COMMONWEALTH OF PENNSYLVANIA HOUSE OF REPRESENTATIVES COMMITTEE ON APPROPRIATIONS

In re* Department of Commerce Regional Federal Block Grant 1991-1992 Budget Hearing

* * * *

Stenographic report of hearing held at the Cranberry Motor Lodge, Warrendale, Pennsylvania

Thursday March 14, 1991 9:30 a.m.

HON. DWIGHT EVANS, CHAIRMAN Hon. Victor J. Lescovitz, Vice Chairman Hon. Joseph W. Battisto, Secretary Hon. Gordon Linton, Subcommittee Chairman on Education Hon. Thomas C. Petrone, Subcommittee Chairman, Health & Welfare Hon. Gaynor Cawley, Subcommittee Chairman on Capital Budget

MEMBERS OF COMMITTEE ON APPROPRIATIONS

Hon, William F. Adolph Hon. Alice S. Langtry Hon. Paul J. Angstadt Hon. Edward J. Lucyk Hon. Robert E. Belfanti, Jr. Hon. Nicholas J. Maiale Hon. Kevin Blaum Hon. Dennis M. O'Brien Hon. Karl W. Boyes Hon. Richard D. Olascz Hon. Alvin C. Bush Hon. Merle H. Phillips Hon. Nicholas A. Colafella Hon. Joseph R. Pitts Hon. Jeffrey W. Coy Hon. Jere W. Schuler Hon. Robert C. Donatucci Hon. Paul W. Semmel Hon. Robert J. Flick Hon. Thomas M. Tigue Hon. Jon D. Fox Hon. Terry E. Van Home Hon. Michael Gruitza Hon. Peter C. Wambach Hon. Richard A. Kasunic Hon. John N, Wozniak Reported by Dorothy M. Malone.RFR _

Dorotki, M M«lone Registered Professional Reporter 135 5 Landie otre*t |—iummelstown, |Jennr(jlvania 17036 / Also Present:

Hon. Patricia Carone Hon. Ronald E. Black Richard Willey, Executive Director Roy Wells, Budget Analyst

Dorotk4 M Malone Regirt«t*e

Dr. Susan Hansen, University of Pittsburgh 37

Timothy Parks, Pittsburgh High Technology Council 54

Dr. Rodney Erickson, Pennsylvania State University 75

Hans Koehler, Wharton Export Network 75

Dr. Michael Luger, University of North Carolina 107

Daniel Pilcher, National Conference of State

Legislatures 107

Dr. Bennett Harrison, Carnegie Mellon University 108

Raymond R. Christman, Department of Commerce 185

Carmine Scotece, Butler County Human Services 222

Pat Brexmen, United Cerebral Palsy 228

Jessica Eichner, Hospice Services Incorporated 230

Marty Friday, Women's Center and Shelter of Greater Pittsburgh 231 Martha Haverstick, Butler Family Counsel Center of Lutheran Services 236 CHAIRMAN EVANS: I would ask that the panel move to the table, please. I would like to first say good morning to you, the panel. We appreciate your coming this morning. This is a reconvening of the House Appropriations

Committee. Prior to me making a few statements, I would just like to have the members introduce themselves to the audience,

REPRESENTATIVE LUCYK: I am Representative

E. J. Lucyk. I am from Schuylkill County.

REPRESENTATIVE BATTISTO: I am Representative

Joe Battisto. I am from Monroe County, the Poconos.

REPRESENTATIVE VAN HORNE: Representative

Terry Van Home, Westmoreland and Allegheny County.

REPRESENTATIVE LESCOVITZ: Representative

Vic Lescovitz, Washington and Beaver County.

REPRESENTATIVE KASUNIC: Representative Rich

Kasunic, Fayette County.

CHAIRMAN EVANS: Dwight Evans from the City of Philadelphia, Chairman of the Appropriations Committee.

REPRESENTATIVE GRUITZA: Mike Gruitza,

Representative from Mercer.

REPRESENTATIVE PETRONE: Representative

Thomas Petrone from Pittsburgh, 27th Legislative District.

REPRESENTATIVE COLAFELLA: Nick Colafella,

Representative from Beaver County. CHAIRMAN EVANS: Today we are here in Butler, particularly in Cranberry, Representative Fat Carone's district, who also will be here who has helped bring the

Appropriations Committee here. The reason the Committee has traveled to western Pennsylvania for the Economic

Development Hearing is because few parts of the state were as hard hit by the shifting of the industrial economy to a more service base economy. We want to hear firsthand how effective our state investment has been in Economic

Development. This recession requires new solutions. It is not enough to simply review the economy, development, department budget. We have to get a- firsthand, review of how successful the state investment has been in Economic

Development.

The Appropriations Committee is investigating how successful the state Economic Development programs have been. We want to know what is working and what is not working. Then and only then can we make budget decisions that appropriately invest the taxpayer dollars in Economic

Development programs.

The Appropriations Committee is taking the hearing process a step further this year. We are hearing not only from state officials, but we have invited national experts to share with us what is working in other states.

In this recession we must be aggressive in our search for

solutions. This morning on the panel we have for the next half hour individuals from the Industrial Development

Corporation. What I would like to do is ask the panelists to introduce themselves and maybe say a word about themselves and maybe we can kind of start with questioning,

MS. STERN: I am Laurie Stern. X am the

Executive Vice-President of the Allegheny Valley Development

Corporation. That is in the northeast corridor of Allegheny

County and I have been with that organization for the past eight years. I have also served as the President of the local Chamber of Commerce in the Allegheny Valley.

MR. SKIAVO: I am John Skiavo. I am the

Secretary for the Central Westmoreland Development

Corporation. I am also President of the Central

Westmoreland Chamber of Commerce. We are located in the central part of Westmoreland, which by the way, includes the current Sony project, which I am sure you are all familiar with.

MR. HOWLEY: My name is George Howley. I am the Executive Director of the Community Development

Corporation for Butler County. I have been with that post

for about the past three and a half years. We cover all of

Butler County and we work hand in hand with Laurie also.

CHAIRMAN EVANS: I would like to start off with a question to all of you since we're talking about Industrial Development Corporation. Each of you have worked

with a number of Economic Development programs that make loani

to small, medium and large companies. In your opinion have

these programs been successful? Let me go on further. Have

you had any problems in administering these programs? Are

there any programmatic changes that should be made in order

to make these programs more responsive to a changing

regional economy?

MS. STERN: I think that there are lots of

things that are working well and there are some things that

aren't working at all in regards to IDCs, Again, that is all

we will be able to speak to from our perspective, I want to

commend you as well for taking the hearings a bit further

and getting some input from other states. I think that is a

wise idea.

But we sort of put our heads together a little

bit prior to this meeting so that we could be a little bit

more cohesive in our comments since they need to be brief.

And I think that the PEDA Program, which is pretty much the

bread and butter of most IDCs, has worked well for the

Commonwealth for a number of years. I still think it

continues to work well. That being said, I think there are a

couple things we need to look at if we are given this

opportunity to share some input in terms of broadening that

program. In fact, making it more responsive to the current I economy.

We are still living with a $15,000 per job formula, new job created for $15,000 of state funds and I think those of us in the field are finding that that is just too small a dollar amount for inflationary reasons, for reasons of how capital investments are made today, how jobs relate to capital investments on a pro rata basis, and I think that it is a fair assessment to say that we would suggest at least doubling that to a $30,000 per job formula in the PEDA Program.

The concept behind it works well. I just think the dollars are too low.

CHAIRMAN EVANS: Can I follow up on that?

When you say double it from 15,000 to 30,000, is that a national norm in terms of cost of developing a job at

30,000?

MS. STERN: There is a program we do right now that is 25,000.

MR. SKIAVO: We also have the PEDFA Program

that is 50,000.

BY CHAIRMAN EVANS (To Mr. Skiavo):

Q 50,000, one job?

A Yes.

Q How much do those jobs pay, the Industrial

Development job? A Well, I think what we are talking about here when you are talking about job development, not necessarily how much the job pays but to create one job or to have a new need for one job oftentimes companies have to spend quite a bit of money as far as equipment and building expansion.

That $15,000 per job requirement from FEDA has been around for some time, at least 15, 20 years. Just by virtue of inflation you can see what has happened to building and equipment costs as well. Businesses are not utilizing the

FEDA fund or not expanding because they can't get capital because they are afraid that they are not going to be able to meet the job requirements that they have. So, therefore, there is no incentive for them to create as many jobs, and rightfully so. We have a penalty now for those companies that do not meet their job requirements. So, therefore, we kind of, in the past what happened, there was an encouragement. If a company thought that they could create

20 or 25 jobs, even though they didn't have to say that many in order to get the dollars they wanted, let's say for example they wanted $100,000 out of FEDA or $150,000 out of

FEDA, that would require ten jobs. But they would come in

and say, gee, X am going to try to create 20 jobs, Which is

fine. We wanted them to try to create more jobs. But when we start to penalise the companies now because they didn't

create 20 jobs, then it served as a disincentive. Because companies recognize today too that you just don't create as many jobs because production and manufacturing is not near as

labor intensive. I guess that is the word I have been

groping for. It is not near as labor intensive as it once was.

Just for example, I mentioned Sony to you.

We saw their two production lines out in San Diego. The one production line had about 650 or 700 employees. Their new updated modernized cost-effective line, which is going to be

the kind of line we have, creates about 450 jobs doing the

same level or more of production. So, that is the kind of

situation you are facing in manufacturing today. They don't

create as many jobs. You work with far fewer workers than you do before to produce more.

So, therefore, that $15,000 job requirement is just not realistic in terms of the market.

CHAIRMAN EVANS; Representative Gruitza would like to follow up on that issue.

REPRESENTATIVE GRUITZA: The Chairman touched

on this. If such adjustments were made to the FEDA Program,

don't you think it would be really appropriate if not

compelling to require that some minimum be set as to what

base skill for those jobs are? I have seen in my area some

of these projects that have been funded where we have been

under the impression these would be at least seven, eight dollar, not necessarily top scale paying jobs and found out that the people have been brought in working at just barely above minimum wage where the Commonwealth has made substantial investment with PEDA or other funding with programs that we have. *ty inclination would be to try to establish some minimum standards as far as what people are being paid that are being so highly subsidized by the state.

MS. STERN: I think that what we have been led

to believe in terms of the intent of the statute in the program when it was developed is that this is an opportunity

to create jobs where there are no jobs as opposed to better paying jobs or worse paying jobs. And so, it has always been my understanding, we have a whole formula that we prepare when we do an application that discusses existing payroll at the time of the loan, a projected payroll over the next three years and how that impacts on new jobs and basically at what level these new jobs will be created. We have always been led to believe that creating these sort of medium paying jobs are really what the state is looking for.

That it is not very realistic to think that you are going to help subsidize and there is supposed to be some sort of

entrepreneurial assistance being given with this program.

You are not going to bring in managers at top paying levels.

Those aren't the jobs we will be creating, but rather you will be either taking people off welfare or creating jobs in a community where they just don't exist. The Investment at the time you begin a new business or relocate to a new facility are so serious that as long as they are creating the jobs, that has always been the understanding at least from my perspective.

For instance, if you look right now you can borrow 40 percent of your total building cost through the

PEDA Program. If you wanted to move a gentleman who is operating with seven or eight employees in a leased facility and finally meeting payroll and comfortable enough and maybe can buy the'next machine to increase capacity and grow a little bit, he is ready to move into his own building.

He can't do it anywhere even in this part of the state where things are a little bit cheaper for less than four or

$500,000. Buy the land, put up a new building and that is what he is looking at. So, if he can borrow 200,000 of that from the state through the PEDA Program, he has got to create

13 jobs in the next three years to do that under the current formula. That is such a major risk for him to take to say he could add 13 people. He is currently employing seven or eight. To double, triple his existing staff, it is not something he will be comfortable with doing. The program is not going to work for him.

REPRESENTATIVE GKDTTZA: I can understand that, but my trouble I have I guess is the fact that if we reduce that to him being required to create five or six jobs, I think my contention and I can tell you my position in light of some of the things that I have experienced and seen in my district would be that those jobs pay some Iminimun standard that would be established through Labor and Industry or the

Department of Commerce.

MS. STERN: Yeah. I mean, I don't think anybody would have a major objection to that.

MR. SKIAVO: I don't know if it is a widespread —

REPRESENTATIVE 6RUITZA: 20 jobs, when people are actually still eligible for welfare benefits because these jobs aren't paying them enough to support their families.

MR. HOWLEY: I don't see that that is a problem. In my experience, and I am very close to your county, the pressure comes at the end of the three-year period, PEDA allows three years to create the jobs that are committed. If you were to change the adjustment to one job to 50,000 and then extend the commitment period to ma^be

five years and then put in some type of a minimum or a floor, that would give the customer, our client, an additional two years to create the higher paying job that you are looking

for. In some circumstances, if you are having difficulty

getting started, it is a relocation, that is a very expensive proposition to go through. Then all of a sudden your three year time limit is coming down and you are just barely getting by, you have got to make a decision to create some jobs. Sometimes a company is faced with creating minimum wage jobs just to meet the job requirement number.

If it is ten or 15, they may do that. If there is an extension that maybe they could get five years instead of the three-year job commitment, that would give them a little more breathing room to manage their company. The extension of the

$50,000 would give them a lot more clout. I don't think any of us — we would be amenable.

CHAIRMAN EVANS; Wouldn't you agree there is a concern Kike Gruitza is raising, Vic has that question, Tom has a question, is how do we strike that balance? Over the

'80's, in terms of Pennsylvania making a transition from heavy manufacturing county and the state getting much more active in Economic Development, actually there is some debate about what can a state do about economic development in this national economy and worldwide economy. But the point

I think Representative Gruitza is raising is how do we, in a sense, do we want to make the investment and strike that balance.

Because you want people to have meaningful

employment. I know it always gets into a whole debate about where we set limits of minimum wage and what we do and people debate should government do that. That should be left up to

the marketplace. But it still comes down to an issue about

the investment. Particularly when we have the PEDAs. We will have the Department of Commerce coming before us and we need

to be able to measure that. We need to be able to ask

questions if you have had these revolving loan funds. You know, it wasn't PEDA that just changed the requirement a

couple years ago where companies got penalized if they didn't

reach up. I mean years before that.

MR. SKIAVO: It is justified. It is

justified.

CHAIRMAN EVANS: Years before that loans were made. Basically it seems like there was no requirement and

yet we were investing taxpayer dollars and we were not seeing

the kind of return. The companies take this money and spending

and something happens.

So , I am sharing with you what we are trying

to do here is, how do we strike the balance? We don't tie

peoples' hands but we also make sure the money we invest

can be returned.

MS. STERN: Well, the best thing that has

happened to the program was this accountability.

CHAIRMAN EVANS: Right.

MS. STERN: And serious accountability,

because we, as practitioners, will sit there and tell the clients, you are going to sign your name to a form and they are going to come back and they measure it every year. It is the best thing that happened to the program.

In terms of coming inside an employer's office and telling him how much he is going to pay for the job he creates, I think you can set a floor. 1 think it is an easy thing to monitor because that information has to go on an application and if that is an additional regulation you want to throw in the program, I don't see it as a major obstacle. We don't have that problem. I have never seen the jobs that are created sort of substandard kind of jobs.

CHAIRMAN EVANS: But I want to be clear. You don't hear me saying if we want to throw another regulation in. I don't think we throw the regulations in for us to be burdensome. I mean, X don't think we do that, X think we do it because in tight times and the dollars we have to measure, we have to be able to make some determination about performance and accountability. We do that because that at least allows us to stand up.

Let me go to Representative Lescovitz.

REPRESENTATIVE LESCOVITZ: I would like to

follow up on that. Then I want to broaden off into a

different area.

CHAIRMAN EVANS; Let me do this. Let me go

on that issue, Vic, and then X will get Tom on that issue and then I want to get back specifically.

REPRESENTATIVE LESCOVITZ: Following up on that, I am just wondering when businesses are looking to attract state dollars* I don't know if there is a percentage of breakdown, but the businesses that are going to pay the higher priced employee such as Sony or whatever, do these programs mean a difference to them in locating into an area?

Because I think it is a very good point. The monies that seem to have been going out are to companies that are on the borderline and are the lower paying jobs and therefore they need these state dollars in order to get operating. I'm just wondering, the monies that we are putting in does it really make that big of a difference to a company that is going to be a reputable firm and pay decent wages and decent benefits?

MR. SKIAVO: Let me comment on that. I think what you have to understand, there are a multitude of factors that go into a company's decision to expand and in particular where to locate. Having as part of the incentive the PEDA package and the other state Commerce programs has been extremely important to us. For one thing when you look around the surrounding states, you know, it is a very

competitive type situation. They offer special incentives,

financial incentives. So, whether we want to or not, it Is

something I think we are going to have to continue to do. Because maybe what you're saying Is the companies financially could put their own package together. They don't really need the money.

REPRESENTATIVE LESCOVITZ: Yes.

MR. SKIAVO: There are instances where that certainly is true. But I think it is necessary that

Pennsylvania have these programs that we do because if we don't, then we are going to start, especially where we are relatively even with states on other factors. If we don't have those kinds of financial incentives and PEDA has been our best program, by the way, we are going to lose those companies ♦

Let me also get back very quickly, I think your point is well made, Representative, concerning the level of wage. But to be honest with you, and I really don't know what the statewide statistics would be, in Westmoreland

County we haven't seen that kind of problem because the companies we work with with the PEDA loans generally are paying the kinds of wages that you have indicated you think are minimum. That may not be the case statewide. But we haven't had that experience.

REPRESENTATIVE GRUITZA: I just want to say

that in most situations that has been true in our area as well. But it has just been a little bit of a sore spot in a

couple situations. It hasn't been, and in fact in those situations, those deals haven't been very successful.

MS. STERN: In terms of the business continuing to operate?

REPRESENTATIVE GRUITZA: Right.

CHAIRMAN EVANS: Tom Petrone on this same subject and then Rich Kasunic on the subject.

REPRESENTATIVE PETRONE: Thank you, Mr.

Chairman.

Mr. Skiavo, my question to you regarding the

Sony Corporation's decision to move to Westmoreland County, we are somewhat criticized, I think there is a fear out there when the public sees more intrusion by foreign firms.

I don't share that fear because I think the world is changing so fast that we have to be able to adapt, to accept this.

We know that Sony products are probably premier quality in the electronic industry.

My question is, could you estimate the total value of the payroll per year to your community from the proposed jobs in terms of dollars? It was 450 jobs and the per job earnings possibly as an average,

MR. SKIAVO: We really don't have those statistics right now, but let me give you some information

that should prove helpful to you. Remember what I told you

the Sony line is going to be a much more sophisticated line, perhaps the most sophisticated in the world. They have indicated to us, for example, on the CRT, that is the tube manufacturing end, that the vast majority of their employees, and they are going to be starting out some­ where between 350 and 450 employees, they are indicating that the vast majority of those employees will have education at least two years beyond high school. Ydu are talking about either a technical degree or education or associate degree. Those people will be able to command higher salaries.

You are also talking, for example, they will be bringing on board for that CRT operation 50 engineers that will be on board by March. They are coming from all around the country. So, if you look at an average wage spinoff,

It will be rather significant. So that the money that the state has invested in that site will come back to

Westmoreland County two, three, four, fivefold very easily.

In addition to that, Sony is much different than the former VW site in that they are already making a very concerted effort to bring suppliers and other entities with them that is going to create some additional jobs.

They are also being very, very conscious about dealing

locally with other businesses in the area. We, for example,

are helping them along those lines bringing people to them

that perhaps could service them not only with a product but

a particular service. They are being extremely conscientious in that. When it is all said and done, we expect a tremendous amount of local spinoff from the dollars that have been invested.

REPRESENTATIVE PETRONE: I'm certain there will be significant peripheral benefits and things like that.

Often we do not look at that possibility. I'm sure this is going to be a huge success. However, there is still apprehension simply because a lot of people have an antiquated kind of attitude about foreign companies. But we have to deal with it, I think. We have been buying these products for 30 years. We might as well make them here in

America.

MR. SKIAVO: Exactly.

REPRESENTATIVE PETRONE: One other point, Mr.

Chairman. On this same subject, the question is, we recognize the fact that many southern states offer tax abatements or moratoriums to companies coming in. They will say we will give you a ten year tax break. You don't have to pay us for ten years realizing they are going to get the monies in wage taxes or some other form. I don't think we have been able to offer something like this in that case.

Do you feel that would be an added inducement for this kind of development?

MR. SKIAVO: It possibly can, but there are

some advantages that we have besides our financial incentives that are very important to us. Again, X go back to the Sony

situation and several others that we have dealt with. The

quality of our work force, our infrastructure, those kinds of

things perhaps in the scheme of things have a higher

priority. Don't get me wrong. The tax issue is extremely

important and you are going to hear an awful lot of

discussion about the budget proposal that is now before you,

a very serious one. But in terms of paying no taxes, we have

seen that time and time again especially from the sunbelt

states. We have had examples where those companies are

coming back. We just helped, with the help of a PEBA PEDFA

loan, we brought a factory back from South Carolina to

Westmoreland County. His comment was, one of the problems,

one of the major problems he had was his workers would come

to work for three days and go fishing for two. The work

ethic that we have in Pennsylvania is an extremely powerful

incentive for us. As a matter of fact, that was one of the

major incentives for Sony. So, you throw in that work ethic,

you throw in the state incentive, you throw in the other

factors we have, we are fairly competitive and that is the

way we want to stay.

REPRESENTATIVE PETRONE: Thank you very much.

CHAIRMAN EVANS: Representative Kasunic on this subject.

REPBESENTATIVE KASUNIC: Just to follow up on I that, we In western Pennsylvania, southwestern Pennsylvania have constantly said and talked about the work ethic and so on* Yet we have still continued to lag behind not only the rest of the country but the rest of the state as far as new business and new jobs being created here with the exception of Sony. I have said the same things that you just sat here and said too. I said that many times. I don't really see, in southwestern Pennsylvania, and particularly Fayette County where I am from, new business and new industry beating down our door or running to relocate. Like 1 said, we lag behind the rest of the state, as a matter of fact.

MR. SKIAVO: Do you know where our best potential is? You know, the Sonys get all the attention.

But the real growth in the communities are the people you already have there, the existing businesses, the small manufacturers. If you look around again our areas in

Westmoreland County, when we look at manufacturing, it is small manufacturing. We're talking about starting out with two, three employees. We did a PEDA deal, by the way, with a company that started out with two employees. They will be at 25 at the end of three years. It is a father and son started with a machine shop in their garage. These are the kinds of people that we are helping. This is where our job creation is coming from. That is why western Pennsylvania, in our opinion, is going to be stronger as we finish this transition than when we went into it, because we are not going; to be as dependent on a few number of employees for jobs. It is the people that are already here that we have to continue to look at, what can we do for you, how can we help you, because that is where our growth is.

REPRESENTATIVE KASUNIC: I agree with you, but at the same time we have to remember that southwestern

Pennsylvania, once again, we are fast becoming an older population. We are losing our youth. We have been losing them.

MR. SKIAVO: We have got to get them back.

REPRESENTATIVE KASUNIC: We have to do something, obviously, to turn that around. One more comment. All of us sitting here at the head table and those of you in Economic Development and such, I am sure we have made the statement more than once at various meetings and places that we have been, we want to try, we want to provide a better way of life for the people who are living here in the communities. I agree with Representative Gruitza. It seems as though the jobs that have been created, the new jobs they are minimum wage jobs, the majority of them or just above that. In essence, my question is, are we really

creating a better way of life? I don't think so. A minimum wage job is not a better way of life* I am very much concerned about the fact that those businesses who are coming here, are they looking for, more or less taking advantage of the poor economic conditions and knowing that they come in here and get that good quality worker that we are so proud of here in western Pennsylvania and at the same time come in and be able to get that person at a very low wage rate.

As I said, we want to provide a better way of life. Quite honestly, I would rather see a couple of small businesses come in paying a decent wage and few employees instead of coming in and paying a minimum wage to a lot of people because it isn't making life any better for the family or for that person or for the community.

MS, STERN: I think everybody is concerned about the quality of jobs that are being created, but again,

X need to reiterate that the application process and the examination of all the financials of the company, including the owners' salaries, all the salaries of management, that is

all available at the time an application is put together.

And we are just not seeing companies come in, continue to

draw very large salaries and create the lowest paying jobs

that they possibly can to meet some sort of job formula the

state has set up for the PEDA Program.

To the contrary, I see people stretching as

best as they can, making as many personal loans to the

company as they can to keep it floating, to get the company to grow and to create whatever additional jobs they may for the community. I just don't see that as a plaudit, schematic kind of approach towards state funds. I don't think that is happening.

CHAIRMAN EVANS: Before I go to Representative

Colafella, I need to real quick, you stated the PEDA Program you believe is a successful program. You think that par­ ticularly that it needs to be on the aspect of moving it from

15,000 to maybe 50,000?

MS. STERN: Well, I didn't say 50.

CHAIRMAN EVANS; Well, how much?

MS. STERN: I think 30.

CHAIRMAN EVANS: 30,000 you say. Are there any other specific programs that you know about function in the state that you think is positive, any other programs?

MS. STERN: Well, we probably have ten more things under PEDA we could talk to you about if we have 20 hours. Pennsylvania capital loan fund I think is serving

a very nice market in terms of long programs. We would like to see that continue to be funded in a healthy way. We have had some administrative problems in this area but I am hoping

that those are behind us.

CHAIRMAN EVANS: When you say administrative, meaning what? In terms of management distribution?

MS. STERN: Right. MR. SKIAVO: One comment X would make, machinery, equipment and loan fund* one of the problems that we think exists out there that our programs really don't deal with and that Is job retention. Pennsylvania, of course, as you recognize, especially western Pennsylvania, was in that mode of just trying to retain jobs. The slogan was, well, we got to stop the bleeding first before we can cure the wound.

So, job retention became important to us too, particularly with regard to equipment. Because if you are going to update and modernize and be competitive, that is where equipment comes in. The machinery, equipment and loan fund was established but it was established with very little funding. As a matter of fact, most of the IDCs and local entities really don't get to use it because it is with so

little money the priorities have to be gauged statewide and therefore that is strictly done by —

CHAIRMAN EVANS: What type of money would you

think it would need?

MR. SKIAVO: Well, it is proposed to have, I think, eight million. We could easily, easily, justify

twice that.

CHAIRMAN EVANS: So, 16 million.

MR. SKIAVO: Because it is one program where you can use job retention as a justification.

CHAIRMAN EVANS: Nick. REPRESENTATIVE COLAFELLA: I know there has been a great deal of criticism and X have heard a great deal

of it that a lot of money is being spent by development groups

to bring in industries and different companies and they are

low paying jobs. I think that there have been a lot of studies that have indicated that once people get into jobs, whether it is a low paying job or not, after they have been unemployed, that they traditionally find employment in higher paying jobs. Since yon people are more involved in all of

that have you seen some studies that indicate that the thing

to do is to get people into a job and they will eventually

find themselves into higher paying jobs because they are now working?

MR, HOWLEY: In my case what we have been seeing

.there' has been reference to the lower paying jobs. The

companies that we have been dealing with, the high tech

companies, large warehouse and distribution companies, when

they come in and they look at a wage scale, they look at what

the determining wage scale is for the area that they will be

drawing their employment from. In general I have had two

companies come in recently and look at the wage scale. They

are not coming in with a set rate that they are going to pay

a minimum wage or something similar to that. They will look

at the wage scale. That wage scale, if those people are

already employed in lower paying jobs, they realize right away that they don't have to worry about what the labor pool is because the labor pool for them includes people that are employed. People that will leave lower paying jobs and then gravitate to the higher paying jobs. That has happened in the last two instances of the two PEDAs that we have had approved. That has been the case for us, is that people will gravitate to the higher paying jobs. 1 am sure that is the same ™

MR. SKIAVO: We also see the experiences when you start out, and most of it, the applications we have dealt with, the starting salaries have been around seven dollars an hour and higher. Those salaries then tend to increase on somewhat of a regular basis. You know, people who are starting at seven are now in the eight, nine, and ten categories.

MS. STERN: And moving up within the company.

MR. SKIAVO: Yes.

CHAIRMAN EVANS: Can I do this? There is one question I'm going to lead off with George answering and ask you to answer real quick and then I am going to end with

Representative Terry Van Home who has a couple of questions.

George, over the past five years have there been any changes in the type of companies that are seeking state aid and have you been able to respond to those company needs? MR. HOWLEY: The companies we have been seeing, we are getting more high tech companies. And the big benefit for us has been the Ben Franklin Partnership. That has been an excellent program iior us. We are also seeing a lot of warehouse and distribution companies coming in. The industrial jobs, just to give you an example, I used to work in the mill for USX and we used to cut steel and we used to have 13 employees cutting the steel. We funded a man last year with one machine that did the job of 13 people. It is a very high paying job. It is all computer. The cost of his productivity has gone way down. But yet just six years ago working in the mill I had to have 13 people doing the same job.

We are seeing that the industrial employers, more industrial service companies are coming in to assist industrial people. That is the change I recognize in Butler

County.

MS. STERN: I would make the same comment. To the extent that there are "industrial service type companies" they currently are not eligible under the loan programs for state assistance. They are a healthy growing sector of this economy, and I would like to see them included in eligibility for these programs.

MR. SKIAVO: I would endorse that. The nature of business changes. I think it Is important that the programs keep up with that changing nature.

CHAIRMAN EVANS: Terry Van Home.

REPRESENTATIVE VAN HORNE: Thank you, Dwlght.

John, I know you have talked a little bit about Sony today and rather than get into it at length, if you could provide the Committee with some information about how the whole Sony deal works, some things you thought were good or bad, just in kind of micro area regarding Sony. We are pretty familiar with it out here, especially from my viewpoint in Westmoreland. But if you could at some point provide us with some more information rather than getting into that.

There is a couple other questions. Of course, you need to be congratulated on that, what you and everybody else did on that*

The BID Program, the infrastructure we hear is

so important to Economic Development. I mean, this area around here when we saw what happened in '79 and then when

East Street Valley was finished and what is obviously happening around here. Is the BID Program working well?

