An indirect approach to economic development

by Mike Kroll

In corporate America it is common for large, established industry behemoth corporations to become entrenched and resistant to change, even when that change is clearly in their self-interest to embrace. When young, upstart competitors who don't suffer from this inertia begin nipping at their heels as small but real competitors it is common practice for those corporations to resort to a strategy of instilling Fear, Uncertainty and Doubt in their customer base with regard to these small competitors with “risky” new ideas or products. They employ the FUD strategy because it often works with risk-adverse customers even though the products and services offered by the new companies may very well be superior and economically advantageous.

When the leaders of the Galesburg Regional Economic Development Association were first challenged by local elected officials and citizens they promptly adopted the FUD strategy, as did their supporters and apologists. When it became clear that most thoughtful people would no longer believe their claims of success that contrasted sharply with all available evidence and their strict adherence to absolute secrecy precluded them from offering credible alternative data of either process or outcome GREDA appeared to be in trouble. But FUD had never before failed them so they and their supporters came back with the argument that in essence stated that having an established group such as theirs was essential despite a total lack of success (and at great cost cost I might add) so there was no credible alternative to holding one's nose and blindly continuing their reign.

When the Galesburg city council last month narrowly voted first not to approve a new “improved” GREDA contract that actually included no substantial changes from the existing contract and then voted to terminate the existing GREDA contract at the same city council meeting everyone was shocked. The GREDA officials and their supporters threw their hands up in disgust and dismay at how stupid and fooling the city council had been. Immediately the PR rescue battle was begun as GREDA and their supporters told anyone who would listen that these irresponsible fools booted GREDA out without any alternative in place! Even the Register-Mail got on-board this propaganda wagon with editorials pleading with the city council to work out their differences with GREDA so local economic development critical to this community's survival wouldn't be rudderless.

This entire argument is of course bullshit. A much stronger case could be made that GREDA was worse then merely ineffective -- it was actually counterproductive to the Galesburg area's economic development success.

By continuing to pursue a false and outdated strategy focused on attracting medium to large manufacturers to relocate here; by attempting to promote an ill-conceived, misplaced Logistics Park/intermodal facility; and by adopting a marketing plan reliant solely on incentives and the false promise of an ample available low-cost skilled workforce – realistically there was no way GREDA could ever be successful. To have continued employing a clueless GREDA the city council would not only be throwing good money after bad but wasting precious time. We can ill-afford to squander as the local situation steadily deteriorates. Sad as it is, this community has little to lose by attempting almost any other approach. Expecting GREDA to suddenly change its ways would be delusional.

Galesburg needs a plan that is both realistic and doable. A plan that recognizes that economic development is really a community-wide effort and not just the playground for a privileged few. A plan that begins by shedding a whole pile of misassumptions and misrepresentations of just what the Galesburg community is or realistically can become. A plan that places much more emphasis on improving city infrastructure, services and quality of life and relies on indirect rather than direct incentives to attract new people or businesses to Galesburg. A plan that recognizes the time and place that this community currently sits upon; with a declining population and tax base coupled with a national recession we must act very soon before the resources to support any plan are no longer available and Galesburg becomes unsustainable as a community.

Candid reassessment and community reinvestment

We need to begin with a realistic appraisal of the Galesburg community. What are our strengths and what are our weaknesses? Strengths are aspects of the area we need to bolster and promote but we must be careful that we are honest with both ourselves and outsiders about just what are strengths. The Galesburg community has a long history of looking at itself through rose-colored glasses and retain the illusion that all was wonderful. Whenever anyone seriously suggested the existence of problems or the value of reflection and remediation they have been systematically undermined, discredited, muzzled and ignored. This attitude is responsible for much of the dilemma currently faced by our community. Ignorantly denying the existence of problems won't make them disappear but it will provide more time for them to fester and grow. Blind complacency also undermines the community's credibility with outsiders who see for themselves the weaknesses we deny to ourselves.

