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Rural development: Are we selling out?

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Wednesday, August 17, 2011

By DARIN RUTLEDGE

There’s very little disagreement that small-town economic development is getting tougher these days. In fact, few would argue the fact that economic development — even in urban areas — is facing obstacles that they have never had to negotiate.

The major hurdles for small towns are still there: lack of high-volume transportation routes, limited amenities, lack of utility infrastructure, etc. With what many are calling the “new normal,” prospects are finding new reasons to be jittery about deciding where to set up shop. 

Rural economic development is largely a sales game. And as officials work even harder to overcome objections on the way to closing the sale, it would seem that they are more frequently settling for opportunities that have fewer tangible economic impacts, and sometimes less favorable social impacts. For example, the new Facebook data center in Prineville provides only about 35 jobs to a community with a June 2011 unemployment rate of 15.3%. The facility does not provide any services or products to the local area; in fact, due to the nature of its business, the entire facility is locked down. How then does a project like this represent responsible economic development?

Job creation is the most obvious indicator that we rely on for determining whether an economic development project is a good or bad investment, and for good reason. Rural Oregon almost across the board suffers unemployment rates that are 3 percent to 6 percent higher than in urban areas, and it doesn’t take much analysis to know how to fix that: Simply create more jobs. But a closer look uncovers economic impacts that, if not quick fixes, are certainly the building blocks for improving economic conditions. Aside from the direct injection of payroll dollars into the economy ($1.75 million annually, in the case of Facebook), communities benefit in the following ways from economic development projects:

•    Companies often provide community development contributions to offset the tax incentives they receive or other impacts they have on the community
•    Companies often invest in Chamber memberships, event sponsorships, etc. to establish themselves as good corporate citizens
•    Franchise fees that municipalities collect through utility companies often increase as a result of increased utility usage
•    For projects that are heavy consumers of utilities, the result is often an upgrade of the local infrastructure, which eliminates an obstacle to further development
•    After incentives expire, taxes are collected on real property that had relatively little or no value prior to development
•    While intangible, economic development officials agree that the buzz of a small community that continues to secure development opportunities causes other prospects to take notice. When those projects have an everyday household name attached to them, the marketing value increases.

Aside from the financial aspects of economic development, it seems that every prospect faces local opposition for one reason or another due to its social or cultural impact. While a new restaurant or retail store is rarely controversial, other types of projects face varying levels of criticism. The most glaring example is industrial projects and their accompanying environmental impacts.

Without exception, these projects are met with controversy by environmental groups, NIMBYs and community activists. This opposition often extends the approval cycle, and increases the resources that are required to guide the project to completion.

The rewards however, can be worth the sometimes extended and grueling process if opponents fail to make their case. Industrial projects typically have a larger footprint in terms of physical needs and real property, which usually translates to additional tax revenue. Additionally, their employees are generally compensated at higher wages. And finally, in addition to the jobs created when the facility is operational, the extended building timeframe and complex construction requirements often inflate the overall economic impact and job creation figures.

Sustainable energy, particularly biomass, is a timely and illustrative example in Oregon. While biomass has been endorsed by government officials at all levels, the practicality of actually developing these projects can seem increasingly difficult to quantify.

In Klamath Falls, Northwest Energy Systems Company has been working for over a year to gain approval to build its 35-megawatt facility west of town. Among the benefits the company says it can provide to the Klamath Basin are a peak construction labor force of 175, and 30 regular jobs once the facility is operational. Aside from the facility itself, a 20-year agreement with a timber company will create approximately 70 additional jobs related to provision of fuel for the facility.

While the economic impacts of this project seem like a no-brainer, many local residents are less than flattered with its location near a residential area and the increased pollution they say it will create.

Projects such as this put economic development officials in a very difficult position, particularly in tough economic cycles. The increasing pressure to create living wage jobs is in direct conflict with the resistance of some to welcome industrial or even large commercial and/or distribution facilities. And wise developers know that an economy built purely on retail and service jobs is not going to reach its optimum level. While restaurants and shops are attractive, they typically have less of an economic benefit, job-for-job, as other types of development projects (the exception of course being economies that are exclusively driven by tourism). While these amenities are critical to the sustenance of a small economy, most economic development officials would prefer that they support higher valued cluster development than function as the main economic engine.

What it really boils down to for rural Oregon is the need to adapt from an economy largely based in timber and agriculture to an economy with a robust balance of commercial, industrial and retail development. These economies must do more than just “diversify” — they must recognize that good corporate citizens and neighbors now come in a variety of different packages.

Does this mean that rural areas should “settle” for opportunities that don’t perfectly match up with economic development strategies? Does it mean that desperate times call for desperate measures? Maybe, maybe not. What it does mean is that in today’s pool of limited opportunities, there is always someone out there who will meet or beat your deal. And it might be a while until you find another prospect to negotiate with.

Darin Rutledge has lived in Klamath County for more than 20 years. He is a past president of the Chamber of Commerce, a board member of the Klamath County Economic Development Association and chair of 2020 Klamath Vision.