Do we need to change that? I feel in some areas there may be too many restrictions and I'm kind of piggybacking on

Representative Battisto's comment. George, Laurie or John,

do you have any comments about the BID Program?

MR. HOWLEY: I could tell you the BID Program saved an employer of 250 some jobs were saved from us from going to Ohio because of the BID Program. We didn't have any infrastructure. Besides '79, we don't have any water, we don't have any sewer, we don't have any roads. Without the

BIB Program, that company would be over north of Youngs town.

The BID Program saved that for us specifically.

MR, SKIAVO: The infrastructure is one of the most important things that the state can provide. These kinds of programs are absolutely essential. The problem again is one that you gentlemen face every year when it comes time to make the budget. It is a question of money. We've got a number of programs that are excellent programs but just simply don't have a lot of funding which means they don't go very far. They do a number of projects. If you look at the projects BID does, you will see they are extremely worthwhile but there are probably more than twice as many that could be done,

REPRESENTATIVE VAN HORNE; Overlap,, some of our colleagues have raised the question of RIDC, Regional

Industrial Development Corporation, southwestern

Pennsylvania, what their true mission is. And I know Jay

Aldridge is scheduled to be here from Perm Southwest and

Ben Franklin, Sometime their mission gets clouded I'm sure

from our eyes and from the general public's eyes and possibly your eyes. Is there a problem with overlap in that area? Are they all fulfilling their initiative they were

created to fulfill? I'm not so sure that the industrial

resource centers are doing what they are supposed to. If you

could follow up on that. Without infringing on something

you may have going with any of these groups.

MS. STERN: We have had discussion about this

among ourselves. We are not so sure either. But I can't

comment that they are not doing what they are supposed to be

doing. I can comment that the trickle down that we as

practitioners would expect to see hasn't yet occurred. I

don't know what the length of a successful IRC Program should be. If those folks should be generating new jobs and working with industries last year, this year, next year, five

years from now. I don't know what the creators of that

program were hoping for in terms of generating jobs.

I have the same question about Ben Franklin.

In parts of this Commonwealth it is working very successfully,

I have colleagues who can suggest three or four companies

that have located that have specific increases in

productivity or employees generated based on that. I have

not seen one. That doesn't mean that is not happening. It

is certainly not happening in my community through our

programs or through our RIDCs,

MR. SKIAVO: I would echo what Laurie has said,

We have seen, and a number of my peers in northeast Pennsylvania have commented the same thing to me, we haven't seen the kind of success from Ben Franklin that supposedly some may have. There has just been no effect for us.

I would also say this too. As an economic practitioner, more is not necessarily better. We seem to be creating a lot of new programs. Maybe a lot of new entities that all require new funding. Perhaps what we need to do is take a look at what works best. Fund them adequately. Make sure we bring the kind of changes to those programs that are needed and maybe we will be better off.

MR. HOWLEY: I would disagree with my colleagues on Ben Franklin.

REPRESENTATIVE VAN HORNE: There is some question among our colleagues what Ben Franklin's mission is.

Is it just to provide another area of research funding to universities and it is kind of lost in academic morass rather than being channeled to research and something that could truly work.

The Industrial Resource Center for

Southwestern Pennsylvania I think is focused so much again on the Mon Valley that they lost their true mission regarding Alle/Kiski, Butler, Beaver, Shenango. It is kind of unbelievable. I take them literally at what they are

supposed to do and I don't think they are doing that at all.

And I think a lot of us have questions with some of that. MS, STERN; There Is a lot of money associated with those two programs. I think that is the problem we as practitioners have.

REPRESENTATIVE VAN HORNE: I want to move on.

We have one more good one. Go ahead* Just elaborate on Ben

Franklin.

REPRESENTATIVE BATTISTO: You disagree

with that?

MR. HOWLEY; The Community Development

Corporation does not get one cent in the Ben Franklin for any type of Economic Development activity. Yet our clients, Two

Six for the optical research that they are doing have been funded by the Ben Franklin Partnership. Ellwood City Forge, just over in Ellwood City, has been funded by the Ben

Franklin Partnership for research on a tracking system, software tracking system. We also have Control Fluids

Corporation where they are coming up with a new operation that is being funded by the Ben Franklin for the rolling of steels. In addition to that, we have the world leader right now in Clean Room Technology. They have gone from zero employees to 25 employees just in eight months. It is a fast growing firm. It is just up the road here. It took us

a while to get it off the ground. Now, Ben Franklin is helping us to put that together. They are helping with the processing. They are looking at funding the research on that In addition to that we have another firm that is an MRI firm that Is enhancing imaging. The gentleman that is trying to get that started already has ten patents to his name, but without the Ben Franklin funding the research for that has been definitely in the hole.

As far as Butler County is concerned, those are where our emphasis is, those type of jobs. I can't speak highly enough. I have been turned down three times for economic funding by the Ben Franklin people, but the success of their programs as far as I see It has just been

tremendous,

CHAIRMAN EVANS: Due to time, and I know the members are really getting involved, but we only really set

a half hour for each panel. I want to sincerely thank all of you. I hope, if you care to stick around, the members can ask you and give us some feedback.

MR, SKIAVO: One quick thing, if we can. One issue that hasn't been discussed and is becoming extremely

important in Economic Development, that is the environmental

issue. Not only the amount of regulation but what it takes

to get through the process. It is becoming extremely

costly and is one of our biggest disincentives that we are

now working with.

CHAIRMAN EVANS: Can I make a suggestion to

you and it is only because of our time. Any notes, letters, correspondence, could you submit that to us rather pronto in the next week or so, particularly around Economic

Development. We are reviewing this whole program, the

Commerce Department, We would really like to get your thoughts.

Thank you again, and members of the Committee,

I would like to thank you. We have on the agenda next the

Evaluation of Traditional Manufacturing and Industry Programs,

The next panelists will take their places, please; Mr. Jay

Aldridge and Dr. Hansen. Would you like to introduce yourself and tell us a little bit about yourself?

DR. HANSEN: Yes. I am Susan Hansen. X am a Professor in the Political Science Department at

University of Pittsburgh. I have been doing research for the last several years on Economic Development, comparing programs across all 50 states and looking at what they have been doing, what works, what doesn't seem to work so well, and roughly, how Pennsylvania compares to some other states.

CHAIRMAN EVANS: Let me stress to the members, this portion we are dealing with the Evaluation of

Traditional Manufacturing Industry Programs. You heard Dr.

Hansen give a description of her background. The other

guest we are to have, and he may eventually show up, was to talk about specific programs around the Commerce Department as we have just been discussing. So, I share with you, Dr. Hansen will be dealing from a global macro standpoint. If

Mr. Aldridge eventually shows up, we can bear about the

specifics.

BY CHAIRMAN EVANS:

Q So, let me start off with a question to you.

In your opinion, what economic challenges will face the

Commonwealth in the 1990's and can our current programs meet those challenges? I think you heard the previous panelists that we had and the kind of struggle that we are going

through. The programs we have had over the last couple years to what we are trying to do today. As you see as we move

into the 1990*8 what is your sense about our ability to

address some of these concerns?

A Well, I am always a little cautious about

forecasting the future. I am much more comfortable explaining what has gone on, but I think I can extrapolate a

little bit.

One thing that is apparent from my research

is that states can do relatively little about unemployment.

This tracks very closely the national rate, national

economic policy, the value of the dollar, the business cycle,

interest rates, monetary policy and the independent state

contribution to the unemployment rate is fairly minimal.

Again, looking at all 50 states over the past 15 or 16 years.

It looks at least from my research that states can have some impact on things like productivity, rates of exports, personal income growth and gross state product in manufacturing. But one of the real dilemmas of Economic

Development is that improvements in all of these other areas; productivity, export, et cetera, don't necessarily have an immediate payoff in job creation.

In fact, sometimes it works exactly the opposite. I was struck by what one of the previous speakers said, new equipment that took the place of 13 workers. And unfortunately, for those concerned with unemployment, the gains In productivity do indeed often mean lower employment rates at least in the short term. Longer term I can't really say on the basis of what 1 looked at. So, that is clearly one challenge that dealing with employment problems may take something other than Economic Development. It may take work at the federal level, emphasis on education, but the

Economic Development programs simply don't seem to have that kind of impact.

Q If economic programs, as you have described, don't seem to have that kind of impact, naturally, that is a

concern of all the members up here as well as probably the people in the audience. Because that is a real question,

I mean, the people who we represent do not sometimes understand what is happening in the changing economy worldwide and a lot of factors. They understand something that is very simple. They need a job. They don't understand when you have companies that move to Korea, Japan or Mexico or Canada or whatever. We as legislators are caught in the middle with a national government that doesn't have a clear domestic agenda and we clearly are caught in the middle trying to figure out what do we do. And you say Economic

Development is something that may not be the answer. Then what form with some new programs should take in the future?

Do you have any idea exactly?

A Well, actually, I found, and this somewhat

surprised me, that some old programs really were working very well. Things such as infrastructure, investment in highways has consistently been a predictor of growth in jobs.

Defense spending, the defense payroll, the defense contracts

in a given state has shown a consistent positive

association with a number of indicators of the progress of

a state's economy. And the downsizing of the Defense

Department may indeed have some negative impacts on the numbers of states and regions, particularly those that have

come to depend on it. Now, that may not include Pennsylvania because we have not been one of the major beneficiaries in

recent years. But certainly other states such as

Massachusetts that have had big cutbacks in defense spending

are paying the consequences.

I should, of course, mention education. That growth In high technology employment in particular seems to be a function of the level of education or retainment in a

given area. And so, this is an investment which does seem to have economic payoff in high technology employment if not in jobs in general. And, of course, these high technology jobs tend to pay better wages.

CHAIRMAN EVANS: Mike Gruitza,

BY REPRESENTATIVE GRUITZA:

Q I'm fascinated by your remarks. Coming from

■ an area which was really devastated in the mid ' 80*s where we lost a number of manufacturing jobs within really a matter

of days. Throughout this period of time I have been

involved at an incredible level with the Economic Development

groups in our area in the state programs, many of which have been mentioned along with some others that weren't. So many

times I have been told that unless this deal can be put

together with PEDA or BID grant or this or that, this deal

isn't going to happen. So, my personal experience has been

in the Economic Development programs that we implemented

through Fenn Pride and some of the other things along with

some of our traditional programs have been just critical in

my area in terms of retaining some jobs and creating others.

I can give you one big example, Sharon Steel probably would

have been gone. They did away with 2500 jobs.

A Well, let me clarify what I have been dealing with which Is the state level, the level of unemployment across the whole state. And this simply does not seem to be closely related to the Economic Development programs that I have been looking at. Now, it is very clear that there have been pockets of success. There have been counties and regions and cities and programs that have indeed been successful. But there have been other areas within the same

state which simply have been left out. So, in balance it is very difficult to show that kind of improvement.

Q Can I ask you this? Do you think that perhaps if we said, if none of these programs had existed

and Pennsylvania was trying to deal in this whole area

competing with Ohio and all the states with the programs that they have, perhaps, you know, maybe we aren't seeing

statistically great growths statewide or statistics like that

I'm wondering if we hadn't had these programs if we would be

seeing a continuing, what am I saying, maybe we have mitigated our losses?

A X think that is correct based on some

research that has been done by David Lowery and Virginia Gray.

Lowery is at the University of North Carolina. He looked at what he called the compensatory impact of Economic

Development and forecast growth in the '80*8 based on the

rate of growth in the 'TO's* From his research it appeared

that states that were declining in the late '70's and early '80'8 did pick up faster if they did adopt a series of

Economic Development programs. Although their overall rate

of growth was still below some of the really booming regions,

but they nevertheless picked up. He argues that there was a

compensatory impact from Economic Development programs.

Q I might just add too that I agree 100 percent with your assessment that some of the old basic things providing the infrastructure, some of those ideas I think is

instrumental in attracting jobs and retaining jobs. That

has been understated?

A I think it has and I think some of the

research on Economic Development really focused on sexy new

programs and hasn't paid as much attention as perhaps they

should have to the older ones.

CHAIRMAN EVANS: You raised a good point about

the difference in the state, I think this leads into Rich

Kasunic who was asking that question of the previous panel.

Rich.

BY REPRESENTATIVE KASUNIC:

Q I don't know if you were here when I asked

the previous panel the question that obviously here in

southwestern Pennsylvania we have lagged behind the rest of

the nation and in fact the rest of the state in Pennsylvania

as far as recovery is concerned. It seems as though we are

even falling further behind at this particular point in time. I guess I would like to have your opinion based on your research as to why are we, in southwestern Pennsylvania, lagging behind the rest of the country and the rest of the state?

A Well, I think there is a couple possible answers to that. One is that many of the Economic

Development programs have really been very modest. State

Venture Capital programs, for example, have received a lot of attention but the total amount of state provided Venture

Capital is a very small fraction of the total private Venture

Capital market.

And similarly, programs like the Ben Franklin

Partnership, although they have created, what is it, ten or

12,000 jobs that they credited. 1 didn't find my table of that over the past several years. And this is certainly very positive particularly in the counties that have been well served but this is the minis cule portion of the total labor force in a state the size of Pennsylvania. Although

I think there have been some good programs, they have been very modest, they have been experimental and they really haven't had the opportunity to do what they could do, I

think that has been exacerbated in Pennsylvania because

essentially there has been competition among different parts

of the state, different programs for a very small pool of

funds. So, it has been difficult for any one region really to get enough to show a dramatic impact. So, modest results may come from modest programs that you simply cannot expect great impact from a very small portion of the state's budget.

Another reason is, I think the difficulty in

targeting, and this is a problem in most states, not just

Pennsylvania, that there is certainly a concern with inducing growth, solving unemployment in the seriously depressed regions. But it is often very difficult to persuade companies to invest in those areas. They may be much happier going off to Chester County the way Eastman

Kodak did. And aids have not been able to do the targeting

as effectively as they might have done to really convince

companies to locate in regions with the most serious economic problems.

One possible reason for this is, I believe

there could be more coordination between the Enterprise Zone

Program and other Economic Development efforts. That they

are in different departments and they don't often seem to

coordinate to really try to bring businesses in areas that have been designated as in serious distress. I think

targeting is one of the big issues for the 1990Ts. Can you

really focus the programs most effectively. And no state is

really doing very well at this. That is a serious problem.

Q So, what you're saying is, the state should

focus more on southwestern Pennsylvania? A Well, on any region that Is —

(Laughter.)

I'll support that. What can I say?

CHAIRMAN EVANS: Don't worry. People from

Pittsburgh and Allegheny County will be happy that you said that.

REPRESENTATIVE KASUNIC: That is all.

CHAIRMAN EVANS: Before I go to Representative

Lucyk and then Representative Colafella, the person who is responsible and certainly advocating that we are here whatever, and we are glad to be in her district, is

Representative Pat Carone, Pat, thank you very much.

Representative Olascz also is a member of the Committee and

Representative Ron Black and Representative Wozniak from

Johnstown. Representative Lucyk.

BY REPRESENTATIVE LUCYK:

Q Just to follow up on that, Dr. Hansen, and I think you answered the question but it came to me a little before you started answering the question. What you are talking, and I am learning new words here, the macro approach, the micro approach where you are talking that

specific programs that we talked about aren't successful

statewide. Then you talk about programs that are successful

statewide. The state can participate in education,

infrastructure, things like that. I think Representative Gruitza, of course, his area has been successful but his area has also been the focus of the state which you said a

certain state activities*

So, I think what you said is the programs are

successful if the state decides to focus on a specific

area and bring the resources available of state government to bear in that area. Whereas, if it is just left to the

statewide of competition for PEDA money, for the different program money, that if these programs are spread statewide

they really have little effect. Is this basically what you

are saying?

A Tes, that is a good summary,

Q Where the governor of the state decides that

Schuylkill County is going to be the next miracle of the

1990*8 he can, through the programs and through his

influence and the Department of Commerce and what aid and

technical assistance he can send into that area, these

programs can be successful if focused in that area?

A I would have to qualify that a little bit.

One recent national study of Enterprise Zones found that the

most successful Enterprise Zones were the ones that had the

most going for them to begin with. That they had not

declined too much in infrastructure and tax base and

population loss and they were the most successful. But the

most depressed areas, those facing the most serious problems were not helped. So, I think there is a question here of where you invest your resources. What is going to show the biggest payoff. And it certainly appears from the program evaluation that investing in areas that are not that bad off is going to have a bigger payoff.

Now, politically that, of course, is going to give you folks some problems. If you are from an area that is really having serious problems.

REPRESENTATIVE LUCYK: Thank you.

CHAIRMAN EVANS: Nick.

BY REPRESENTATIVE COLAFELLA:

Q Dr. Hansen, I want to make sure I understand your study. What is the title of your study so I know how encompassing it is?

A The Political Economy of State Industrial

Policy,

Q How many states have you studied?

A SO,

Q You have studied 50 states?

A The basic aggregate data analysis is for all

50 states and then I looked at five states in more detail, interviewing some people looking at the specific programs,

Q I think you are making statements where I

don't think you have sufficient data. You are telling me

that there is not a significant relationship between, for example, what Tennessee did to get the Saturn plant with thousands and thousands of manufacturing plants versus states you did nothing and there is a lot of data out there that you haven't touched. I think you are making some observations about states but you really haven't gotten a tremendous amount of data. I think your statements about the fact that Economic Development programs that are being developed in some states statistically don't make a significant difference over states that do nothing. I don't really think that is accurate to make those kind of statements based on the data you have uncovered and the

comprehensiveness of your study.

A Well, let me qualify that. I said that the impact on the unemployment rate was quite minimal. That there were other areas such as manufacturing growth, exports, productivity where you could indeed demonstrate a connection.

But it was unemployment, the employment rate specifically that seemed to track the national level and simply did not respond very much to the state initiatives.

Q Let me ask you, for example, let's take in the

Pittsburgh region. If you looked at individual counties such

as Beaver County, they have done a lot of unusual and

innovative things in the last few years to get monies from

the state as a result of industrial parks being created in

Beaver County. Unemployment has been reduced 100 percent in Beaver County and I think a great deal by the state's efforts,

I guess what I am saying is, have you looked at that closely?

Have you made comparisons over one year versus another year in the Pittsburgh area, unemployment?

A I have not looked at the county level in this comparative research. It is based on the state aggregates.

And there are indeed differences across counties and regions within states. But my focus has been on comparing what states can do about these different economic outcomes. And there are indeed successful programs in specific counties, specific regions and Saturn is a good example. But however much Saturn contributed to the Tennessee economy, it still in the aggregate, did not raise the level of employment in the state of Tennessee.

Q I find it difficult to follow basically objectives in your study based on the limited amount of research. It is Just my own perception.

A Well, that is perfectly reasonable because I think you are asking programmatic questions. I simply am not prepared to answer those on the county or the local level.

I can tell you something about what appears to work on states as a whole for a broad level of economic indicators. I can't

.do program evaluation,

CHAIRMAN EVANS: Let me stress what I said in the beginning. The difference we have had from Dr. Hansen from the macro point of view in comparison. We said that she probably could not evaluate how our programs are functioning county by county and the unevenness of what has been happening. We had another person on the panel to try to balance in terms of what the conversation was going to be about.

What X would like, and it probably will be helpful to us, Dr. Hansen, if you could submit to our

Committee any study as a comparison of other states so we can look at it from the local standpoint of Pennsylvania trying to compete. I would like to end with Representative Joe

Battisto so we can go to our next panel. Joe.

REPRESENTATIVE BATTISTO: Thank you very much,

Mr. Chairman.

BY REPRESENTATIVE BATTISTO:

Q Dr. Hansen, looking at the 50 states can you indicate that any one of the states or any groups of states have made an investment In human capital, higher education, public education that gave them a tremendous advantage over any other state? Is there any specific state that you could point to or any groups of states or any area of the country?

A Well, I can*t really identify a specific state but the problem with educational investment is that highly educated workers tend to be more mobile. So the states that

are really reaping the benefits of higher education investment in particular are those that are attracting highly educated people from other states rather than educating their own, and this is a real dilemma. My university may not be too happy with this, but there certainly is a problem with the high rate of labor mobility.

So, a number of the southern and western states, which have not traditionally been strong in education, have done well without paying for it basically by attracting them from other states. So, what I think might be helpful for Pennsylvania and other states with a good educational basis is programs to attract more high tech employment to this area to keep the better educated people in the state or region.

Q You sort of touched upon a follow-up question

I was going to ask and that was that we experienced during

the '80's or late '70's the loss of jobs to, for example,

the southeastern states and southwestern states. And as you have indicated yourself, they traditionally have not

invested heavily in higher education. Although North

Carolina and some selective states have been doing that.

A Yes.

Q I was wondering whether the exodus of jobs to

those areas are simply a matter of availability of cheaper

labor?

A Certainly that was part of it. The labor

costs remain a significant factor in the unemployment rate. But there Is a positive side to this. The states with high labor costs are also the ones that are gaining the most in productivity and they are the ones that are leading the country in exports. So, we have a technological advantage for which you have to pay high prices for labor and this has positive effects on exports and productivity. But it isn't much help with the basic unemployment rate. Those jobs have indeed been moving up.

Q We touched upon the fact that Sony is going to

locate right here nearby. I guess a good deal of it centers around the fact that there is available a fairly literate and productive work force?

A That could really change some things. But my analysis does not go up to what that impact will be which will be two or three years from now.

Q One last question quickly, what about the environmental regulation and laws? As you looked at the

50 states are there any areas of the country or any state that because of highly restrictive environmental regulation

laws were able to attract a certain quality of manufacturing

or not attract them? Is there anything you can tell us about protection between environment and jobs and manufacturing?

A Well, I think it is interesting that some of

the states with very restrictive laws, including Minnesota,

Colorado and California, all have very healthy growth rates in the 1980rs. That I don't see environmental regulation as necessarily inimical to growth.

But I should also note that a couple of states such as West Virginia and Louisiana have attracted certain kinds of industry, particularly the chemical industry, because their regulations have historically been very lax but they are paying a price for that now.

REPRESENTATIVE BATTISTO: Thank you. Thank you, Mr. Chairman.

CHAIRMAN EVANS: Unfortunately as usual, the members are into it, but I have a time schedule and Roy keeps banging me about the time schedule. So, I apologize. I sincerely thank you and hope that you will provide that information to the Committee.

DR. HANSEN: Yes.

CHAIRMAN EVANS: We'll give a five-minute break to the Court Reporter.

Next on our agenda is High Technology in

Pennsylvania, Mr. Parks.

(Brief recess.)

CHAIRMAN EVANS; Mr. Parks, just introduce yourself,

MR, PARKS: Good morning, Chairman Evans. I

am Timothy Parks. I am the Executive Director of the

Pittsburgh High Technology Council. I am also representing as Executive Director the Pennsylvania Technology Council which is a statewide umbrella organization for the Regional

Technology Councils that have emerged. X should also mention that I have had the privilege of serving on the

state Ben Franklin Partnership Board from 1987 until this past

February and have had, through an affiliated organization,

direct experience with the new Industrial Resource Centers

Program, So, I bring I think some customer client base, market based perspectives and maybe a little bit of

perspective from my experience in Harrisburg.

Chairman Evans, should I just open with

questions?

BY CHAIRMAN EVANS:

Q I would like to start right off. The

question I would like to ask you is, could you provide this

Committee an evaluation of the Commonwealth our current

High Technology Economic Development programs, how they work?

A Certainly. My assessment, and I will speak

from an industry perspective, and I should mention that we

now count 2500 technology based or technology intensive

companies in the Commonwealth employing close to 250,000

people. I would say that there would be a rather universal

consensus that while we may disagree a little bit on some

issues of delivery and administration, the Ben Franklin

Partnership Program and the Industrial Resource Centers Program, which we would view as the technology investment or technology development programs of the state, have been very, very important in establishing an environment for this state nationally and I think in doing some very specific things in helping to create new firms. Probably more importantly to help fledgling start-up ventures get off the ground and move towards becoming real businesses.

If I could just take one moment to sort of establish a context and X will use western Pennsylvania because we have done some very detailed studies in the past several months, western Pennsylvania, the southwest

Pennsylvania 13-county region, now hosts 769 technology based companies and they employ 68,000 people. Now, that may be

surprising or not to you, I am not sure. But the one

statistic that I want to emphasize, because X think it sets the stage for further discussion, is that 58 percent of those firms, of those 776 firms, 426 did not exist in 1981. They exist, they are doing business, they are employing people in

1990. So, we have gone through a decade in southwestern

Pennsylvania, and I believe this is certainly going to be proven to be the case in many other parts of the Commonwealth where there was indeed a very prolific rate of company

formation. How, I would not suggest that Ben Franklin

itself or the later, Industrial Resource Centers were the prime cause for all of those companies being formed. In fact I would say the public sector may not be able to take direct credit for anything specific, but it certainly contributes to the process. The final point* and then I wi > some more specific questions, but the other tuxiig BUVUL new ventures, and we are talking about technology ventures, is that they have a life cycle just like all businesses retail or more traditional manufacturing. The life cycle of going from start-tip venture to what I would call viable business generating real dollars and real jobs is usually a seven to IS year process. So, if we look at 1983 to 1991, we are just beginning to see some of those start-up ventures actually mature and have the kind of impact that you would hope would be the result of Economic Development effort. The last piece is that, although X am sitting here talking about high technology, X think the time has come the decade of the '90*8 where to some extent we remove that adjective high or advanced. Technology is what we are really talking about. Technology, if it is a product or if it is a process has become absolutely pervasive in our lives and certainly in our industry. And some of the most effective and successive and high impact kinds of businesses are companies such as Kenametal (phonetic), Calgon Carbon, Allegheny Ludlum which many people might not think of right off the bat as high tech companies but they most certainly are.

Q A follow up on that a little bit. You said, I was going to ask you that question. Tell us again how high technology is defined. Give me an example of, again, a high technology company. How would it be defined?

A Well, there is two ways of going about it,

Chairman Evans. One is, do they produce a product that by most standards would be a technology product. Obviously, computer software, and advance material. In this area, for instance, we used to measure production by tons of steel.

Now we talk about pounds of engineered materials. That is a high technology product. Certainly biomedical, biotechnology instruments as well as the processes. These are the products but I would also say as I was also trying to hint at before, that the impact of technology is those processes. In proving the competitive posture of major process industries or discrete manufacturers. Just to take off on John Skiavo's point about Sony, I think their attraction to this region were many fold, but I know from discussions directly with the Sony people as they made their due diligence, that one of the things that attracted them here was the technology, the knowledge infrastructure. Certainly in the universities but also the emerging technology community represented by smaller

firms and very competitive improving smaller manufacturers that they could see as suppliers. So, again, I would attribute some of the effect of the seven years of

incremental funding to the small firms as having given us

another tool to attract a company of Sony's dimension.

CHAIRMAN EVANS: Terry Van Home.

REPRESENTATIVE VAN HORNE: No questions.

CHAIRMAN EVANS: Representative Olascz.

REPRESENTATIVE OLASCZ: Yes, Mr. Chairman,

since you pitched me a shutout on the last one.

CHAIRMAN EVANS: I will pitch you a home run

just now.

BY REPRESENTATIVE OLASCZ:

Q Mr. Parks, it is a well-known fact that the

Japanese rather than copying a lot of the American high tech

are now just buying the plants and research outfits outright.

Of the approximately 776 companies that you are familiar with do you know if the Japanese have shown any interest in

any of those companies?

A I can't say a specific, I can't give you a

specific example. I know that there is an interest, a

generic interest in the idea of forming partnerships, joint

ventures, corporate partnerships with those technology

companies. That is not unlike American corporations, I

think the trend that we have seen, and it will continue in

the '90* s, is large corporations wanting to form alliances

with smaller, more nimble, more entrepreneurial companies. There are strategic alliances that can be formed. I know, I feel very certain that just as European companies have done that in this region, I am sure the Pacific rim corporations,

Japanese corporations, will seek to do that. I think it makes sense for large corporations. It makes sense for smaller companies.

Q How familiar are you with the Second Avenue high tech proposed center down there?

A I certainly know some of the dynamics of it.

I followed it as it has been proposed and hope to see it develop soon.

Q Well, I have a comment and then a question to you.

We have approximately 20 miles prime riverfront: material, and this is what I wanted to direct to Dr. Hansen, but one of the concerns that I have, and it came to bear in the development of the Second Avenue site, we had J and L producing steel down there for approximately 50 years and men working seven days a week, 24 hours a day in that plant and no one concerned themselves about the hazards. Since that site has been cleared and approximately ten feet of dirt placed over it and a concrete pad, suddenly DER has come

in and I think that you are going to lose a lot of that prime

area down there as far as development. It is my

contention if they continue to do this, there is no hope for these destitute steel towns up and down the valley. Because

I am familiar with the process and I guarantee you as you go up and down that valley you are going to find a lot of questionable hazardous sites and I use questionable.

Bow do you feel that that will impact on the

Second Avenue site?

A Well, I think that they have certainly had to address it and it has been part of the reason we have had delays down there, I will state, from a personal opinion, that I believe the advances of technology, both in terms of the diagnostics that we have done to determine that there may be a problem, but perhaps even more promising is remediation techniques or ways in which we can, through technology, ameliorate those problems. I think that we can solve those problems through technology and move ahead with the development efforts that that site and other sites desperately need. I know it is frustrating, the delays that we have encountered but nevertheless X think they will be solved.

And if I could use this point with the

Pittsburgh Technology Center as an example. X know there has been, and X have lived with, this for seven years, a great deal of skepticism about technology, its impact or whether it really produces jobs and where are these jobs or where are these companies. We are living in a different world in which this city is perhaps the prime example, the manifestation of our Industry were those huge steel mills some of which still remain and remind us they are vestiges of our industrial past. The era that we have entered, a knowledge based economy, the companies whether they be software companies or manufacturing companies that are manufacturing precise instrumentation and precision machining products and so forth simply don't occupy those kinds of physical sites. So, in a sense the technology industry becomes somewhat invisible to us. I just hasten for people to not dismiss the impact of this technology industry by the fact that you can't always see it. There are real people being employed by these companies at very good jobs, and as we have gone through this wrenching experience of economic transition in this region, some of the steelworkers did in fact find positions within the technology oriented jobs.

