If "... having a job is the single most important characteristic of an adult in indicating whether the family lives in poverty or not," as Kentucky's demographic data strongly suggest, then a state's ability to develop, attract, and retain jobs is the key to enabling its citizens to enjoy an above-poverty standard of living. Kentucky's system for economic development, or, more precisely, that portion of the system which offers tax subsidies and low-cost guaranteed loans to foster the attraction, expansion, and retention of jobs, is the standard for states with similar economic situations. Built upon a variety of programs, Kentucky's scheme for meeting job competition is frequently cited as the most comprehensive and generous plan among the southeastern states. Recent tax-incentive legislation introduced in the Alabama House of Representatives under the sponsorship of House Speaker James Clark, and supported by the Economic Development Association of Alabama and the Business Council of Alabama, was cited as necessary "... to keep Alabama competitive with the very generous Mississippi and Kentucky incentives legislation...."

While conceding the attractiveness of Kentucky's incentive programs, and choosing to remain neutral on the issue of utilizing substantial tax breaks to attract business, the Commission on Poverty observed the absence of any significant effort to tie the jobs attracted through the majority of the state's economic development programs to employment of the poor or unemployed. Also noted was the absence of any programs designed to encourage the development of jobs through the creation of small, high-risk businesses, to identify potential entrepreneurs for indigenous businesses, and to assist private, nonprofit organizations in their efforts to foster local economic development. Absent also from Kentucky's economic development programs are guarantees that the wages paid by employers benefiting from the state subsidies will be sufficient to support a family above the poverty level or to provide benefits, especially health care and dependent care, which the employee might not otherwise find personally affordable. Chapter 6 presents the Commission's findings and recommendations concerning Kentucky's tax incentive programs, loan programs, the Commonwealth Venture Fund, and other matters of interest to Commission members.

Currently, there are five tax incentive programs designed to attract, expand, or retain jobs in Kentucky:

Of the five programs, only the Kentucky Rural Economic Development Act and the Kentucky Enterprise Zone Program stipulate eligibility criteria which have even an indirect connection with the employment of the poor or unemployed.

The General Assembly created the KIDA program in 1992 to aid the establishment of new manufacturing plants or the expansion of existing operations. If granted approval by the Kentucky Economic Development Finance Authority (KEDFA), an eligible company receives a 100 percent credit against the income tax liability generated by the project limited to the annual amount of debt service (principal and interest) paid to a lender in connection with "eligible project" financing. Financing may be provided by any source, the most typical being banks or industrial revenue bonds. This credit remains in place for the term of the financing or 10 years, whichever occurs first.

There are various eligibility criteria according to KIDA guidelines. Corporations, partnerships, sole proprietorships, and business trusts are eligible for participation. Eligible projects include the acquisition of land, buildings, and building fixtures for new and expanding manufacturing companies, together with storage, warehousing, and related office facilities. Expenditures for land acquisition, site development, utility extensions, architectural and engineering services, building construction or rehabilitation, and purchases of building fixtures (including installation costs) are considered to be eligible costs.

According to Economic Development officials, the KIDA program has been successful in its mission of assisting manufacturing businesses. Since it began in 1992, officials have approved 90 projects, the majority of which have occurred in urban areas such as Jefferson and Fayette Counties. Participating companies have invested a total amount of approximately $2 billion in these projects. While investments have ranged from $75,000 to $450 million per project, the total investment of KIDA money has been $906 million. Overall, 9,607 jobs (measured in full-time equivalents) have been created under this program.

Created in 1992, KIRA also focuses on manufacturing companies but targets businesses facing imminent closure due to lack of productivity or profitability caused by outdated equipment. A company receives a combination of a Kentucky income-tax credit and the right to invoke an employee wage assessment equal to 6 percent of the gross payroll if approved by KEDFA. These credits remain in place until 50 percent of the approved costs have been recaptured or 10 years, whichever comes first. In addition, the company's employees receive a tax credit against their Kentucky income tax equal to 2/3 of the annual assessment fee. Further, they gain a credit against the local occupational tax equal to 1/6 of the assessment fee.

Similar to KIDA, KEDFA operates this program by applying various eligibility criteria. Eligible businesses must employ 25 or more persons and, as stated above, must face imminent closure. Building improvements, equipment purchases and other efforts intended to make the company profitable are all considered to be eligible projects. KIRA's main goal is to increase the profitability of a company to a point at which the company can survive on its own.

The KIRA Program has been used sparingly according to Development officials. Few companies apply for this program since it is uncommon that manufacturing companies face immediate closure solely because of their use of outdated equipment. In fact, only two businesses have participated in KIRA's brief history. Steven Jones, Director of the Rural Economic Development Division of the Department of Financial Incentives, testified that KIRA funds recently allowed the General Electric Appliance Park in Louisville to remain open and thereby saved 9,000 jobs. And, Jones said that when officials of the Emerson Power Transmission Corporation decided to consolidate their operations in Colorado and Kentucky by opening one location in South Carolina, KIRA funding allowed this consolidation to occur in Maysville, Kentucky.

