State, businesses lack common plan

THE BALTIMORE SUN

After the inauguration parties end on Jan. 18, the next governor will discover how hard it will be to give Maryland the coordination and reputation needed to revive an economy that has been battered in the last six years and badly lags behind the nation in economic recovery.

That formidable reality emerges from 47 interviews over three months with executives both in and outside Maryland, economists, state officials, economic development authorities and others.

Maryland has many elements working in its favor -- an excellent location, an educated work force and a superb transport system.

And the port of Baltimore, transformed by the Schaefer administration, stands out as a central asset, permitting companies to move merchandise into and out of the East Coast with ease, and pumping vitality into every element of Maryland's economic landscape.

Gov. William Donald Schaefer is widely credited with upgrading the state's highway system, reinvigorating Baltimore-Washington International Airport and elevating a once-anemic state development agency to a central role.

But the interviews reveal problems so deep that they undercut the state's ability to exploit its assets.

Among the most serious:

* Governor Schaefer, though known as an enthusiastic business booster, is widely regarded as intolerant of open discussion on issues he considers "negative," blocking public debate of critical problems and fostering mistrust between the administration and core elements of the business community.

* Division and infighting within Maryland's business community prevent a unified voice and complicate relations between the state government and the top business leadership.

* All attempts in recent years to establish a comprehensive, joint government-business strategy for economic development have failed.

* Business leaders inside and outside the state perceive Maryland's taxes as being among the highest in the country.

* The state compounded its tax reputation in 1992 by imposing a series of nuisance levies and an income surtax to make up for revenues lost to the recession.

* A perception is widespread within and outside the state that Maryland's regulatory bureaucracy is often heavy-handed and a drag on economic growth.

The problems are only deepened by the strains in communication between government and business leaders.

And in some of the interviews, the tensions at the top of the state's power structure broke the surface spontaneously.

In a broad discussion of the state's economy, Governor Schaefer immediately raised his voice at the first mention of criticism from the state's most powerful banker, H. Furlong Baldwin, president of Mercantile Bankshares Corp.

"Baldy is a damaging and very negative person. He talks about cutting taxes and rides around in a stretch limousine. He talks the state down all the time," Governor Schaefer said.

In a separate interview two weeks earlier, Mr. Baldwin vented his own feelings about Governor Schaefer.

'Hello, Baldy'

"When the governor calls me, I know what's on his mind as soon as he says my name. If it's 'H. Furlong Baldwin,' I know he's about to chew me out. If it's 'Hello, Baldy,' I know he needs something from me," he said.

While the bluntness of their remarks speaks to the personalities of two of Maryland's most influential and strong-willed men, it also illustrates a broader gulf between the state's government and key segments of the business community.

This division couldn't come at a worse time and has aggravated a troubled economic climate.

The national economy's restructuring -- especially the shift away from manufacturing -- has clobbered Maryland's once-powerful industrial core, and the sudden contraction of defense industries is compounding that challenge into one of the most serious threats to the state's economy.

As recently as 1989, Reagan-era defense contracts pumped billions of dollars a year into Maryland. Even as erosion accelerated in Maryland's traditional manufacturing base -- clothing, chemicals, steel and building supplies -- the defense buildup more than made up the losses.

The state averaged 3.5 percent annual job growth from 1983 through 1989, adding as many as 87,000 jobs in 1984 and 86,000 in 1987, the two peak years of the Maryland defense boom.

Shrinking defense

But since then, the end of the Cold War has brought radically shrinking defense budgets, which have been an economic calamity for Maryland, the country's fifth most defense-dependent state.

Waves of defense cutbacks have meant that the recession hit Maryland harder and longer than the rest of the country. Even today, the state lags behind the rest of the United States in the economic recovery.

Since 1990, Maryland has suffered a net loss of 61,000 jobs, and its job growth was a minuscule 0.68 percent for the latest 12 months, ranking 46th among the 50 states.

"In the 1980s, when the defense boom made growth here virtually effortless, Maryland had one of the country's most envied economies. That was only six years ago, but in that short time, the state has plummeted from leader to laggard," said economist Charles W. McMillion, president of Washington-based MBG Information Services.