Not as many as we would all like, no doubt about that. But their sons and daughters are able to stay in Pittsburgh and southwestern Pennsylvania because of what is coming now and emerging from this new industry.

My theme here is to suggest that we have a technology infrastructure, a knowledge based infrastructure that must be sustained or else we will lose our competitive edge. We won't be positioned for the economy that is emerging in the '90's. X know how frustrating it is when we evaluate a Ben Franklin Partnership or an Industrial Resource Centers program and can't count up X number of jobs today. But if we don't invest in our technology or knowledge infrastructure, we won't be able to count any jobs in the future.

REPRESENTATIVE OLASCZ: Just by way of adding to the statement Mr. Parks has made for the benefit of the

Committee, recently we have seen USX sign a contract with the steelworkers for approximately 19,000 steelworkers throughout the United States. For the record, when I came out of high school and went to work in USX Homestead plant, that plant alone employed 18,000 men. They had 53 open hearth furnaces operating at that time. So, that shows you what an impact the divestiture and closing of the steel industry has caused in that valley just in that one community alone.

MR. PARKS: One other comment about, we all take a stab at the macro view of things. In the decade of the *80's this has been widely reported by distinguished academicians that have done studies, primarily John Birch of

MIT, in the 1980's, 87 percent of all jobs created in the

United States were created by firms with less than 100 employees. So, there is just no question that it is new

firms or smaller firms that can be existing, smaller or medium sized manufacturers which is the target group for the

Industrial Resource Centers as well as the new ventures that we have been trying to stimulate through Ben Franklin.

These are the economic engines of the '90*s. They have been

for the '80*8 and I suspect they will continue in the '90's.

CHAIRMAN EVANS: Vic.

BY REPRESENTATIVE LESCOVITZ:

Q I just want to follow up on something you said earlier. You know, talking with the latest, reviewing what the latest person just said on why business locates in a region, the steel mills located in the Pittsburgh area because they are along waterways, the rail lines on a whole to supply the steel industry. High tech centers you said need high tech infrastructure. I am assuming when you are talking counties like Wayne County or Forest County those were not good locations for steel mills nor are they probably good locations for high tech centers. But for some of us who live in the region around Pittsburgh in Washington,

Beaver, Westmoreland, Fayette Counties, how far away from the high tech infrastructure the universities, the hospitals can you be and still attract high tech industries or are they just

so concentrated that they have to be right next to the

facilities that the other jobs are generated?

A No, I think there is no question that there is

a general bias towards proximity to universities or hospitals and medical research institutes, et cetera. But when we are dealing in a knowledge based economy, distances become less important and I think that what we are seeing also is that quality of life is becoming as important an issitt: for the location or the continued expansion of facilities as some of those raw materials resources that you mentioned before. So, I think that when we look at Pittsburgh,

Greater Pittsburgh or southwestern Pennsylvania, I do generally believe that you will see a continual ripple effect and impact from this knowledge based economy.

We have the Sony facility which has been mentioned and referenced many, many times. That is a fair distance from the Oakland Universities and there are examples I of other companies that are looking to evolve.

Let me just tell you the origins of our organization came out of Pexm Southwest Association in

'82-83. When J. Aldridge was presented with the question how are you going to attract high tech to Pittsburgh, and when you gathered some people from the universities and from the technical companies, they said forget it. You are not going to attract high tech to Pittsburgh. Besides, that is not the right way to do it. Grow your companies, grow from your strength, grow from what is really here. Do you know what is at the universities? Do you know what is out there

in the smaller companies that have spun off from our

industrial giants like Westinghouse and U.S. Steel and so

forth? Grow from that base. And that is what we have done. Because once you have done that, if you go to an

entrepreneur, to any of the successful technology CEOs and you say well, why are you in western Pennsylvania? They say,

I live here. This is where X grew up. This is where my

first job was. But what happens eventually, and the Sony

example is perhaps the best example, is that once you have

created that infrastructure and that critical mass, then the

attraction becomes quite natural and it is not contrived.

Q I don't disagree with that because it was brought out earlier, if you have grown up in a community and

you start a small business there, you have a commitment to

that community as compared to when LTV took over J and L.

They could care less what happened to Aliquippa or Colt

Industries when they took over Midland Steel or National

Steel when they took over Weirton (phonetic) Steel. I don't

disagree with that. My point is, how far away can you grow?

You can get some spinoff, but, of course, you are not going

to start a high tech center in Bradford no matter if you

offer free land, free water, free taxes or whatever for the

next 50 years. 1 don't think you are going to attract a lot

of high tech industry. There has to be some type of

infrastructure set in place In that area. But us as a

region, do you feel that we as a surrounding region, Butler

and our area, we can still filter into that high tech

infrastructure? We are not that far away that we can possibly compete?

A That is right. I agree* But there is another point that perhaps I should return to, and that is, undoubtedly those outlying'counties certainly north in

Meadville and in other parts of Washington County and so forth have very strong smaller manufacturing traditional industries; metal vendors precision machining shops, forges, foundries, et cetera. They are as important to this total infrastructure as the new high tech company, but they are also very dependent, and it is so important, that they put into place and into practice appropriate manufacturing technology. Not robots but rather appropriate technology that makes them more competitive. And by that way they become suppliers to the Sony, they become suppliers to some of these high tech manufacturers. And I think that that is why 1 see, and I think most of the industry sees, a continuum with these Economic Development programs. Ben

Franklin, and even before Ben Franklin, X have to make a case for continuing the state's investment in the basic technology infrastructure at the universities. We have been supporting a 3upercomputing Center at the University of

Pittsburgh and Carnegie Mellon and Westinghouse for a number of years. I know there is questions. People say why do we need a Super computing Center? Why should we put a million

dollars into that? 1 think the state has put in something on the order of eight million dollars since it was founded in 1985* That is leveraged close to $70 million in federal monies and in private corporations adding to the pot.

So, what we have is with selective and well placed investments of that sort and there are others that need to be made. You leverage an emormous amount of money, but you bring — there is only four of those Super computing

Centers in the country.

Q Did they create any jobs?

A Do they create any jobs?

Q Did putting eight million dollars state and nine million dollars worth of federal dollars create —

A Yes.

Q Or could we have given everybody a $250,000

lump sum and say, here, go live on this?

A We could do that —

Q I am wondering how far do we go?

A I understand your point, I think this is

essential to the theme I'm trying to emphasize here. We

could have done that and the direct job creation from Super-

Computing Center, and I don't have those figures, might be very iHntwal at this point. But where will we be in ten years? When Illinois that has a Super computing Center or northwest or wherever those other are have continued to

attract Sonys and the like, it is so Important. We really must think about technology and the knowledge Infrastructure

In the way that we used to think about our rivers and our natural resources and our transportation systems. 1 am afraid It Is just simply the nature of our economy and certainly the nature of our future economy.

REPRESENTATIVE LESCOVITZ: Thank you, Mr,

Chairman*

CHAIRMAN EVANS: Joe Battlsto.

REPRESENTATIVE BATTISTO: Thank you, Mr.

Chairman*

BY REPRESENTATIVE BATTISTO:

Q Mr. Parks, a couple of questions. First of all, I am somewhat perplexed by talking about high technology

I am somewhat perplexed about our vacillations statewide with respect to our commitment to Mag/Lev Technology. In the mid '80*8 we did a study with respect to a line from

Philadelphia to Pittsburgh. That study I guess was finally completed. Now, we are in the process I guess of studying the feasibility of a line from Pittsburgh to the airport.

Can you comment (a) with respect to our commitment to

Mag/Lev? Whether you think we are dragging our feet, where we should be accelerating our commitment and (b) can you

comment about the study being conducted now with respect to

a possible line between Pittsburgh and the airport?

A I will make a few comments but I must acknowledge, must admit that I do not know and cannot comment intelligently about the technology aspects of the various approaches to Mag/Lev. I think what it represents though in terms of the studies that are now being undertaken is very simply a strategic evaluation. Not just whether the technology works. We know it does. There are examples of this technology working in West Germany for instance and certainly in Japan, another version of this technology. Yet that is not the question. The question is, does it make sense in this environment. And 1 think you separate the technology question from, is this the most rational approach for transportation to the airport. It may or may not be the case. I think that is almost a public financing question.

Certainly more so than it is a technology question.

Hag/Lev Technology typically makes sense in longer stretches.

We are talking Pittsburgh to Cleveland. I think most people will say in demonstration that makes more sense than a downtown to airport route. But I think there are other issues on the table which is to suggest that perhaps by doing it here we might be able to attract Mag/Lev Technology

Research and ultimately Mag/Lev Manufacturing. I think the fairly nominal investment we have made to date is worth exploring those opportunities.

Q That is precisely my concern is, for example,

I'm from eastern Pennsylvania but X am concerned about creating that technology around Pittsburgh. But I can't get an answer with respect to the question as to whether we should really pursue It. Because you are absolutely right.

It is most effective in ranges of 300 to 500 miles, 250 miles,

In f.act tit can beat airlines from downtown Philadelphia to downtown Pittsburgh?

A Sure.

Q 1 am just not getting answers with respect to whether — we did initially invest a couple million dollars in that study and it seems to have been lying now somewhere.

I am not sure. Certainly I've heard about the funding of three to $10 billion, an astronomical figure, but it may be that ten billion dollars will end up creating a research center and a manufacturing center around Pittsburgh that will be many, many billions. I am not sure. I am just looking for an answer. Thank you.

A couple other questions, if I may, please.

With respect to Ben Franklin, I happen to be on the board of the one at Lehigh University. Early on we saw quite a difference among the four technology centers. Some were more efficient than others. Are you aware now that the fact — could you comment, I don't want you to mention specific names but have all the centers generated efficiency to the extent they can help in their regions rather effectively?

A I really do believe so. I think that we, over the last four years, I can speak from my experience on the state board, there were some changes that were

Implemented and received and embraced I think effectively by the regional centers. One, to get more private industry both in the governance and in the operating procedures. That has occurred.

Second, I think to be a little bit more market driven, Ben Franklin has to deal with this tension you might say between what is called a technology push. Trying to get the technologies out of the universities and into a commercial setting versus what 1 like to call a market pool or technology pool which is the private sector venture saying we have got some ideas here that might make a very successful commercial product. Some of which has connections to universities and some, quite frankly, do not.

So, I think they have had to start balancing that and my assessment is that each of the regions, each of the centers in their own way through their own strategic approach have done a pretty successful job of that. X have been impressed by the way in which four centers have gotten to know their territory and have attempted to focus on their comparative strengths. How, that is not to say, and I am sure this is the case with many of the legislators here today, that they have been completely successful in getting out to all of the

counties in their regions as effectively as they could to try But, quite frankly, I think that Ben Franklin has been heralded, and I think deservedly so nationally as an innovative program, it has had a lot of attention, a lot of scrutiny. 1 don't think we should stop that process but in terms of all of E^ononic Development here, in terms of specifically technology investments that the state is making, which according to my calculations if it is about 35 million of a $13 billion budget amounts to about one-quarter of one percent of our total budget, 1 don't dismiss 35 million or

135 million which is the total Economic Development budget as insignificant, but I do suggest that it Is a rather modest sum, relatively speaking, to try to build the leverage that

1 have been talking about.

One other message X have is, in business one o : the competitive assessments that are always made of companies is what are they putting back into their product development. What is the percentage of their research and development. Many companies, high tech companies, put as much as ten to 15 percent of their gross sales back in.

Most companies are in the two to four to five percent. I don't think it is a bad analogy to look at this state and think about there is a certain percentage. Whether it is a quarter of one percent or half of one percent or whatever that goes back into our investment, our R and D, technology infrastructure investment. I think when we look at it in that kind of context, it may make a little more sense to us even though we are always trying to find that direct relationship with jobs and dollars spent.

Q Can I ask one quick question about the effects of a tax proposal on nanu£«icturing# high tech or any other kind of manufacturing? What about the proposal to eliminate the manufacturing exemption? What effect is that going to have on high technology?

A Well, I think it is unfortunate. There are!

I should add, that a lot of the technology In high tech ventures and companies are in fact manufacturers. They produce something you can kick. In fact, five years ago we were successful in convincing the state that software was in fact a manufactured product because in fact it is,

Q Snow is too but go ahead.

A Yeah, well, so, there is no question —

(Laughter.)

There is no question that removing the manufacturer's exemption will have an effect on the technology industry but I am not prepared to make a judgment or offer an opinion as to whether it is going to have dire prospects or anything of the sort. I think what we are looking for as an responsible group, business, consumer group, et cetera, is a balance, is a balance in the tax program. That is all I would say. CHAIRMAN EVANS: X would like to thank you sincerely. Your comments have been very rewarding to this

Committee. We appreciate that. Thank you very much.

MR. PARKS: Thank you.

CHAIRMAN EVANS: The next person on our panel

Is Export Policy. I would like to have our panelists introduce themselves in this portion, Export Policy.

DR. ERICKSON: X am Rodney Erlckson,

Professor of Business Administration and Geography at Fenn

State. X am Director of the Center for Regional Business

Analysis there and head of the Department of Geography. X have been at Perm State for 14 years. X work in the area of

Regional Economic Analysis.

CHAIRMAN EVANS; The next panelist.

MR. KOEHLER: My name is Hans Koehler. X am the Director of the Wharton Export Network which is a program involving the university. Basically MBA students to help small and mid size companies go International. Prior to that I worked internationally for both large and small

American companies always abroad. I am also involved heavily In the Fort of Philadelphia being a member of the

Fort of Philadelphia Maritime Exchange.

CHAIRMAN EVANS: I would like to start off with this question to the both of you. Could you provide this Committee with an evaluation of how well our current efforts in export ^development* and promotion have been working DR. ERICKSON: I think I'm here to represent the macro view. So, I will start with that perhaps. I think it is safe to say if you look at most any economic indicators, Pennsylvania is still not /well integrated into the international marketplace. I think Pennsylvania is pretty well in the middle of the pack. We are certainly not down near the bottom but we are not distinguished as one of the leaders in this area in terms of export activity.

I think Pennsylvania's international program has had some successes, but I think it is well a good deal of what has been accomplished has been in the area of attracting foreign direct investment. I don't think we have done nearly so well in the area of export promotion and export development. I think that stands to reason it is much easier to work with a limited set of potential investors in the state than it is to work with literally thousands of actual and potential exporters within the state and really an infinite number of possible markets for those products elsewhere. So, I'm not surprised by that.

I think Pennsylvania has a fairly typical* fairly solid array of programs that exist within its current

Office of International Development. I think one big problem is the lack of resources that has been addressed to this whole issue. If we look at the amount of funds that have been allocated to this operation in the fiscal year

1990 we spent about ten cents per capita in Pennsylvania on our international operations. If you look at the share of that ten cents that went to export development, I don't know the exact breakout in Pennsylvania, but if Pennsylvania is typical of other states, it is probably only half of that or a nickel per capita that we are spending on export development. Other states are doing far better in terms of supporting this endeavor. If you look at some of the states that stack up much better in the international marketplace, for example, Washington state spends four times as much,

Minnesota four times as much, Vermont four times;' Texas twice, Arizona twice and Oregon 20 times what we do in terms of their international operations. So, I think it is safe to say that we haven't allocated much in the way of resources to the program and consequently in terms of export and development, it would be not unexpected that our success there would be rather limited.

MR, KOEHLER: I would like to add what my fellow colleague mentioned, however, I think comparing us to other states is like comparing oranges and apples. I think we need to revive the tradition we have had here in

Pennsylvania of being an exporter state. When you think of the ports we have, the products we ship not only out of state but also worldwide. It is a question I think of reminding not only our citizenry but also our legislators and educators that there is a world outside of Pennsylvania.

We need to have, I think! a promotion campaign to show the people how dependent we are In international trade, I think we need to — we were the first to have, 1 think, a very strong infrastructure, the premier port until we were replaced by our neighbors north and south. We need to look at that again and revive that. In other words, pump some funds into our infrastructure.

I think part of that is being done. I noticed Governor Casey got together with New Jersey, I think

Governor Keen and the legislature passed a bill to do some things with the ports. I think that needs to be implemented by Hew Jersey. I think we need to stay on top of that and make sure New Jersey implements that. Those are key things I think we need to look at.

Another thing I heard mentioned this morning is technology and perhaps small business and statistics

cited on what small business is, I think that is another

area that we really need to focus on. I think everybody made statements like, well, small business is a major job

creator. I think that is true. I think perhaps they at

least federally produce 90 percent of all the net new jobs

that have been created. They are the innovators and they

really are the continuance of the American dream. I think we need to foster that.

Why is that important Internationally?

Because it is those companies that can effectively compete, can bring new products to bear, that can get into fortress

Europe without having to worry that it can compete with the

Japanes with our foreign concerns. These are some of the macro issues we need to look at particularly when we structure support programs.

I am thinking of things like export loans, export finance programs. I think sometimes they don't really look at the role and nature of small business.

Big business is primarily there to please its stockholders. They are interested in capital gains for its stockholders and perhaps earnings. Small business is usually privately funded. It is family held. The risks are personal risks. So then when we say there is some SBA programs to exist for small business, yes, that is true, but they haven11 really been used very much and the simple reason is that the risk is taken out in these programs addresses the risks of the banks, not the risks of the small businessman. If a small businessman defaults on some of these loans, they come after his house, his wife, his car, his dog.

If you are working for a large corporate

company, and I have been there and I have been set on the street because X didn't get along with the president, you

find another job and say, well, the chemistry didn't work and

so forth but you still have a salary. You have your

reputation. Small business goes under. He takes also maybe his employees along.

So, X think a lot of the fault with our programs when we tried to develop export programs for small businesses that we don't really understand the nature and

the needs of small businesses. Certainly small business is willing to pay for it. It is not a question they are looking

for a freebie because that is not in their nature in their personality.

CHAIRMAN EVANS: Dick Willey. Then we'll go

to Wozniak. Dick.

MR. WILLEY: I had some questions for the previous folks, but Dr. Erlckson, you talked about our

expenditures per capita comparing us to other states. You

talked about us being in the middle of a pack as far as our

success rate in getting our exports to market. What kind of

programs do the other states have that we don't have? Is it

a difference in the type of product? What are the component pieces that we have to be aware of to structure the programs?

Our folks need to understand what the market is over there.

They need to be able to market the products that we have.

There is price competition Involved. There is getting the product to market. And also I want to talk about potential opportunities of EC92 and that whole.

DR. ERICKSON: Well, as X was saying fairly early on, I think Pennsylvania's array of programs is

similar to what is available in other places with a couple of exceptions. Pennsylvania has not done anything in the area of export finance to the extent that some other states have, for example, California, Maryland, Minnesota.

MR. WILLEY: Well, when you talk about export

finance what do you mean?

DR. ERICKSON: Export loans or loan guarantees things of that nature. Other kinds of programs that other

states have that we don't have, there are things such as the Foreign Sales Corporation, the Shared Foreign Sales

Corporation. I am not saying we should have these things, but I'm saying we don't have some of the things that other places have.

I think more importantly is the whole context within which Export Development Policy is developing nationally over the last ten years, has been in the context

of very, very little information and very little evaluation.

We have almost an unfathomable amount of data on exporting

at the federal level. We can tell you how many brood mares were exported to what country, but when it comes to a place

like Pennsylvania it is very, very difficult to get good information on what is the location of our current markets, what are the industry sectors doing the exporting, and what other factors account for it. We are starting to make some progress on those kind of fronts.

I think we need to do a lot of evaluation along the way as to what kinds of things are working. I think there is enough information out there that we can start doing those sort of things. I am not suggesting that we rush willy-nilly into doing everything that every otker state is doing. It would he better to do something well and do the things that have some effect.

So, first of all, I think we need to get more sophisticated in terms of targeting. And I note that the

Commerce Department is currently doing some study. At least one of the people that has been doing study for them about the location of markets and industries and markets has been into our office to get data that we have gathered from

Washington and so forth on exporting for the Mid-Atlantic

and the work we are doing in Pennsylvania. But I think there are other dimensions to that too, I think a lot of programs have Been directed towards the small relatively new to exporting businesses. And I think that is good. I

think we also need to address existing exporters because

there is a lot of strength, there is a lot of potential

strength in the existing export group of firms. Our research on relationship between exporting and state industrial growth shows that simply shifting sales from domestic to export markets has no significant, positive effect on state industrial growth.

State growth is really a combination. It is a two-forked kind of process where you have got strong domestic growth on which strong export growth feeds. The two of them feed back one to the other. Exporting is done also from a position of strength. Strength in the domestic market also leads to strength in the interational market.

So, I think we need to pay more attention to targeting, the kinds of firms we are targeting, the industries we are targeting and trying to find out more about where the products are going.

I think one of the most neglected markets that Pennsylvanians deal with is Canada, for example. We found in our recent study that about 26 percent of all industrial exports out of the Middle Atlantic end up in

Canada. That is a very large share of the market. So, I think we need to do a better job on that.

Networking I think is very, very important.

I concur entirely with my colleague's perspective here about the importance of networking. That is the only way — I

don't think at the state level we can get down to the

specific firms that are potential exporters nor can we get down to providing the kinds of lead Information and so on.

I think it is very critical to build those export networks

in whatever way we can to strengthen them to allow them to be the eyes and the ears and the mentors, I think that is where you get the good kind of mentoring programs. In fact,

a lot of states now are starting to look twice about their

old kinds of mentoring programs. Their one on one mentoring

and looking more towards networks.

Things such as the Trade Show Assistance

Program I think where other states have been providing small

subsidies for businesses to go overseas where the state is not actively involved in those shows.

Foreign offices is an area where X think we need to take a very close look at because it represents a very large share of the budget. About two-thirds I believe

of the current budget goes to the maintenance of foreign

offices. I am not saying we should pull out. It would be

one of the few states that has no exposure In a place like

Japan. But unless we got the infrastructure in locally to

take advantage of what we are doing overseas in those

offices, we are going to lose a lot of that strength and

momentum.

Finally, I would say I think there is a big

role for the universities in higher education that hasn't

been tapped here. I would say that there are areas where the universities can play a part, first of all, in program evaluation, the various aspects In policy analysis. 1 don't think we have tapped that. But there is a tremendous resource as well in the university in terms of international expertise that we have never really tapped. There are faculty, there are graduate students, there is probably no greater collection of international expertise and international experience than there is at the universities.

I think we have got to do a better job of tapping into that network somehow to tap that expertise*

CHAIRMAN EVANS: Representative Woznlak is next. Excuse me, Dick, was I supposed to follow up on that?

MR. W1LLEY: Well, if he has something to add to it,

CHAIRMAN EVANS: Go ahead.

MR. KOEHLER: Let me add a couple of things, if I might, and I will be very brief. It is good to look at other states' programs, but'I think we also need to look at

Pennsylvania, for instance, is as large as some of the foreign countries we are trying to trade with. Look at what programs they offer. X mean, after all, Europeans, for instance, have been around the block even before we were discovered, they were in trading. So, particularly the

United Kingdom, France, Germany have some very unique export trade development programs I don't think you even adopted here in the states at all. So, if anybody is looking

at that we ought to get ahold of their trade development

agencies, Canada included. Canada subsidizes a lot of exports. And see what they do and perhaps some of those things will fit here in Pennsylvania. Why reinvent the wheel?

Also, my expertise primarily dealing with

small business, small mid sized companies, when we talk exporting not just producing a product here and perhaps

shipping it abroad, there are various other modes of exporting that exist. Things like export management

companies, also joint ventures, licensing, all this type of

thing when they are talking export program is part of it.

And then thirdly, I think we have to be very

careful about template broad approaches to dealing with

small or mid size companies. They don't have cultures.

They have personalities. I think you have to have one on

one. You need to sit down with them, first of all, to

convince them to go international. 1 find myself oftentimes being a minister of gospel of internationalism. So, once you

convince them on that then they say, well, why should I

export? I don't have the resource. I wouldn't know where

to start. And that is where I think one-on-one counseling

can come in, good, in-depth consulting* Because they have

limited resources, and as was pointed out, perhaps they are better off expanding in the states rather than going abroad.

All these things need to be looked at. They have to be helped with planning. Because singly to jump in internationally can be very dangerous for them, very high risk. I think they need to look at all these risks and then make a basic business decision on where and how to participate in international markets if at all.

CHAIRMAN EVANS: Representative Wozniak.

REPRESENTATIVE WOZNIAK: Thank you, Mr.

Chairman. Dr. Erickson, I want to thank you for the plug for Penn State and a little more money for some studies to be done on export.

Let me see, just for my clarification, we kicked around the idea of exportation for a long time. I remember we pumped money into Pier 44, whatever was down in

Philadelphia and we were going to dig all kinds of western

Pennsylvania coal and ship it over by rails and off it goes.

I think that didn't have as much success as what we

anticipated.

When we talk about small businesses or larger businesses going into, as Mr. Koehler said, fortress Europe

and I would say fortress Japan too because they have some

incredible walls and we can't get through. The United

States, we are a state of the union, it is still the great

economic sponge for the planet, I assume. I was just wondering, when you talk about going after Time Life How To

Book in Canada, what they use in their way of going after

seeking exports or finding markets out there, is our weakness

that we don't know where to sell to or that we don't know what to sell?

DR. ERICKSON: I think it is a combination.

Undoubtedly, even some larger firms that one would expect —

REPRESENTATIVE WOZNIAK: Before you go any

further, you brought up California, Oregon, Washington,

Texas, all the maritime states. When we look at their

exports, what are their exports? Because obviously we are a pretty diverse state and we made some goods just as they do.

When you look at California you might be talking computer

chips and things like that. Obviously we have things to

offer. I was just wondering what do they make that we are not making that they are exporting that we can't?

DR. ERICKSON: Well, in the case of

Washington, Boeing Aircraft. Boeing Aircraft is the big

one and a lot of lumber products and Ag type products as well

REPRESENTATIVE WOZNIAK: I understand we have

had some qualified success with our hardwood Industry In

Pennsylvania.

DR. ERICKSON: Certainly it is a function in

part of what a place is able to export. We have been doing

some study on the interstate variations in relative export efficiency, and what we have found is that the traditional kind of supply side of things, human capital, physical

capital, accounts for 20 to 25 percent of the variation in that export. What accounts for the rest of it is really things like differences in the mix of Industry and really the pattern of global demand. That is really what is driving us, the demand for aircraft is what is driving it and obviously places that are building airplanes or say electronic equipment, things like that are certainly in a much better position to capitalize on those export markets.

You can't expect the textile industry, for example, to

compete internationally in the same way that one can in

aircraft.

But typically industries, there is a lot of

cross trade that goes on between Canada, Europe, Japan and

so on even in the very same industries and usually what it reflects is kind of a niche market strategy where we are producing, the things that we are producing In textiles and

selling abroad are really very small segments of the market where we have been able to carve out a successful niche.

MR. KOEHLER: Really, I think we are still

missing the boat here in Pennsylvania. What my colleague is

driving at is also the added value side of things. 1 mean,

Pennsylvania industry and economy is very broad. We are not

a specialist in anything but perhaps agriculture. We are what, the number two state. Although oil perhaps Is no longer a big item in the state, we are still a major supplier of spare parts, drills, et cetera, to the oil

Industry. But a lot of our added value that is produced in the state and being exported, the state isn't getting. This

is one of my big bones I always pick. We have a fairly large somebody mentioned defense, we have a very large defense industry in the state. When it gets shipped out of here, it probably gets shipped out of Baltimore and out of New York.

Why not through Philadelphia or perhaps Erie? I was thinking of some of the tanks that are made in Pennsylvania, parts of the tank.

And I think that is part of it. The infrastructure, I think we are beginning to look at and I think you people have done that. For instance, toll

abatements for export, trucks rolling with goods manufactured

in Pennsylvania actually go out of ports. Here you are

creating jobs along the way. You have added value and I

think that is what you need to look at.

Having a competitive rail system, I think

finally the state of Pennsylvania, particularly the Fort of

Philadelphia, again, now have a competitive railroad

situation. Because certainly I think Conrail favored

Baltimore and New York although it was a Pennsylvania based

corporation. Now you have got CNX coming in, you have got Canadian Pacific which have opened up the Canadian markets to

Pennsylvania goods, that type of thing. I mean, these are some of the basic things that really need to be looked at before we can talk about dramatically increasing exports.

REPRESENTATIVE WOZNIAK: But you are of the opinion exporting is something that we make here, new fancy widgets, whatever it is, has a tremendous potential in

Pennsylvania?

MR, KOEHLER: Well, I think the history of the state has proven that. That is how the state got on the map originally through that very process. I know we talk about foreigners stealing our technology, but certainly the word Vessimer wasn't English. I think we stole it from the

Germans. I don't think we paid royalty for them. The steel process, the textile industry in Pennsylvania was brought in not by camera but by some English immigrant that probably started it up. Marconi, Diesel, Einstein, they had

a few good ideas that we have adopted and I think we need to

stay open to that avenue. It is a two-way street. Also, I

think promotion of what we are doing here is important.

You asked specifically Japanese coming to

Pennsylvania, you ask them where was the first electronic

computer produced. They will tell you Palo Alto or Route

128' in Boston, right here, Pennsylvania. When has the state

ever promoted that fact when we are attracting, say, Japanese companies to cone in.

CHAIRMAN EVANS: Dick Olascz.

REPRESENTATIVE OLASCZ: Mr. Koehler, it is refreshing to know that you are also a member of the unemployed and you became a man on the street at one time.

MR. KOEHLER: A couple of times and not always by choice.

REPRESENTATIVE OLASCZ: That is encouraging.

Hopefully next election we won't be the man on the street.

MR. KOEHLER: It is a good learning experience. It is tough on the pocketbook and the nerves.

REPRESENTATIVE OLASCZ: Mr. Koehler, the subject has been touched on but when you speak of exports,

I have always looked along the lines of transportation systems. You have touched on them with the railroad and the shipping. Are the ports of Camden and Philadelphia separate entities?

MR. KOEHLER: Well, really, they shouldn't be.

REPRESENTATIVE OLASCZt They are; aren't they?

MR. KOEHLER: I guess they are. One is in

New Jersey and one is Pennsylvania but really through the

Delaware River Port Authority, I think if you have a unit

there that sort of combines the two. They are

interdependent. They can't be separate.