The General Assembly created this program in 1992 in order to entice service or technology-related businesses to locate in Kentucky. If granted approval by KEDFA, an eligible company receives a 100 percent credit against the state income tax arising from the project and a wage assessment (5 percent maximum) of the increased gross payroll of the new employment resulting from the project. Total assessments and credits cannot exceed the approved costs, and cannot be taken beyond a 10-year period. Each employee is entitled to an income-tax credit against their Kentucky income tax equal to 4/5 of the total wage assessment if the company utilizes such an assessment. In addition, the employee is entitled to a credit against the local occupational tax equal to 1/5 of the total wage assessment.

Like with KIDA and KIRA, KEDFA determines a business' eligibility to participate in this program through the application of certain criteria. Eligible companies must be service- or technology-related and must provide more than 75 percent of their services to persons located outside the state. The purpose of this requirement is to prevent KJDA participants from competing with existing Kentucky businesses. Additionally, the company must increase its employment of Kentucky residents by a minimum of 25 new, full-time jobs resulting from the project. Eligible approved costs are defined as 50 percent of the start-up costs which are essentially the cost of furnishing and equipping the facility, and 50 percent of the annual rent costs.

According to Economic Development officials, approximately 40 companies now participate in the KJDA program. Steven Jones indicated that these companies have invested a total amount of $80.6 million in their projects while the state has invested $2.1 million. Although only 2,075 jobs (measured in full-time equivalents) have been created under this program as of June 1995, officials anticipate the creation of 7,204 jobs overall.

This program was created in its present form by the Kentucky legislature in 1992. Designed to encourage economic development in counties with high rates of unemployment, the Act grants eligibility to firms which agree to locate in Kentucky counties whose average annual unemployment rate has exceeded the state average annual unemployment rate for five consecutive calendar years. A KREDA approved company receives a 100 percent credit against the Kentucky income-tax liability generated by the project limited to the annual amount of debt service (principal and interest) paid to a lender in connection with eligible project financing. The tax credit remains in place for the term of the financing or 15 years, whichever occurs first. Unused credits may be carried forward for the term of the KREDA agreement.

In addition to receiving state-tax incentives, an approved company may also utilize the Job Development Assessment Fee ("JDAF") in connection with the KREDA project. This entails a withholding from the employees hired as a result of the KREDA-approved project of a maximum of 6 percent of their gross wages. The employees recover this fee through a state-income tax credit equal to 2/3 of the JDAF and a credit against the local occupational tax equal to 1/3 of the JDAF (to the extent that local occupational taxes exist).

Corporations, partnerships, sole proprietorships, or business trusts that establish new manufacturing plants or expand existing manufacturing operations in qualifying counties are eligible for this program. Further, eligible companies may initiate projects involving "approved costs" related to land acquisition, site development, utility extensions, architectural and engineering services, building construction or rehabilitation and purchases of equipment and fixtures (including installation costs).

The KREDA Program applies only to counties with exceedingly high poverty rates, rather than to counties with high numbers of poor. As would be expected, the participating counties, reflected in Figure 6.1, are predominately rural in nature. Urban areas, which the demographic analysis in Chapter 2 revealed as having the greatest number of poor, are effectively barred from participation in the KREDA Program.

[Insert Figure 6.1 - Kentucky Rural Economic Development Authority: Map of Eligible Counties]

The General Assembly created this program in 1982 as part of an effort to bring new or renewed development to certain economically depressed areas. After a "poor" area has been identified, it is declared an enterprise zone -- a designation lasting 20 years. Provided that a company meets the eligibility requirements discussed below, state and local tax incentives are offered to businesses located or locating in this area.

Among the tax incentives given to participating businesses are specific exemptions from sales and use taxes, and wage-assessment credits (for previously unemployed persons and/or persons receiving public assistance). For example, building materials used in remodeling, rehabilitation, or new construction within an enterprise zone are exempt from sales and use taxes. Likewise, new and used machinery purchased and used by a qualified business within this zone is exempt from sales and use taxes. Most importantly, a qualified business shall be allowed a credit against the corporation income tax equal to 10 percent of the wages paid to each employee who has been unemployed for at least 90 days or who has received public assistance benefits for at least 90 days prior to being employed by the business. The credit has a maximum limit of $1,500 per employee, and any unused credit may be carried forward for a maximum of five years.

