Tennessee: Positioned to compete

NASHVILLE — The sluggish economy isn't slowing down Tennessee's chief economic recruiter.

After landing three billion-dollar investments since last July -- including two in Southeast Tennessee -- Economic and Community Development Commissioner Matt Kisber says he's working to harvest upstream and downstream business ties to those investments for the Volunteer State.

"To have an eight-month period where we had Volkswagen, Hemlock Semiconductor and Wacker Chemical each announce projects in excess of $1 billion apiece is a trifecta that I don't think anyone imagined that the state of Tennessee would win," Mr. Kisber said. "I think we're now seeing success even in this very challenging economy."

The lucrative announcements in the past couple of years are payoffs, in part, from years of effort to upgrade the state's appeal to growing businesses, he said.

Tennessee lured more than $5.4 billion in new capital investment in 2008 and is on pace for another multibillion-dollar recruitment year in 2009, Mr. Kisber said. Investments from industry recruited or expanded since 2003 come to more than $27.5 billion, adding 167,419 jobs.

"In recent years, Tennessee has been on everybody's radar," said Mark Crawford, an editor for Area Development magazine, which awarded the Volunteer State its top "Gold Shovel" award last week.

Last year, Site Selection magazine recognized Tennessee as having the second-best business climate among the 50 states, behind only North Carolina.

SETTING THE TABLE

Tennessee was not always viewed as favorably, however. The state had to reform workers' compensation costs for employers and retool business incentives to compete in recruitment. Gov. Phil Bredesen, a Democrat, had to take on labor unions.

"It took years of preparation to get to the successes we've enjoyed in the past couple of years," said Mr. Kisber, who joined the Bredesen administration after serving 20 years in the state House of Representatives, including a stint as chairman of the powerful Finance, Ways and Means Committee, which is responsible for the state budget.

Mr. Kisber said relatively high employer costs for workers' comp was "the biggest single obstacle to capital investment in our state."

Gov. Bredesen, a Harvard-trained physicist, used a scientific approach. He put the heads of the insurance, labor, finance and economic development departments together to work out a solution. It took nine months to research the problem and develop a solution.

"He did something I had never seen in my 20 years in the Legislature. He was able to pass reforms that truly deal with the problem," Mr. Kisber recalled.

The changes cut the number of workers' comp cases going to court and limited the amount of medical claims paid in many cases.

TAX BREAKS AND INCENTIVES

The administration next tried to identify key industries for growth and what incentives the state needed to recruit such businesses.

To recruit Volkswagen, state and local governments offered the equivalent of $557 million in tax breaks, training assistance and infrastructure investments -- the largest incentive package ever offered for a U.S. auto plant.

After a National Governors Association meeting last year, Gov. Bredesen asked his recruiters to look at the emerging clean-energy industry.

"What this really is is a job-creation opportunity," Gov. Bredesen said then. "The states that understand that first will be the states where these industries will take root and grow."

Mr. Kisber said the state had a start in the solar field. Sharp Electronics Corp. opened a solar panel plant in Memphis in 2003, and AMA Glass Co. in Kingsport supplies parts for solar devices.

"We are staying very busy talking with companies in the entire value chain of solar and green energy," Mr. Kisber said. "Capital is available and because of Tennessee's emphasis on this, we are spending a great deal of our time on this industry."

A new study found that Tennessee was one of only three states that had both above-average growth and above-average per capita employment in green energy jobs from 1998 to 2007 -- the most recent year for which data is available. Only Colorado and Oregon also enjoyed such growth, according to a study released last week on green energy jobs for the Pew Charitable Trusts.

"Tennessee clearly has a large and growing piece of America's clean energy economy," said Lori Grange, interim deputy director of the Pew Center on the States, which conducted the study.

Last year, Tennessee agreed to absorb any carbon emission costs for new green industries. This year the Bredesen administration is looking to extend job credits to companies that might buy the polysilicon parts Hemlock and Wacker Chemical will make for solar panels.