REPRESENTATIVE OLASCZ: The reason I asked, I just wondered how we compared with Jersey, Camden and

Philadelphia. If they got more business than Philadelphia did. Representative Wozniak touched on when he said about the unpleasant experience we had with the coal port up there.

But no matter what we do, you mentioned Erie and Philadelphia and the advantage of California. They are all deep sea ports. Philadelphia is a very shallow port and as la Erie. How do we compete against those areas? That is the reason Baltimore is getting so much business. They are a deep sea port.

MR. KOEHLER: Baltimore is not a deep sea port either.

REPRESENTATIVE OLASCZ: Is it deeper though than Philly?

MR. KOEHLER: I don't think so. I think they are what, 70 or 80 miles up river. So, they are not as close as a lot of people give them credit for. New York is sure.

But there is federal money available to deepen the channels,

REPRESENTATIVE OLASCZ: There is?

MR. KOEHLER: Oh, yes. I think there is legislation now being phased for, what, 44 feet, something like that. And we have to do it because, again, people think not looking at what we have in Pennsylvania, think of

Texas, Oklahoma, Baton Rogue as being the big oil and chemical ports. I think when you take a look at

Pennsylvania, the oil products being shipped on Pennsylvania waterways, I think we are number one in the country. So, we have got to keep the channels deep In order to keep that business or else you are going to lose the oil business.

REPRESENTATIVE OLASCZ: I know one of the problems we have had here in western Pennsylvania, even though we had tremendous barge traffic were the locks down here on the Ohio and finally there is some federal action to replace and widen quite a few of those locks. Once again, make us a major inland port. That is the one question X had. The fact that Philadelphia was more or less a shallow port that businesses weren't interested in taking advantage no matter what we did with Philly.

MR. KOEHLER: No, I think you've got a lot of good business there. What the problem is and it is a problem nationally, is when ships come up river loaded with imports and they go out empty because there are not products going onto it for export, it becomes more expensive for it to

come up river or to Philadelphia. And that is what exports

can help maybe change.

REPRESENTATIVE OLASCZ: I appreciate it.

Dwight, get some of that federal money to deepen the channel.

CHAIRMAN EVANS: Sure. Representative

Kasunlc, Representative Pat Carone and then Representative Black and we end there lunch,

REPRESENTATIVE KASUNIC: Very briefly, Dick

Olascz and John Woznlak already touched on this but coming from the coal region, I have to say something about this,

Pier 124 was built specifically and all that money put into it for exportation of coal. Now, that particular port is now being used to import coal from foreign countries that is being used right here in our own state. X find it appalling, based on the fact that here in Pennsylvania coal is our most abundant natural resource still today even though for years we have been pulling it out of the ground here for many years,

We have ranked number one in the production of coal at one time or another in the state. Until recent times in the last ten years we never fell below the third leading production, coal producing state here in America. Now, we are number five and falling fast in states like West Virginia, Kentucky,

Illinois that isn't even in most peoples* minds considered a coal producing state. And I believe it is Colorado or

Wyoming, I am not sure which one, is now producing more coal than we are here in Pennsylvania. It disturbs me that we have this resource. It is not being developed. In fact, we are being discouraged from mining coal because of the EPA

and DER regulations. We have many, many people who are unemployed or underemployed because of the standstill or

cutback in coal production here in western Pennsylvania. I guess my question is, as far as coal is

concerned in producing it and exporting it, what are we doing wrong or what aren't we doing? What could we do in order to

do something about exporting it rather than importing coal?

MR. KOEHLER: The federal government and you,

as legislators, can put pressure on this to make sure other

countries deal fairly. Because, you know, a lot of your

former eastern block countries, they were so desperate to

get hard currency they were dumping coal on the market, particularly Poland. Czechoslovakia was actually dumping

coal. South Africa dumping coal. Fart of the reason is, of course, we have a blockade against them and not look for

an item we should drop. That is again because of moral and racial reason and apartheid policy and rightfully so. So, I think the U.S. government can help there to put pressure on these countries to market their coal at fair market price.

The other thing, we have to learn to compete.

That means looking at the environmental issue. It isn't just environment. It is also, can we get the coal to the ports at a reasonable freight rate. All these things we need to

look at. If coal is that important to the state, then I

think we need to perhaps, as part of our export policy, maybe have some sort of a subsidy program or something to help coal. But that is a very broad and a variety of issues

come into it that need to be looked at. Maybe the coal companies should get together to compete. You have Senator

Heinz from Pennsylvania who was instrumental in creating the

ETC type act. I think people like apple growers, coal mining organization, I think that is ideal, made for them to compete internationally.

REPRESENTATIVE KASDNIC: In view of the fact of the constant unrest in the Middle East, I think it would behoove our government, obviously, to establish some energy policy and become more independent.

MR. KOEHLER: In the area of technology bring coal back into our own plant. I think we have got clean —

REPRESENTATIVE KASURIC: Obviously our state government anyway does not feel that coal is as important a statewide issue as it is to those of us that come from the coal region.

MR. KOEHLER: I think you have the task then of setting priorities and it is tough. You have got so much money and you have to see where to put it.

CHAIRMAN EVANS: Pat.

REPRESENTATIVE CARONE: Exporting has been an issue for me prior to my becoming a state legislator. This has been very interesting today. You are in the 12th district, part of Butler County which has a variety of diversity of exporting items. Mine Safety is about a mile and a half from here with Its major technologies. Mining

equipment Is one of them being sent to South American markets as well as to China. North of here is Gemini

Productions which makes kaleidoscopes, a toy. They sell them very well.

MR. KOEHLER: So do hoola hoops.

REPRESENTATIVE CARONE: And it is the quality

of the kaleidosscope that makes the Japanese like them better than the Taiwan version. And further north you have

a chinchilla farm which raises chinchillas for the purpose

of selling them to reproduce the animal in its natural habitat in South America or sell them for purposes of breeding in Europe and whatnot.

So, a goal for me is try to take the base

that we have in my district as well as Butler County and

increase it and improve on it. You mention the theme of networking. So, networking is very important to me to be

able to do if there is something I can grasp from the state

level or from the universities to bring together those

persons who are successful and learn how to get through the hoops and paperwork. Is there any model anywhere in the

Commonwealth that local efforts are being made to increase

that networking or is that something a state legislator or

a county shouldn't be pursuing that narrowly. And I do

appreciate the fact that Dr. King has come in, my Commissioner from Butler County. That's why I wanted to make a point of saying the whole county has the importance of exporting as well as draw industry,

MR. KOEHLER: I think what you need to do is really take a look at your county and assess what you have and where you can market that. Again, 1 don't know if your county is primarily large business, small business, medium size.

REPRESENTATIVE CARONE: Well, like I just said to you, Mine Safety is a very large corporation and then we go down to this fellow, he and his wife making the kaleidoscopes has been successful. I heard you mention the possibility of assistance in going to trade shows and I know that is his way of marketing something that small.

MR. KOEHLER: Yes, but that really should be the second step because you need to know where your market is before you spend $10,000 to go to the Hanover Fair when your market is Japan. That is wasted money. And that is why

I think sometimes where we promote the wrong thing we can actually turn somebody off on exporting. Because If they go to Hanover Fair, find it is a bad experience, they are going to say exporting is not for me when there could be a golden bucket in Japan or Australia.

Simply looking at statistics and saying

Germany is a $50 billion market for kaleidoscopes. You may have 30,000 competitors and margins of two percent. If he

sells it in Japan, I am picking on Japan here, but Japan,

Australia or Singapore, he may be the only bagel seller on

the street and he can sell it at 300 percent gross margin with little risk or little investment. That is the place for him to go if he is a small business. That is what I meant

about not having a model or template approach. He really need's one-on-one counseling.

So, by assessing what you had in your county, your traditional markets, your bigger companies, they have a history of sale. Their product like steel, coal, textile,

there is a history. It is easy to find out where the markets

are. Where you have trouble, if somebody invents a new widget and he goes to the Commerce Department, federal, state, wherever, the library, be it a sophisticated library, also

some data banks he can go into, it is going to come up

zilch. There is no SIC code, there is no history on the

product, how does he know where the market is? So, what you

need to do is basically market research and I think

universities are very good at that. That is their research

organization. So, that is what we do at the Wharton Export

Network. Use MBA students within the national business

experience to help these companies do their market research,

target their market, focus on them and say, look, these are

the markets, these are the approaches, these are the options you have and do a cost benefit analysis for each option.

And then the company, it is his business, his buck he is investing or gambling. He has to make the decision. We don't go and make deals for him. That is going too far. So, really, the first step is assessment, knowing what you have and then developing an approach that fits your assessment or assessments.

REPRESENTATIVE CARONE: I don't presume that comes free.

MR. KOEHLER: No.

DR. ERICKSON: I would simply make two points in addition to what Mr. Koehler said. One very important point you mentioned is quality. I think in the decade ahead that is going to be one of the key American and Pennsylvania selling points. We may not be able to compete on price in every market, but quality is going to sell. We are seeing a lot of major corporations that are beginning to rethink their approach. X think it is going to be very typical. And your kaleidoscope example is a very good one. Somebody that can sell something even at a higher price because it is quality and service that are going to be increasingly important in the next decade.

About the network, X think there is a key role

for state government to play. . There is already a lot of

information out there that exists in various kinds of places. For example, at our university there are already organized

systems of information about who has what international

expertise on the faculty. What we need to do is better find

out what is out there in terms of systems and networks and how we can tap into it. By the same token, provide people who are on the front line of this activity with that sort of expertise. Right now 1 occasionally get a call about what

can you tell me about this or can you line up some students

to do a project on that, but it is very isolated. We are not well organized to do something in this area.

REPRESENTATIVE CARONE: That is the point I was trying to address. I would love very much to be able to

take a brochure, a pamphlet and hand to folks who are toying with the idea and not even thinking about it because they have that fear of going into the unknown or afraid they are

going to take too great a risk.

MR. KOEHLER: Well, they need to first do a

feasibility study. Exporting isn't for everyone by no means.

They need to look at things because certainly they don't want to put their resources at risk unnecessarily. I mean,

you are in business after all to make money, to make profit.

And the fall of Eastern Europe proves that. Their system

didn't work. Ours does. And you need to keep that in mind.

It is nice to say you are helping the American economy, you

are helping Pennsylvania. Really, they are there to help their own pocketbook and that is the drive of business. But there is help out there. I'll be pleased to give you some pamphlets. You have to have structure. It isn'tjust throw students at a company. They have to be supervised. You have to have a network out there. You have to have what we call

Philadelphia, a godfather in quotation marks. These are technical advisors, about 75 to 100 of them, both from large and small companies who allow us to pick their brains, open doors for us overseas. So, we harness all this information that is already there. That resource that is there and funnel it into the small company who usually can't access it themselves and wouldn't be able to pay, let's say, $300 an hour for a big consultant. In fact, we work with consultants. They often send us clients or people they can't help simply because they can't pay. But we do charge.

We do charge a fee* It is a reasonable fee. It is something they can afford. You know, run it like a Robin

Hood. The larger company pays more. The smaller company pays less and hopefully covers our budget.

REPRESENTATIVE CARONE: Thank you.

CHAIRMAN EVANS: Representative Black.

REPRESENTATIVE BLACK: Doctor, are we able to

leverage any exporting through an unfavorable trade balance?

We have an unfavorable trade balance with someone. Are we

able to leverage export to do something about that? Have we explored that or Is that something you don't do?

DR. ERICKSON: If I understand you correctly, you are saying can we, by improving exports, improve the trade balance?

REPRESENTATIVE BLACK: Right, if you have a

company that you have an unfavorable trade balance with.

They are sending us more than we are sending them. Are we able to leverage our exports to them to try to get that balance in balance?

DR. ERICKSON: Well, that is the idea behind most federal and state policies, is to try to deal with a hundred plus million dollar trade deficit.

REPRESENTATIVE BLACK: That goes back to what my fellow legislator is saying, is that if you don't have a way to reach the companies, can in fact get the products out

and do that, I think coal is one of the ones we are talking

about. We have countries out there that maybe would be able

to use that coal and I think if we forced more, we could get

that coal to go to them to take care of that balance but I

don't see that happening.

DR. ERICKSON: I see what you mean now. Two ways of looking at that. One is, I think, as my colleague

here points out and I certainly agree with, we really have to

look at it in terms-of what we'are. The global market in

terms of what you are doing. There is simply some places where you can't sell certain kinds of things. That has got

to be the paramount kind of issue.

The trade policy I think in terms of

leveraging is best left to the federal government. We have a

new round of gap talk that hopefully will begin soon. X

think that is where we really need to apply the pressure, is

dealing with some of the agricultural export policies and so

on that are really going to provide a more level kind of

playground that is going to benefit all producers. I think

for Individual states to go out and try to leverage those

kinds of things probably would be unsuccessful. I really

don't think it would have much effect.

REPRESENTATIVE BLACK: So, it should be

through our state office that we maintain in Washington?

DR. ERICKSON: Right. I think we leave that

to Washington*

MR. KOEHLER: The other thing you have to be

careful of is, X mean, you don't like to do business with

somebody who is twisting your arm, X think you have to be

very careful. If you axe a businessman and somebody comes to

you and says you got to buy this or else, in the short run

they may be forced to buy. In the long term it shows that

you are not a very strong competitor. In the long run It

doesn't pay.

CHAIRMAN EVANS: X would like to thank you, I both of you, the Committee would like to thank you for taking

the time in answering our questions as well as giving us your

comments.

I would like to say to the Committee that we will reconvene instead of at 12:30, we will reconvene at

12:45. We will extend that 15 minutes. I ask that you be back here at 12:45 so we may continue.

(Whereupon the hearing was recessed at 12:15 p.m. to be reconvened at 12:45 p.m.)

CHAIRMAN EVANS: I would like to ask that our panelists be seated at the table. The House Appropriations

Committee will reconvene this hearing. Over the next hour

or so, members, you will have more than enough time to ask

questions I hope. In this particular section on the agenda,

Economic Development in the '90's, what we have attempted to

deal with, as you have seen we have gone from local to a

regional to a state to a national look into the future. We

have some national people here. People who have been around

experiencing these issues for some period of time. We want

this particular session to be an exchange. Although X guess

we will have some statement and we will ask them to keep

them as tight as possible so we can get into a dialogue and

exchange. This Is very important to us. Because we have

the Commerce Department coming up after we hear what our

guests have to say. We are going to kind of test some of the things that we heard from the Commerce Department to see how we are functioning here in Pennsylvania.

So, what I would like to do is ask that each person take some minutes* talk about himself and then lead

into a statement and then we will go from there. Let's

start with Dr. Luger,

DR. LUGER: My name is Michael Luger. 1 am

a Professor at the University of North Carolina, Chapel Hill,

in the Department of City and Regional Planning and Public

Policy Analysis. I have been doing work in Economic

Development for about ten years. I will be in my comments referring to some research comparing state Economic

Development programs and talking a little bit about research

from a book that I just completed on research parks in

Economic Development.

MR. P1LCHER: I am Dan Pilcher. I am with the

National Conference of State Legislatures in Denver. Some of you X have known and seen before in NCSL meetings and NCSL

is your national legislative organization. As such we try

to provide the legislatures with assistance whether it is holding meetings, sending out materials, being in touch with

experts around the country or whatever, both in terms of

policy as well as legislative issues.

CHAIRMAN EVANS: Will you talk up so everyone

can hear you? MR. PILCHER: In the morning sessions it was a

little difficult to hear some of the speakers at this table.

I joined NCSL in 1978 and almost all of my work over those years has been in the area of state Economic Development,

international trade promotion. So, what I try to do is keep track of what the 50 states are up to as well as the federal government and increasingly what foreign governments are doing in terms of Economic Development and economic

competition.

DR. HARRISON: My name is Bennett Harrison.

For about 20 years I have been teaching Economic Development at the Massachusetts Institute of Technology. I have moved now to Pittsburgh and am now teaching at Carnegie Mellon

University. Since I was raised in Camden and did my graduate work at the University of Pennsylvania, it is a bit of coming home involved in this. I have written a number of books and papers and have done a great deal on the

subject. Have done a great deal of work for the governments

of Massachusetts, California, Ohio, Texas and a number of

foreign governments. I will look forward to joining the

conversation today about the larger picture that you have

requested. But at the appropriate moment X also want to

try to come back and make some comments about what I have been observing in the Commonwealth of Pennsylvania and in

particular about the sort of approach to this whole subject by the Commerce Department of the Commonwealth of

Pennsylvania. Thank you.

CHAIRMAN EVANS: Dr. Luger.

DR. LUGER: Mr. Chairman, members of the

Committee, I want to thank you for inviting me this morning.

This is the 25th anniversary of my last stint of service to

the Commonwealth of Pennsylvania. 25 years ago I served as a page in the House of Representatives.

(Applause.)

DR. LUGER: While my father was representing

the 112th legislative district. So, I feel quite at home.

I am glad to be back.

I have also always wanted to come to the

Cranberry Motor Lodge in Warrendale, Pennsylvania. Now, I have been asked to help place Pennsylvania's Economic

Development strategy within a national context. My hair is not grey enough, I am not wise enough to do that. In fact,

I'm not sure anyone can. It is a very difficult task for a number of reasons.

First, the scope of Economic Development and

Policy is quite large. There are literally hundreds of

programs around the country. Now, we could classify these

into similar categories, but seemingly similar programs in

different states have different institutional features,

different administrative features, different program funding levels which makes comparisons difficult if at all possible.

Second, there is no common definition of what we mean by success in terms of Economic Development programs.

Third, we are not even certain what the nature of the beast is. We don't really know well what the

arsenal of Economic Development programs contains.

Information is not collected systematically among the states.

Researchers either have to piece together surveys,

inventories from different places that are often incompatible or have to collect the information themselves, which is quite costly and quickly out of date since programs

change focus are defunded, new programs are added.

Fourth, too often we consider only program

inputs when we compare state Economic Development strategies rather than program outcomes. An extreme example is a well-known periodic national survey that reports checklists

of programs that simply indicate the number of programs on

states' books regardless of the program size in terms of

their activities level.

Some researchers have undertaken the more

ambitious task of measuring the size of Economic Development

programs as well as their existence. But those studies are

limited to a subset of Economic Development programs.

Moreover, size does not necessarily equate with program

success, as some of you pointed out already this morning. Studies that attempt to relate program inputs to program outputs* what we call program evaluations essentially are

case studies of specific programs. Now, on this point I want to draw a definitional distinction between programs and policy. The latter program is a specific example where policy is a mix of coordinated activities to constitute an

Economic Development strategy. One of the things I want to stress is the consistency among programs in terms of their

commonability to address policy objectives is at least as important as the impact of a particular program,

X mentioned a minute ago, and I am reading from my prepared text, but I will go through it quickly, skip some parts and try to key you into where I am if you want to follow. The hundreds of programs can in fact be

classified in a systematic way. We could take many examples on page four, I give seven or so examples of particular programs that can be described in terms of three attributes.

There is a policy emphasis that could be on labor or on

capital, on connectedness, the movement of inputs, goods and

ideas among businesses and between businesses and markets.

Policy focus on ideas or creativity, on management or the

general business milieu.

The second attribute is the target of the program. Whether the target is a business sector or a

geographic target. A business target, for example, would include new or small enterprises, minority owned, businesses, homegrown or recruited businesses. Central targets might include high tech or traditional manufacturing or export based businesses. Geographic targets normally are distressed areas of the state. So, on page four I give some examples.

Now, the key analytic questions we can ask about these or the hundreds of other programs are, one, what determines the choice of states, of policies. Why do states

choose the policies they do?

Second, why do states choose the program mix within that policy that they do?

Third, what outcomes are related to the programs and policies that are chosen?

The first two of those, the choice of policies and the choice of programs ostensibly comes from the

legislators1 belief that what they are doing has the highest

likelihood of success.

Well, that gets to my second problem, that is, we don't know really what success means. It is a fuzzy

concept. The academic literature defines success in several ways. To an economist success is when benefits exceed costs

over time. That efficiency calculation is easier in theory

than in practice. Benefits and costs are often difficult to measure. There is a time problem, especially with technology

development programs, R and D programs, the costs are borne up front, but the benefits, if there are any, often take a long time. If we do a cost benefit calculation prematurely, it will be skewed toward inefficiency.

There is also the geographic problem. Where do we draw the lines around the geographic frame of reference. A program funded by the federal government to

Pennsylvania will look positive from Pennsylvania's viewpoint since the cost of exporting may be not so positive from the federal standpoint. Similarly a program from

Harrisburg to Westmoreland County may be positive from

Westmoreland County's perspective but not from the state's perspective.

The second measure is program effectiveness.

The ability of a program or set of programs to accomplish a stated goal whether or not efficiency is achieved.

Political scientists add another dimension of success, another measure. What we can call symbolic outcomes. Sometimes the very use of a program with the articulation of a policy is judged successful.because of'its symbolic connotation. Quite apart from effectiveness or

efficiency.

In 1978, for example, the governor of North

Carolina articulated a balanced growth policy that had no programmatic content* no budget authority. It was ratified by the general assembly and generally thought of as a positive sign that that is what the state cared about.

My point in enumerating these different measures of success is not to say that one is better than the

others* but just to make clear that we have to identify what we are talking about when we say do programs work.

I'm trying to frame reference to particular

research that I have done. One paper is on program mix and

policy effectiveness. That was published two years ago. And

the second is on the Economic Development benefits of

research parks. The first of thosef the national study of

state development policy is chosen to illustrate why states

choose the industrial development strategies they have and what the effect of that choice is on outcomes. On the back

of the handout I have a couple of tables, if I can draw your

attention to. Table one, and I apologize for not bringing magnifying glasses for everyone, is the typical kind of

checklist that I referred to earlier, different kinds of programs. This simply indicates whether programs are on

state books as of around 1984 and what often is done in

academic circles is to count up the number of check marks

and to say such and such a state has done more than another

state because they have more checks in their column. Now,

of course, that doesn't make a lot of sense because a

program could be on the books with no budget authority or no

level of activity and a state with three or four check marks might In fact be doing a lot more than a state with 15 or 16

check marks. So, what I did in Table two was actually come up with an effort index for different kinds of Economic

Development programs for the 48 contiguous states. Where the indices were constructed using actual input data.

Spending in the case of some programs. Indices of regulatory strictness or indices of effective tax rates.

And I combined those in such a way as to rank states from one to 48 and give them an index of effort, low, high and medium to be able to compare states effort in Economic Development policy.

My point is not about the rankings per se since they have undoubtedly changed in the last several years

But about the fact the states differ considerably in the mix

of industrial development programs that they use. Even though their total effort by this measure might be the same, the composition of the policy is often quite different. In

Table three on page eight I give an example of that where I

compare Missouri and Pennsylvania which at the time these

indices were constructed had the same total effort in what I have called industrial development programs. It is on page

eight. That is the one table in the text.

The eight categories of Economic Development

programs that I have used are land and building subsidies,

debt and equity programs, tax programs, higher education, post secondary education assistance, subsidized job training, regulatory relief programs, outreach recruiting programs and research and development programs. And I have left with the

Chairman the full article which explains how I constructed

these. The point is that Pennsylvania chose at this time

to stress debt and equity programs, ax& indeed programs.

Missouri chose to stress land and building subsidies and

tax programs. And the question I was interested in is why have these states chosen to stress different things in their

arsenal of programs.

To answer that question I conducted a

statistical analysis where I related states1 use of programs

to different kinds of characteristics of states and found

some empirical irregularities that are in the testimony that

X have given you and I won't read. Just to summarize, states

adopting industrial development programs is a response to

social and economic conditions, the organization and

construction of government institutions and state political

dynamics. But there are sensible reasons to predict what

states are doing that are consistent with political theory

and economical theory.

The next question I asked is how does the

choice of those programs, that mix of programs, affect

outcomes. And here I conducted a policy effectiveness test

where 1 said that from the perspective of Economic Development planner, the desired outcome is to increase wage

levels and to reduce unemployment or to increase job

opportunities. Those were the outcomes that X sought to

test against the use of these programs. Again, I conducted

a statistical analysis and found that some industrial

development programs, specifically job training and debt

and equity assistance, accounted for lower wages by

facilitating job creation in relatively low wage industries,

and that point again was raised this morning, but also reduced unemployment rates. While other programs, and Dr.

Hansen made the same point, land and capital subsidies, tax

incentives and R and D assistance seem to have no effect on the outcomes chosen. And I will mention the limitation I have the same as Dr. Hansen, this is an aggregate for the

state in general. That is not to say for some parts of the

state or for some particular programs that is not the case.

These results underscore my earlier point

about the importance of the definition of success. Job training and debt and equity assistance help to achieve one

goal, Increasing job opportunities at the expense of another goal, lower average wage rates. Whether the program is

successful then depends upon which of those two goals we, as

a society, judge to be more important. For other programs,

R and D, land and capital subsidies, tax incentives, the

economic benefits were shown to be zero in the time frame that was chosen. But this underscores the limitations, the kind of analysis we all do. That is only for the aggregate, the whole state, it is only for the time frame I looked at and that is not to say that if one took a more fine grained analysis that might not be the case.

Moreover, even if the benefit cost ratio was in fact not one or more, the symbolic importance of some of these programs should not be dismissed.

Let me talk for a minute about the second study on research parks. Of all the things that states have been doing in the last ten, 15 years, one of the most prominent has been the creation and development of research parks. In the U.S. Today there is something like 125 research parks, most of which, if not all, have some state assistance either in the provision of infrastructure, the financing of state buildings or private facilities with state money, the provision of public utilities and so on. Almost all states, 44, 45 states have research parks funded in this way. What is interesting is that despite the proliferation of these research parks very little research has been done on whether they are paying for themselves. Whether they are worth the cost from the state's perspective.

And that is for a couple reasons. First, a

lot of these parks have been established, at least by

interviewing those who have been involved in their establishment, for their symbolic importance. The

legislators, the developers who have been involved have been

concerned with creating a positive state image. After all, research parks, technology parks has the connotation of progress and high tech which sells. Now, one could be

cynical about that but it Is true. To the extent that that

creates an image of the state as a high tech method, it does

draw other businesses to it. One of the striking things about our research on this, we surveyed some 3000 businesses in

the vicinity of research parks in the U.S. And a

considerable amount of economic activity was drawn to the regions research parks rent not because they had any

relationship with the research park or the universities that research parks related to, but because they liked the high

tech image that the research park in that region helped

create.

The second reason that efficiency and

effectiveness of research parks have not been studied is methodological. This pertains not only to research parks

but to many Economic Development programs. The pertinent

base line is what would have happened if that policy hadn't

been created. It is counter factual. Someone mentioned this

morning that a policy doesn't look successful because we

haven't seen growth in some variable. Well, the question we

have to ask is, what would have happened if that policy hadn't been created. Perhaps it would have been declined.

So, even though the growth of jobs night have been flat

relative to what would have happened, the program might be judged successful. That is a very difficult methodological

issue.

Professor Hansen mentioned this morning that

it is hard to find the benefit of some programs. In our stud} of research parks we actually found a significant benefit.

Now, I want to mention this to you because the numbers really

are rather astounding. We did case studies of research parks

that we pre-selected because we thought they were successful.

The Research Triangle Park in North Carolina, the Stanford

Research Park in California. In the case of North Carolina, the Research Triangle Park has accounted for one-quarter of

all the jobs in the region since 1959. Either directly or

indirectly including multipliers, including linkages that

firms outside the park inside the region have 12 percent of

all jobs in the region in total, would not be in the region

if the research park hadn't been created. And Stanford,

the numbers aren't quite as large but still rather dramatic.

Approximately eight percent of all the jobs In San Mateo

County owe their existence to the creation of the Stanford

Research Park.

My point here is to find these kinds of

impacts or this kind of an evaluation, one has to do it on a case-by-case basis. It is not easy to do or possible to do a national s=tndy of the effectiveness of all programs.

What does this mean for the House

Appropriations Committee? Well, the question I was asked to address was, what industrial development programs and policies are likely to work in Pennsylvania in the 1990's?

Well, my answer is typical for an economist. It depends.

CHAIRMAN EVANS: We hear that all the time.

DR. LUGER: That is right. First, it depends on what we mean by successful. Second, it depends on the appropriateness of the mix of programs as much as it does on the ability of a particular program to achieve success. Third, it depends on the fit between the programs and the context, the economic context and environment in which those programs

are placed.

On that point, I will draw your attention to my final table, the very back of the testimony, which ranks most of the research parks, many of the research parks in the

U.S. by a measure of job growth. This is the percent job

growth that wouldn't have occurred if it weren't for those

research parks. What we see is approximately half of the

research parks in the U.S. have contributed to positive job

growth and half the research parks have not. Have actually

resulted in less job growth because it has transformed the

economy from a manufacturing high job growth type economic base to a less labor Intensive job base.

Now, the reason I have this table here Is to

Illustrate that a program or a policy, In this case research parks, Isn't successful or not successful. It can be successful depending on the context In which It exists.

Research parks that have certain characteristics, proximity to a university for example, proximity to other high tech businesses are likely to be more successful than other research parks. From a policy perspective then the question is what can we do to make certain programs work. Not what programs can we choose that will necessarily work. Two very different questions.

What X would recommend to the Appropriations

Committee then is to ensure that any appropriation for

Economic Development programs contains with it, and this is not surprising coming from an academic, money for evaluation, ongoing evaluation before the program is set up and while it

Is ongoing* This Is at variance with some of the literature

David Osborne, for example, states his laboratories of

democracy, takes a trial and error approach and says state

government tries things and those things that are successful

stay on the books and those things that aren't successful

die. To me that is very wasteful and there Is no assurance

that the successful programs will be retained and the failed programs will be hyped off. Let me stop there and leave room for questions.

CHAIRMAN EVANS: Let me go to the next and then I will entertain questions.

DR. HARRISON: I said in the introduction I would like to start with Pennsylvania, western Pennsylvania and then work out. And I particularly want to start with some questions that Representative Kasunic raised this morning and take that as a focus. We lost something there.

I want to bring it back on.

Jobs aren't enough. People, it was said this morning that companies ultimately are in business to make money which is right. People ultimately go to work in order to make money, in order to pay the bills and send the kids to school and pay the rent. So, I want to say something about wages.