The Enterprise Zone Program applies to all types of businesses. Although there are certain exemptions from the motor vehicle usage tax, the major tax incentives involve exemptions from sales and use taxes. Most zones are found in urban areas with the exceptions of Knox County and Hickman. Table 6.2 provides a current list of enterprise zones in Kentucky.

Businesses must meet several criteria in order to qualify for the Enterprise Zone Program. First, 50 percent of their employees must perform all of their services within an enterprise zone. If a company wishes to apply as a "new" business (one which began operation in the zone after the date the zone was designated), 25 percent of the company's total full-time workforce must meet the targeted criteria (discussed below) as long as the business is enterprise zone-certified. On the other hand, if a company desires to apply as an "existing" business (a company in operation in the enterprise zone prior to the designation of the zone), it has two options: initiating a 20 percent increase in capital investment or increasing its total workforce by 20 percent (25 percent of these new employees must meet the targeted-workforce criteria).

TABLE 6.2

The targeted-workforce criteria contain three basic parts. Businesses must hire a Kentucky resident who either (1) resides within the enterprise zone, or (2) was unemployed for a period of 90 days prior to being hired by the enterprise-zone business, or (3) received public assistance for 90 days prior to being hired by the business.

Other than the KJDA which requires businesses to hire Kentucky residents, the Enterprise Zone Program is the only program that requires businesses to hire persons meeting pre-determined criteria. Currently, 2,802 businesses are enterprise-zone certified. Sara Bell, Principal Assistant, Enterprise Zone Program, told the Commission that 34 percent of the total number of persons who have been hired meet at least one of the targeted-workforce criteria. It is not possible to determine the number of persons underlying this percentage since information about the unemployed and persons receiving public assistance is confidential to the Cabinet for Human Resources and the Workforce Development Cabinet.

The Enterprise Zone Program is experiencing one major problem.

In many areas, the pool of targeted workers is shrinking and the larger enterprise zone businesses are finding it extremely difficult to fill their necessary numbers ... This problem seems to be acute in Northern Kentucky and Louisville, areas where most enterprise zone activity takes place.

In response to a Commission inquiry, Economic Development officials cautioned that increasing the percentage of targeted workers would be unduly burdensome to enterprise zone businesses. "Increasing the percentage of employees from the targeted workforce would render Kentucky's Enterprise Zone Program virtually impossible for businesses to comply."

In recommending the establishment of incentives within KIDA and KJDA for businesses to employ from a targeted workforce, the Commission took note of the Economic Development Cabinet's caution that many firms resist dictation as to the kinds of employees they must hire, even when a modest percentage of employees are involved. On the other hand, the Commission also noted the Cabinet's testimony to the effect that employers participating in the Enterprise Zone Program had met and substantially exceeded similar criteria for employment from a targeted workforce, and the Commission was skeptical of the Cabinet's contention that "...adding similar qualifications to KIDA, KJDA and KIRA would make KREDA and the Enterprise Zone Program less effective in helping Kentucky's distressed areas." The Commission believes that to totally omit employment of the poor or unemployed as a criteria for participation in Kentucky's tax incentive system of economic development would be an opportunity wasted.

From the point-of-view of the qualified business, a targeted-workforce employment requirement would seem a reasonable tradeoff for the tax benefits offered. And the incentive to the state to include the requirement is obvious.

In addition to the general tax revenues received from an employed worker, the state benefits through savings in welfare payments when a public assistance recipient is employed. And employers, who support the Unemployment Insurance Fund through payroll taxes, realize a savings when the unemployed are hired.

Omissions of a targeted workforce employment requirement from the state's economic development programs, when there appears to be compelling arguments for its inclusion, fosters the impression that workers in the welfare recipient/unemployed pool are unemployable in manufacturing- or technology-related jobs. If training or retraining is necessary, as is frequently the case for many potential workers, job specific instruction is available through the state's Bluegrass State Skills Corporation. Creating a demand for skilled workers among the poor or unemployed will emphasize the need to properly prepare participants in the JOBS Program for jobs in modern industry, and will support the contention that all unemployed persons should have access to the skill counseling and training referral available through the JOBS Program.

While the Commission makes no recommendation as to the incentive that should be offered, it does suggest that a "wage assessment" provision, similar to the one present in KJDA, could be added to the KIDA, and that the wage assessment incentive present in KJDA could be made available only to those firms which agree to hire from a targeted workforce. In both cases, the new incentive or the added criteria would apply only to newly participating firms in either program.

Since the purpose of KIRA is to salvage existing businesses and to save existing jobs, providing an incentive to employ a portion of an existing workforce from a targeted pool would make no sense. The Commission believes, however, that encouraging businesses to employ a percentage of new hires or additional hires from the ranks of the poor or unemployed is a reasonable policy. The wage-assessment incentive, already present in the KIRA regulations, would appear to be a logical incentive, offered prospectively to encourage full participation in the program.