Now is the time for honest community self-examination and a commitment to begin correcting for past mistakes while we explicitly recognize the value and importance of properly maintaining public services and infrastructure even if that requires higher taxes or fees. We can no longer placate those who argue that bad economic times necessitate a massive tightening of government belts if Galesburg is to have any chance at all to recover. But such taxes and fees must be fairly applied to all just as public services and infrastructure must be designed and maintained for the benefit of the entire community.

Geography -- A realistic self-appraisal will help us target better our business attraction efforts while simultaneously helping to direct the most effective and efficient use of tax dollars for community development. For example, if we ignore GREDA's propaganda and study the geography of Galesburg closely we can see that the intermodal facility idea was little more than a pipe-dream just as the notion of becoming an attractive location for regional distribution. Not only is Galesburg too far removed from the metropolitan Chicago area to compete with the bevy of new and existing intermodal facilities that ring that area the interstate highway serving us (I-74) is not a first-tier interstate that directly connects us to any significant urban area or a sufficient number of smaller communities to make Galesburg a practical location for regional distribution. Communities located astride I-80 or I-55 are in a much stronger position for such sites.

Another important geographical weakness of Galesburg is that we are not adjacent to a major waterway or lake. Not only does this greatly diminish our distribution potential for commodities such as agricultural products but it also limits the types of manufacturing businesses that we can realistically support. Any business that utilizes massive quantities of water that are not cost effective to recycle within the plant itself will pose major problems for our wastewater treatment system. While the Galesburg Sanitary District can properly treat a much larger amount of wastewater than currently goes through their plant the GSD's Achilles' heel is in the strict limitation on the amount of treated wastewater they can release into the Ceder Fork Creek. This would be particularly true for a major food processor or manufacturer.

Workforce -- Beyond geography there are some very real demographic issues that should impact our economic development plans. Not only is the Galesburg area losing population but the population that remains is not the wonderful skilled workforce that GREDA has been claiming for years. If this area is going to attract new businesses they will either have to bring their employees with them or we must work to resurrect the demographic base of the Galesburg community itself.

Most of the employees at Maytag or Butler or Briggs were not highly skilled or educated. For the most part these were low-skill manufacturing jobs that simply don't exist in Galesburg's future. The best, most skilled and educated of the employees who once worked at Maytag or Butler have either long since found other work elsewhere or are retired. A good number have moved from the Galesburg area in search of suitable employment. If we could attract even a modest number of new manufacturing jobs to Galesburg they would need far more skilled employees than we have available at this time. This is one of the reasons Galesburg was never seriously in consideration when Pella Windows went to Macomb.

We cannot ignore the value of an educated and skilled workforce in the rebuilding of the local economy. Currently one in five local adults have neither a high school diploma nor a GED while less than 16 percent of our adults have a bachelors degree or better. Unfortunately at the present time the best and the brightest of our children leave for college and never come back while the most talented and most educated adults are frequently leaving Galesburg for better employment opportunities elsewhere. In essence what remains of our available work force are a small cadre of professionals and self-employed, educators and health care workers, a small group of skilled workers and a much larger group of low-skilled or unskilled or unmotivated adults. It should come as no surprise that the Galesburg area has had so little success in attracting new businesses to relocate here.

Finally, for years we have touted this city as a great place to live and raise a family – and it is. However, our inattention to city services and infrastructure as well as inability to come to grips with weaknesses in our public schools are undermining this “strength.” Galesburg remains a good place to live but the quality of life here is moving in the wrong direction. To be successful we must reverse this trend and make the types of investments that will make Galesburg more attractive and inviting.

Infrastructure -- Much of Galesburg's infrastructure has been allowed to decay from inattention over the last few decades as our city officials worked hard not to commit tax dollars to such mundane needs as our water system, storm sewer system, streets and sidewalks, and parks. Today Galesburg is in the midst of the largest, costliest public works project in the city's history because we could no longer ignore maintenance of our water system. While we have completed much ballyhooed storm sewer upgrades along Main Street and Henderson Street much of the remaining storm sewers in Galesburg have been ignored for decades and a number of neighborhoods have no storm sewers at all. Ditto for sidewalks despite a few small sidewalk projects conducted in recent years.