 

Comments   

 
Slim
0 #1 Well PutSlim 2011-08-17 10:55:15
Couldn't have said it better myself!
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Tracey
0 #2 Tracey 2011-08-17 12:05:25
Well said Darin
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Jason Carr
0 #3 Facebook Was Hardly a Sell OutJason Carr 2011-08-17 15:39:39
My name is Jason Carr and I'm the economic development manager for Prineville and Crook County. I’d like to respond to comments made by Mr. Rutledge of Klamath County in reference to facebook. Overall, Mr. Rutledge makes some good points in the article about economic development in rural areas, and there are many of his points on which we can agree. However, I take exception to a couple of assertions given my direct and intimate involvement in the project: 1. facebook's impact is minimal, given low job creation 2. facebook’s so-called "closed-door" operations make it an irresponsible project for the community. 3. That facebook was a “sell out” by the community.

Let me respond to each assertion one by one:
Mr. Rutledge claims facebook will only create 35 jobs and have a payroll of about $1.75 million. Unfortunately, the information provided is incorrect. Facebook currently has 52 employees, and average wages must be $50,000 per year in order to qualify and maintain the long-term enteprise zone tax exemption. (Employment is expected to rise with construction of the second building.) Conservatively speaking, that equates to about a $3 million payroll impact per year. Also, as data centers grow they are served by various vendors, such as electrical supply companies. EOFF has opened up a facility in Prineville and has created jobs above and beyond what’s directly connected to facebook. Data centers, by nature, are not labor intensive facilities – they are capital intensive, which essentially means there is a higher ratio of revenue produced from the projects than jobs created. However, between full-time jobs, power franchise fees, a community fee and other monetary impacts (that can be tracked), the estimated yearly impact will likely exceed $4.25 million before tax incentives. Even with use of the long-term exemption, the community will realize an economic impact of well over $2 million a year. And these numbers don't even include development and planning fees and construction impacts, which have provided an enormous boost to construction and retail since January of 2010. And that impact will continue another 12-18 months as facebook starts construction on its second building this fall. (There’s also a misconception that the workers aren’t local. Many of the workers at facebook live in Crook County, and many of them are Prineville residents. I personally know three facebook employees, one of which is my neighbor.)

Secondly, the assertion is made that facebook is somehow locked-down and not an active or engaged member of the community. Facebook has become an integral member by joining the Chamber, donating to our local schools and non-profits, sponsoring community events (like the rodeo and 4th of July Celebration), and others. In fact, facebook is funding a study so the City of Prineville can determine the feasibility of piping the city’s treated gray water up the hill to our industrial parks to reduce water usage the costs related to using clean drinking water. If that’s not being a responsible community partner, I don’t know what is. Facebook's business model and culture are modeled after being socially responsible. If there was ever an example of how to be just that - it would be facebook's data center. They have set the bar very high for any subsequent companies that may locate in our community in the future.

Lastly, the assumption is made that Crook County and its leadership will do anything possible (or settle for anything) just to create a job. On the contrary, this community deliberated for months over this project, and I had the honor of leading them through the process of understanding what the return on investment would be, especially given tax incentives offered through the enterprise zone. Our local leadership remains in full support of facebook and believes it is helping our community toward a more robust, diversified economy. Facebook alone can't turn Crook County's economy around or reduce a 16% unemployment rate. One company alone is incapable of doing that. But this project provides us with a healthy investment, economic momentum, increased infrastructure capacity, and an increased awareness in the tech community that Crook County is a great place to do business.

For those of us in economic development, healthy and spirited competition for jobs is expected. But what's also expected is that our colleagues in the industry show mutual respect and honor when hard labor turns to fruit. It's too bad Mr. Rutledge chose to criticize, instead of congratulate.

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Darin Rutledge
0 #4 Response to Mr. CarrDarin Rutledge 2011-08-17 16:55:04
Mr. Carr -

We're not as far off in our thinking as you imply. In fact, we're on the very same page.

The question I posed at the beginning, "How then does a project like this represent responsible economic development?", along with an admittedly oversimplified description of the Facebook project, was simply a way to set up the very same arguments you made in your response - that communities should NOT view projects like this as "selling out"; rather, the projects should be evaluated based on a range of economic and other community impacts far beyond the 35 or 52 jobs that are created. By those criteria, you are absolutely right - Facebook was hardly a sell out. In fact, it's what many would consider a coup in the current climate, and you should be proud to have led the effort.

Without question, Prineville is to be congratulated for pulling off what many of your peers would have been proud to announce in their own communities (including here in Klamath Falls). The hard work you and others put into this project should not go unmentioned, either.

My assertions were intended to be empathetic to you and your peers, and to illustrate - perhaps more to the uninformed than to those familiar with economic development - that eco devo projects can be successful and beneficial to communities even if they don't create 100 or 1,000 jobs. Unfortunately, too many lay people evaluate the performance of economic development officials on that criteria alone. Not only is that unfair, it is an inaccurate representation of the overall benefit provided to the community.

Thanks for your comments, and for your efforts toward the success of Central Oregon.

Darin
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Michael Vaughn
0 #5 ^^^Michael Vaughn 2011-08-18 22:44:17
What healthy dialogue exchange. I love democracy!

Viva free speech!
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Jason Carr
0 #6 Thanks, Darin.Jason Carr 2011-08-21 08:47:41
Darin,

Thank you for the reply.

My apologies for misunderstandin g your intent. A few of my colleagues and I thought you were questioning the validity of the facebook project. I see now that's not that case.

I appreciate your candid response and for putting me straight! :-) I think we certainly are on the same page, and now that I see where you were coming from, I'm thankful for what you wrote.

Apologies again and take care!

Jason
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