It is ironic that KREDA targets counties with long-standing high rates of unemployment, but fails to require the qualified business to hire from the ranks of the unemployed. The assumption is made that if a business locates in an area of high unemployment, it must, by sheer numbers, hire some of the unemployed. This assumption, however, ignores the possibility of persons within the county shifting from one job to another, and ignores the possibility of currently employed persons from outside the county, or from outside the state for that matter, being hired to fill the newly-created jobs. The Commission believes that in order for KREDA to fulfill its mission of providing jobs for the unemployed, a targeted-workforce employment criterion is necessary. Including public assistance recipients in the targeted workforce is a logical extension of the state's economic development policy to increase per capita income and insure a meaningful quality of life for those citizens.

The General Assembly, in creating the Enterprise Zone Program, declared as its purpose the revitalization of economically depressed areas in the state. One of the four major goals of the program was to: "... improve the quality of life of individuals that reside within an enterprise zone by providing employment opportunities ..."

The original concept of an enterprise zone was a small, highly depressed area in an urban setting. Today's enterprise zones, for the most part, are large, sometimes nearly county-wide areas, encompassing both depressed and affluent areas. The goal of improving the quality of life of the poor or unemployed is easily thwarted by the employment of nonpoor, employed persons living within the zone. The Commission believes that the original goal of the Enterprise Zone Program would be better achieved by dropping the local employment criterion and focus on the employment of the unemployed or public welfare assistance recipients.

Two general purpose loan programs, the Kentucky Economic Development Finance Authority (KEDFA) Direct Loan Program, and the SBA 504 Loan Program, are available to assist in the recruitment of business to Kentucky. Neither program has eligibility requirements touching upon the employment of the poor or the unemployed or upon the payment of above poverty-level wages, or the furnishing of benefits to the business' employees.

Essentially, this program offers mortgage loans designed to allow companies to create new jobs or have a significant impact on the economic growth of a community. Under the Direct Loan program, KEDFA may supply a maximum of 25 percent of the fixed-asset costs associated with a project (land, building, equipment), but its amount of participation will be based on the number of jobs to be created. "The money loaned under (this) program is not state money originating from tax revenue. It is instead loaned out of a bond pool on which the state pays interest." The maximum loan amount is $500,000, while the minimum is $25,000.

While retail projects are ineligible for this program, others such as agribusiness, tourism, industrial ventures, and service industry projects may receive direct loans. The interest rate for a particular loan is fixed, and is tied to the term of the loan. Under KEDFA guidelines, only fixed assets may be financed. Project owners must inject a minimum of 10 percent toward these assets.

Development officials maintain that the KEDFA program has aided community development throughout Kentucky. Participating businesses have stimulated their local economies by creating new jobs, using local services, and purchasing local products. "The majority of loans from KEDFA have created the jobs they projected to create." Approximately $13 million had been loaned under this program as of July 1993.

The Commonwealth Small Business Development Corporation (CSBDC) is an economic development entity created under the auspices of the Small Business Administration (SBA) to enhance economic growth. Its staff is largely composed of KEDFA officials who are responsible for operating the SBA 504 Loan Program. Essentially, this program promotes community development through job creation and retention. It requires that loans be used in conjunction with private financing. The CSBDC is the subordinate lender to a private institution and can lend a maximum of 40 percent or $750,000 per project.

Once a loan is approved, the SBA issues an authorization committing to the project. At this point, the bank may begin interim financing of this project. Such financing must be obtained from a regulated lending institution. When the project is completed, the debenture is sold and CSBDC debenture proceeds are disbursed.

Companies must meet certain eligibility criteria in order to receive an SBA 504 loan. An applicant's business must: (1) qualify as a small business by SBA standards, (2) have a significant impact on the economic growth of a community, (3) create or retain new jobs, (4) and initiate a project no smaller than $125,000. Eligible projects are limited to fixed-asset acquisition. Examples include land and building purchases, building construction and rehabilitation, and machinery and equipment purchases.

Just as the KEDFA program has been successful in reaching its goals, Development officials claim that the SBA 504 Loan program has been effective as well. Small businesses receiving an SBA loan have created new jobs, used local services, purchased local products, and enticed other businesses to open in their communities.

While the Commission feels very strongly that state subsidies to business should be leveraged to generate the greatest return to the state, e.g., the employment of the poor or unemployed, the payment of above poverty-level wages, and the providing of benefits, the Commission is unsure as to whether or not the benefits provided through loans or grants are sufficient to demand these provisions. Therefore, the Commission recommends that, for the time being, the "carrot" of selection and degree of participation should be used to extract the desired concessions.