Since 1979 in western Pennsylvania, the

changes in the economy by no means only related to steel, have been disastrous for the situation of wages in the state.

It strikes me as a useful way to start thinking about

differentiating different kinds of Economic Development efforts. Since 1979 in Allegheny County, start with the most urban, there has been a ten percent decline in the average working person's wages. Since 1979 in Armstrong County, a

20 percent decline in the average wages. In Beaver County,

35 percent decline. This is all adjusted for inflation in real take-home average income. In Butler County, a 14 percent: decline since 1979. In Fayette County, a 28 percent decline.

In Greene County, a 25 percent decline. In Lawrence County, a 22 percent decline. In Washington County, a 22 percent decline and in Westmoreland County, an 18 percent decline.

Those are among the worst numbers of any parts of the entire United States of America for the same period.

It strikes me that when all of us working in this field on all different sides of the table ought to be starting there with reminding ourselves what the public purpose in Economic

Development is about. There are many purposes, but the public purposes strikes me, has to do with something about turning those numbers around.

Well, I quite agree with my colleagues on a number of things that have come up this morning and this afternoon about the dangers of generalizing. You have nevertheless asked us to jump in the swimming pool and take a bit of a risk about generalizing and that is a useful thing

and a fair thing for you to ask. So, let me hold my nose

and cross my fingers and try a little but of generalizing

around what I think I'm learning and my colleagues are

learning and the research community has learned.

Particularly from overseas experience, that is from the

experience of Japan, Germany, Italy and some of the most

successful regions of the United States of America with respect to the character of the Economic Development that has an effect on wages. I am not talking about unemployment or nose length or hair color or phases of the moon. I am asking about the Impact of Economic Development policy on peoples* wages.

It strikes me that the experience from abroad and the experience from the most successful regions In the

United States is amazingly similar. Although when you get down to the details, of course, when you get down from the stratosphere down to the ground there are a million important differences but we don't have the time to talk about those and policy needs to worry a little bit about an overview.

So, let's do that for a minute. Regions that are economically healthy and resilient weather the storms like recessions or major Industries that crash and regions where wages tend to be sustained tend to have two big

characteristics, and It is true as far as I can tell of the region 200 miles south of Tokyo and 100 miles east,of .Milan,

and in the western part of Germany as it is in Boston and

Texas and North Carolina and northern California.

The first of those features is a balanced mix of different industries and services. Not just one, not

a company town, not a company region but a mix. The post

Industrial strategy of saying bye, bye to manufacturing and trying to build an economy based on insurance companies Is a disaster. It never works, it never sustains wages. Equally, as we know from bitter experience in the valley here and in

Detroit at the moment, a strategy based exclusively on a particular part of manufacturing, after a period of time begins to kick back. Unless you think that that last point only applies to ancient, so-called matured industry, we were talking about this at lunch, it is pretty clear to the research community that probably the number one explanation for why northern California is doing quite well these days in the recession and Boston is in a terrible recession is that

Boston chose to specialize in big, heavy centralized expensive computers. Whereas, northern California is the world headquarters for very small desk top computers and the networkings that connect them. The world has come to bet on the small ones and the process has left Massachusetts behind. Even Massachusetts has overspecialized and is now paying the price. So, that first lesson is a balanced mix of activities.

The second lesson, in every region that I have been able to study and that I have read about in other peoples1 studies, speaks to some things that people said to you this morning and this might sound a little different.

Not small firms, not large firms but a mix of both and

connections between them where one is helping the other.

And in the little bit of time 1 have left for the opening remarks, I want to focus on the second of these things. The question of the connections between small and large. I don't know whether it was Representative Kasunlc this morning or somebody else and maybe I am shamelessly taking advantage of something you said. Using you as my hook.

CHAIRMAN EVANS: He doesn't mind. It puts more In his budget.

DR. HARRISON: But somebody around here asked the question, can you really get high wages in the economy with nothing but small business. The answer is no, absolutely, positively no. There are two reasons why. In the first place, workers'wages rise over the course of their careers

largely either by moving up in ladders within very large

companies. That is how it Is done in IBM and Prudential

Insurance, or, by starting their life In small companies and

small firms, learning skills, acquiring contacts and moving

around and moving from one company to another and gradually moving into larger firms, which because of their scale,

are capable of promoting people. Small businesses do not

have very many places to promote people. That is not a knock on small firms. That is a simple observation. The

small businesses have tremendous things to contribute but

upward mobility as a real shot for most workers is not one of

the things that small business has to contribute. It can't If you think about It. You move up through moving around,

getting experience, getting a reputation as a good worker,

getting a reputation for that matter as a good manager.

Managers move up also by changing jobs. And generally without having some judicious mix of relatively large

companies in a region into which people can move and through which they can move up, it is very hard to find regions that

sustain a relatively high wage economy over a long period of

time without a mix of both.

There is a second reason why you need to have both large and small firms, and this will lead me into saying

something about what I have been able to learn in the little

time I have been living in western Pennsylvania about

Commerce Department policy. Where the large firms take an

active role in providing technical assistance, financing,

retooling and long-term subcontracts to the smaller firms,

one tends to see sustained economic growth and relatively high wages. What happens is no mystery, When larger firms

partner with smaller firms, when they put out, when they make

an effort, when they reach out, when they make longer term

rather than short-term commitments, when they make

commitments to small firms rather than playing the small

suppliers off against one another, what happens in the best

of the small firms is that productivity and profitability

rise. That makes the smaller firms more likely to be able to expand, at least to survive, and to be potentially able to pay higher wages over time.

In Japan and Germany both big firms and

government working together make these kinds of investments

In upgrading small companies. According to the U.S.

Congressional Office of Technology Assessment, which produces the best research on these subjects than any part of

the American government, the last time anybody looked as best

as anybody could measure the Japanese government at all

levels, national and local, was spending more than 40 times

as much as the U.S. government at all levels on assistance to

small business to help upgrade their technical capacity and

their productivity. And that number 40 times is surely an understatement.

In my judgment, the Pennsylvania Department of

Commerce is very aware of the importance of the difference

between one-on-one assistance to small companies versus the

idea of networking where large and small firms are partners

brought into partnerships and partnerships encouraged in

order to build these kind of linkages. You have the Foundry

Industry Project around Pittsburgh and the Plastics Project

up in Erie, the Power Project over in the Lehigh Valley on

the other side of the state, the Manufacturing Innovation

Networks Project out of the Department of Commerce, Bob Coy's

Project. Among Economic Development professionals not only in the United States, but when I go to conferences in Tokyo,

London and Paris, Pennsylvania's Economic Development experiments in these regards and Massachusetts and Ohio and

New York are generally considered to be the most innovative programs in the country.

I think that Mike Luger is absolutely right.

There is a difference between effort and outcome. X am not

suggesting that Pennsylvania's Economic Development programs have been the most successful in the world. I am talking about effort. These axe all very new, we'll see how they

go, we can hope for the best. But the principal line behind what drives the philosophy of the programs that Ray Ghrlstman

and Andy Greenberg and Bob Coy and other people have been pursuing is very much the principle that drives the projects

that are thought to be the most productive in other countries

and in some other parts of the United States that have been

seen to be the most successful. A balanced mix of activities

and efforts to link networks of companies with large and

small firms so that the government plays a role as partner bu : the o 1-d technical assistance idea that basically the

government is doing all the work is not the answer. Thank you.

MR. PXLCHER: Thank you, Ben. That was a perfect lead-in to my comments and I would like to second

that. What I will try to do is very quickly summarize what I see happening in state Economic Development in the 1990*s and I think this is based upon almost a total revolution in my thinking over about the last nine months* I think probably like a lot of us I have decided that Economic

Development consisted of 50 states down one side of the matrix. Across the top of the matrix you have 50 programs; technical, extension, export, financial, trade fairs, managerial training. You name it, one, two, three, four, five, all the way up. Isn't a goal of state Economic

Development to put a dot in every column so that you can say 45 other states have this program, we must need that;

correct?

Well, 1 think what has happened, and we have the recession to thank for this, there are not many thanks owed to recession. This is one. I think the states around the country, state Economic Development programs that were put in place through the 1980 *s were put in place and they operated during a period in which things, in most cases, were on the way up. With the recession all of a sudden we

start to focus back on what are we getting for our money.

I think, as the comments this morning revealed, we get pretty uncomfortable when we try to come up with some hard figures

in terms of increases in real per capita income or increases

in jobs at a meaningful level, at a meaningful level. What

I see happening is that in an increasing number of states, 1 think you are starting to perform this function perhaps in

Pennsylvania, you are starting to take that look. In

January I took part in Topeka, Kansas in a peer review of

the state's Economic Development strategy. It was a

fascinating experience because there were six of us who came

in from around the country. One was Brian Bosworth, who

worked in Indiana and ran the Indiana Economic Development

Council. One was Doug Ross, who was Director of the

Michigan Commerce Department and now is the head of the

Corporation for Enterprise Development which every year

issues the report card where you get As, Bs, Cs, Ds and Fs

or whatever and always shows up on the front page of the

newspaper. Jamie Kinworthy from the Michigan Strategic

Fund. He was in charge of technology programs. Jay Kane

from the National Governors Association. Scott Bossier from

the Committee for Economic Development which has put out

several very significant works in state Economic Development.

And what was interesting for us was to come in

with no preconceptions about what we were going to say at the

end of a day and a half. Listening to this state talk about

its Economic Development strategies, its policies and

programs and then have us react to that, pool our knowledge

or ignorance as it might be and come up with some things

for them to think about.

We came out with three comments I think and it I very much ties in to what Ben has said and what Kike has said

and other people said this morning. Is a sense that if we

are going to have real impact in terms of the state dollars

that are spent on Economic Development, we have got to figure

out a way to leverage it and have a much greater effect.

The key X think, as many states are finding, if your goal is just jobs and you have no concern about income distribution

or no concern about wage levels, you are just going to count jobs, at some point down the road you are going to realize

that we are all getting poorer. We are not increasing our wealth. Kansas, in terms of per capita income, Is following

relative to the region and relative to the U.S. We suggested your goal for Economic Development should be quality jobs, higher wage jobs, higher skilled jobs linked to higher performing businesses that are globally competitive. How are you to achieve that? Given that states have limited

resources, and particularly during a recession they get ever

so more limited, turn to what some are calling a third wave

in Economic Development. 1 am kind of amazed we have made it

to almost 1:30 and no one has talked about the first wave,

second wave and third wave of Economic Development. How

many have heard of this so far of the three waves of

Economic Development? X know Soy has because I sent him the

book.

(Laughter,) MR, PILCHER: I'm sure you can run off copies.

I think It is a very provocative little journal. It is

called the Entrepreneurial Economy Review. Doug Boss is now

in charge of this. And we have some problems with his

terminology. In fact, we are trying to think of a different way to define Economic Development or to give some labels to

it.

But essentially the first wave was

industrial recruitment. That is what Mississippi pioneered

in 1936. The second wave took place in the late '70's,

early '80's, and that was, look at your state's economy and

try to figure out where are all the market imperfections and

then devise discrete programs to meet that gap to provide

some sort of service. And so, we end up with this alphabet

soup of programs all across the board aimed at technology

or capital or managerial technical assistance or

international trade or whatever. They are all supply side

driven. They are all program driven. They are coming out of

a public technology. We end up with a very fragmented

system and the impact Is very questionable.

In Washington state the legislature in

session last year authorized the Task Force on Economic

Development Service Delivery. They pulled together people

from the legislature, the private sector, government

agencies, local Economic Development agencies. Essentially in the words of one legislative staff person they concluded we are a mile wide and an inch deep.

So, how do you achieve some impact? Well, In the third wave principles what we are looking at is how can a state change its role from being a direct service provider to working with clusters of firms in a certain geographic region, working with specific industries and helping them organize themselves, define their problems, define their strategy for solving their competitive problems.

So, the role of state becomes not that of a direct service provider but a very different role. You can look at programs in almost all the states and in Pennsylvania you are acknowledged for doing a lot of very innovative things through the IRCs, through the Ben Franklin Partnership and so on. And you can look at those programs and see a lot of these principles in place. One of the things I did in the paper which I have provided to Roy, which I don't think he distributed yet, is I tried to list these principles.

Essentially the state has a role as a broker, catalyst.

What you are trying to do is make the process demand driven

from the side of industries or clusters of firms and not just

from manufacturing. I think these principles are very

applicable to what we are talking about, community

development or rural development, distressed urban/rural

development. Principles which really depend on the people who are affected organizing themselves and coming together

somehow to develop a strategy and to Invest in their own

competitiveness. Whether it is a community, an industry or a group of firms located in a town, whatever,

Let me give you a brief example with Oregon because 1 think they are, in terms of their overall Economic

Development effort, they are probably making the most concerted effort to adopt this third wave in Economic

Development. And X think what really provided a catalyst for them, and 1 sent a copy of this to Roy and X will leave one more with you and X also have extra copies if you want to give me your cards afterwards, they sent a delegation over to

Europe and they went to Italy and they looked at the

Amilia-Somagna region of Europe. They went to Germany and

France and Denmark and Sweden and they came back and one of

the things that the legislative staff looked at was looked at what the state was spending on Economic Development, however you want to define that, by industry. Not by agency but by programs. So, how much is Oregon spending on the wood products industry? How much is it spending on tourism? How much is it spending on the biotech industry if they have

one or whatever? And then look, compare that with where the

jobs are created within your state's economy. So, you are

really trying to take an industry specific look at your state budget and the staffer, Joe Courtwrlght produced this great two graphs side by side and there Is such a mismatch between where the state is spending its money and where the jobs are.

One of the things they are trying to do now is work with specific industries in Oregon, Film and TV Is one. Parallel computer processing is another. But the most interesting one is the secondary wood products industry which is the largest industry in Oregon. It has 75,000 people. They are going to lose 11,000 of those jobs over the next two years if they don't do something. So, the political need is there. The industry is aware of the problems that is facing it competitively. The state is going to put six million dollars into a wood products corporation which will be designed and run and staffed by the wood products industry. They will work in creating networks amongst firms to do many things. For example, they help focus groups with these firms in certain regions of the state,

And they brought together people who run these firms who never talk with each other. And simply by bringing them into the same room and getting them to talk to each other these people went out and they started working cooperatively on joint deals. So, there is an example of the power of networking of getting these firms together. The wood products corporation will be working with them in terms of whatever problems they defined is demand driven. It will be defined by industry. It could be product development, product standards! product testing, work force training all across the continuum of Economic Development activities.

So, it is not the state coming in with 16 different programs and trying to shovel that into the wood products industry.

It is the wood products industry organizing itself to decide what they are going to do to invest in their own

competitiveness.

I think In Michigan, and I don't know if this has been picked up by the press in Pennsylvania or not, we are going to see a real interesting experiment, maybe experiment is the wrong word, a real interesting event in

state Economic Development. I think essentially most of the

Economic Development programs are going to be eliminated.

They have a one billion dollar budget deficit. As you probably are aware, many innovative programs were put in place during the administration of Governor Blanchard and when Doug Ross was head of the Michigan Commerce Department.

Community Growth Alliances, Export Growth Alliances, the

Michigan Strategic Fund, Michigan Modernization Service,

two technology Institutes and so on and so forth. Well, the new governor is John Ingler, He was the Republican Senate

Majority Leader while Blanchard was governor. He Is now the

governor and faced with the one billion dollar deficit plus

I think he is not ideologically predisposed towards all these

programs from his predecessor. What I hear is a lot of those programs are going to be wiped out.

Now* my question is, is the state capitol going to be flooded with all the businesses that have been served by those programs or not? Where is the constituency for Economic Development? If we are back with this supply side public technology model that is fragmented across all sort of state agencies, where is the constituency for those programs when the budget crunch comes?

If a state moves to the role of being a facilitator or catalyst working with industries, presumably in Oregon at some point the wood products industry, which is

75,000 strong, is going to go down to the state capitol and say, yes, you really are helping us. You are really having an impact with what you are trying to do. So, I think by moving into this third wave of Economic Development you have the potential to create a real constituency because you are really having some effect on major, critical industries within your state.

With that I will stop because in the paper I tried to list as many principles as I could think of. Some

are essentially flip sides of the same coin. And I also tried to list as many examples as I had time around the

country. I think an interesting exercise, In fact, this was proposed in Kansas, the fellow who is president of Kansas,

Inc., which is their strategic planning body for Economic Development, I know, it wasn't a clever name, but one of the things we concluded is that Kansas, amongst all 50 states, has the best organization for strategic planning in the country because they have quasi-public strategic planning body. It is called Kansas, Inc. The governor is the vice chair along with a private sector person. It includes the senate president, the house speaker, senate minority leader, house minority leader and all of this is by statute. The various members, representatives of the major economic foundations of the state, agriculture, oil and gas, aviation, finance and so on and so forth. It really provides an interesting model of how you can pull together all the major players in the state to really take part in long-term strategic planning and thinking and have that translated into specific policies and programs. Our first conclusion was, they have a competitive advantage amongst all the states just in the way they go about strategic planning for Economic Development. So, with that I will stop,

CHAIRMAN EVANS: Let me follow up on that part about Kansas. What are the political dynamics there?

What is the part of the governor, the house and the senate?

MR. PILCHER: What they are facing right now,

I think is the issue of continuity in their strategy and their programs. Their Economic Development Program was put in place in '85 and '86 with a republican legislature and an outgoing democratic lame duck governor who supported it and then by a republican governor for four years.

Unfortunately, they ran into a tax rebellion in Kansas because they put in place a property tax reappraisal classification system that just outraged everybody.

So, a republican governor was thrown out.

A populist democratic governor is now in place who really has a very different view of Economic Development from the rest of the people in the state. There is a democratic speaker now in the house. The republican speaker stepped down and the republicans lost the chamber. But despite those differences they have a high degree of bipartisan support for their strategy in their programs. And one of the ways this operates in the legislature is by statute in * 85-86, they created standing Economic Development committees in each chamber, which during the interim, meets as a joint Economic

Development committee. So, the legislature as an institution is covered year-round and it is an equal player in Economic Development along with the Commerce Department, the governor and in the public private body, Kansas, Inc. which has legislative representation.

CHAIRMAN EVANS: Dr. Luger, after you just heard that and you do in your paper mention the political dynamics of the situation, I get the impression you are probably the first one I heard outside of, Dan was first, and that certainly is a fact in terms of Economic Development,

X think on page nine you list about nine different results

and you mention number two, business climate, and you talked

about the aspect of the political dynamics.

DR. LUGER: Right.

CHAIRMAN EVANS: Do X get the impression that

you are trying to, rather than me trying to interpret what

you are saying, will you give me a sense of exactly what your

view is in terms of the political scenario?

DR. LUGER: This was strictly a descriptive

exercise. X had the data and X had some characteristics of

states and X was trying to figure out what patterns there

were in the data. One of the patterns that came out in terms

of business climate was those states on average that at the

time were governed by republicans, had greater effort in the

business climate. X drew no inferences beyond that. X am

just describing the patterns of the effort indices that X was

observing.

CHAIRMAN EVANS: You also, in your report,

rankings of parks by successful indicators, as X look through

that list that you have there only two parks I think are in

Pennsylvania, One is the Great Valley Corporate Center.

You see on the last page?

DR. LUGER: Yes.

CHAIRMAN EVANS: X think that is in I Montgomery County.

DR. LUGER: Yes.

CHAIRMAN EVANS: And the other one is the

University of City Science Center which is in the city of

Philadelphia.

DR. LUGER: That Is right.

CHAIRMAN EVANS: One area you talk about the successful use. The other one is unsuccessful use. I would just be curious, particularly the one on the unsuccessful part, particularly when there was a lot of money, because the one where the University of Science Center is, the

University of Perm, Drexel University.

DR. LUGER: That is right.

CHAIRMAN EVANS: We have, as a matter of fact, the Benjamin Franklin Partnership is located in that Science

Center. We have invested a lot of money in that particular area. I am curious to know —

DR. LUGER: Exactly illustrating the problem

in defining success only in terms of job growth, short-term job growth. What we did was, we took the date of the

establishment of the park, in this case University City

Science Center, and then looked over the next five years or

so what the pattern of job growth was.

To the extent that science parks, technology

parks are intended to develop technology, then if there is any job growth it Is much likely to happen longer term or it might be greater productivity gains instead of job gains.

So, if the only measure we are using is job growth, then, yes it is not successful. But if we use another definition of success, then we will conclude differently.

CHAIRMAN EVANS: Would that be the same thing in the Great Valley Corporate Center in your view? It is like it is outside the suburb of the city. Do you have any sense on that in terms of a measuring stick?

DR. LUGER: I can't remember the specific details of the Great Valley Corporate Center.

CHAIRMAN EVANS: Dr. Harrison, I see you shaking your head. Are you aware of those particular —

DR. HARRISON: Well, I went to school at Fenn so I have some awareness of when the University City Science

Center was being started up. It is gray but it is still there. I think that Tim Parks raised this with you this morning* Mike was really saying the same thing and I agree.

I think that in this business it is really important to be

clear that there is some kinds of Economic Development

activities like when a community development organization

starts up a supermarket that had better have some direct job

impact or there aren't going to be any groceries moved out of

the back room if ten people aren't hired.

But there are other kinds of Economic Development activities, particularly related to research and

development and technological assistance to others whose objectives is, frankly, not job creation per se. Neither Tim nor Mike said it, I'll say it, to the extent that those kinds of centers do create jobs at all, they tend to be jobs

for people who look a lot like us namely; a whitehead, who work in universities and are highly paid college professors and engineers and scientists and technicians, but not very many of those either. Their objective is to

generate research which then can be used by companies in a

lot of different places.

CHAIRMAN EVANS: I think you raise a very good point. Rich Kasunic and this is a question I have always raised with the Secretary of Commerce and I have raised about the Ben Franklin Partnership, we have talked over the years,

and that program came in existence in 1982 and started out at

four million and moved up to 32 million and the General

Assembly reduced it in terms of its performance. Because 1

think the question that Rich Kasunic asked and all the members who are up here, we tend to be caught in the middle.

You have a changing economy and you have people who have

concerns about jobs and where they live and where they

operate. And although 1 do agree with you in terms of what

Tim Parks says, that is great in the academic environment

and it is great in front of the public hearing, but it is not great to John or Jane Q. from Fayette County or John or Jane

Q. from Beaver County, that is not great to them. It is great for us to talk about that in the abstract. At some point that has to translate. I know sometime people in the academic world or people who are in the Commerce Department don't seem to have patience with we who have to run every 13 months and are tested in terms of our theories.

And I guess you are the first one I have ever heard say in a public forum that linkage, and that is all we ask, X think we can have patience with anything In due time, but at some point we haven't been able to find people to tell us in a specific time frame, even though they keep telling us they can't tell us, exactly when is there going to be some fruition to the investment we have made. I have just indicated to you the Benjamin Franklin Partnership started in 1982. It started at four million and then I remember over the years it went up to as much as 32 million.

And then only in the last couple years was it reduced in terms of the amount of money that was invested. We were looking for some answers.

DR. HARRISON: I understand your question and

I am perfectly willing to take the heat. I understand about the luxury of the academic, wearing the academic hat. But

the point about Science City in particular and about this

thing in general you are onto now is really not a question about whether, in ray judgment, It Is not a question about

whether or not you can actually, it is not a question of whether it is academic or not, how many jobs it creates. It

is a question about that business of balance. To me, an

Economic Development Program that doesn't create job creating

activity for displaced factory workers and homemakers and

folks who need to get off welfare and doesn't do that in the

short run is an unsuccessful packa.-ge. And I have argued

about good packages being balanced programs. In a balanced

program with a program of infrastructure, a program of

assistance to small business, a program, a recruiting program,

the one that has successfully brought Sony in, in the

context of a balanced mix of projects, the kind of thing

that goes on at Peim and Science City does make sense even if

you never see more than a handful of jobs inside Philly and

the jobs are mainly for science and engineers. The reason

that makes sense in the context of a package is because the

German and Japanese Investors or New York investors or

Chicago investors, who are thinking about investing in

businesses around here and putting money into the stock of

companies in the state and so forth, do turn in part on the

kinds of activities that go on in those centers. What is

wrong is when the package gets off tilt and it ends up being

mainly that and there isn't enough of tension to the

transportation projects, the housing projects, the job training projects, the small business projects and so forth.

And it is a question of balance. It is in the context of balance that one needs to evaluate any one particular program. That is really Z think what Luger and I are trying to say to you.

CHAIRMAN EVANS: What I hear you saying, at least to this Committee, because X am asking you the question that all of this stems out is really how do we evaluate?

That is exactly what we are trying to ask and we are trying to get a handle on, exactly how to do it. I heard you tick off a few things. You wanted to respond?

MR. PILCHER: Yes, Mr. Chairman. If I could respond to the question how to evaluate. I think that Is something that has troubled a lot of state legislators.

Programs were put in place, money appropriated and programs were up and running for some years. And there has been kind of an unease about how do we evaluate, what is effective, what can we get rid of? That may be an exercise in itself just trying to get rid of programs that are ineffective,

Minnesota is the only state that I know of that Is putting in place a system to systematically monitor the clients who are served by the state's Economic

Development programs. It is a system that was designed by the Urban Institute. It is called the Performance

Monitoring System. It is not intended to be an evaluation tool per se but it will serve some assistance when the legislature decides to evaluate the various programs. But the point is to send out quarterly surveys to the clients.

Those who receive your services. Essentially it is asking two questions. One, the quality of our assistance; was the

Information timely? Was It helpful? Were people polite, whatever, quality, customer satisfaction. The other Is, given this information, this assistance that you receive from the state, what did you do with it? What steps did you take? Now, no one can wait around two or three years to find out that the firm created a job. So, what they tried to do is come up with intermediate indicators that would allow them to have some sense, some assurance that the firm did do something or the community, might be working with the community. That something happened. 1 think they are going to spend about $100,000 and two FTEs to put in place this quarterly monitoring system.

CHAIRMAN EVANS; FTE meaning?

MR, PILCHER: Full time equivalent, two staff people. So, $100,000 and two staff people to run this quarterly survey mechanism and provide the Information to the program managers. So, it should be very helpful in terms of telling program managers what do people think of our

service? Where do we make a move, shift away? What Is going wrong? What is going well? When the legislative program evaluation office comes along, they will have something in the files to look at other than just anecdotes or activity reports or things like that.

CHAIRMAN EVANS: 1 have to go to a couple other people, but I want a final question particularly to you. In a climate, and 1 think Dr. Harrison talked about no constituency for Economic Development, certainly there is no constituency for general government operating. We who sit in the general assemblies across the states, a lot of state governments are almost pared down to the bone. We all say let's put all the money into programming. Let's have programming. And then literally we don't have individuals within the operation to be able to go evaluate just as you have described. So, we have invested money, but we really don't know exactly what is occurring out there because we don't have anybody to really go ask what exactly is taking place. And yet there is a view, I ask you particularly from the National Conference of State Legislatures, if that government is overbloated and clearly we don't know what is going on. In that climate you just described about hiring people, evaluating people, how do we deal with that issue?

MR. PILCRER: I think in some states a number of legislatures have in place full time program evaluation offices; Minnesota, Wisconsin, Virginia. And so, it becomes a matter for the legislature to decide we want to evaluate everything the state is doing in Economic Development, which

Virginia just did. They spent 18 months evaluating everything the state does in Economic Development and turned

out two massive reports. Or making a decision, well, let's just focus on one or two programs.

So, I think part of it is a function of the

legislatures resources to perform those evaluations. I think the point is very well made in which so many programs have been put in place and except for general goals of job

creation and things like that, not much thought Is given to how do we evaluate it and who evaluates it and when do they evaluate it.

So, what I have collected are some 60 or 75 evaluations, primarily most of them legislative evaluations,

some by outside consultants of agency programs. It has been mainly in the last two or three years that these have come

about. So, I guess the question I would raise for you, is

the legislature able to put up some money to perhaps go to

outside consultants to come in and perform the evaluations of various of your programs?

In Kansas, Kansas, Inc. was mandated by

statute to evaluate all of the state's Economic Development

programs. And they have just come up with a large

methodology of how they are going about doing this and they

are asking the legislature now we need the money to start this process. And over a two-year period they are going to evaluate and they will set priorities and they will just go

through them program by program and evaluate what they have

done. So, I guess in terms of evaluation it is a question of

if you really want to know the answers somebody somewhere has

got to put up money and make the commitment to do it.

CHAIRMAN EVANS: Dr. Harrison and then Rich

Olascz.

DR. HARRISON: One very small thing, in the

interim until the money appears, there is perhaps one useful thing you can ask your various and sundry agents to be doing, which to be frank, I don't think they are doing as well as they might. I am talking about the IRCs and a number of other entities. And that is, they can be more specific than they have been, and this is generally true in most states, not just here, they can be more specific about the very

concrete objectives of their programs. X have worked a lot

of congressional campaigns and X worked in the 1988 presidential campaign. I understand about the real politic of needing to talk to constituents about jobs. But an awful

lot of Economic Development programs, while they may be

about jobs down the road, in the short run they are about much more specific things. Like getting a small company to

buy a new computer control tool and learn how to use it.

Or getting a community to have a sewer system rebuilt so that other businesses will be willing to set up shop there and

so forth.

You can certainly be asking the various

agencies of the state that do Economic Development work, basically saying to them, stop telling us of the objectives

of your program or Economic Development or the objectives of

your program are jobs and get more specific.

It came up this morning In the little

discussion about Mag/Lev. Partly through perhaps the PR or bad PR by Mag/Lev of Pittsburgh and partly In my judgment

through kind of a not so honest editorial policy In one of

the major local newspapers. Hag/Lev has come to be debated

In part about whether It Is a cost-effective way to get to

the airport. Well, that Is nuts. It Is not a cost-effective way to get to the airport. That Is not what Mag/Lev Is for.

Hag/Lev Is trying to see whether It Is possible for

Pennsylvania to capture a demonstration project which Is

going to Involve Japanese banks, German engineering companies

and American workers or is it going to go to Florida or Is it

going to go to California. That is what Mag/Lev is about.

It is about whether they are going to create some steel jobs

and some engineering jobs and some construction jobs here or whether they are going to be In Los Angeles. It is not about

how fast you can get to the airport.