Galesburg's streets are becoming a huge problem. Today city public works officials have a declining amount of funding with which to maintain city streets and much of that is devoted to completely replacing streets that have become too bad to cost effectively repair. In the meantime more and more Galesburg streets are deteriorating before our eyes but the city no longer has either the manpower nor the resources to properly conduct either regular or preventative maintenance on our streets. If you don't think this is a priority for economic development you don't understand just how bad an impression this crumbling infrastructure has on anyone contemplating moving their business or family to Galesburg. But just as importantly, as the city infrastructure declines so too does the attractiveness of Galesburg as a place to live. Not only must we attract new residents but we must work hard to stem the ongoing population loss.

Education -- Too many of us assume that high quality local schools are an unquestioned existing Galesburg advantage but realistically our local schools have numerous deficiencies that are not being acknowledged or addressed in any real terms. The argument that the state school funding formula short-changes communities like Galesburg while true does not negate our community's responsibility to our children. For the large of mass of children in the middle of the bell curve Galesburg schools do an adequate job. It is the students who make up the two tails of this curve that we regularly fail.

It is obvious to most that low performing students are not educationally successful, but it is seemingly less clear how many of the best and brightest of our local children fail to perform because the school system doesn't adequately challenge them or command their interest. The result is expressed by the exceptionally low graduation rates in Galesburg. Local school officials constantly try to play statistical games to artificially inflate the graduation rate but the simplest indicator is the difference between the number of students who enter Galesburg High School as freshmen and the number who graduate four years later. By this simple calculation we find GHS graduation rates between 70-75 percent in recent years.

An effective school system cannot operate on the overriding philosophy that governs School District 205, that all students must be treated exactly the same. The fact is that no two students are exactly the same and to effectively educate them we must acknowledge these differences and adjust our schools as much as possible to accommodate the individual needs of each student. The further removed from the norm a student finds oneself the greater the need for extra resources. The current system leads many of those on both ends of the curve to act out and misbehave and the most common solution employed in our schools in such instances is disciplinary suspension or expulsion (unless the student in question is the son or daughter of a key community member where the overriding philosophy does not apply). Galesburg public schools today apparently prefer to cull the outliers from the heard.

Our schools must focus instead on keeping kids in school and graduating them with meaningful diplomas. This means making adjustments to staffing and curriculum to permit a slower pace for the struggling student in those subjects where required and simultaneously reducing frustration and boredom for students need more challenges and a faster pace. Interestingly, these two opposite approaches may be applicable to the same student across differing subjects. The weak math student may be a great reader for example. And finally we must recognize that the undue focus on only reading and math scores in the No Child Left Behind program is a great disservice to our children who need to be knowledgeable and proficient in science, history, geography, communication (written and oral), and so much more to be successful and employable adults.

Community – A city is much more than streets, sewers and schools. An attractive city offers quality parks and recreation, a modern spacious public library, arts and culture. Galesburg has some of all these things at present but most are just as much in need of attention as the infrastructure mentioned above. If you don't think an outsider evaluating Galesburg as a place to live or bring her business doesn't notice the deteriorating state of our local parks or the cramped quarters of the Library your not being honest with yourself. All of these are high profile checklist items for most discerning evaluators.

So too is the general state of our private infrastructure. Visitors do notice litter and junk. They notice poorly maintained homes and business buildings and they certainly notice vacant and abandoned buildings. Just as a prospective employee is judged by his appearance so to is a prospective new hometown. In recent years Galesburg has begun to deal with this problem but mostly by penalizing offenders. This approach has hardly been a success and it has resulted in an escalating number of demolished homes. At present very little consideration has been given to offering assistance and/or incentives to property owners to cleanup and renovate their properties. In the 2009 city budget a whole $10,000 was earmarked for such programs, but only after a skeptical penny-pinching city council was shamed into doing so.

The first and most important economic development priority must be community development efforts to fix what ails Galesburg. We absolutely must rebuild this community, including its population, if we are to expect any significant business investment from the outside.