Venture capital is the lifeblood of the high-risk, often small, frequently indigenous business venture. When traditional commercial lenders refuse to participate, the availability of venture capital will determine whether or not a business will open its doors.

The impact of venture capital is easily observable through the operations and success of Kentucky Highlands Investment Corporation. KHIC is a Community Development Corporation originally created by the federal government in 1968 and is now responsible for administering economic development programs in southeastern Kentucky. It has evolved from a government-supported entity into a private, non-profit organization that focuses on managing investments designed to benefit a nine-county service area: Bell, Clinton, Clay, Harlan, Jackson, McCreary, Rockcastle, Wayne, and Whitley. Utilizing a "development venture capital" approach, Kentucky Highlands assumes the difficult task of finding aspiring entrepreneurs and financing their businesses as long as they promise to locate inside the KHIC service area and to hire unemployed residents. New ventures also must promise to exceed $1 million in sales by their third year of operation. At present, the corporation has a net worth of $17 million and assets totaling $22 million.

Kentucky Highlands' 17-member Board of Directors reviews funding applications and approves all investment decisions, although 13 staff members are responsible for the corporation's daily operation. It encourages the development of manufacturing operations rather than service companies for fear that the latter would only compete with existing businesses in the nine-county service area, while manufacturing ventures would cater to markets outside the area. By providing fair financing terms and the capital necessary to begin this type of business, Kentucky Highlands often assumes an ownership position in the fledgling company. All else being equal, the corporation will either sell its interest in this company once it has proven to be successful, or will maintain its ownership position in an effort to make the company profitable.

The corporation has assisted numerous businesses in their effort to benefit the southeastern region of Kentucky in spite of a shortage of entrepreneurial and management talent. Kentucky Highlands has provided more than $31 million in investment capital to aspiring entrepreneurs during its 27 years of operation. Debt and equity investments constitute the majority of this amount. Also, it has investments or loans with 17 companies at present, ranging from $50,000 to $2 million. Over the years, sales from companies receiving financial assistance from the corporation have approached $1 billion.

Kentucky Highlands' officials claim that their organization has positively influenced its service area in several ways. They point out that the corporation's investment has increased personal and corporate income tax revenue for the state. As of 1993, investee companies paid $200 million in wages to their employees which generated $49 million in personal income taxes. The companies themselves have paid a total of $8.2 million in corporate income taxes over the years.

KHIC officials also assert that the number of job opportunities for area residents has grown. As of June 1995, investment activity had created 4,100 jobs for these residents. Many manufacturing jobs have appeared partly due to the corporation's investments. There were 4,671 manufacturing jobs in the KHIC service area in 1968. As of 1993, employment in this industry had climbed to 7,164.

Finally, corporation officials argue that southeastern Kentucky has reduced its dependence on public assistance programs with the help of KHIC investment. Jerry Rickett, KHIC president, believes that a conservative estimate of the proportion of persons hired by Kentucky Highlands investees who were unemployed prior to being hired is 65 percent. Further, he claims that a conservative estimate of the proportion of persons hired who were public assistance recipients at the time they were hired is 53 percent.

The Commonwealth Venture Fund Act, in its present form, was adopted by the General Assembly in 1992. The law was designed to "... encourage capital investment in the Commonwealth of Kentucky, to encourage the establishment or expansion of small business and industry, to provide additional jobs and to encourage the development of new products and technologies in the state through seed and venture capital investments." The act required a minimum investment in the fund of $5 million, raised through private donations. Contributors to the fund were to receive a credit against any state tax for which they may have been liable. Major investors in the fund ($500,000 or more) were to be seated on the Venture Fund Panel, and, together with gubernatorial appointees from the private sector and ex officio public officials, would have had the responsibility for general administration of the fund and the selection of a firm to manage the day-to-day operations of the fund.

"Small businesses" employing less than 500 people, manufacturing firms with less than $1 million of capitalization and manufacturing firms with less than $3 million of investment, were to receive 75 percent of the proceeds from the fund. The remaining 25 percent was available for investment at the discretion of the panel, with no more than 20 percent of the total to be in agribusiness or agriculturally-related ventures.

Unfortunately, no money was raised for the fund. As reported by David Bratcher, Principal Assistant to the Kentucky Economic Development Finance Authority, flaws in the legislation authorizing the fund were the stumbling block. A task force created by the Economic Development Cabinet is in the process of developing suggestions for rectifying the Venture Fund law, and will forward its recommendations to the 1996 General Assembly. Larry Brown, Commissioner of the Department of Financial Incentives, anticipates the creation of a successful Venture Capital Fund if the task force's recommendations are followed.