But I guess the two years I have been a visitor in this part of the country, I have heard that

canard 5000 times. How expensive is it going to be to get to the airport. The point is that that project has a very

specific objective. The objective is to have something up

and running overhead down your street so that people can see

it, businessmen from Chicago and Cleveland and Philadelphia and government officials from Washington can come and look at it and decide that looks exciting. Let's invest in it.

That Is what the project is about and it should be supported or not supported in terms of the correct statement of what the objectives of the project are. And it wouldn't help very much to say that Mag/Lev Is an Economic Development project. And that is one thing one can do, is insist that agencies be much more specific about what it is they expect their programs to produce. That can be a very helpful thing.

REPRESENTATIVE OLASCZ: Dr. Luger, your Table two, the indices of state effort and industrial development.

Over what time span was this developed, period of years?

DR. LUGER: The data reflects program

activity in the period 1981 to 1983, 1980 to 1983.

REPRESENTATIVE OLASCZ: The reason I ask that, while you were speaking of the situations, I just made a

check here of the industrial northeast. If you look at

Pennsylvania, obviously, Illinois, Michigan, Ohio, New York,

the only one that really put anything about total effort was New Jersey. X think that is significant at least to my way of thinking. Because at that particular time they were all heavily industrialized areas he it steel or automobile manufacturing. Conversely, if you look at Alabama and

Arizona their total effort was high. So, what they were in effect trying to do —

DR. LUGER: Playing catch up,

REPRESENTATIVE OLASCZ: Right, offering a lot of incentives to do it.

DR. LUGER: Yes.

REPRESENTATIVE OLASCZ: Do you think that would possibly still hold true today?

DR. LUGER: I would doubt it. There have been dramatic changes in the last ten years. I am inclined to redo this as time-consuming as it was.

REPRESENTATIVE OLASCZ: While you were

talking I went through and made my checks and circles of

Alabama, go down to Mississippi and Georgia, what they put

forth in effort.

DR. LUGER: That is right.

REPRESENTATIVE OLASCZ: Thank you,

CHAIRMAN EVANS: Vic,

REPRESENTATIVE LESCOVITZ: Just one question,

maybe Dr. Luger can answer it. There have been a lot of

states that have been regionalizing their effort on Economic Development rather than competing against each other. Such as, you have Pennsylvania, West Virginia, Ohio, Instead of competing for a business and saying we will provide you this or., no, we will steal that company from you here. Have you any data on whether that is successful to regionalize with states instead of compete against each other?

DR. LUGER: From my observation, that is a relatively small part of the Economic Development activity.

REPRESENTATIVE LESCOVITZ; Maybe Dan has a little —

MR. PILCHER: I think there are a couple of interesting experiments underway and I will mention what seems to be the most intriguing and far-reaching one. The five northwestern states, Alaska, Oregon, Washington, Idaho and Montana are forming, it is almost an economic union.

That is what they are going to try I think, until the federal government finds out about it, with Alberta and

British Columbia. They have been working at this now for about a year and a half. The impetus for this comes out not out of the governors' offices but out of the legislative leadership offices in the five states and the two Canadian provinces. They are looking at regional cooperation on a whole range of issues; international tourism, education, job training, environment, clean up of hazardous toxic waste,

sharing of information resources amongst the universities and they are quite serious. They are working very hard.

There is a policy institute at the University of Washington which is providing a lot of staff work for this initiative.

But it seems to be a very serious effort.

Fart of what is motivating them was the awareness that individually, I mean, as important as each state may seem, if you look at the world economy and rise of global trading blocks, and we will keep California out of that comment, if you look at the rise of global trading blocks, particularly with what is happening in Europe, they decided that they would have a lot more political and economic clout if they could cooperate on a regional basis. So, I think it is a very instructive model. And if you tend to see more interest in regional cooperation amongst some of the smaller states, the larger the state I think perhaps the more tendency to go it alone.

But I think one very potential beneficial area of regional cooperation would be in dealing with, let's

say you have a certain industry that I guess is part of your economy as well as your neighboring states, if you start moving into this kind of third wave of Economic Development

of trying to get industries and clusters of firms to work

together, and X think there is great potential for

interstate cooperation because certainly the firms can deal with each other across state borders. So, I think that would be one area specific iJOmmon needs that could be addressed through some of these third wave initiatives. REPRESENTATIVE LESCOVITZ: I just wanted to know if there was any, I know the southern states are starting. I just didn't know if there was any data yet to see if it was working. Whether to use one state's university for business and — MR. PILCHER: Yes. REPRESENTATIVE LESCOVITZ: Or is it just too early? MR. PILCHER: Actually there is something happening. The Southern Technology Council, which is an affiliate of the Southern Growth Policies Board in Research Triangle Park has underway a consortium for, some sort of consortium of state technical colleges throughout the region. And all of those colleges are working together to try to assist small businesses to improve their manufacturing capabilities, their technologies. So, it is a region wide effort. Probably the Southern Technology Council is one of the leading examples of a regional multi-state effort. REPRESENTATIVE LESCOVITZ: Thank you, Mr. Chairman. CHAIRMAN EVANSi Nick. REPRESENTATIVE COLAFELLA; Dr. Harrison, how do you feel that CEOs, big decision makers in business in this country perceive Pennsylvania and maybe specifically western Pennsylvania as a place to locate?

The second part of my question is, what do you see the economic future of our area based on how things have changed in western Pennsylvania?

DR. HARRISON: X know the small questions. I understand why you would ask that.

REPRESENTATIVE COLAFELLA: Well, the reason why I am asking this question, everyone gave Representative

Kasunic all this credit for asking all these questions. I thought if I asked that — but seriously, I would like to have your answer.

DR. HARRISON: It is a very serious question and you must expect the same kind of answer you have gotten

from other of our colleagues in the course of the day and

that is to be circumspect about such a big question.

I do lots of interviews with CEOs in my

research so I get to talk to some of them. So, I can give you a decidedly nonrandom sample of some ideas. We have heard about Sony. Almost surely companies like that one

doing that particular set of things certainly have an

interest in this part of the country and will continue to

have an interest in this part of the country to the extent

that they want to ship products throughout the northeast.

This is an attractive base from which to do that. It is relatively low wage although that will not be a low wage plant. In fact* the best companies, the best foreign

companies, have a pretty powerful rule of thumb about how to

decide what to pay when they move into a place and that is to

look at the local wage structure and pay a little above the

average. That Is how you stay out of trouble. That is how you stay out of trouble in a lot of different respects and

get quality labor. So, obviously, if this place did not have

the appropriate, in the case of Westmoreland County, but you

talk about western Pennsylvania, I have only been here two

years but I hike and camp and get around, and this place is

enormously diverse. So, it is hard to generalize about this

place. You can generalize about eastern Massachusetts more

easily than you can about western Pennsylvania,

But in general, this is a particularly

attractive base for companies that want to sell in the

northeast megalopolis that don't want to be situated in the

middle of that area and high rents and very high wages. It

is attractive to that.

It is clearly, at least within some range in

Pittsburgh, an attractive place for a whole range of high

tech companies and high tech has had a measurable effect on

changing the economy of Pittsburgh. It hasn't employed a

lot of people. And I think, well, Tim Parks may be right,

that the children and grandchildren of the steelworkers and mine workers who have lost their jobs can make new careers because they can certainly go to school and get the degrees.

I mean, I am In a job helping to train them. The trouble is so far it hasn't created a whole lot of jobs and that is just a fact. Maybe it will create more. But surely there will be more high tech in the Pittsburgh region in the future. The airport expansion is going substantially to be distribution and more of the small high tech shops that are burgeoning around the area.

Having said all of that, I think that I am simply not sufficiently familiar with the area yet to be more specific and 1 don't like to get pushed too far beyond what I think I know. But I intend to make some real investment over the next couple of years *ti learning some more and maybe we can talk about it some more.

DR. LUGER: This response is in part addressing your question. When we talked to CEOs around the country, when we look at data, one of the concerns that I have is a growing disparity between metro and nonmetro counties. As

the economy restructures, becoming more high tech, companies value location in urban areas. Not so much because of markets or resources, but because of the conglomeration of economies, because of the proximity to others like them, because of the proximity to universities and the amenities,

cultural amenities that urban areas give. So, there seems to be a reconcentration of economic activity. I know the

Pennsylvania data showed this as well as North Carolina and

other places away from nonmetro, especially nonadjacent metro counties toward metro areas.

CHAIRMAN EVANS: Battisto.

REPRESENTATIVE BATTISTO: Thank you, Mr,

Chairman. I want to go back to one of my topics again.

Dr. Harrison, Mag/Lev, the question I brought up this morning. Let me just ask you this question. Is there

anything else we can do as a state besides the money we

appropriated for studies to capture what I consider to be an

opportunity to create a Mag/Lev industry in an area like

Pittsburgh? I mean, I use the opportunity in various forums.

I'm not exactly an economic power as a person. But what else

can we do? Can you give us some direction?

DR. HARRISON: Representative, I think the

answer is not much. But that is not analogous to Professor

Hansen's general remark this morning about in general what

states can do much and other states can do quite a lot.

But the reason, I am working on the Hag/Lev project. Some, as you may or may not know. And the reason

I am saying that is because really what is holding up Hag/Lev

as much as anything else is the uncertainty of the foreign

investors with respect to how serious the federal government

is likely to be in getting into this. There are two levels of decision making as there always are in investment projects,

There are two different levels of decision making in that

large corporation, in some cases governments if we are

talking about building big infrastructure projects. One is whether to do it or not and the second thing is the location.

Of where to do it is what Dr. Luger was just talking about.

Some industries really concentrate in certain locations. It

is very clear that the Germans have got to export this

technology for a variety of reasons. They have got to sell

it in the west. It is not clear where they will do it.

Whether here or elsewhere or in several places, but it is

very, very expensive. There is something unusual about that.

Relative to the size of the budget of the state 100 years ago

or 150 years ago the canals were very expensive.

Transportation projects are always massively expensive.

There is nothing special about this one.

The problem, well, one problem seems to be

that the Germans in particular, who control the technology

and are sitting on the fence about moving on this, are not

clear yet whether and to what extent the United States

government is really committed to moving on this. And you

can't build a national rail system without a national

government. Nobody has ever done it. This country has never

done it. It has never been done. We can build supermarkets

but we can't build rail systems. So, frankly, and this is a set of CEOs I guess I have net & bit in the last six months, the people at

Trans Rapid are not clear on both questions. Where to put it but more importantly whether or not if they make a more major investment in the United States whether or not the United

States government is going to be on board. My sense is that the legislature of Pennsylvania has been enormously supportive. I don't think — and Secretary Skinner, largely through the lobbying of your delegation in Washington, has done about as much as he can do. But this administration in

Washington is not very sympathetic to projects of this sort and that is the source of my pessimism. Hot because the state of Pennsylvania has not done everything it could be doing. The coalition in Pittsburgh is extraordinary. The coalition in Pittsburgh is a model of the public/private partnership. It is hard to imagine designing one that would be more inclusive than the public/private partnership in

Pittsburgh which is, after all, business, government, labor,

community organizations, folks from the valley towns. It is

a remarkable coalition and the legislature has been there

for this project. The governor has been there for this project. It isn't because Pennsylvania hasn't done enough.

REPRESENTATIVE BATTISTO: Well, isn't it true

then, you have talked about the lack of federal commitment,

isn't it true then, from what I have read of Skinner's and the president's transportation proposal, and it is heavy on highways and very lacking in the very area we are talking about.

DR. HARRISON: Well, for a lot of them in another discussion, you have a very important panel, both on the questions of transportation, well, both — on the questions of transportation, on energy, on the appropriate mix between housing services and health services versus other kinds of things in general, some of us are less than thrilled about the current federal budget, but I am sure you

are not thrilled about the current federal budget either.

REPRESENTATIVE BATTISTO: Thank you.

CHAIRMAN EVANS: Representative Wozniak.

REPRESENTATIVE WOZNIAK: Thank you, Mr.

Chairman. I appreciate the gentlemen coming in today and I

think one thing that you don't have, you have the luxury of

taking and analyzing these numbers and looking at the big macro picture and then coming down to a region. What happens in our end of it is, these numbers become real people ,

real communities and we work with those CEOs and other

business people. And I am a firm believer that you can't

take anybody anywhere unless they want to go. I think we

have a problem with the mind set in western Pennsylvania aboul:

taking a new direction on moving away from the heavy industry

We still have guys that axe 45, 50 years old that were steel mill trained and mine trained and you are going to have a tough time breaking through that barrier along with a lot of

small communities or even communities of my size who have sort

Q| an elite- group of people who have done well and continue to do well. Although they talk a good story aren't as enthusiastic about economic growth as I think they should be.

You brought something else up though, and 1 would like to direct it. Since one of the problems we have in our state budget is the finances, the fiscal crisis of the state, maybe it is chronic, perhaps it is not.

Representative Evans, the Chairman, brought up about Ben

Franklin, the Science City and somebody brought up about one of the states doing a study on its effectiveness and all these different Economic Development organizations, all different monies that states put in for different programs

and how to quantify them. My question is, how do you break

away from consulting groups or anybody to quantify these

things when everybody dances with the girl that brung them.

Ve all have a habit, hey, if I want some information from

any three of you and I am shelling out the money, it is going

to be tainted in that direction.

How do we go about getting objective, honest

information as to whether our Ben Franklin Partnership is

doing the mission it is supposed to do? If any other

organization or any other university that we might be supplying money to In doing Economic Development or research and we are trying to tie that in with long-term

economic growth or immediate job expansions or anything like

that, how do we go about addressing getting objective people

to give us that information? Because obviously, everybody

is going to try to protect their turf and say that they are greatest and all I need is a little more time, more money

and things will happen. This is to the tune of tens of millions of dollars for the state.

DR. LUGER: You are really raising a question

about how state government should be structured. Again, 1 mentioned Virginia. Within Virginia state government there

is a Joint Legislative Audit and Review Commission which is established as an independent auditing agency much as the

General Accounting Office is. That its mission is to do

Independent, objective audits as a part of state government.

That is one way.

REPRESENTATIVE WOZNIAK: What I am looking

for is somebody to give us an overview of our matrix in

Economic Development programs to see if we are indeed on

target or if we are expending large sums of money and not

getting anything at the other end. And obviously, if you

ask the people that are in charge of it, they are going to

say it is working.

MR. PILCHER: Well, I think in the case of Virginia, and I was down there when they held the very first hearing for the legislators who make up this commission, and the room was essentially empty except for all the agency and program people who were right behind us. That is a state that has a heavy emphasis on marketing itself, recruiting and also has the added benefit of a lot of federal dollars being spent both in the Norfolk area as well as in northern

Virginia.

After a year and a half of legislative staff looking at Economic Development, they found that the state was spending, not just the state, but all entities within the state, Including local government, $750 million on Economic

Development. I forget, 30, 40 different actors, different entities. So, you have this huge conglomeration. Their essential conclusion was, we have all this activity going on, we have no strategy, We have a lot of programs and no

central strategy. So, one of the recommendations of the

commission was create a strategy through their state Economic

Development Department, and every four years they change

governors by the way, that is by their constitution. So, you're talking about problems of continuity, every four years

a new governor who has new themes. So, when the new

governor would come in, 1 don't know the status of this

legislation, the point is, when the new governor would come

in — REPRESENTATIVE WOZNIAK: That should be helpful for us since we keep ours for eight.

MR. FILCHER: When the new governor comes in, that new governor can accept that strategy or change that strategy but he has got to have some sort of Economic

Development strategy.

To get back to your question, there are ways, and a number of legislatures as I have mentioned, do have,

I mean I would call them nonpartisan, evaluation arms, which have both majority and minority membership on it and represent both house and senate. So, there are those staff people. In other cases, if the legislature doesn't have that, for example, in Kansas they brought in a peer review group of six people and we spent a day and a half, which wasn't really time enough for us to lock at specific programs, but just to kind of look at their overall direction which I think was extremely critical, to look at their overall direction and their overall strategy. And none of them, we had no allegiance to Kansas and we could say things, hurt their feelings and get on the airplane and

leave. So, I mean, you could assemble a team to come in and look at some aspect. It is really a question how do you want

to organize yourself to evaluate your Economic Development programs.

DR. HARRISON: I just want to say one small thing to what you have raised. I have no objection to audits and program evaluations and the best of all possible worlds,

Hike Luger's earlier recommendation would be a general way of working on everything, and that is, as soon as the program got started you put into place a monitoring program and it would be monitored. And I don't know, if the same guys who hold the awards announcements, the Grammy's or the Emmy's, would get hired to be your objective people and you really trust. I don't know who those guys are on the payoff either.

But let's presume they are not.

But I guess I am dismayed at the implication of your question that, how can I say this simply and best, my assumption in this business, forget college professors,

let's talk about the Economic Development professions. The people that run the agencies, the XS.Cs, the development corporations and so forth. I start from the premise that they have the best interest of their constituents at heart, that they are working very hard, that they are committed to

the programs, that their goal is not inefficiency. That in

this very complicated business some things work and some

things don't. Some things are beyond their control. Some

projects which, when you look at them this morning, you are

absolutely sure to be working by Friday and by Saturday

morning they are dead because three things that were

supposed to happen never quite happened. That is nobody*8 fault. That is the way the world goes, the way the world works. And X think we have got to be careful in this era of tight budget and kind of conservative philosophy coming

from Washington not to ascribe to the people who are on the

firing line, whether it is social workers in low income neighborhoods or Economic Development corporation directors in western Pennsylvania counties who have a lot in common, a lot more than what you might think, in what kind of order

they have to carry. Not to assume that look all around and underneath and over and top and bottom to see whether or not

they are keeping the books straight.

My very strong conviction is that when programs "don't work" it is partly because they are

incorrectly targeted or partly because the 17 things that would have had all had to happen to have made them come

together to work didn't quite all come together and nobody

can make that happen. Some of them work and some of them

don't. That is not an invitation to license anything goes, particularly not to your Committee. But I hate to be

interpreted as anything that I have said as implying

anything other than the most total support and belief in the

integrity of the profession, I am not talking about mine,

the profession which is involved in the daily business of

doing Economic Development. X think they are extraordinary

people and they are the ones on the firing line. REPRESENTATIVE WOZNIAK: Mr. Chairman, I just want to make a statement and then we may go. I am not

criticizing anybody out there but I do know what happens, people get zealous. They believe in what they are doing and what happens, we have a tendency, I am doing the right thing.

I know I am. We have to be in a position to realize if we

took a wrong turn somewhere no matter how good intentioned it was, there comes a time when you have got to shift that

locomotive. Perhaps in Washington you can't even nudge the

locomotive. It is just going down the tracks a thousand miles an hour. But Pennsylvania and most other states, we

still have a little control over that throttle and we can

change it to go in a different track every once in a while.

And what I was getting at, those opportunities take a look

and say what are we doing and where do we want to go. I

think that nobody knows better than some of the Economic

Development programs and some of the efforts going on in

western Pennsylvania. And I am just over the mountain here

in Cambria. I want to thank you, Mr. Chairman. Hopefully,

we can take a look and see how we can sort of not audit, but

look over our Economic Development programs together.

We have Secretary Chrlstman coming on next and I'll shut up.

CHAIRMAN EVANS: We will take a five-minute

break. We have two other people, just two more questions by

Representative Lucyk and Representative Kasunic. I have the Secretary of Commerce and then I have the federal block grants. So, I will ask people to stay In the seats,

(Brief recess.)

CHAIRMAN EVANS: 1 would like to reconvene the hearing. Representative Lucyk. Are you ready, sir? Then

Representative Kasunic.

REPRESENTATIVE LUCYK: I am under a time constraint. My question is to Professor Harrison and Mr.

Pllcher. Just to clarify in my mind. I think in your statements you said, Br. Harrison, you said a balanced approach. That the economies that survive are balanced.

Where Mr. Pilcher, when you were talking about Oregon of putting the money where the jobs are now, we seem to be putting all your eggs in one basket. Just clarify.

MR. PILCHER: With Oregon, with Oregon, they are going to pick the wood products industry as the first one.

REPRESENTATIVE LUCYK: And if that goes boom, then they are done?

MR. PILCHER: No, no. They are going to be working with the other industries. They are going to be

trying this strategy with other Industries in Oregon. It is just that that the wood products industry right now is the biggest one in Oregon and that is where they are going to

try this third wave model of working through a wood products corporation, providing businesses with vouchers to buy

services to help them modernize and improve their

competitiveness and that they will create a technical

extension network, several other things.

So, they are just picking that as one

industry. They have done a sectorial analysis, and this gets

to another question I think, many states would have a very

good knowledge, what kind of a macro state economy, the macro figures. I am sure in Pennsylvania you have got much more detailed knowledge because of your industries. But in many states they do not have the information they need about

the specific sectors. For example, in Kansas we started

talking with them, well, what about the meat packing

industry, very important in southwestern Kansas? What about

aviation in Wichita which has four big firms; Cessna,

Beech, Lear and Boeing. Farm machinery manufacturers, what

about those specific industries? How can you target those

industries and work with them? So, what I was not saying

about Oregon was that they are putting all their eggs in one

basket. They aren't. In a given year they have about

$50 million for Economic Development. That is dedicated

revenues that come out of the state lottery although there

is a high probability it is going to be raided this year for

other purposes because the voters, in their wisdom last

year, passed an initiative that puts on a property tax lid on local and school spending. Consequently, the state over

a two-year period Is going to have to put up $700 million.

So, the whole governmental structure In Oregon I think Is going to be turned topsy-turvy.

But the point Is out of $50 million for

Economic Development they are going to seed this wood products corporation with six million. So, in terms of their overall spending, no, they are not putting all their eggs in one basket. They are just starting with wood products as the first industry that they are going to try this European influence third wave approach of putting the industry in the driver's seat. Does that answer your question?

REPRESENTATIVE LUCYK: Yes. Secondly, Dr.

Harrison, could you give us, if you were going to plan our

Economic Development for the next two or three years, given money that we have available in Pennsylvania, what specific approach and nobody has asked this yet, and I guess that is why we are here, what should we be doing? Where should we be putting the money? Can any three answer that?

CHAIRMAN EVANS: The Secretary of Commerce job is open.

(Laughter.)

CHAIRMAN EVANS: This is your chance.

DR. HARRISON: I just want some success in helping support our research. I don't want to be the Secretary.

The last chapter of an Economic Development program has to be about as concrete as your bank statement.

Otherwise It Is not worth the paper It Is printed on. The

last chapter has to be very real and specific.

REPRESENTATIVE LUCYK: That Is what I am

asking.

DR. HARRISON: The first chapters have to be more general and strategic and thinking about what has been

learned elsewhere, what obviously doesn't work, some rules of thumb and so forth, and obviously mainly, for this kind of meeting that Is why you asked us to come. I am not at all reluctant to have a discussion at the level of that last

chapter with you, but I don't think this Is the place where

It Is possible to do that because It takes so much effort,

so much time and needs to have the players around the table who have been doing it.

I have suggested that the state, in the last

few years, has been moving very much in the directions that best practice Economic Development policies in the Far East,

In much of Europe and at least a couple of places in the

United States does say is the right place to be moving.

And that is, a mix of manufacturing and services, a mix of

high tech and low tech, when you see low tech as a major

customer for what high tech has to sell, a mix of urban and rural, a mix of western and eastern and central parts of the state worrying about where the jobs are located. And I would emphasize this notion of networking of mixing groups of companies and local governments and agencies which provide services rather than the old-fashioned model of working one on one with the individual firms which is

Intolerably expensive, has an enormously high failure rate.

Not because there was any 111 will or anybody did the wrong thing or ran off with money and gave it to their uncle, but simply because small businesses have an enormously high failure rate if nothing else happens.

And so, we learned this lesson from all over the world in the last 20 years, that working In networks of

firms, particularly where there are some large companies as part of those networks, greatly reduced the hazard, the risk, the danger that the thing will fall. In that respect I

think the state has made an enormously good start. There

are only a handful of places in the United States that one

can say that about It.

When you get beyond that into more details,

I think you need to have a much longer term conversation.

REPRESENTATIVE LUCYK: Thank you.

CHAIRMAN EVANS: Representative Kasunic.

REPRESENTATIVE KASUNIC: My question revolves

around the fact that Pennsylvania being here in the northeast and part of the rust belt, 11, 12 million people live here, very diversified, as Dr. Harrison said. When you are doing a study are we getting a good picture of, when you are comparing we will say, I think you said you compared

Missouri and Pennsylvania? Am I correct?

DR. LUGER: That was a subset of the table, yes.

REPRESENTATIVE KASUNIC: Are we getting a fair analysis when we are comparing two such different states, socially, economically? Is it a highly industrialized

Pennsylvania versus Kansas or Missouri or whatever? Are we really getting a true picture when we compare them?

DR. LUGER: Well, I think there is a lot to what you are suggesting and X am uncomfortable making these sweeping comparisons. Because states, there is so many important contextual things that one has to take into account. The table that I presented was to explain, using those context specific facts, why states do different things. Taking into account the different mixes of industries, the different densities of population, things like that as a way to explain why states are doing what they

are doing. But one could argue that a better way to understand what are states doing is do a case study of that

state taking into account the very specific features.

REPRESENTATIVE KASUNIC: My question would be, or if I were doing the research, I would be thinking that I would want to compare Pennsylvania to another comparable

state with the same kind of socio/economic background.

DR. LUGER: Well, you can do that in a

statistical framework by having the variables that control

for these differences. So, we tried to account for those

facts.

REPRESENTATIVE KASUNIC: Just a follow-up on what you said earlier, Mr. Pllcher and Dr. Harrison, I am

very happy to hear what you had to say. First of all, raising the question are we really getting a bang for our buck. Sure, jobs are created but are those jobs actually helping our people? When you take, for example, a family of

four and a man has to go to work for four or five dollars an hour, is he really bettering himself and helping his family, or in some cases, is he better off going on welfare where he would have medical benefits for his children and his

family? He obviously would have food stamps coming in as

opposed to taking a job that really isn't bettering his

quality of life or his family and just helping the family

as far as the old American theory, wanting that new home and

two cars in every garage and sending your youngsters to

college. You know, that is the American dream, that is the

American way. In Economic Development,t you are exactly

right. Economic Development is more than just jobs. It is quality jobs and a better life.

MR. PILCHER: Would this be a closing

comment?

CHAIRMAN EVANS: Sure.

MR. PILCHER: If I could follow onto that.

Last year there was a report released called America's Choice

High Skills or Low Wages. I haven't read it but I finally

got ahold of a copy. Ira Magaziner was the chair of the

commission. For those who have been involved in Economic

Development for some time, he is most noted for having worked on the Rhode Island Greenhouse Compact, which when put

to the voters ±a Rhode Island, went down in flaming defeat.

Nonetheless he has come back to deal with states and just

traveling the country he is talking about this report. I heard from staff in both Washington and Oregon who heard a

presentation by him about this study and its report and the policy implications. What they told me was his presentation

galvanized those legislatures to do something about work

force competency. So, a question, to kind of throw it back

to you all if I could, when we were in Kansas, Jamie

Kinworthy from Michigan kept saying what are the two or three most important things you can do that will have significant

effect five or ten years down the road? I don't think it is

going to be export and finance. It Is not going to be a lot

of these little programs which do help individual firms. But what are the two or three most important things that we can do at the state level that really will have an impact?

I think work force training and how that works in with the idea of the approach, the strategy of networking amongst firms, how those tie together would be, I think, a strategy that more and more states are going to look at.

DR. HARRISON: Doing this on Ray's time I think. He is gone.

(Laughter.)

CHAIRMAN EVANS: Ray doesn't have anywhere to go. He will stick around.

DR. HARRISON: But 1 have to go to work.

There is a whole element to this thing that we haven't talked about at all today and 1 have no idea whether this is going to persuade any of you or make you feel any better about the work you do. This will be my last remark for this panel, and this happens to be a fact. If you make a list of all the great social achievements of the United States government in the 20th century that have had an effect on working peoples' lives, on the quality of peoples' lives; unemployment insurance, social security, health and safety, minimum wage laws, child safety, the list goes on and on and

on. And you go back in American history, you find an

incredible thing which to me is the genius of this particular

country. Every single one of those programs and a hundred others I am leaving off the list started in some state. They started with state government. None of them were invented in

Washington, D.C. Half of the Roosevelt New Deal wasn't invented in Washington, B.C. That is a myth that our grandparents Invented and political scientists invented.

The American system involves innovative programs at the state level. That is why Justice Brandeis called the states laboratories for democracy, a title that was picked up a couple of years ago by a friend of ours who works in the same business we do, Dave Osborne. And what happens Is, and I went through this with the plant closing legislation because

I worked very hard on that over the last ten or 12 years and

I watched it in action and I experienced it. It wasn't academic. It didn't depend on theories. I was a consultant to the Massachusetts — state legislature' s commerce and labor committee. I worked for them for a very, very long time as a consultant. And I watched it happening. What happens with every single one of those programs in 20th century is some state invents the program because there is political pressure, because a committee gets together, because people organize to do it, because somebody says we got to try it. And then business says, well, you do that there and you don't do it somewhere else, we are going to

leave and pack up and go down the street and go across the border. And then little by little the next state does it and then the next state does it. And what happens after a while

is, there are 25 different sets of laws and regulations

about child safety and about ours and about unemployment

insurance. And at that point what happens historically is,

the company sends their lobbyist to Washington and they go

in to the appropriate committees in Congress and say please pass a law, minimum wage law, please create unemployment

insurance, please create health and safety legislation in

order to standardize this because our lawyers are going

crazy trying to figure out how we can avoid going to jail

doing business in all the states we do business in. I am not exaggerating.

It strikes me that the things that you are meeting about now, the technology assistance and rural

development versus urban development programs and networking

and infrastructure programs and all the rest are not just

trying to make the best of hard times financially, hard

times at the state level and a great deal of disinterest

in Washington, but over the long run what we are all engaged

in now is very much a part of American history. It is the

way it works. It does work this way. Eventually things

that got, PEDA which started here, is now done in 30 states

and the Commerce Department in Washington under a different

administration, would already long since have been doing

similar sorts of things at a national level. I see what we are about In this kind of business as innovating things which will eventually become national lav. And that is a real validity to what Dr. Hansen was suggesting this morning. Because in the long run it is arguably true that unless a program is nationally available, it is hard to make

it work in any one place. But the paradox of the American

and the genius of the American system is that you have got to make it work in localities first in order to get the politics that will make it happen nationally. Because it never happens nationally unless there Is a ground swell to do

these kind of things locally. And that is the sense that

there has to be some tolerance for experimentation at the

local level even if you don't have audits in some ideal world one might like to have.