The governor and Mark L. Wasserman, secretary of the Department of Economic and Employment Development (DEED), acknowledge some of the problems, but they add that Maryland's accomplishments have often been ignored.

The next governor will find the state's sprawling collection of bureaucracies hard to control, Mr. Wasserman said. He worries whether "we may see a loss of the coordination this governor has established" even within the state administration, much less between the government and private sector.

Governor Schaefer says the news media and some business executives, "see what's wrong but never what's right with the state's economy."

"You always compare Maryland with the whole country. You ought to compare us with the Northeast. We're doing the best in the Northeast," he said.

In fact, if Maryland were counted as a Northeastern state -- which most U.S. government statistical services do not do -- it would have ranked No. 9 out of the 11 in job growth for the past 12 months.

Some business executives, especially in the biotechnology industry, which the state has made the centerpiece of its development work, praise Maryland's business climate.

"There's a real metamessage in this state that transmits a very supportive feeling toward our industry," said M. James Barrett, head of Montgomery County-based Genetic Therapy Inc.

But the consensus is that the state faces serious problems that must be confronted.

Success is unlikely without a long-term strategy that addresses all the state's varied economic sectors and has strong and coordinated backing from all key players -- the administration, the General Assembly, regulatory agencies, the city and county governments and the business community -- those inter viewed said.

The failure to develop such a plan is of concern and places Maryland at a disadvantage, especially in the intensifying competition with other states in the mid-Atlantic region.

Because it faces huge defense cutbacks in addition to the nationwide decline of manufacturing, "Maryland's economy is going through a restructuring even deeper than the national economy's," says Michael A. Conte, director of regional economic studies at the University of Baltimore.

"If we want to come out whole, we are going to need to use everything we have and we are going to need to have everybody -- the administration, the legislature, the business community and the counties and cities -- all working together toward clearly understood goals that are very broadly agreed on. We certainly don't have that today," Mr. Conte said.

While Maryland has failed to put together a strategy, other states, such as Virginia and North Carolina, have vaulted past Maryland as hotbeds of economic growth, largely by getting state and local governments and the business community to unite on policies to stimulate growth and jobs, according to economists.

Often, well-intended state government actions have just the opposite effects.

On May 21, 1991, with the recession and defense cuts bleeding Maryland of jobs by the tens of thousands, Governor Schaefer and officials of Frito-Lay Inc. had a nugget of good news: The snack food giant would build a pretzel plant and warehouse in Aberdeen employing up to 500 people.

One year later, the state slapped a 5 percent tax on selected snacks -- including most of those made by Frito-Lay. That tax was one of several the state imposed to make up for revenues lost to the recession.

Today, it brings in an estimated $22 million a year -- a scant 1.25 percent of Maryland's $1.75 billion in sales taxes.

But to Frito-Lay, a PepsiCo subsidiary, the tax was a slap in the face, and in retaliation, it has virtually written Maryland off its list for expansion as long as the tax remains on the books.

"The snack tax . . . puts Maryland at a distinct competitive disadvantage for obtaining the capital investments Frito-Lay will make," said Steven S. Reinemund, the firm's president.

But there's more behind Maryland's reputation as a "tax happy" state than the snack tax.

The business community declared victory in 1991 when Dutch-owned Aegon U.S.A. Inc., announced it would put the headquarters of its North American operations in Baltimore after taking over Monumental insurance companies.

The firm has 6,000 U.S. employees, only about 800 of whom are in Maryland, but Donald J. Shepard, the new head of Aegon's American operations, was the only one who moved to Maryland when the headquarters came here.

The reason: taxes.

Mr. Shepard cites land transfer taxes and fees specifically, and the overall tax burden in general, which, he and other executives maintain, are among the highest in the nation.

"Truthfully, the corporate headquarters here consists of me. I don't ask anyone else to move here," Mr. Shepard said.

"The real estate transfer tax and recordation fees are a problem the state absolutely must deal with -- they kill the state's reputation," said Mr. Conte, of the University of Baltimore.