The city has very real resource limitations, however, while more than $500,000 was squandered on the “China Initiative” and nearly a million dollars has already been spent on the hapless Logistics Park the city has actually reduced its investment in both capital projects (excluding the water system) the staff of public works, water, parks and recreation to a near critical level that precludes adequate maintenance. While the city council has eagerly put more and more money into GREDA they have become increasingly penny-pinching when it comes to properly maintaining city services and infrastructure. There is little doubt in my mind which approach would have been a better investment. Look at it this way, investing additional funds into local infrastructure, even if we need to sell bonds to do it, is a localized version of an economic stimulus package for Galesburg that offers a real return on our investment (very unlike GREDA).

Traditional economic development

The traditional approach to economic development focuses on luring existing businesses to relocate manufacturing plants to your community and the focus is nearly always on those employing hundreds or workers. And the most common attraction method has been to dangle incentives (read bribes) before the eyes of potential new businesses. This has been the prevailing strategy of GREDA and it predecessors. The weakness of this approach is that there is little evidence that it ever pays off.

There are two major reasons for this lack of success: and exceedingly small number of opportunities combined with covert nature of the process that limits a community's opportunity to proactively participate.

City manager Dane Bragg, an economic development guy himself, noted just this Monday afternoon that there are maybe 200 “big fish” industrial economic development opportunities nationwide each year and “Illinois typically sees maybe three or four of those.” Furthermore, “the focus of most of these opportunities is going to be concentrated in the greater Chicagoland region and few will even consider downstate communities like Galesburg,” noted Bragg. “In many cases a small community like Galesburg is unlikely to even be aware of many of these opportunities unless we are approached.” And it should also be noted that Galesburg would need to be lucky for even one of these opportunities to be a good fit for us.

By “big fish” we are talking about plants or operations employing 250 or more. Smaller opportunities are even less likely to pop up on the radar of a community like Galesburg. If you are unaware of specific potential opportunities it is impossible to cost effectively operate in a targeted proactive recruiting mode. Instead, GREDA and its predecessors have engaged in a much less efficient scattergun approach to marketing where any success would almost have to be due to pure chance alone.

While the traditional secrecy surrounding everything about local economic development makes such analysis exceedingly difficult, to my knowledge every one of the small number of local economic development successes have been with businesses that approached GREDA or the EDC rather than the other way around. While a certain amount of active recruiting seems necessary, if only to enhance awareness of the Galesburg area as a potential site it seems clear to me that most of the money spent in proactive economic development marketing is most likely a poor investment of resources.

“Economic development is almost all relationship-based,” observed Bragg. “I believe you have to be very strong in relationship building to be successful and you have to need to understand the industry segments you are best positioned to compete in. In Galesburg's case those two segments are agriculture and rail. They offer our greatest chance of success but any number of other communities in Illinois are in much the same position as Galesburg in this regard.”

The relationships Bragg believes we must build aren't with prospective new companies themselves but rather with middlemen such as banks and Realtors and consultants who are in a position to insert Galesburg into consideration. This would be a hit or miss proposition at best for cold calling and can probably be accomplished sufficiently by attending targeted trade shows at relatively modest cost.

“Incentives” -- Once a potential business is considering Galesburg the next issue is what makes us attractive. While GREDA has always trumpeted all the usual community characteristics when you get right down to brass tacks they have always viewed competitiveness as a function of available incentives. Generally this amounts to free or drastically reduced real estate costs, tax reductions and outright cash gifts.

Even if a community is successful in luring a new business through such incentives at what cost were you successful and what real benefits will your community see from the effort? Jobs are just one measure of economic development, an important one surely but just as surely not the only measure. Just like other citizens, businesses have civic obligations of good citizenship. They must not only contribute to the local employment rolls but also pay their share of local taxes and fees and make their share of contributions to the betterment of the community.

Most incentives are based on eliminating or minimizing those other civic responsibilities of business and as such most often undo any gains from that business’s arrival. As an illustrative example look at what Maytag did. Over the course of many years the company and its predecessors systematically extorted every single possible economic development incentive available only to leave just as those benefits expired. Businesses, just like individuals or families, should choose to make Galesburg their home because of the inherent qualities of the community itself not because of the comparative size of the bribe. Because when incentives are the primary motivation you must expect that businesses commitment to the community to only last until another community dangles a more lucrative bribe.