Venture capital will fill a void present in the state's economic development system. While the state has been highly successful in recruiting established businesses to Kentucky, and while several large, Kentucky-based operations have been successfully developed, mainly as the result of the vision of a few individuals, the government's success in developing small businesses has been less noteworthy. Absent the efforts of the Kentucky Highlands Investment Corporation (a regional entity with no formal ties to Kentucky government), the Commission did not observe any major, concerted effort to identify or encourage local entrepreneurs.

The success of Kentucky Highland Investment Corporation can be attributed as much to its entrepreneur identification and selection process, and technical assistance in business planning and marketing, as to the availability of venture capital. The Corporation locates aspiring entrepreneurs, selects those who are most promising, finances the business, and provides continuing technical assistance. In some cases the Corporation takes an equity position in the business, and, as an owner, participates in management decisions. Kentucky Highlands refers to the entire system as "developmental venture capital." It is this approach that the Commission recommends be adopted by the state's venture capital fund.

Father Ralph Beiting, founder of the Christian Appalachian Project, suggested to the Commission that greater effort should be made to establish smaller businesses, offering only a few jobs, rather than trying to attract large corporations with large numbers of jobs. Father Beiting said that the development of smaller businesses, offering products or services indigenous to the area, have a greater potential for the creation of jobs in rural areas, particularly in Kentucky's Appalachian counties, than the often futile attempts to bring in large firms. Smaller business, he said, are also more likely to remain in the state than larger, more mobile firms. Venture capital, correctly applied, will provide the necessary funding for the types of businesses of which Father Beiting speaks.

Father Beiting also spoke of the need for public-private partnerships to foster economic development. Specifically, Father Beiting explained that the state should join organizations like the Christian Appalachian Project to identify entrepreneurs in Kentucky's smaller communities who could become the focal point for the development of small businesses. He said that private venture capital is available through nonprofit organizations like the Christian Appalachian Project; the difficulty is in identifying qualified entrepreneurs. Further, the state could help insure the success of small local businesses, Beiting explained, by identifying volunteers who could assist an entrepreneur in starting a business. He noted that no such effort by the state is currently in place.

The Office could be part of the Venture Capital Fund or independent of the Fund. In the latter case, the Office should be organized within the Cabinet for Economic Development.

While a Kentucky Venture Capital Fund should serve as a source of funding for small, high-risk business ventures, the Commission believes that other opportunities also exist for capital investment in smaller businesses. The Commonwealth traditionally utilizes a number of state banks as depositories for its funds. The rate of interest paid to the state by the depositories for the use of the funds is generally below the market rate paid to other depositors. The Commission believes that as a concession for the below-market rates of interest, the state should require the depositories to make loans available to small businesses which otherwise would have difficulty in securing loans from other commercial lenders.

The portfolio of loans to small businesses through the Linked Deposit Program should be in an amount equal to the average amount of state funds on account in the depository. Individual loans should be capped at an amount sufficient to provide adequate funding to a small business, but in an amount to reduce the depository's exposure from any one loan and to maximize the number of businesses served through the Linked Deposit Program.

In 1992 the Kentucky General Assembly created the Local Governments Economic Development Fund. The Fund was scheduled to eventually receive and retain 38 percent of the state's receipts collected from the coal severance and processing taxes. Moneys in the Fund are allocated to coal producing counties based upon a three-factor formula. Use of the allocated funds is restricted to "industrial development projects" to promote manufacturing, processing, or assembling operations. None of the moneys may be used under current law for community development other than that related to site preparation and the construction of industrial facilities.

The Commission believes that successful economic development is dependent, to a great extent, upon the quality of life available within the community. Much of the state's rural areas, and many of the state's smaller urban areas, lack services as basic as water and sewer facilities. The absence of such services is prevalent in Kentucky's coal-producing counties, particularly those counties located in the eastern part of the state. It is the Commission's position that the presence of water and sewer services in communities where they are not presently available will make those communities more attractive for the relocation or development of industry.

The Commission believes, as stated in Chapter 4, that affordable dependent care, the availability of transportation, and employer-subsidized health care are essential to enable many persons currently unemployed and living in poverty, to "afford" a job and overcome poverty. The Commission has supported its belief by recommending tax credits for the establishment of dependent care facilities or the subsidizing of dependent care expenses, grants to public transportation agencies for the planning of employment-targeted routes and schedules, and the linking of employer-furnished dependent care, health care, and transportation to the selection of firms to receive state loans or grants.

The Commission believes, however, that the publicizing of these and other incentives, e.g., the income-tax credit awarded for premiums paid by employers into a health care trust, and the furnishing of information to business about the approaches, alternatives and means to providing employee benefits, will be necessary to realize their full development.

The most logical fit for the office would appear to be within the Cabinet for Economic Development, although the Cabinet for Human Resources would be an alternative site. The mission of the office would be to encourage employers to provide employee benefits, particularly dependent care, transportation, and health care. The success of the office would be measured by the number of employees receiving the benefits. The office would approach its mission by publicizing the tax and other financial incentives to provide employee benefits and by furnishing technical assistance in designing those benefits.