Part of the state's recession-driven tax package was a surtax on incomes over $100,000 -- a decision that not only enraged executives but helped foster the image that Maryland is a "tax happy" state.

"Every time Maryland's ox is in the ditch, Wham! Just slap on another new tax," said Mr. Baldwin of Mercantile Bankshares.

The 1994 Assembly repealed the surtax effective next year, but reputations die hard and slow.

Tax stability is at least as important to businesses as a state's actual tax rates, according to economic development experts.

And some Maryland officials now acknowledge that the state severely harmed its reputation by suddenly piling on new taxes amid the recession.

"In retrospect, doing what we did -- throwing wild cards into the tax mix -- does make everything more difficult. . . . The immediate tensions of an unprecedented recession, one that kept hitting in new waves, made for inefficient public policy-making," said DEED Secretary Wasserman.

The U.S. Advisory Commission on Intergovernmental Relations actually says Maryland's tax burden isn't as bad as perceived. The commission ranks it 34th from the heaviest out of 50 states, when taxes are calculated as a percentage of personal income.

But popular published rankings, such as in Money magazine, that use per capita revenues, put Maryland's tax burden as high as eighth in the country.

L Accurate or not, such a reputation is difficult to overcome.

"Once you let yourself get hung with a bad tax reputation, it can live on for ages, no matter what you do," Mr. Baldwin said. "Baltimore used to have an inventory tax that drove a big Exxon refinery, with hundreds of jobs, out of town. It's been 40 years since the city got rid of that tax, but I still get calls from people who are thinking of moving here and ask me, 'Are you folks still doing that inventory tax nonsense?' "

Bad news arrived at the Walkerville headquarters of BioWhittaker Inc. in June 1992.

Two auditors from the tax division of the state comptroller's office announced that the firm owed $216,000 in penalties and current and back taxes on electricity used by air-treatment equipment in the "clean rooms," where it makes medical cell cultures.

For years, the company had handled the air treatment -- which the federal Food and Drug Administration requires -- as a manufacturing process, which meant that the electricity it used was tax-exempt. But now the auditors were informing BioWhittaker that they considered the process taxable because it also benefited employees who worked in the rooms.

That type of sudden change has given Maryland a reputation as a state whose regulatory system often works against businesses and sometimes even the policies of other state departments, such as DEED.

"If [Maryland] wants to prosper in the future, as it did in the past, it has some things to work on, especially regulatory and permitting issues. Or it could fall off the pace," said Dennis Donovan, of the Wadley-Donovan Group, a New Jersey-based site consultancy. "Some northeastern states can be even worse, but Maryland has a serious bureaucracy problem, especially compared with neighbors to the south."

When officials at DEED heard of the tax ruling against BioWhittaker, they realized it was not just a tax nuisance for one company, but a threat to scores of small biotechnology firms that are the core of the department's economic development hopes.

DEED pushed a bill through the Assembly last winter that specifically exempted clean rooms from the electricity use tax. Today, officials use that case as proof of how quickly Maryland responds to business concerns.

But Noel Buterbaugh, chief financial officer of BioWhittaker, though pleased with the results, remains unconvinced that regulators won't surprise him again.

"Once it came to DEED's attention, they moved swiftly on that particular law. But today we are still dealing with the same bureaucrats and the same bureaucratic attitudes, and who knows what they'll find to try the next time the state is strapped for revenue?" he said.

Business executives, development experts and even some senior members of Governor Schaefer's administration acknowledge that bureaucratic attitudes are a serious impediment to Maryland's economic growth.

The chamber view

"After eight years under Governor Schaefer, who may well be the greatest booster the state has ever had, what is remarkable is that Maryland regulators still look upon a business as a problem to be solved, not as an opportunity to be pursued," said Champe C. McCulloch, president of the state Chamber of Commerce.

Only as part of a comprehensive growth strategy can Maryland hope to deal with its tax reputation and its bureaucracy problems, business executives, economists and some officials say.

But Maryland has repeatedly failed in the past five years to come up with such a strategy on which the administration, Assembly, business community and local governments can agree.