DR, LUGER: This is my last comment. All of us have taken a high school or college chemistry course.

We have had laboratory work. We know that in a laboratory

experiment we take careful notes, we evaluate the experiment, we reexperiment. All I am suggesting is that while states

can be laboratories, it can only be efficient and effective

laboratories if more systematic evaluation of what we are

doing takes place. And that is the message I would like to

leave you with.

CHAIRMAN EVANS: 1 would like to thank you.

This Committee would also like to thank you. It was a fantastic hour and a half listening to you and your comments.

If you have any additional information you would like to provide to the Committee, you can send it to me in the mail.

We would greatly appreciate the information. Again, X would

like to thank you.

We now have the Secretary of Commerce. 1 would like to apologize to the people who are here for the

federal block grant. We are a little behind schedule, but I

assure you, you will definitely be able to testify and we will definitely be willing to listen to anything you have to

say. Secretary Christman, I would like to have you come before the Committee. Secretary Christman is here at this

time for the Department of Commerce.

My question list is Representative Lucyk,

Representative Van Home, Representative Fat Carone,

Representative Gruitza, are on my question list; Van Home,

Gruitza, Pat Carone and Representative Battisto.

Good afternoon.

SECRETARY CHRISTMAN: Good afternoon.

CHAIRMAN EVANS: How are you?

SECRETARY CHRISTMAN: I am fine. Thank you.

Nice to see you.

CHAIRMAN EVANS: Did you drive out or fly out?

SECRETARY CHRISTMAN: I drove out yesterday

afternoon and missed most of the snow. BY CHAIRMAN EVANS:

Q We have been asking questions of all of the various departments. And the questions we have been asking them, Mr. Secretary. In this tight fiscal time In terms of the governor's budget, we have been asking these questions in the area of what type restrictions or freezes on the question of equipment, employment, travel, things of that nature, and we would be interested in knowing what the savings are regarding your particular department? Can you tell us that information specifically in terms of the Department of

Commerce?

A Well, I can't tell you off the top of my head. Share with you any specific numbers although it would be quite easy to get those when X return to the office and

X will provide those to you. We have followed through with the same set of reductions and cutbacks that every department has in terms of travel, in terms of participating in training programs, conferences, trying to cut back on small things like long-distance phone calls and how much mall goes out and how much xeroxing you have done. Xt is across the whole range of operating expenditures of the department and we have seen a considerable reduction in our monthly outlay

for those basic operating costs. We tried to do it in a way

that emphasizes those things that are important though and more important than other things. In other words, the bread and butter of what we do in the department, of course, is work with companies that are looking to expand in the state or we are trying to bring into the state. So, areas like the governor's response team which has the need to go out and meet both in state and out of state with a lot of companies, we tried to be as flexible as we can with the governor's concurrence in allowing those kinds of activities to go forward because the return to the Commonwealth is obviously substantial enough that makes it worthwhile.

But in answer to your specific question, we would be happy to share with you the information about the reductions that have occurred on a monthly basis.

Q Mr. Secretary, I guess the issue has been coming up consistently, I know you haven't been here certainly this morning. Maybe some of your people have been here. And that is the question around, do you have adequate resources for evaluating the effectiveness of the Commonwealth

Economic Development programs given furloughs and other

cost saving policies you have undertaken?

A My biggest concern is not with the level of

staffing I have even after the furloughs that took place in

January. Well, like every state official, we wish it didn't have to occur, the cut in personnel in Commerce was handled

in a way that made it manageable. X am much more concerned

about the level of funding for various programs at this point In time as we look Into the next fiscal year than I am about

the level of either of staffing or operating dollars that I have within the Commerce Department to carry out those programs. If I can receive the dollars that the governor has recommended in his proposed budget, which Involves as you know, some healthy increases in a number of our key programs, 1 am confident that the department would have the

level of personnel and operating dollars to implement those

successfully.

Q The question, again, and 1 know I have had

discussions with you about this in the past and I raise this

issue with you now. We have all this morning been listening

to person after person on our ability to evaluate programs.

I guess 1 just heard you say that it would be sufficient to

implement programs. But I guess it would lead to the question of how do we evaluate programs and I have raised

that issue before many years ago, I raised it to you about

the PEDA issue, the Benjamin Franklin Partnership and any

other thing that we have. Are we really evaluating those programs? Are they meeting the standards that you, as the

Secretary or as well as the administration, have set out to

say these programs are performing to where they should be

performing? Are you able to make some kind of concrete

determination and be able to provide that type of

information to this Committee in terms of functioning of those programs?

A Well, we have annual evaluation numbers that we have prepared and can share with you. And there Is a

couple ways to answer that question. First and most immediately, as I think all of you know, Economic

Development has traditionally been based on a measure of job

creation. Indeed in many of the statutes governing our programs like PEDA and BID specifically says how many jobs

shall be created per $15,000 or $20,000 of state expenditure. Our basic performance measure has always been jobs created and jobs retained, but particularly jobs

created. I think that has been done because what has been the great concern in the Commonwealth to legislators, to the public at large and also because it is easily measurable.

There is no quarreling over the job creation factor.

I think as we look ahead to the future what we are going to see is a different set of performance measures being developed. More and more there are questions

around job productivity, quality, around job retention, not just creation. Around how do we keep our manufacturing base in place, retain what is already here and make It more productive and more competitive even if it doesn't involve

a net job creation. And while we all, I think, intuitively believe that that is important, we don't know how to measure

it very well. In fact, we just engaged in a consulting 1 contract recently or about to with a firm out of Washington called The Corporation for Enterprise Development to do just that. To prepare, to look at all of our financing programs and give us suggestions on a new set of performance measures that might be used in addition to the traditional job creation measure that might be more in keeping with Economic

Development in the 1990*s. These people, who are a national organization, say that there is only a few states that even began to scratch the surface in looking at these questions.

But I personally believe it is important for us to do so because 1 think we are going to have to begin to measure these Economic Development investments by a more diverse and complex set of criteria than we have in the past.

Q To give you somewhat of a scenario and tie it into an issue that was raised this morning by some people who were talking with the Industrial Development panel. If a company receives a $450,000 loan from FEDA and it would have to create 30 jobs over 3 years, one job for every 15,000,

I am going to ask you the question, do you think that we should still be at that 15,000 level? Some individuals raised this morning that we should double that in terms of creation of jobs. What would happen if a company does not create the number of jobs it has promised to create and have we ever penalised a company receiving state subsidized loans for not reaching that target? That question and the question about the number we have in terms of job creation, the number we set?

A First of all, I think the $15,000 per job criteria is antiquated. And one of the things that I hope, of course, I am not going to be here to see the end of the study, but the department hopes to take the results of this study that I mentioned a few minutes ago, which should be completed by June of this year, and use it to implement a whole set of changes. Some of which can be done

administratively and some of which can only be done

legislatively with your concurrence to a range of our programs. Personally, 1 believe that the $15,000 per job criteria with PEDA will be one of those changes.

Q What do you think it should be?

A I think the number probably, and this is just a gut feeling, should be probably more in the neighborhood of

25 or $30,000. But I would like to have, number one, I would like to have somebody take a look at that and give us

a rationale for that that we can use.

Number two, rather than just pick on the PEDA

$15,000 job measurement, I would like to do that in the

context of all of our programs and look at a whole set of

criteria changes that I think are necessary. So, that is

point one. On your other points, yes, we go back and check on whether the jobs indeed have been created. Our PEDA staff, on an ongoing basis now, go back and look at companies that are three years or further out in terms of when they received their loan and every month bring a set of companies to the FEDA board and say these companies have been checked for whether they met their job creation figures.

Interestingly enough, we found that the great majority of the companies that we have canvassed so far* and there has been hundreds of companies, something like 70 some percent have exceeded the job figures that were promised, exceeded it.

Now, those companies that do not need the job figures, there is a formula that was agreed to by the PEDA board that sets forth circumstances under which penalties would be imposed on companies for not meeting job figures.

In other words, there are certain ways in which, there are certain acceptable reasons for not meeting the job figures and there are certain unacceptable reasons and these are detailed very clearly when an applicant gets a loan. There have been several companies that have been penalized for not meeting their job figures for unacceptable reasons. What is the penalty? The penalty is that the three typically, three percent PEDA rate, goes up to prime plus two and that is the interest rate they then have to pay. We have had several circumstances in the last few years, and we only began this in the last few years, this penalty imposition. We have had several eases where companies have been dealt out that

penalty.

Q Hay we get a list of the companies? Provide

It to the Committee?

A Sure.

Q To the person who is responsible for us being

here today, who is our host today, Representative Fat Carone.

Pat.

BY REPRESENTATIVE CARONE:

Q I do hope that ride up wasn't too bad. I plan

to have a survival kit ready for you. We discovered you went

without your survival kit.

A I'm from here. I have run into this many

times.

Q I feel better. The question I would like to

address is, under the General Fund grants and subsidies

category. In last year's budget we provided $400,000 for

the National Science Foundation Engineering Research Center

at Carnegie Mellon University. Now, the governor has not

proposed funding that next year. Could you explain why the

center is not being funded? It has gone from 400,000 last

year, '90-91 to nothing.

A It is always embarrassing to have to admit

when something was an oversight, but this was an oversight

and the governor or Secretary Hershock, it is my understanding I we111 be requesting as part of what happens every year when

supplemental budget items are requested by the executive branch after the initial budget has been proposed. That will be Included in the budget request. That will be sent to you on a supplemental basis here in the next few weeks. As the budget was put together this year, there was an ongoing commitment to a national science foundation center at CMU as well as a new commitment. There was simply gome confusion in drafting up the budget and some people who put it together thought that the new center was the old center.

Didn't realize they were talking about two separate line items and one got kicked out. There was an oversight. We had made an initial five-year commitment of $400,000 to the one you are talking about and that commitment will be honored.

REPRESENTATIVE CARONE: Thank you.

CHAIRMAN EVANS: Thank you, Representative.

Representative Van Home.

BY REPRESENTATIVE VAN HORNEj

Q Good afternoont Mr. Secretary,

A Good afternoon, Terry, how are you?

Q A couple things, looking through the budget

and proposal there was some discussion this morning also

about Industrial Resource Centers. Looking at some of the

line items, I looked at the one on Machine and Equipment Loan Fund, MELF. There was an increase. Is that increase that is proposed by Casey tied in in any way towards the mission of the IRCs and however you answer that would you just discuss

a little bit about the mission of the IRCs and if you think that mission is being achieved?

A Well, let me start with the Machinery and

Equipment Loan Fund. That program was started I think three years ago and it has been an extremely successful program in terms of the level of receptivity we found in the business community and the kind of demand that is out there.

It goes back to my earlier point about productivity and quality and competitiveness. The Machinery and Equipment

Loan Fund is a program that does not require job creation.

It gives us the discretion to use the money for job retention or job creation. And I think that has been important because

it has let us invest in machinery and equipment loans in

companies where keeping a company a viable company, but because it was becoming more technologically innovative, was not necessarily creating new jobs in great numbers, enabled

us to invest in those kinds of companies. And the demand

for that program has far, far outstripped the available

resources at two and a half, three million dollars a year which is why there is a request for a major increase to

eight million dollars. I believe that there is really a market for that program that even goes beyond that number, but I think an eight million dollar figure for next year is reasonable.

Now, does it tie into the IRC Program? Yes, it does. Although this is a program that is operated independently of the IRC Program, we see the industrial resource centers as being a vehicle for identifying worthy projects to be funded under the Machinery and Equipment Loan

Fund. The Industrial Resource Center Program as you know is a program that works with small and medium sized manufacturers in the state to try in a variety of ways to help them be more competitive and productive. It has been a very successful program I think. Something like now seven to

800 companies have been directly assisted through this program in the nine IRCs and we are satisfied with the kind of progress we have been seeing.

Many of these companies could benefit from the Machinery and Equipment Loan Fund. If we are able to receive the higher appropriation, our plan is to use the

IRCs as our eyes and ears, if you will, as the delivery

system, the network at the local level among other groups to

identify worthy projects for us to make loans to. In that way we see it as just one more evolutionary step in terms of the assortment of activities and initiatives that the IRCs

can carry out.

Q Talking about the industrial resource center, is it by tracking them or evaluating them? Have you seen a

lack of resources on not the part of the state, but on the part of the companies, has been kind of a hinderance to them

following through on some of the IRC recommendations?

A I haven't seen a real pattern on that, no.

X mean, I think, there are always resource constraints when you are working with small and medium sized companies. But I

think what the IRC Program has done is two things. On a more

general level it has helped really raise the consciousness

in Pennsylvania and in various regions of the state about the

importance of manufacturing to the state's economy. I happen

to believe that the single most important part of our

economy is our high technology in manufacturing base. It is

still, as a recent national study shows, is the sector that

contributes the single greatest amount of our gross national product. That has been increasing. I am sure the

statistics are similar for Pennsylvania in that regard. It

creates most of the wealth in our economy. Its indirect

benefits, its multiplier effects are substantial in terms of

many service and other jobs rely on manufacturing and

technology jobs. If Pennsylvania is going to be successful

long term, we have to have a strong technology and

manufacturing sector. The IRC Program is one program that

tries to make people understand that. And then second, on a

more specific level, work one on one directly with companies to help companies be more successful* There are something like 20,000 manufacturing companies in Pennsylvania. I think there is about 6000 in this region. I think the goal of the program and the goal that the Commonwealth ought to have is over time to have efforts like the IRC that can work directly with each and every one of them and make them understand it is important to remain in Pennsylvania, that state government and local government wants to see these companies grow and remain in Pennsylvania because our economic future is tied to them.

Q Switching to another program, I think it is a favorite of many legislators. That is why I am so concerned about it. I think Dave Washburn gets as many calls about this as about anything. That is the late lamented

Community Facilities Program that last year eliminated, put back In some minor level I think. Now. this year it looks like it is either being eliminated or transferred or put in with a Pennvest Program I believe. Do you have any inclination, any reason why that Is going on? The second part of it is, the reason a lot of us, I know most of us at this table. It has always been a good vehicle, and I think you realize it too, for a lot of the smaller communities to put some of these other projects. I think that is why It is so — it Is so Important. Can you shed some light on why the transfer/elimination Is taking place? A Well, the proposal is really the same as last year. I am well aware that the program is a popular program

in some of the smaller rural communities. It has been

especially used in southwestern and western Pennsylvania.

The proposed consolidation, if you will, I think that is the most accurate way to term it of Community Facilities within

Peimvest, is occurring for the same reason why a lot of other things are occurring in state government right now. In a time of fiscal constraints, people are looking everywhere

they can for where there are efficiencies that can be

derived through consolidation. And one logical

consolidation, given the advent of the Peimvest Program in

the last couple of years, is to put Community Facilities

inside of Peimvest. I think, and X have said so, that it is

important that if this occurs, that Peimvest create a vehicle. It may not be called Community Facilities, but have a vehicle that it operates that can provide grant money

to smaller communities in smaller amounts for the kinds of projects that have been traditionally funded through the

Community Facilities Program* In other words, It needs to recognize the need that the Community Facilities Program

served and to develop a comparable kind of a program within

its larger program to meet that need. My belief is that the

proposal of the administration has that goal In mind. That

it will be consolidated within Pennvest for reasons of efficiency and cost reduction, but that the need can be met

through the Pennvest Program.

REPRESENTATIVE VAN HORNE: Thank you. I

certainly hope they heed your recommendation If In fact that

does happen. That is all the questions I have, Mr. Chairman.

CHAIRMAN EVANS: Representative Gruitza.

REPRESENTATIVE GRUITZA: Thank you, Mr.

Chairman.

BY REPRESENTATIVE GRUITZA:

Q Mr, Secretary, you weren't here earlier when

I commented during some earlier testimony how important the

Commonwealth's Economic Development programs have been to my particular area which was so hard hit In the early and mid

'80*8 of plant shutdowns. I know you personally are

familiar with all the different things we tend to do up

there. My concern comes In, I noted in your brief outline you note the targeting of two million dollars to distressed

areas. I am assuming that is a statewide initiative for

areas that had been maybe harder hit by plant shutdowns, whatever, to come In for some special aid for whatever their needs might be.

A Well, we focused in our budget submission

this year and in the testimony that I shared with the

Committee, we focused on the full question of distressed

areas and distressed communities because In a recessionary time, obviously, it is more on peoples1 minds. But I think

it is fair to say that the philosophy of the Casey

Administration and my department for four years has been a focus on those areas of the state that need assistance more.

We have done many projects in Chester County, in Montgomery

County, in areas of the state that are rapidly growing.

Where there is an opportunity there, I think we have been

there to capitalize on it. But the real emphasis has been

on those areas of the state that are in greatest economic need and that includes, generally speaking, much of western

Pennsylvania as well as many of our older urban areas whether they exist in the western or eastern part of the state. I

think the record is clear that many of our projects and investment dollars have gone into those communities and

companies in those communities. So, while we are trying to

further intensify our efforts and even target more of our efforts in 1991 to be sensitive to the needs of distressed

areas, whether it is the Shenango Valley or the Venango

County or any number of other areas one can mention, I think

it is part of a pattern and a track record that we tried to establish over the last four years.

Q I would agree with you and I mentioned that

earlier in the hearing. That has been my experience, The

Commonwealth has probably had a stronger presence in my

particular district over the past four years than any time in history. That is why it surprised me when I saw in the

budget proposal the line items that had been in existence

for Shenango and Beaver and Hon Valley were deleted in this

year's budget.

A Let me talk about that for a second because X know it is on your mind and a lot of other peoples' minds

and it is important everyone understand what our thinking was

Because obviously* we are not interested in simply cutting

the legs out from under Economic Development, revitalization

efforts in those areas. Far from it, given our priorities

in the past and our record in the past. But these programs

have existed on a line item basis for a number of years and

it was clear to me that the time was rapidly coining to an

end that the legislature as a whole was going to support thes<>

line items. That they were originally created in the early

and mid '80*8 when we were coming out of the worse economic

recession we had In this country in half a century. They

were put into place among other measures to try to help those

areas get back on their feet. But now there is a feeling

as time went by that the state did not have an obligation to

fund these operating programs ad infinitum. We talked at

great length about it and came up with a proposal this year

that does two things.

Number one, it shifts that money into project

oriented programs like our Industrial Communities Program which helps fund industrial redevelopment projects, the modernization of older industrial buildings. We put some of

that money into programs that received increased funding

like MELTH, the Industrial Resource Centers and BID where

those monies are especially used in the western Pennsylvania

communities like yours. The idea being that the state should

concentrate its resources on project specific or business

specific investments and operating funds for these

organizations that are responsible for Economic Development

at the local level, the Shenango Valley, the Beaver Valley or

the Mbn Valley really ought to be a local responsibility on

the operating side.

Now, knowing that it is difficult for there to be an abrupt change in funding for anyone where you have been

counting on money for many years and it is suddenly ended in

one year, we tried to create a transitional situation. You

will notice that it is recommended that our Community

Economic Recovery Program is penciled in for a two million

dollar increase from one to three million. Much of that

increase we would like to use to provide some transitional

operating funding to some of these local organizations in

the steel valleys of western Pennsylvania at least for this

year to help make sure that there is no elimination of their

operations or diminishment in their effectiveness until they

can begin to work with their counties and communities and local businesses to fund replacement funding for their operating costs, personnel staff and operating costs. And

the state should be there I believe long term with money for

any projects that they want to carry out. Whether it is

financing a business, whether it is redeveloping an older industrial site, whether it is renovating a building or whatever the case may be.

Q I don't know personally the track records of particularly the Mon or Beaver Valleys, how monies particularly have been spent. I know in our area, my understanding at least is none of those funds were really used for operational type of expenses. I think they have benefited to some degree by interest repayments on loans and things like that. That the development corporation involved has acquired some of the interest on some of the loans. But by and large our funds have gone directly into, they have been much project oriented. The track record X think has

been excellent. We haven't been a thousand percent, but we have been pretty good and it has been a super program for us

and I just have to say I was disappointed to see its

deletion. I guess I am going to test the legislative will

here of the Committee in terms of the budget proposal we

might put out because 1 would hope my colleagues would be

willing to support things along that line.

A I understand your point and I agree that by and large some excellent projects have occurred in the

Shenango Valley as they have In the other valleys. My only point is that I believe there is not a single project that you would like to do in the future in the Shenango Valley that we can not support through one of our ongoing operating programs like the Industrial Communities Program or MELTH or

BID if it is brought to us by the community. And we believe that that is the most effective and cost efficient way for getting at those projects in the future working with you.

REPRESENTATIVE 6RUITZA: Thank you, Mr,

Chairman. Thank you, Mr. Secretary.

CHAIRMAN EVANS: Representative Battleto,

REPRESENTATIVE BATTISTO: Thank you, Mr.

Chairman.

BY REPRESENTATIVE BATTISTO:

Q I read, Mr. Secretary, part of your paper with respect to the BID program. I have always supported it despite the fact you have said it is always targeted many miles away from my district, I believe in all of Pennsylvania.

The statistics that you include here are things that some people looked for here this morning. For example, the 1.5 billion leveraging of private monies and the creation of

15,000 plus jobs. That is rather impressive. Do we have

any measurement, for example, of the effectiveness of our

Sunny Day loans, ten million here? For example, I think we created the hardwood industry through some Sunny Day funding,

did we not?

A Created the what, sir?

Q The hardwood industry.

A Well, we certainly invested, we made a couple of major investments in hardwood companies with Sunny Day monies. A couple of very visible projects were funded.

I mentioned earlier in answer to Representative Evans' question that we have performance measures developed that I would be happy to share with this Committee for each of our programs including Sunny Day. What it will show is the job

creation and retention numbers, the leveraging of private investment and other benefits that have been received for the investment of the Sunny Day monies. As you may know, we have been very, very active on the Sunny Day Fund since this

administration took over. I think now we made something in

the neighborhood of, oh, probably 15 Sunny Day loans, maybe

even closer to 20 now over the last four years.

Q That is why X asked the question. I remember

approving each one legislatively.

A I think the track record with those projects

has been real good and we would be happy to share that

information with you.

Q With respect to the local development

districts, we have given $850,000 for the past three or four years. Is the money distributed to, I think there is seven or eight of them, is the money distributed from some central board or do they get their share of the money based on performance or how is that money distributed?

A There is a formula that we have had in place for a number of years that is based on a number of factors, population served as well as performance by the LDD and the money is distributed on that basis to the LDDs. Each of those LDDs, as you may know* also receives Appalachian

Regional Commission money and that money also flows to them on a formula basis through our department.

Q A question about Small Business Development

Centers. Last year we increased the funding up to about a million and a half. This year I know it is a line item proposal to cut it back to 600,000. Obviously it is a budget decision, I realise that. Is there any connection between

that and the effectiveness of those 13 or whatever we have?

A I think there is 17 of them. Well, first of

all, most grants, if not all grant programs, not just in our

department in most agencies, budgets were cut and should be

looked at in that context. My own view as an Economic

Development professional is that the Small Business

Development Centers have not been in the front ranks of

effective Economic Development organizations locally.

Obviously there is 17 of them and some do a better job than others. It is hard to generalize. But it is not a part of our Economic Development delivery system that is tied In very well at the local level to the networks of agencies that tend to exist in different communities. They kind of operate on their own as independent, almost autonomous organizations. I am sure many, many small business people could attest that they have received good service from them and I hope that is the case. But in my judgment there are many, many other parts of our budget that are simply more important than the SBDCs. That is my view.

Q Turn to tourism for a few moments, an area 1 that I have a little concern about. The TPA proposal, the suggestion is to fund it at the same level, 7.2 million as last year. But your statewide marketing program is due for a three million dollar cut I believe. In view of the fact that your marketing program seems to have been successful, about a 14 percent increase in total revenues spent for tourism. I think we are up to around 14 billion or more.

How is this three million proposal, If indeed this proposed

cut goes through the legislative process, how is it going to

affect your statewide marketing program?

A The honest answer I have to give you is, it

can't help. We are going to have to swallow that decrease

as best we can. We have known that. It is, again, part of

a larger picture of cuts that are occurring in a number of areas. I will say this about our budget. It is remarkable when you look around the country at other states and all states, of course, are experiencing the same thing

Pennsylvania is fiscally, how badly touidsm is^gettdng cut in other states. Two years ago Hew York state spent $23 million on tourism between the State Marketing Program and Its

Tourism Grant Program. They have the same as us, two different pieces to that. This year Governor Cuomo's budget goes through as requested. The budget for tourism total in

New York state will be $3.3 million.

Q From 23?

A From 23. And you look at other states,

Virginia, New Jersey, major competitor states of ours that emphasize tourism and the cuts in that area are substantial because it becomes a vulnerable area in fiscally tough times.

I think the fact that we kept the tourism promotion matching grants level in a difficult year is an accomplishment in itself and a testimony of the governor's

interest in tourism. And the cut from nine million to six million, he basically wanted, he thought the most Important priority was to keep the planning grants, the matching grants

to the local TPA's level. Let's not cut that. If we are

going to cut anything, let's do it on the statewide

advertising front. Hopefully, we can figure out some

innovative and creative ways to get more bang for our buck out of each dollar we spend on television advertising and print advertising than have the diminishment in investment hurt us less than it would if we had to spread it out among the local promotional agencies that receive the 7.2 million.

Q Let tne ask another question about the TFA matching grant program with respect to how it Is supposed to be funded through PERF through the $170 million bonds or so.

That is through your department 1 guess. In a sense, and I understand budget constraints, but in a sense does it make sense to fund operational activities through PERF? That is what we are really doing; are we not? When we are trying to fund the $7.2 million program through PERF to serve an operation?

A Well, I am not sure, A discussion and debate about PERF might be a classic academic discussion at this point from what I understand, but let's have it anyway. The feeling on our part and on the governor's part surrounding

PERF was twofold. Number one, in times of economic recession, in economic tough times like we have now, there was reason to try to fund Economic Development programs out of bond funds rather than operating funds. Both because that kind of investment could be useful in stimulating the economy and because it simply took a certain amount, in this

case, we are talking 150 million this year out of the General

Fund budget and that meant that the General Fund budget would be $150 million easier to pass through some combination of spending and taxes.

The philosophical argument or public policy argument as to whether or not certain programs should be funded with bond funds or should not, I think is one of those arguments that can be debated at great length. I think we could sit in i room and talk about it from this vantage point and that vantage point. The truth is there are a couple of programs in the proposed PERT bond issue most notably tourism grants that may, in many people's view, not belong in a bond issue. The great bulk of those programs though are programs though that not only in my opinion deserve to be funded with bond funds if the bond issue is to occur, but which were funded by bond funds in 1984 when we had the first PERF bond issue in programs like BID and other

Economic Development programs of its type were included for funding at that time because they existed then.

So, I think that In summary answer to your question there are certain programs that probably belong more under a bond funded program than others but I think

these other programs are a minority of expenditures under

the proposed PERF bond issue. And the real question with

the PERF bond issue in my opinion is really not that

question, do these programs deserve to be supported with

PERF bonds. I think we crossed that bridge back in 1984. But this year does the General Assembly wish to fund

Economic Development programs generally with bond funds or with operating funds. Both are legitimate ways to do it. We have done it both ways in the past in this state. And I think the question is simply where do you want the money to come from this year.

REPRESENTATIVE BATTISXO: When I looked down the list I saw we had funded all the other ones one time or another and simply the operation one sort of stuck out. I think you have answered my question. Thank you. Thank you,

Mr. Chairman.

CHAIRMAN EVANS: Representative Kasunic.

REPRESENTATIVE KASUNIC: Thank you, Mr.

Chairman.

BY. REPRESENTATIVE KASUNIC:

Q Mr. Secretary, I just want to follow up on a couple of things that have already been touched on.

Number one, the Community Facilities, my concern with it going over to Pennvest is the fact that right now here in

Pennsylvania we have many small communities that have populations of senior citizens on fixed incomes. And right now this Community Facilities money coming into these

communities is very helpful and very vital in doing

such things are refurbishing water lines in terms of

replacement and extension replacements and expansion of sewage facilities. My concern with it being put into the

Pennvest Program is that this money will then be there available and be there in the form of a grant, but there may be some strings attached in the form of these communities having to apply for a Pennvest loan which in essence can't be repaid because the tax base has been eroded. As I said, the senior citizen population just simply couldn't afford maybe water and sewerage bills amounting to 45 and $55 a month. And they would not be able to go after, as I said, these loans because they simply couldn't repay it even though it is maybe one percent or two percent low interest loan. My concern is that what is going to happen and it is going to shut these communities out of this much needed grant money that right now is available to them.

A I can appreciate that concern and whenever there is uncertainty, you know what you've got in Community

Facilities and you know how you qualify and how you benefited. In your county, it has been an important program for Fayette County. And whenever there is uncertainty about the future you can't help but have the concerns that you have. I don't know if you have had your hearing yet with Secretary Hershock. But has he testified yet?

Q He said to ask you that question. A He and I do that a lot. That is why I always like him to follow me. But what I was going to suggest is, perhaps he could have allayed some of your concerns about his : intent on how it would run under the Fennvest Program, because i

1 have talked to him about this and I believe personally that there is a genuine commitment on the part of the administration to not just let this program fade away into the woodwork, but to try to structure something under

Fennvest that will allow these legitimate needs to be met long term. Obviously, there is not much more I can say to give you any greater degree of confidence than that except to say that is the intention.

Q Well, I could support the program coming under

Fennvest if the strings weren't attached to the loans. If it would continue under Fennvest the same way it is, I can support that. But if it is going to he contingent going after loans, it Is impossible for many communities.

A I understand. Of course, Petmvest can and does provide grants now. They only provide grants in a limited number of cases. I think they would have to revise their program guidelines to recognize a new set of projects for which only grants applied which would be formally

Community Facility projects.

