not got our incentives cost per job down to the lowest level in a decade on top of two record-breaking years. That I think shows that we are moving in the right direction.
TMN: Talk about the eight new international trade offices formally opening this month and their role in growing Tennessee exports.
Hagerty: Over the past 10 years, Tennessee exports have grown from $10 billion to $30 billion. The reason for that is the exchange rate. Over the same period, the euro has increased its purchasing power from a dollar perspective by 50 percent. The yen’s purchasing power has increased by 25 percent. But Tennessee has a unique edge. That advantage applies to any state. Tennessee’s unique advantage is our location as a logistics hub. … The opportunity for us is to leverage the favorable backhaul economics that occur when you’ve got to send those containers back to their home. I think that’s the unique advantage that Tennessee has. The growth from $10 billion to $30 billion has been largely enjoyed by the largest and most sophisticated Tennessee companies today. There are great examples across the state of companies that are small or medium sized who have figured out how to begin to export. I’ve done it a couple of times in my own career. It’s not rocket science.
TMN: Are we where you want to be in terms of state incentives? Does what the state offers change how locals approach incentives? We’ve had some energetic debates locally about incentives and claw backs.
Hagerty: We have three primary tools for incentives. One of them is the basic infrastructure tool and that is for infrastructure that goes on public land that benefits multiple entities. That does not have claw backs. … Then we have the FastTrack training tool. The way that’s implemented is an employee has to be on the payroll at the time. … And then there is our new FastTrack business development fund, which has a claw back mechanism. It’s called an accountability agreement. It is a performance-based agreement. It is going to something to benefit the company directly.
TMN: Do you see locals having to change what they do? Are PILOTs outdated or are they here to stay?
Hagerty: Each locale has a different view. Some locales have been very protective of the component of the PILOT associated with schools. I have great respect for that. But not every jurisdiction does that. And the local level sees the same thing that I do at the state level. Unilateral disarmament while laudable is sometimes challenging from the competitive standpoint. Each mayor, each city council is challenged to deal with the matrix of different tools that different jurisdictions use to compete against them. What I would say to any mayor or city council is this. Your locale has certain strategic advantages. There are reasons for a company to be there beyond the incentive. If the incentive is the only reason the company is coming, beware of what happens when the incentive burns off.
TMN: How scary is it for a business owner to come off the sidelines in this recession and its aftermath? And are you seeing companies still sitting on a lot of cash?
Hagerty: There’s $2 trillion still sitting on corporate balance sheets. A lot of companies today are focused on their internal cost structure because they are trying to figure out how to implement the Affordable Care Act. Some are making adjustments to their part time full time employee mix as a result of that. I would far rather see them focused on expanding their markets and hiring more people than focused on internal cost structure trying to optimize for a regulatory regime that is still not fully defined. The implications of Dodd-Frank are far reaching and they continue to impact small and medium sized companies. While the stated purpose of legislation was to address the too big to fail banks, that’s not been the result. What’s happened is more and more small community banks are going away. That’s creating an increasing void for our small and medium sized companies and the capital they need to grow.
TMN: Is economic development statewide more of a challenge because we border more states than any other state?
Hagerty: It is a challenge but I think we are learning to coexist better. I’ve reached out to my counterparts in Kentucky and Alabama and we are working on some joint regional programs. They are different political parties. That doesn’t matter. We’re trying to do what’s best for our citizens. … Companies don’t really care whether political boundaries are there or not. … If the conversation among the governors is more along the lines of we’re trying to demonstrate cooperation, maybe we can get away from this continuous race to the bottom if you will on which state can out do the next one on some major incentive program and really create a good and wholesome environment for the businesses that exist there and that logically should come.
TMN: The site consultants have had it pretty good with this competition.
Hagerty: I think that competitive pressure is going to remain. It’s a fact of life that is amplified when you have a tough economy like you do now. It’s the nuts and bolts of our work that don’t get headlines. The expansion – that’s a great story. The trade stuff – we’re not going to get any headlines on that. But it’s going to count and it’s going to add jobs and that’s what Gov. Haslam has us focused on.
The opportunity to get any company to this region is one I’ll take because I believe tn. will stand up very favorably in a head to head competition with any border state. I’m happy to go into the ring with all of them.
TMN: Do our bordering states with state income tax have an advantage in recruiting businesses?
Hagerty: I would never promote that as a policy for the state of Tennessee. While it may be advantageous in a particular recruiting scenario to tax the workers and then pay it back to the employer, it’s not good for the citizens. That’s not our objective, to mask incentives and do stuff like that. We have no interest in pursuing that as a tool, although we have been on the receiving end of that.