Diversification dollars demanded

By Buck Wargo

Friday, Sept. 24, 2010 | 3 a.m.

Two of Nevada’s leading advocates for economic diversification said the Legislature must make it a higher priority if it wants to lure companies to the region and make a dent in unemployment.

With construction at a near standstill, commercial vacancy rates at record levels and 140,000 jobs lost in Las Vegas since the recession began, Somer Hollingsworth, president and CEO of the Nevada Development Authority, and Mike Skaggs, executive director of the Nevada Economic Development Commission, are urging business leaders to back changes in how the state gives incentive packages and to back more spending for economic development even though Nevada is dealing with a nearly $3 billion budget deficit.

Hollingsworth and Skaggs spoke Sept. 16 at the Orleans during a panel discussion on economic development sponsored by the local chapter of NAIOP, also known as the Commercial Development Association. They also spoke to In Business Las Vegas about the issue.

The state spends about $6 million a year on economic development with the majority — $4.6 million going to the Economic Development Commission — created in 1983 to help diversify the economy. Only $250,000 has been earmarked for the commission for marketing. Another $1.1 million a year is given by the state to the development authority — a 54-year-old nonprofit organization with a similar purpose.

Hollingsworth said Nevada is diversifying its economy, but the problem is that it’s doing it in small increments. He said he fears lawmakers are going to make education and other issues higher priorities, and shortchange diversification, which should be the No. 1 issue.

“You hear reasons of why haven’t we diversified,” Hollingsworth said. “It’s alive and well here, but it’s just that we’re doing it in ones and twos. We can’t do that any more. We have to get serious about this. We have to turn this community around as fast as we can, and we have to create 10,000 to 15,000 jobs a year and not 2,000 to 3,000.

“Every two years diversification becomes a magic word, and everybody talks about it. And as soon as we find some more tax revenue, we forget about diversifying. We were a one-trick pony for all these years because of gaming.

“If we don’t put some serious money behind diversification, and we don’t market this nationwide, the (state budget) shortfall you see today is going to pale in comparison to what you see in the next session after that and the next session after that. It’s going to be a nightmare.”

The development authority has a staff of eight and $2.2 million budget, half of it funded by its membership and the other half by the state for marketing. The authority’s advertising in California has gained national attention, which has leveraged its value, but that still isn’t enough, Hollingsworth said.

“That is as absurd as you can get,” Hollingsworth said. “For $1 million, we’re trying to attract companies from all over the United States, and in the last five years we concentrated strictly on Southern California; $1 million in marketing doesn’t (buy much).”

Two states that Nevada competes against — Arizona and Utah — spend $50 million a year and $30 million a year respectively for economic development, officials said.

“Michigan, which looks like Germany after World War II, spends $20 million a year selling that state,” Hollingsworth said. “What we need at least is $1 million a month over the next two years to go out nationwide and sell this like the (Las Vegas Convention and Visitors Authority) sells tourism.

“Do you know why that is continually successful? Because they continually sell it. We go three weeks and we are off for a month and three weeks and we are off for a month. We have no continuity in what we are doing and yet we create a campaign that is so obnoxious — we use chimpanzees and anybody else we can drag up and it is like a carnival sometimes — but the results are huge for us,” he said.

“We want the dollars that we need to be able to go forward.”

Hollingsworth points out the state Tourism Department has a $19 million budget, the convention authority is already spending $100 million, and hotels are spending even more money.

Hollingsworth said $9 million of the Tourism Department’s budget is marketing and advertising.

“We are going to go before the Legislature and ask for a big load of money so we can start selling this community for what it is. It is the best business climate in the U.S. and (we want to) make sure the rest of the country knows this. We’ll get through this recession, and we want to hit the ground running.”

Since 2006, the state commission has helped 468 companies either by attracting them or expanding existing ones and created 17,000 jobs, Skaggs said.

Skaggs said his agency revamped itself more than two years ago to deal with the recession and budget cuts, to focus on business development. But, he said still more money must be spent on marketing.

“We’re doing everything we can, but we’re only talking to California and Oregon,” Skaggs said. “We have the whole East Coast (to target) and most of our deals are coming from the East Coast. As we are coming out of the doldrums, a lot of companies that don’t have a West Coast presence know they need to be out here. That is where the population is.”

The commission has taken some steps that can make the state more competitive without any legislation, but more money is needed, Skaggs said.

“We’re going to have to address incentives when we go before the next legislative session,” Skaggs said. “Every state needs revenue and every state needs jobs particularly in the West. This is a dogfight that goes on all day, every day.”

The commission is working with the Employment, Training and Redevelopment Department to use its workforce-training funds from state and federal sources. The commission has only $100,000 in its own training funds, he said.

