Maryland and Virginia dueling for development

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ANNAPOLIS — Maryland and Virginia have upped the ante in their high-stakes competition for economic development with plans for more than $200 million in new spending as other states struggle under staggering fiscal challenges.

But Virginia has a big head start.

Gov. Robert F. McDonnell, a Republican, won legislative support last spring for about $50 million in new economic development funding. He came back in December to ask for $54 million more.

Gov. Martin O’Malley has made a splash this year with a $100 million venture capital fund to fuel young, high-tech firms.

But Maryland’s Department of Business and Economic Development has seen its budget shrink during the recession to 25 percent less than in fiscal 2007.

“The worst budget crisis in 30 years that either state has, and we’re cutting economic development to the bone, and they’re growing it,” said Richard Clinch, director of economic development at the University of Baltimore’s Jacob France Institute.

“The notion has been that the reduction in economic development expenditures [nationwide] served as a competitive opening for Maryland,” said Anirban Basu, chairman and CEO of Sage Policy Group Inc. “When other people are less vocal about telling their own stories, they are more likely to listen to yours. But you have to tell it.”

Coming out of the Great Recession, the 50 states are facing a combined budget deficit of $82.1 billion for the coming fiscal year. Despite their own fiscal problems, Maryland and Virginia are trying to seize the competitive opportunity by spending more on programs to stimulate economic growth.

“A lot of those states don’t have the wherewithal to put the money up,” said Jim Dinegar, president and CEO of the Greater Washington Board of Trade. “New York and New Jersey can’t. California can’t. Illinois can’t. Florida is having a very tough time. Some of them will choose to continue their investments and some will to choose to cut, and that will be to the benefit of this region.”

Christian Johansson

Christian Johansson, Maryland’s economic development secretary, touts the state’s highly educated work force as one that stacks up well against “competitors not just statewide, but globally.”

“The industries that we compete in, [biotechnology] for example, it’s going to be about how you tackle more novel ways to tackle issues when it comes to disease,” he said.

O’Malley’s $100 million venture capital fund, which would be financed by selling tax credits to insurance companies and is awaiting legislative action, plays directly “to our competitive strengths,” Johansson said.

Investments would focus on early-stage, high-tech startups, including those in the biotech, cyber security and aerospace sectors. Maryland officials hope the new fund would give the state’s image a boost, even as Virginia makes strides of its own.

Maryland spending declines

“Maryland doesn’t have bad policies when it comes to economic development,” Clinch said. “It just doesn’t invest in them. And for a long time, we didn’t have to. Government contractors are always going to want to locate next to Aberdeen [Proving Ground] and Fort Meade.”

Richard W. “Dick” Story, the longtime Howard County economic development chief who retired last month, said the state’s programs need more “horsepower to compete in the global economy.”

The Department of Business and Economic Development “has suffered with decreasing state revenues along with the rest,” he said. “They’ve lost people, they’ve lost financial incentive programs.”

Maryland’s Sunny Day Fund, designed to spur what DBED terms “extraordinary” economic deals for the state, doled out a total of $19 million in incentives from 2005 to 2010.

In 2008, Morgan Stanley & Co. Inc. received $4 million to assist in the expansion of its Bond Street Wharf location. And in 2009, the fund lent East Baltimore Development Inc. $4 million for the construction of the first — and so far only — life sciences building in its redevelopment north of Johns Hopkins Hospital.

Maryland did not use the fund at all in 2010. O’Malley had proposed to funnel $13 million through the fund to Northrop Grumman Corp., but the defense giant, which had considered Maryland in relocating its headquarters and 300 jobs from California, chose Virginia.

The Maryland Small Business Development Financing Authority, which offers loans and loan guaranties to help small businesses expand, has seen its deals slow as well. It delivered $14.3 million in financing in fiscal 2010, according to DBED. That was an increase over the $10.5 million the year prior but it was one-third less than the $21 million it provided in fiscal 2007.

Matching grants for worker training under the Partnership for Workforce Quality program fell from $1.3 million in fiscal 2007 to $272,000 last year.

O’Malley’s budget proposal for the next fiscal year would add $4.5 million to the Maryland Economic Development Assistance Authority and Fund. But, that comes after a total of $12 million was taken from the fund, which provides below-market rate loans, to balance the state’s books in 2009 and 2010.

O’Malley did add $10 million for small-business loan guaranties last year, and offered businesses $5,000 tax credits for hiring unemployed workers, though less than half of the available credits were claimed in 2010.

Virginia’s economic incentives

The Virginia funding package — the next $54 million will be up for legislative approval in April — lowered the bar for some business tax incentives and, with a $12 million infusion, doubled the size of a fund the governor uses to offer dowries to businesses considering a move to the Old Dominion.

The Governor’s Opportunity Fund has delivered $63 million in incentives to businesses from 2005 to 2010, outspending Maryland by $44 million.

Virginia Commerce and Trade Secretary Jim Cheng said $3 million from the fund was used to help woo Northrop Grumman.

Such incentive programs typically come into play at the end of relocation discussions, said Kenneth E. Poole, CEO of the Center for Regional Economic Competitiveness, an Arlington, Va.-based group that studies local and regional economic development efforts.

“A lot of times, the companies are using [incentives] to get the best deal they can when they have leverage,” he said. “But it’s seldom a deal-breaker.”

Regional assets like the Pentagon and the National Institutes of Health, quality of life, and strong education systems are often larger factors, Poole said.

Virginia’s economic development funding package passed last spring also included tax incentives for film production companies on movie and television shoots, $2 million to establish economic development offices in Europe, China and India, and money for top state officials to make marketing trips overseas.

Maryland’s film production tax credit program is funded with $1 million this year and is budgeted for the same amount in fiscal 2012. In 2010, however, nearly half of its funding was used to help cover a revenue shortfall.

DBED has representatives 10 countries, most of whom are paid only if they bring jobs to the state.

Maryland’s marketing challenge

“When everybody else is not marketing, if you actually make the effort to invest, you’ll make a difference,” Cheng said. “Your voice will be heard.”

DBED also has been focused on marketing. The department added a marketing wing in June 2009 to sell Maryland to potential corporate citizens. It was allocated $3.1 million this year, and has expanded the department’s social media and Web presence while promoting sectors like aerospace and cyber security with events and reports.

Basu said Maryland has a tougher marketing challenge than Virginia.

“Northern Virginia has emerged as such a focal point in the nation’s innovation economy,” he said. “They [businesses in other states] are more likely to know about the Dulles corridor than the I-270 corridor.

“Virginia, I think, has already told its story. I’m not sure that Virginia needs to work that hard to convince people that it’s pro-business.”

In Maryland, the most Southern of the Northern states in many respects, workers have greater freedom to unionize and are protected by stricter regulations on workplace policies, such as how often workers are given breaks.

“Maryland has very much struggled with a perception of being an unfriendly place to do business. Sometimes it’s deserved and sometimes it’s not,” Clinch said. “We pursue tax and regulatory policies that make this a very good place to live, but not always a good place to do business.”

The balance between well-funded public education, higher education and worker-training programs and a palatable tax structure is a difficult one to strike, many economic experts say.

“It’s an investment,” said Story, whose county boasts some of the best public schools in the state. “But you can argue that until the cows come home.”