The first attempt, coordinated by Mr. McMillion, then a research fellow at the Johns Hopkins University's Public Policy Institute, was dead on arrival in 1990 of its three-volume report.

Participants describe it as a case study in the Schaefer %o administration's determination to snuff out any hint of criticism and block public debate of any "negative" topic.

"It all came to nothing," said Robert C. Embry Jr., president of the Abell Foundation, one of Maryland's biggest charitable trusts and a key sponsor of the 1990 McMillion report.

"The governor's office didn't like the study because it thought the findings were too negative, especially in finding that the electronics industry, which was the big push at the moment, was already declining because of defense cutbacks," said Mr. Embry.

The Schaefer administration's reflexive rejection of anything "negative" has created a paradox. While the governor is widely viewed as having been a strong supporter of economic growth, communication between the administration and powerful segments of the business community is strained and sometimes impossible, many business leaders say.

"If you won't look directly at the problems and allow a public debate of them, I don't know how you're going to solve them," Mr. Embry said.

Yet only coordinated action by all elements of Maryland's power structure has a realistic hope of coping with the challenges the state faces, economists and business leaders say.

Any strategy must deal with upgrading the state's tax reputation and re-educating its bureaucrats, Mr. Wasserman said.

But turning around a bureaucracy can be an immense job, according to people who have tried it elsewhere.

"You have to go slogging through it step by step, one agency and one office at a time, getting each chunk of the bureaucracy to sit down in a room with the people they regulate, and let the regulators see what kinds of problems they cause for businesses and the businesses see exactly what they need to do to speed up their permits," said Victor L. Hoskins, the new executive director of the Greater Baltimore Committee's Technology Council, who did just that in Long Beach, Calif.

Maryland has assets that can help make its economy a powerhouse again, but far greater coordination and planning are needed to exploit them, development experts say.

"You have to start with the location you have, and in that, Maryland has important advantages -- the port of Baltimore, proximity to Washington, D.C., access to the Northeast, the infrastructure it has developed in the past eight years," said Mr. Donovan, the site consultant.

The combined power of the port, the state's highway system and the access to population centers in the Northeast have been recently demonstrated by the decisions of some companies to locate operations in the area.

Among those are Time Warner's recently announced plan to put its 400-job East Coast distribution center on Interstate 95 at White Marsh, and Woodward & Lothrop's decision to put its 200-job consolidated distribution center in Baltimore.

But most people insist that the state is losing more than it's gaining because of the failure to develop and implement a strategy for growth.

Maryland's chief existing development strategy, the drive to make the state a biotechnology center, seeks to exploit location by feeding on the presence of huge government and Johns Hopkins University laboratories that give the state one of the country's leading life-sciences talent pools.

But the state has no comparable strategy to exploit key opportunities that could provide more jobs sooner, development experts say.

"Maryland . . . needs to be much more coordinated and aggressive in targeting Northeastern companies that want a more affordable or desirable place for their distribution, warehousing and processing centers," said J. M. Mullis, a Texas-based site consultant who often works in the Mid-Atlantic area.

The same applies to firms from outside the region that are looking for new sites to serve the Northeast, he said.

Take, for example, the state's biggest near-miss this year, Starbucks Coffee's decision to locate its East Coast plant in York County, Pa., rather than in Harford County.

The sites Starbucks really liked were in neither of those places but in Maryland's Cecil County.

"In many ways the biggest, most flexible and best located sites we saw were in Cecil County, Maryland, and we had to pass them up because the infrastructure -- gas, sewer, water -- was not in sight," said Howard Wolner, vice president of Starbucks.

"I think Cecil County has the potential to be Maryland's next big takeoff, much like Harford a decade ago, but the fact is the groundwork has not been done there at this time," he said.

To many analysts, Mr. Wolner's remarks illustrate an all-too-familiar facet of the state's planning and coordination failures.

"You constantly hear of cases where Maryland could have won if only the state and the county had both been reading from the same page of the script. But first, everybody has to agree on the script. Maryland suffers from its inability to get one together," Mr. McMillion said.

TOMORROW: How division in the business community hurts the state's business climate.

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