“That was pitiful and so with (Employment, Training and Redevelopment Department) that number is $23 million,” Skaggs said. “We lead with training dollars because our workforce skills are different. They are not in manufacturing. We were riding the homebuilding wave for a long time, and so that is where most of our skill sets are. To help people enjoy new careers, we have to re-equip them. We have got to prepared to spend as much as $5,000 a person to train people to go into solar panel assembly or solar panel manufacturing, geothermal and other hot areas we have right now.”

Companies must have a minimum of 75 jobs to qualify for incentives, but a typical company in manufacturing has 30 to 40 jobs, Skaggs said.

“It is the way of the industry,” Skaggs said. “We really haven’t addressed the incentives that were written way back 15 to 20 years ago” to bring them up to date.

They are working with the Assembly on lowering the threshold so more companies can become eligible. The minimum wage of companies that can receive assistance is $20 an hour, Skaggs said.

The average wage for Nevada is skewed by wealthy people who live here and that number is too high, he said. State calculations show that a wage of $16 is considered sustainable when the person is free of all government assistance, he said.

Assemblywoman Marilyn Kirkpatrick, D-North Las Vegas, chairwoman of the Government Affairs Committee, said she plans to propose a bill in the next session that will enable smaller manufacturers to be eligible for incentives.

Kirkpatrick said the key to economic development is local governments working together and playing a role in marketing. She wasn’t enthusiastic, however, about diverting tourism-marketing money for luring companies to the state because those are separate issues. As for putting more money in marketing overall, Kirkpatrick said she didn’t disagree.

“But we have to have a clear return on our investment,” Kirkpatrick said.

Hollingsworth said he gets calls from consultants for companies looking to move. They tell him what they would be getting from Utah and other states.

Utah has a personal income tax, but it can divert that for companies to use. That means the state is offering cash to help companies ramp up in a new location, Skaggs said.

Nevada can’t give money but it discounts taxes, abates what companies pay in property taxes and sales taxes, but the state gets that money back in three months because it generates jobs and other revenue.

“We’re not giving away the farm or billions of dollars and or any of that kind of stuff,” Skaggs said. “The best incentive we have right now is training. We are in an environment right now where New Mexico can write a check because it gets revenue from oil and gas production.”

Hollingsworth said that doesn’t mean Nevada should get into a bidding war because incentives can be overdone as when New Mexico offered $73 million in incentives to Hewlett-Packard for 647 jobs that paid on average $14.50 an hour. It will take 24 years to repay that through tax revenue generated from it, he said.

“That is what we compete against for a daily basis,” Hollingsworth said. “Those giveaway programs are not working, but company after company on a daily basis will walk past us for those kind of upfront instant-gratification programs.”

It is against the state constitution to directly put money into a company and that has hurt when it comes to landing technology firms, he said. It would take an amendment of the constitution that would take two legislative sessions and a vote of the people to change, he said.

Hollingsworth said he doesn’t think the current restriction is bad because states have made a lot of horrible investments by either their payback or companies pulling out.

Ralph Murphy, president of Circle M Development and a member of the New Nevada Task Force created by the state to develop a plan for diversifying the economy, said the sectors “right for picking” include energy, medical, transportation and technology. He said the committee has no interest of creating a report that collects dust.

“Economic development is the single most important thing we should focus on,” Murphy said. “We’re having trouble filling vacancies in our office buildings and retail, and we need tenants. We need jobs, and we need them now.”

The average incentive paid out in the form of tax breaks is less than $5 million a year, Murphy said.

“We need to help (lawmakers) understand that if we never attract a company in the first place, it is not paying taxes anyway, so giving it a little discount for a short period of time really doesn’t cost us anything,” Murphy said.

Hollingsworth said this is an important session for business in Nevada in how the Legislature deals with the deficit.

“Once you start destroying the business climate here — I’m not an anti-tax guy — but once you start destroying this business climate with anti-business legislation and taxes, you will never rebuild it again,” Hollingsworth said.

Despite the problems, Hollingsworth maintains that Nevada is well positioned to pick off companies from California. That state’s budget woes will put more pressure on businesses to help bail it out.

Hollingsworth said he would love additional money to open an office in California to go after the firms that want to leave.

Skaggs said the focus needs to be on privately held companies rather than chase publicly held ones that want giveaways. They can be wooed because of Nevada’s tax laws.

Skaggs said they are working with the private sector to give some great lease deals to help California companies afford to move.

“We need to figure out a way to help companies get here,” Skaggs said. We got a ton of companies that would love to do it tomorrow, but they are just stuck because of their assets.”