Strong communities grow from the longterm commitment and investments made by the businesses and citizens alike and through the responsible governing and investments made by the elected leaders of that community as well. The failure of any of these three groups will undermine the success of the community as a whole.

Responsive economic development – While most direct economic development is likely a poor use of resources it seems just as clear that having a strong and responsive staff in place to properly handle inquiries is an essential and necessary expense. If Galesburg is to handle economic development directly then clearly it will be necessary to hire at least two staff to assist economic development director Cesar Suarez. One of these would be a professional level assistant who is capable of handling prospects directly while the second would be essentially an administrative assistant to handle correspondence, record keeping and the necessary databases. In all likelihood these clerical tasks may require at least an additional part-time person brining the staff to about 2 1/2 plus Suarez.

The $75,000 currently paid to GREDA would clearly be insufficient to cover this extra personnel cost alone much less the other necessary operational expenses. However, it must be remembered that GREDA received much more than just that $75,000 from the city to cover its costs. The additional personnel costs beyond Suarez's own (which are already included in the city budget) would most likely not exceed $125,000 including benefits. Estimating non-personnel costs is a bit more difficult particularly because of a shortage of available office space in City Hall. Much of the half-million dollar extra cost to the city estimated by Bragg is related to acquiring and outfitting the necessary additional office space but it does seem like an unnecessarily lavish budget even by city budgeting standards.

In 2007 the quarter-cent economic development sales tax netted more than $815,000 in revenue of which about $287,000 went to paying off the Logistics Park bonds. In 2008 the sales tax revenue was nearly $844,000 and $283,000 was paid on those bonds. The 2009 city budget estimates sales tax revenues at more than $885,000 and bond payments of $281,000. As you can see there is a substantial difference between the amount of tax revenue collected and the direct cost of paying back the bonds. In past years it was this difference that paid for the other GREDA expenses and the city could just as easily use it to pay for those direct expenses of its own.

Retail recruitment and consultants – The city's 2009 budget already includes planned expenses of more than $105,000 just for consultants. More than half of this is to support the ill-conceived program of retail recruitment while the remainder is to fund downtown marketing and the feasibility of second-story loft apartments as well as a housing study.

The money and time currently devoted to retail recruitment is very hard to justify as such recruitment is merely a sham effort to appease some aldermen. Retailers will locate here only when their research shows that they will most likely be economically successful in the Galesburg market. A declining population coupled with declining household incomes (nearly one in five residents live at or below the Federal poverty level, 60 percent of local households had an income of less than $50,000 last year and the median household income has been declining in Galesburg in recent years) do not make Galesburg an especially attractive location for retail investment at this time. Spending money on high-priced consultants will not change these circumstances.

People ponder why Galesburg doesn't have more dedicated apparel stores or why our only bookstore just announced that it was closing but the declining community demographics hold the key. When proponents of retail recruitment point to the vast area surrounding Galesburg as home to many more potential shoppers they myopically misread the situation. You see the declining demographics are not just in Galesburg proper but throughout the area surrounding us. If anything Galesburg has been an island amidst a sea of demographic despair and our own situation has been somewhat bolstered by a small influx of rural migration into the city itself. Fewer and fewer small communities can even support convenience stores and even bars in small towns are suffering the decline in both population and affluence.

Of the four planned consultant projects the only one that may not be a waste of tax dollars is the housing study, but given the city's history with consultants' reports it seems unlikely that this would be of much real value either. I would estimate that by canning these consultant projects this money would more than pay most of the realistic non-personnel expenses of a city run economic development operation and therefore not break the city budget.

Not only do I believe that the city can run its own economic development operation better than that of GREDA's the majority of the most critical investment isn't in direct economic development expenses. The largest, most important expenses must be in the community development expenses summarized at the top of this article. Not only will such investment do wonders to make Galesburg more attractive to outside businesses, it will also make Galesburg a much nicer place in which to live for both current and prospective residents.

1/8/09