Q And the other question or comment is on the regional revltalization program that Representative Gruitza

already touched on, obviously, the money was set up for or targeted for those distressed areas and distressed communities that have suffered and lagging behind the rest of the state due to the loss of many jobs here in the Hon Valley and Beaver Valley, the Alle/Kiski area. We realize that program was set up to target those specific areas. We heard earlier testimony today that the truer picture or better bang for the buck, so to speak, has been in, according to, I believe it was Dr. Hansen from the University of Pittsburgh told us that in her study of all 50 states they found that there was, you got more for your dollar in areas that were specifically targeted above and beyond the regular or routine type of programs that are available statewide, that money. Targeting created new jobs and did help get things going and back on target. In view of the fact that Fayette

County is for the first time participating in that program, which obviously is going to be very helpful, it is also going to be a big blow to us if we don't receive continued funding because, as I said, we have traditionally been leading the state or in the top three in the state as far as unemployment

and underemployment has been concerned. And this is the first time funding this year is definitely going to be a

shot in the arm. But what we would like to see, at least myself and I am sure some of the other members here, let us

get equal with the rest of the state and get on par with

them before you ask us to compete with them for the dollars that are out there.

A Well, the only response I can give is one similar to what I gave to Representative Gruitza. We have proposed changing this for two reasons. Number one, because in my view, the continuation of these line items is politically untenable, and while you and Representative

Gruitza and many other people obviously feel strongly for good reason about the Importance of this, what we have seen, as you also know, what began five, six years ago as the Mon

Valley and the Beaver Valley, then a year or two later became the Shenango Valley and then it became Butler

Lawrence. Then it became Fayette Greene last year. People in Johnstown have made proposals from time to time about having a line item for Johnstown. And you have many, many other parts of the state. Whether it is Venango County or any number of other places that are equally, in their view, distressed. It was our judgment that these line items were not going to be politically sustainable across the

Commonwealth in terms of support, number one. Number two, we felt that our role was to fund the project and priority projects in these areas. We believe we have targeted these areas. We believe we have been targeting all of those

communities I just mentioned and will continue to target them and that there is not a single project that is viable

and doable that you could bring to us that we would not be able to fund through, one or another of our ongoing programs

in the Department of Commerce or programs of other sister

agencies like DC A,

So, in terms of targeting and concentration,

there is not going to be an ounce worth of drop-off in our

effort. We simply don't think that funding these ongoing

operating organizations should be the role of the

Commonwealth. The role of the Commonwealth should be to put money into key businesses, redevelopment projects. Economic

Development projects that exist in these targeted areas and

that is what we are going to try to do with the additional

funding that we are requesting in many of our programs this year.

CHAIRMAN EVANS; This will be the last

question. Representative Black,

REPRESENTATIVE BLACK: Thank you, Mr.

Chairman.

BY REPRESENTATIVE BLACK:

Q Mr. Secretary, the Capital Loan Fund. Could

you tell me where that fits into what you have talked about

before, things that have gone by the wayside? What was the

rationale for the decision —

A Not funded this year?

Q Yes.

A Well, first of all, that is a misleading figure, because the Capital Loan Fund, although ve request no appropriation for it this year, we entered this year

1990-1991 with $22 million in that account because it is a short-term revolving loan fund for small businesses, typically seven year term. So, we have been regenerating a lot of money as loans are repaid and Interest is earned.

This year we will have between the balance that we began the year with plus other repayments, $34 million in loans in money available for that fund and we are estimating that we are going to spend this year about $14 million. Next year we will begin again with a balance of about 21 million, add to that over the year and have $36 million available during the fiscal year for loans which again will far exceed.

Q So, it has been generating?

A Yes. So, when we need a General Fund appropriation as inevitably we will in a year or two, we will come and ask you for it. Given the other competing needs of other programs, we saw no need to for simply symbolic reasons to ask for an appropriation.

Q I appreciate that. It has been so good in our area. The second part is, I know it is in part a

Community Affairs initiative, but the Heritage Park Program, what are your personal views on that since we didn't have a

chance to hear from you before today?

A It is not a program that, quite honestly, I have been close enough to to have a very well formed opinion. I know the Department of Community Affairs believes that it has a lot of important potential for the state and have been trying to emphasize it. We have a couple of nationally designated Heritage Parks in the state and I guess plans or hopes that a couple of others might be designated including one down in the steel area of southwestern Pennsylvania. And I think that it is a very good idea. I think the problem Is that to do it right costs an awful lot of money. I mean, I am talking tens of millions of dollars of investments to do it right. Neither state nor federal resources are really available in that amount right now to properly implement it. So, It is like many things in life, a good idea but only a good Idea, if you can do it the right way.

REPRESENTATIVE BLACK: Thank you, Mr.

Chairman.

CHAIRMAN EVANS: I would like to, Mr.

Secretary, on behalf of the Committee and the Commonwealth, thank you. X want to thank you for your service that you have provided to the citizens of Pennsylvania and I say that personally. X know the time and energy that you have put in.

The fact of the matter is, you have always been available to

all the members of the General Assembly. We greatly

appreciate the effort that you have put forth. Knowing that this is the Secretary1 s — hew many countdown days?

SECRETARY CHRXSTMAN: Probably another month at the most.

CHAIRMAN EVANS: Mr. Secretary, we want to sincerely wish you the best. We appreciate all the information you have provided us. Is there anything you would like to say to us in conclusion?

SECRETARY CHRISTMAN: Well, first of all, it is very kind of you to say that and I feel the same way. It has been a pleasure working with all of you and other members of the General Assembly and we have a good, productive relationship and I really have valued that. I am happy to be able to say that I am going to continue to work in this field and in the state and X know there will be lots of other opportunities for us to cross paths and work together in the years ahead and that is, from my standpoint anyway, good news.

The only other comment X would like to make, back to the purpose of this hearing, is just to encourage

all of you to think very seriously about the Economic

Development budget of this state this year. We heard today

testimony from a lot of experts about both the importance of

the Economic Development programs and based on the little bit

I heard a feeling on the part of national experts that

Pennsylvania is among the leading states over the last ten years in terms of its efforts in Economic Development, in terms of the innovative programs that we have developed in the state. I think that particularly with the PERF bond issue now very much in doubt and therefore how Economic

Development programs get funded this year, that it is an appropriate time to step back and think about where

Pennsylvania is and what it needs to do. Because Economic

Development represents, let's keep in mind, less than one percent of the total General Fund budget of the Commonwealth.

It is not a big number and yet every year that I have been here the way in which we budget and fund Economic Development becomes a controversial point in the budget and is often never settled on June 30th. I remember one year, I think it was 1988, we didn't get our funding until October. It has always been a point of puzzlement to me as to why one percent of the budget becomes such a controversial one percent,

I think if Pennsylvania is going to continue tc be viewed as a leading edge state in terms of Economic

Development, and get the kind of return for its investment that we would all like to see, there is going to have to be more stability and predictability as to how our Economic

Development programs get funded from year to year as is the

case in many other parts of our budget. The increase, it may not always get an increase, the increases may vary from year

to year depending on the state of the Commonwealth's fiscal health. But at least there Is some certainty that the programs that do have a track record and a proven record are going to get funded and the people who benefit from It will know we are there.

I am saying this not because I think In any way that this Committee or the House of Representatives Is the cause for this problem. I think it is an issue that is shared by parties throughout the legislative and executive branch, but is something that needs to be addressed and beginning this year if we are going to continue to be viewed

In a positive way nationally as well as being able to get the job done locally. That is the end of my speech on that subject. Thank you for the opportunity.

CHAIRMAN EVANS: Thank you very much.

What I would suggest for those people for the federal block grant, I would ask all of the speakers to move to the podium, to move up to the front.

MR, SCOTECE: Representative Evans t my name is Carmine Scotece. X am the Butler County Human Services

Director.

MS. BRENNEN: I am Fat Breimen. I am the

Executive Director of united Cerebral Palsy of Beaver, Butler and Lawrence County.

MS. EICHNER: I am Jessica Elchner. I am the Manager of the Hospice Services Incorporated. i CHAIRMAN EVANS- Could Miss Friday move up also' > MS. FRIDAY: Are you sure I belong in this? J MR. SCOTECE- We're here to address our concern i » regarding the elimination of the Human Services Development Fund , > Today you will hear testimony regarding the 5 devastating impact Governor Casey's proposed elimination of r Human Services Development fund will have on the lives of 3 our most vulnerable people. J You will hear from dedicated people who pro- ) vide Human Service Development funded programs as well as I those less fortunate, who are enabled to lead productive > and self-reliant lives because of these programs. ( Presently, 11 agencies provide Human Service \ Development funded programs to over 4000 low income residents i in Butler County who would be unserved or significantly under - i served with current categorically funded services. As for me, I would like to provide a brief i overview of the substantive and wasteful effects that the i elimination of Human Services Development funds will have on ) our community. This overview can be summarized in 6 points. (1) The elimination of Human Service Developmen: ! funds will remove flexibility and discretion in managing > resources on a local basis. i As you are well aware, what our specific > service needs are in Butler County and what action we take to address them through endeavors of the private and public sectors are not necessarily the same as Allegheny County,

Erie County or Philadelphia County. HSDF enables services to be creatively developed for the intrinsic service demands of

a specific locality.

Moreover, these are needed services that don't necessarily match the eligibility criteria for categorical

funding. HSDF enables us to cross over these funding barriers

so that the needs of an individual or family can be

effectively addressed.

(2) Elimination of Human Service

Development funds will undermine our coalition and networking

of local support systems.

Although 11 agencies use these funds in

different ways, their programs are integrated with services provided through Community Service Block Grants, Emergency

Shelter and Federal Emergency Management Funds as well as

United Way sponsored services so that a coordinated "safety net" of services can be effectively provided to individuals

and families with multiple service needs.

The loss of $320,000 to Butler County in HSDF

would severely damage this "safety net".

(3) Elimination of $32 million in Human

Service Development funds statewide and this transfer to

other Pennsylvania budget line items will have no net benefit

to Butler County residents but rather have a crippling effect Of the $32 million, Allegheny and Philadelphia

Counties will receive about 38 percent. Philadelphia County foreclosure of a state hospital and relocation of its residents. Allegheny County to satisfy a settlement of a suit against DPW.

In addition, these two counties will receive a significant share of the remaining $19.8 million.

This is not to imply that these counties should not receive funds for these purposes but the governor's proposed budget accomplishes this at the expense of other counties.

We also understand that some of the HSD funds will be used for Children and Youth services and attendant care. However, our Children and Youth Agency in Butler

County will lose over $50,000 in HSD funds, much more than what will be forthcoming from the transfer. These transferred funds from HSDF will also be used to reduce waiting lists for attendant care; however, if HSD funds are eliminated, reduction in waiting lists will be negated because people already receiving similar services under HSDF will be referred to attendant care and probably have to be started on a waiting list.

(4) Eliminating Human Service Development funds would dismantle a very cost-effective service network.

Many of the HSDF programs utilize volunteers to keep staffing costs at a minimum and use other resources

(e.g. private donations and United Way) to supplement the

cost of services.

The focus of the HSDF programs Is also to promote Independency and self-reliance of children and

adults and the integrity of the family. Without these

services, many people would be experiencing increasing

disruption in their lives and requiring more intensive and

costly services such as emergency or Institutional care which won't save the state any money but add to its deficit.

(5) Elimination of Human Service Development

funds effectively demonstrates that "we are burning our

candle at both ends".

During a time of serious unemployment, needs

for basic living (shelter, food, clothing), family strife,

and Increased social dependency, services are eliminated

that would help individuals and families address their

concerns.

(6) Elimination of Human Service Development

funds increases the burden of an already overextended service

system with illusion that these people will somehow be

served somewhere.

Demands will increase on social service,

health care, and community service organizations who are

already overextended and many which have substantial waiting lists. Courts and law enforcement agencies will also be impacted.

Our Sheltered Workshop has 47 people

currently on its waiting list, some individuals already waiting over a year and a half. Loss of HSDF funds would

add 13 more individuals to its waiting list.

The ratio of adult outpatient therapists to

cases at the Community Mental Health Center is about 1:150.

Elimination of HSD funds would add another 500 persons in need of services.

Although our United Way has had a successful

fund raising campaign, funding to community agencies had to be reduced on an average of about seven percent in order to replenish its reserves distributed during more economically

austere times.

In view of these adverse effects which

elimination of HSD funds would have, I urge you,

Representative Evans, and other members of the House

Appropriations Committee, to support full reinstatement of

the Human Service Development funds in the Commonwealth's

budget for next year so that over 4000 of our county's most

needy citizens will continue to have opportunities to lead

independent and productive lives.

In addition, several years ago HSD funds were

not released until November due to budget differences among House and Senate members and the governor.

For four months agencies and persons receiving services were left bewildered and frustrated as to what was going to happen. Should agencies risk not being reimbursed for services if funds were not appropriated?

Would needy individuals and families find community supports pulled out unexpectedly?

Therefore, I would also as that legislation be developed to ensure the permanence and stability of these funds and break this damaging cycle of uncertainty.

Thank you for the opportunity to present these concerns and would welcome your questions or comments,

CHAIRMAN EVANS: Do you have any comments you would like to add?

MS. BRENNEN: Yes. I would like to address this from the perspective that United Cerebral Palsy feels.

We are one of the agencies that receives Human Service

Development funds through Carmine's office. If we lose these funds, we are going to lose about $27,000 in funding.

It is going to mean the elimination of a program that serves

77 people who are physically disabled and also mentally

disabled. It is not only going to result in the loss of

services to these 77 people directly, but it is going to result in an adverse effect on their families. For many of

these families, when their family member comes out to a United Cerebral Palsy sponsored activity, this Is the only

respite time that that family gets. They otherwise have

24 hour a day seven day a week care for their disabled

family member.

So, we feel that our service extends not just

to the people with disabilities who are coming and learning

things like independent living skills, how to manage their money, how to read, how to participate in the community, wheelchair safety, different things like that for our program, but it also affects their family members.

Our board of directors raises money actively

throughout the course of the year to supplement all the

state funding grants that our agency receives. However, it

is beyond the scope of our board of directors, our volunteers or our staff to raise the entire $27,000 we would need to fund these services. We have told our families and

our consumers already that we are very concerned about the

situation. You may be getting letters from them

individually because we have asked them to write and talk

about what this would mean, how this would affect their

lives.

Some of the letters you get might be a little

bit difficult to read. These folks have to make a lot of

effort just to write a simple letter, but you will receive

their letters because they are so concerned about these losses.

Within our organization we are wearing the purple ribbon that you see that I have on today and it is

symbolic of our concern about what the loss of funding is

going to do for our people. Our consumers as they write

letters are wearing these purple ribbons and they are distributing them to others and asking them to '^ear them on I behalf as well.

So, today what I have come to do is again ask if you would please see that the Human Service Development

Fund is not pulled away from the county, but rather is kept to all the counties so that they can fund services like the services that United Cerebral Palsy provides for Butler

County.

MS. EICHNER: I am Jessica Eichner. I represent Hospice Services Incorporated. We are also a

subcontractor of the Butler County Human Services

Department under Mr. Scotece.

We have the contract for Homemaker Chore and

Instructional Homemaker programs. We serve about 72 families

in a year's time for about $42,000. I feel these programs

are instrumental in maintaining a very vulnerable population at home and preventing their institutional

placement. And the point I want to stress today is that

placement into foster care, placement into nursing homes for disabled adults or the at-risk children would be much more

expensive than maintaining them in their homes through

these intermittent in-home services. So that HSDF is truly money well spent and you can pay now or you can pay later*

CHAIRMAN EVANS: I know Miss Friday is here to

testify on the Federal Block Grant.

MS. FRIDAY: No.

CHAIRMAN EVANS: You axe here for the Human

Service Development also?

MS. FRIDAY: No, I am here to testify on behalf of Domestic Violence funding statewide.

CHAIRMAN EVANS: Would you like to move the mike over?

MS. FRIDAY: You do have copies of what I am

going to say. I would like to say that we are so pleased with

the Pittsburgh Post Gazette that they did their lead

editorial this morning knowing we were going to come and

talk to you, but it just happens to be a coincidence that

they emphasized legislation that is going to be coming, the

need, fighting back, the enlightened part about Pennsylvania working on Domestic Violence. So, that is an accident.

We are not that much in charge of the Pittsburgh Post

Gazette that we could have orchestrated that.

I am speaking on behalf of all the Domestic

Violence programs In Pennsylvania. I am the Executive Director of the Women's Center and Shelter of Greater

Pittsburgh. We are one of the first six: in the country. So, we are a bigger program, a more complicated program than some of the smaller, rural programs. So, I am going to try to indicate the need for both what happens through the smaller rural programs, and the lack of funding, and the kinds of things you can do once the programs are more developed.

Since we have the availability of the report on the Select Committee to Study the Need For and

Availability of Funding For Domestic Violence and Rape Crisis

Services in Pennsylvania, this was a select committee of the

legislature, X have attached some of those pages and I won't go through a lot of numbers because the numbers are in those pages. I assume you have already gotten that report, I have just highlighted some of those.

So, briefly, the scope of Domestic Violence is bigger than anyone knew. Twenty years ago when these programs had started, no one heard of it, no one talked about it 20 years ago. In 1986 the then Surgeon General Everett

Koop said it was the number one public health problem in

the country. So, that is how noticeable, how dramatic once

people begin to notice what domestic violence means and the

impact, tod we still don't know the number because it is a

vastly unreported crime.

X warn new staff who are starting to work in our Domestic Violence Program to expect a very stunning

phenomena. As soon as you say where you work, people tell you their domestic violence stories, Ones you would not hear

if you don't say where you work. One day I was making a call on a foundation. I took a plane and the stewardess sat down

and told me her whole domestic violence story. The receptionist at the foundation, because she knew who I was

representing, told me her story. The cab driver who was a woman who took me to the foundation told me her domestic violence story and the program officer of the foundation.

This actually happened in one day. It is a pretty

significant story for how domestic violence, all walks of

life, how incredibly common it is.

Pennsylvania it is estimated to affect at least

800,000 families directly. The services in Pennsylvania, you probably know quite a bit about because we are

considered a very progressive state in addressing domestic violence. The Post Gazette mentions that this morning. We have legislation. We have state funding. We have state

support. It makes it better and it is people come and

actually, I have had visitors from last year Greece,

Ireland and Israel wanting to see how we do it, how

Pennsylvania does it as they are developing Domestic

Violence programs. So, not only are we giving the services

in Pennsylvania funded by the legislature and our other funding sources, but people across the world are

replicating what we do. Which means it is a problem but one

day it is going to grow up and be out of business, our programs; not tomorrow. If we succeed, then there will be no need for Domestic Violence programs. And not only will we make a dent in those programs and the need for funding them, there will be a corresponding drop in child abuse, in jail overpopulation, in the flooding of emergency rooms with domestic violence victims and mental health counseling and drug and alcohol problems and divorce and single heads of households on welfare and neighborhood legal service

Domestic Violence services and court and police time devoted to domestic violence cases and poor school performance,

at-risk children and much, much more. Because the link between domestic violence and those services Is inescapable.

They are directly connected. Seeing we would make a dent in

domestic violence would begin to reduce and In an ideal world eliminate a great deal of those problems.

So, we are requesting statewide funding for

Domestic Violence services as recommended In the report of

$11,275,008.

One of the major problems in Domestic

Violence programs is that, as I say in this, never has so

much been done for so little. It is currently appropriated

at somewhere around eight million. It is a little over 8 million. But it was felt statewide that we should not come and talk to you about less than the select committee recommendation.

For that, some of our staff in Domestic

Violence programs, and I should mention that these are all

Domestic Violence people from Allegheny County, Butler,

Westmoreland. Some of the staff in the programs are eligible for public assistance, full time staff. 1 mean, salary levels, some of them are that low. Particularly in the smaller and rural areas where there is much less ability to raise funds from foundations and other kinds of places. We are all a combination of public/private funding. So, our prevention programs, our training programs, we train practically everybody you can think of who is just beginning

to understand how to deal with domestic violence. That is police, that is Mental Health, that is Children and Youth

services, that is practically anybody you can think of who has not known what to do when violence emerges as a problem.

I think we are making very strong progress with the help of the laws we have and the short term impact

of the good laws we have will probably cause arrest,

protection from abuse and its amendments have increased the need for Domestic Violence services. With the protocol that

the chief of police of Pittsburgh adopted, the arrest

rate went up something like 700 percent in domestic violence. That is a short term and swamping of all the systems.

Long term that is expected to reduce the need for services.

And after three years of evaluating the impact of that, the recidivism rate, this is in the city of Pittsburgh, is down to ten percent and it was something like 80 percent of repeats in domestic violence. It is making an impact but

short term, it just swells the demand for services as the police do arrest, as they do refer, as they are supposed to.

We scramble to meet that need. So, I'm open to any questions you have. Thank you.

CHAIRMAN EVANS: You are?

MS. FERONE: Fat Ferone.

CHAIRMAN EVANS: And you are with?

MS. HAVERSTICK: Pat Ferone.

CHAIRMAN EVANS: And you are with?

MS. HAVERSTICK: For the Butler Family Counsel

Center of Lutheran Services.

CHAIRMAN EVANS: And which issue are you

speaking on? Are you speaking on the Federal Block Grant or

which issue?

MS. HAVERSTICK: I am speaking for the Human

Services Development Fund.

CHAIRMAN EVANS: Would you like to make some

comments? Would you move up closer to the mike? MS. HAVERSTICK: I think you can probably hear toe. X am a volunteer in the first place.

CHAIRMAN EVANS: Could you spell your name for the purposes of the record?

MS. HAVERSTICK: Okay, Martha Haverstick. I have been volunteering for the Lutheran Services Society for five years and Fat asked me, Pat Ferotie is the Program

Director of the Butler Family Counseling Center and asked me yesterday whether I would come down, would I be interested In coming down and talking a little bit about the center.

As you know, it provides counseling for low income people as well as others through a sliding payment scale depending on the income of the person as well as the number in the family. This could cost, this help for emotional problems and so on, counseling could cost as little as five dollars. If the person could afford more, then they pay more. But the costs for the center are $45 for one session. So, that five dollars is not going to go very far for very many sessions and that is why the Human

Services Development Fund has been very helpful as well as necessary to the center.

The counseling is considered nonmedical and therefore cannot be paid by medical assistance funds that some people might have. And without this fund many low income persons will not be able to pay at all, even the five dollars. Therefore, they won't get the help they need. There is a great need for counseling in Butler County and not many delivery systems for it. The family structure is breaking down, as you know, and there is no one in the family to help with the problems as it was in my day for instance.

My mother was always there every day I came home. 1 could talk to her plus mother and dad were married for 72 years and that is a long time with the same people.

CHAIRMAN EVANS: Absolutely.

MS. HAVERSTICK: X was used to that background and it is now very difficult for people who do not have that family help as well as extended family help.

Some problems involve abuse, some unemployment and so on. Our rate that the people pay, of course, is cheaper than medical services help. So, we don't want to lose those people. We want them to know that they can come and get help but some clients will be more ready to use our service than to seek medical help. But without the service development funds, the number of sessions per person would have to be reduced and low income clients would not be able to go to the center as often and therefore it would take longer to solve their problems. More people come to us through recommendations of previous clients than in any other way. Therefore I feel this speaks very well for the center.

Pat Ferone is the Program Director and is a very capable one and is working. That is why she is not down here talking to you. I feel like I almost have to say I'm

only a volunteer, but yet without us there would be many

things that would not be accomplished. We do know our

communities and we do know what is necessary and we do know how much it costs. From five dollars to $45 is a big gap

for even one session. Thanks for letting us speak,

CHAIRMAN EVANS: Representative Mike Gruitza.

REPRESENTATIVE GRUITZA: Thank you. Mr.

Chairman. Just maybe a few brief comments. With your

glowing report for the editorial, I would make a

counterpoint that it is unfortunate at this point in the hearing that most of the press, at least that I can see, has left. Because we have a job to do here and part of our

reason for coming out into this area, which quite often

doesn't get the exposure of these types of hearings, is to bring awareness to the areas of some of the issues that we

are dealing with including the issues you have raised. Just

yesterday I met with a group of northwest Pennsylvania

service providers for the mentally retarded and they

presented pretty much the same case in terms of what their

funding levels are inadequate and with the loss of the Human

Services Development Fund what that would mean in their areas.

The difficulty we have, and I don't think there is a

legislator sitting here who wouldn't agree with everything that has been said. Because we are In a unique situation.

We are the ones who get the calls from people and deal with a lot of these problems firsthand, especially House members.

Our difficulty though comes In with being perceived as wild spenders when the public in general isn't educated on these issues and understand how these funds are being used and how their loss impacts right on their street, right in their own neighborhood. And I think it is unfortunate that the press has left and maybe focused a little and I think that this editorial could have gone one step further and said that we would encourage our

legislature to look into the funding here and to say to our taxpayers and to recognize that when your legislators vote

for tax increases, which aren't very popular today, that these are the types of things that they are voting for. We

are not down there voting for new taxes because they want to exercise their legislative macho as much as they want to deal with the problems that are there. I think that all of us,

including yourselves, have a job to do in terms of getting

that message out to the public and maybe going one step

further and advocating that the legislature not be afraid to vote for some taxes because those funds are needed in a state

that requires a balanced budget.

MS. FRIDAY: 1 think we are the people, we are

the people that you can call on to be advocating for that. When you need us to advocate, I think we are the people. I mean, we are fully aware that there isn't enough money unless

something like that happens.

REPRESENTATIVE GRUITZA: That is really what

this is all about. The question is going to come down here

as to the will of this Committee and this legislature to put

up some very tough votes to fund programs that we feel SXB necessary. And the public needs to be supportive in some of

these. We are kind of coming to an end of an era here where

you didn't even say the T word and as a result of that, and

this is just a little discussion at this point, the federal

government has cut us right along the line, there is not a

line item in the ten years, and most of us have been there

that long, that has been enhanced. So, we have been trying

to fill the holes and fill the needs and it is difficult

when the public is saying no new taxes. So, that is really

the challenge. And I would encourage you to be vocal and to

tell people why we need new taxes and not be afraid to write

letters to your editors and say this notion that we can have

a better world and that there is a thousand points of light

out there is fine and good, but we also are practical and we

have been dealing with the real problem and we understand

our state legislature needs to give us the funds we need.

MR. SCOTECE: I can assure you that we

foresee that our role in carrying the standard forward in terms of supporting these programs, that it is really, the onus is on us to get out there to the public. And in Butler

County we have been in the newspapers, we will be on talk shows, we will be on TV and we are going to get the message out to the people. And we will be behind you 100 percent.

REPRESENTATIVE GKUITZA: Doing that is doing us a favor because the public, you know, we are House members,

And there is always a philosophical argument do you vote how the people want you to vote or do you vote how you think is right. And I think that even though many of us say, well, you tried to do what you think is right, there is still a very strong feeling, I think particularly in the House, that we should be reflecting, at least to some degree, that people

and we need the public to understand these issues and we need the public to know what occurs when these programs

aren't funded.

CHAIRMAN EVANS: I would like to thank you

all, all of you for coming before us, listening to your

comments here. When the governor presented his budget on

February 6th, that was his opinion. We are now trying to

formulate our opinion. This is why we have public hearings

and listen to hear what you have to say.

1 don't think 1 could have said it any better

than Representative Gruitza. If you happen to be from

Butler, if you happen to be from Pittsburgh or Allegheny, your reps were here and left. Representative Pat Carone and

Representative Joe Steighner here from Butler, the two people who need to know that you are standing up with them as well as the reps in Allegheny County and the city of

Pittsburgh need to know that. I think Representative Gruitza really focused it. When the governor announced his budget on

February the 6th, he announced that there should be an increase of a billion point seven. The way we have been hearing things over the last two weeks, that does not appear like that potentially will be sufficient to do what is necessary, people say we need to do some things.

But I want to be clear, I want to be clear that there are some things that we in the General Assembly have also done in terms of our own action. We want you to be clear that we know it is a two-way street. We put things up on the table like the Rainy Day Fund and we will look at the Sunny Day Fund. We will look at our own legislative accounts and we will look at our own actions entirely because we do believe that it is a two-way street. And that we say this to you by listening to you and hearing what you have to say and we have to figure out how do we strike that balance. But also we must have programs that can be

accountable and can also perform and we know they provide

the results that are important. Because we also hear from people that tell us that it seems like when we fund programs. do the problems ever go away. That may seem kind of strange

and that may seem kind of tough, but that is the question people keep asking. If you keep funding programs over and

over again, at some point do you ever resolve or solve the problems.

I am sharing with you what we have tried to do

from this Committee's standpoint, is ask questions of

everyone, even within the departments as well as ourselves,

regarding strategies. I think the point that Representative

Grultza raises is a very legitimate point about the question

of taxes. Clearly once and for all, as we approach the

situation and making a decision, clearly we can't move unless

there Is some other way of additional revenue.

Again, I would like to thank all of you for

coming forth. I would like to close now and see if

Representative Fat Carone has any last minute comments.

REPRESENTATIVE CARONE: I agree with

Representative Grultza. I wish the press would have stayed.

I certainly heard from many of you. And those letters are

coming from persons who say please don't cut my funds so I

can go swimming at Slippery Rock and go bowling. I met with

those parents of mentally retarded adults in their homes and

getting their anguish. And I have commended you, Carmine,

and to the staff here for a person who offers good advice

and knows a lot about the system. And we understand. I would like very much to continue to put this Into the news and we are dining tonight with folks who don't want their taxes raised, and believe me, some of those letters I have gotten from your clientele, X will have to remind them of the other side of the issue.

CHAIRMAN EVANS: Again, I would like to thank you and the Appropriations Committee will recess until next

Thursday.

(Whereupon at 4:40 p.m. the hearing was adjourned.) I hereby certify that the proceedings and evidence taken by roe in the within matter are fully and

accurately indicated in my notes and that this is a true

and correct transcript of same.

Dorothy M/JHalone Registered: Professional Reporter 135 South Landls Street Hummelstown, Pennsylvania 17036

(The foregoing certification of this transcrip :

does not apply to any reproduction of the same by any means unless under the direct control and/or supervision of the

certifying reporter.)