Tennessee created an integrated supplier credit to help Volkswagen by extending job credits to include incentives for tier one suppliers locating near the plant.

The Hemlock and Wacker plants won't require such supplier links. But a big economic payoff could come from polysilicon customers locating in Tennessee, Revenue Commissioner Reagan Farr said.

"The value chain in the automotive industry comes primarily from suppliers to the assembly plant, but with Hemlock and Wacker the value will primarily be added by all of their customers," he said. "We think (the proposed new integrated customer credit) is completely novel and the only tax credit like this in the country."

Mr. Farr said some polysilicon now is made in the United States, shipped to Japan to be made into wafers, and then flown back to the U.S. to be made into solar panels.

"That is incredibly inefficient," he said.

But the Bredesen administration is having to battle with some Republicans in the state Legislature to maintain and expand some of its business incentives, including funds for Volkswagen job training and job credits for prospective customers of Hemlock and Wacker. A Republican budget plan released last week limits job training and proposed new tax credits for some businesses to help cut state borrowing and spending.

State Sen. Bo Watson, R-Chattanooga, said legislative budget analysts have assured him that the Department of Economic and Community Development already has adequate funds for business incentives.

Even if the governor's budget is approved, Mr. Bredesen conceded last week that Tennessee probably can't afford to offer the hundreds of millions of dollars in incentives General Motors is seeking for its new subcompact car plant. GM officials said the plant will be located at one of its shuttered factories in Spring Hill, Tenn.; Janesville, Wis.; or Orion Township, Mich.

NUCLEAR REVIVAL

Tennessee also is positioning itself for a revival in nuclear power. Alstom Power is undergoing a $280 million expansion of its Chattanooga complex that will add 350 jobs. Nearby projects by Westinghouse Electric, Chicago Bridge & Iron and Babcock and Wilcox will generate hundreds of other construction, fabrication and engineering jobs in Southeast Tennessee.

"Alstom is a real crown jewel and is part of a major growth industry," Mr. Kisber said.

While Tennessee continually has sweetened its incentive package for new industry, the state still enjoyed the highest per capita growth in business taxes in the Southeast from 2003 to 2007, according to Mr. Farr.

"When our businesses succeed, our state succeeds, and we really don't be needing to try to shake businesses down or figure ways to get more tax revenue from them," he said.

BREDESEN'S GROWTH RECORD

The state has earned industry honors:

* Area Development magazine last week awarded Tennessee its top "Gold Shovel Award" for 2008 investments.

* Site Selection magazine last year ranked Tennessee as the second-best business location in the U.S., behind only North Carolina.

* A survey of business executives last year by Development Counselors, International ranked Tennessee fourth in the nation for best business climate, behind only Texas, North Carolina and Georgia.

But recession still has cut jobs:

* Unemployment rose from 5.5 percent in January 2003 when Bredesen took office to 9.9 percent in April, and economists expect double-digit unemployment in Tennessee by early next year.

* After adding a net 133,899 jobs in the first five years of the Bredesen administration, employment fell by 96,555 in the next three years and continues to decline.

* Only eight states had a higher jobless rate than Tennessee in April.

Sources: Tennessee Department of Economic and Community Development, Department of Labor and Workforce Development

Business costs have been cut in some areas and incentives have expanded:

* Workers' compensation reform in 2004 cut employer costs.

* Jobs Cabinet brought together economic development, labor, education and revenue departments to work on incentives.

* State agencies focused on key growth industries, including automotive and renewable energy.

* Jobs credits were enhanced to extend incentives for major investments to include related suppliers, customers.

* Extra funds were identified for infrastructure improvements.

* Job training assistance was expanded, including employing and educating new workers during startup.

BY THE NUMBERS

Job growth in 10 years:

* Overall employment: 2.5 percent

* Clean-energy jobs: 18.2 percent