Kentucky's tax code provides an income-tax credit to employers (individual proprietors, partnerships, and corporations) to encourage the employment of the unemployed. Established by the Kentucky General Assembly in 1984, the credit is worth $100 per each person hired by the taxpayer who has been classified as unemployed for at least 60 days prior to his employment, and who remains in the employ of the taxpayer for at least 180 consecutive days. The Kentucky Revenue Cabinet estimates that the credit is awarded for the employment of less than 1,000 unemployed persons per year. The Commission believes that this relatively small number is indicative of the fact that the tax credit, at its $100 per person employed level, is not a sufficient inducement to hire and retain the unemployed. Additionally, the Commission believes that whatever tax credit is made available should be extended to include the employment of public assistance recipients.

Tripling the amount of tax credit should increase the interest of employers in employing from a targeted workforce. Tripling the award should also serve as a greater inducement to employers to assist their targeted employees in acquiring the skills necessary to remain on the job. The Commission believes, as stated earlier in this chapter, that the state gets a "bigger bang for its buck" when it induces the employment of public assistance recipients. If the added tax credit results in the additional employment of the unemployed or public assistance recipients, the social and financial returns to the state will far exceed in value the $300 credit.

A basic component of the job search and employment process is the ability of prospective employers and prospective employees to communicate with one another in a rapid and timely manner. The usual means of communications in these instances is the telephone.

Statewide, 92 percent of all households in Kentucky have a telephone and 94 percent have access to a telephone; however, telephone service to the state's households varies considerable from county to county. In two-third's of Kentucky's counties more than 10 percent of households have no telephone. In 32 counties 15 to 20 percent of households lack service. In 21 counties 20 to 30 percent of the households have no phone.

The counties with the lowest telephone service are rural, and all but two are located in the eastern half of the state. Although there is no county data available detailing access to a phone, it is reasonable to assume that the lowest access rates would also be found in the same low populated counties with, in some cases, limited road systems. Nationally, the households with the lowest rate of telephone service are the households with the lowest income. The national findings would appear to apply to Kentucky, whose low telephone service counties are also among the state's counties with the lowest per capita income and, not coincidentally, the highest rates of poverty.

The low rates of telephone service aggravate the employment process in those areas of the state which can least afford an impediment to prospective employee/employer communications. According to LRC staff analysis, a number of states participate in two national programs, sponsored by the Federal Communications Commission (FCC), designed to reduce the cost of normal telephone installation charges or telephone line charges, and in some instances, have developed their own programs to subsidize the cost of telephone service for low income families.

Life Line, a plan first approved by the FCC in 1985 and later expanded in 1986, offers a waiver of up to 100 percent of the subscriber line charge to verified eligible customers, with the state offering a matching reduction. Each state submits its proposed Life Line plan to the FCC for certification. Link-Up-America, begun in 1987, provides for a waiver of 50 percent of a telephone company's normal installation charge, up to a maximum of $30. In addition, telephone companies are encouraged to waive deposit requirements or allow deposits to be made in interest-free installments. To qualify, an individual must not be claimed as a dependent for federal income tax purposes (unless over age 60), and must meet local income and eligibility requirements for each state. In the case of either plan, each state submits its proposal to the FCC for certification.

In 1994, 47 states participated in Link-Up-America, 32 in Life Line. The latter group of states also participated in Link-Up-America. In addition to their involvement with one or both of the national programs, 20 states offer their own cost-of-service reduction programs. Kentucky participates in Link-Up-America, but not Life Line, and does not offer its own program.

A variety of sources are utilized by the various states to fund their matching share in Link-Up-America or Life Line, or the cost of their own program. The most popular funding sources are a surcharge on telephone service rates, a tax credit offered to telephone companies, or a tariff imposed upon telephone service usage.

In addition to obvious safety and health considerations, the Commission believes it is important that every family in the state have telephone service for job acquisition purposes. The benefits of developing a qualified workforce (see Recommendation 6.13) would be diminished if some of the most needy individuals lacked the necessary access to job opportunities. The Commission has no recommendations as to sources of funding, but suggests that a subsidy by regular telephone customers would be justified under safety and health considerations, or a general state subsidy through tax credits or a direct appropriation would be justified as an economic development tool.

To ensure equal opportunity for the employment of members of racial minorities and women, Kentucky has developed a series of programs which address equality of opportunity in preparation for employment, as well as in the process of employee selection and retention. Included are affirmative action provisions relating to state government employment, participation in membership of state boards and commissions, recruitment for teacher training and health profession education, and funding for attendance at institutions of higher education.

Contractors doing business with the state must comply with the Kentucky Civil Rights Act, and their workforce must reflect the minority population in the drawing areas. Minority-owned businesses are provided special assistance through the Economic Development Cabinet's Department for Existing Business and Industry. And in compliance with federal law, 10 percent of federal highway funds are set aside for minority and women-owned businesses. The Commission believes that these and the many other affirmative action programs required by state law are helping to ameliorate poverty.

The Commission was concerned, however, that the recent U.S. Supreme Court holding in Adarand Constructors v. Pena (1995) might erode the effectiveness of Kentucky's affirmative action initiatives. Although Adarand only addressed federal programs, and merely stated that affirmative action programs, when challenged, would be subject to a strict review, the Commission was concerned that the negative publicity resulting from the court's decision might undermine the state's commitment to affirmative action.

The Commission determined that, in light of the Adarand decision, efforts should be taken to preserve and even strengthen affirmative action programs in Kentucky. Although Adarand did not render federal affirmative action programs unconstitutional, at least one observer believes that it essentially ". . . cut the legal legs out from under dozens of federal affirmative action programs.''' As a result, it is possible that state programs, including Kentucky's affirmative action plan, will sustain more legal attacks in the future. The Commission believes that reducing or eliminating these programs will hamper Kentucky's ability to reduce poverty. Hence, the General Assembly should show its full support of affirmative action programs and develop ways to protect and strengthen them.

The Commission recognizes that many of the foregoing recommendations assume a system of economic development similar to that presently in place. Lest the reader think that the Commission believes that the current system will satisfy Kentucky's economic development needs in the future, it hastens to proclaim that it doesn't.

The Commission's view is reflected in the writings of several authors, including Peter Drucker, who points out in his 1993 book, Post-Capitalist Society, that concomitant with the virtual disappearance of unionized labor we have moved into an 'employee society' where labor is no longer an asset." He asserts that the Japanese understand this fact, whereas Americans do not. "Japanese companies are moving manual work in manufacturing out of Japan as fast as they can. In the United States, manufacturing jobs are seen as a priceless asset. In Japan, they are seen more and more as a liability."

He cites Kentucky and Tennessee as examples of "poor rural states" which are "desperately trying to attract manufacturers who offer blue-collar jobs", and in doing so they end up competing against Third World nations which have an ample supply of young people who are qualified for nothing but manual work in manufacturing. He states:

Economically as well as socially, it would be much more productive -- the Japanese argue -- to put the money spent to create blue-collar jobs in developed countries instead into advancing the country's education, and thus to ensure that youngsters learn enough to become qualified for knowledge work, or at least for high-level service work.

Drucker asserts that there is a place for manufacturing in developed countries, but manufacturing should be along the line of the state-of-the-art, high tech minimill steel plants (like Nucor at Crawfordsville, Indiana). He writes:

If a country has the knowledge base, it will also manufacture. But this manufacturing work will not be competitive if carried out by traditional blue-collar workers who serve the machine. In competitive manufacturing, the work will largely be done by knowledge workers whom the machine serves -- as computer consoles and computerized work stations serve the ninety-seven technicians in a steelmaking minimill.

He says further, "Manual labor in making and moving things is rapidly becoming a liability rather than an asset. Knowledge has become the key resources for all work." He concludes, "The only long-term policy which promises success is for developed countries to convert manufacturing from being labor based into being knowledge based."

Carl Rist, a policy analyst for the Corporation for Enterprise Development, Washington, D.C., typifies many who have examined the phenomenon of "smokestack chasing" and "bidding for business" -- the so-called new "War Between the States." In a recent study, Rist says that the costly incentives are "marginally effective at best and inconsequential at worst." Rist advises that the states would be better off investing in people, technology, existing businesses and infrastructure, the kinds of things that attract new businesses in the first place.

Mark Memmot, economic analyst for "USA Today," suggested in his September 18, 1995, column that the way we define wealth and capital needs broader interpretations and must include human capital - "the productive value of people," and social capital - "the value of families, communities, and the other organizations that glue a society together." These, along with natural capital (land, minerals, and other natural resources), financial capital, and produced assets -- the traditional "goods and services" -- constitute what we call wealth. Memmot asserts, "For nations that aren't blessed with abundant natural resources, the key to becoming wealthy lies in their people."

The Commission believes that tomorrow's successful system for economic development will be characterized by a well-educated, well-trained workforce, produced by an enlightened elementary, secondary and post-secondary system of education, and supported by research centers devoted to furthering the ability of industry to design and manufacture new and innovative products at low cost and high quality.

The mission of the Task Force would be to develop the Commonwealth's strategy for competing in the national and world economies in the twenty-first century. Specific objectives of the Task Force would include: