Border Warfare: Can We Do It Differently This Time?

Last year, a handful of corporate relocations stoked fears that another expensive bidding war was getting underway within the tri-state region. As if on cue with the onset of the recession, headlines trumpeted which cities, counties or states were the winners or losers as firms moved headquarters, back offices or production facilities from one part of the region to another. Large subsidies in the form of tax breaks, below-market rents and other incentives from state and municipal governments generally greased the wheels and led to renewed debate over the whether this is the most productive use of scarce public funds.

The fiercest battle was waged between New York and New Jersey over the 2,300 workers employed by the Depository Trust and Clearing Corporation, a long time mainstay of Lower Manhattan's cluster of financial services firms. After a nine-month battle, the company took a $90 million subsidy from New Jersey to move 1,600 workers to Jersey City, leaving its headquarters and 700 workers in Lower Manhattan. In many respects, it was a classic example in which a firm was able to leverage an aggressive campaign by New Jersey against New York efforts to hold onto as much of Lower Manhattan's shrinking finance sector as possible.

While the Depository Trust case followed a familiar script in the decades-long bi-state rivalry, other moves around the region paint a more complex picture. The announcement that OSI Pharmaceuticals would move from its campuses in Melville and Broadhollow to Westchester County caused great consternation on Long Island. Here, the issue was not so much about which jurisdiction put up the biggest subsidy package, although special treatment for the company on public lands was an issue. Rather it was how the move symbolized Long Island's struggles to forge a regional economic development strategy out of the disparate interests of its nearly 100 municipalities.

Westchester also came in for its own share of second guessing as Starwood Hotels chose to move its headquarters and 800 employees from White Plains to Stamford, taking a substantial subsidy of loans and tax credits from the state of Connecticut in the process. Meanwhile, as part of bankruptcy proceedings, Readers Digest is set to move out its buildings in Chappaqua and Pleasantville, relocating its employees to White Plains and Midtown Manhattan.

Whatever these moves signify, it is not the great sucking sound heard in the 1970s and 1980s as firms fled New York City for suburban office parks. Nor is it the massive dislocation after September 11, much of it temporary, of firms moving out of a wounded Lower Manhattan. Considering the turbulence of the economy, the number of high-profile moves seems smaller than expected. There is no city-to-suburb pattern, and one could argue that the four moves described above represent a consolidation of gains made by the region's cities since the mid-1990s. Depository Trust is remaining in the region's urban core. Starwood Hotels moved from a suburban office park to a downtown location that resulted in part from Stamford's efforts to focus development in the city's center. OSI will consolidate workers from two suburban locations to a single suburban campus that is closer to Manhattan. Reader's Digest will relocate to two downtown locations that are closer to where the bulk of their employees live.

There is also no evidence that one part of the region is benefiting more than another. Not only is there nothing in the anecdotal evidence of firm relocations, but employment data is showing that the 312,000 jobs that have been lost in the region over the last two years are fairly evenly distributed. New York City has about one third of the region's jobs and has absorbed about one third of the losses from November 2007 to November 2009. In percentage terms, declines in total employment have ranged from 2.6% in central New Jersey to 4.0% in southwestern Connecticut, with New York City, Long Island, northern New Jersey and the Hudson Valley somewhere between.

Of course it is possible the intra-regional rivalries are just heating up again, but it's also possible that something different is brewing. Cities are in better shape and can be less defensive in fending off threats to move to suburban office parks. The dire fiscal straits of the region's states and municipalities could also cool down expensive bidding wars. While the fear of losing both jobs and tax revenues could still lead to hefty tax breaks, a greater need to justify public expenditures could lead to more restraint.

There is also some hope that economic development strategies are putting less emphasis on deal-making and more on the on the fundamentals of the business environment. The Bloomberg administration has been more hard-nosed in negotiations than its predecessors, drawing a firmer line on how much it is willing to offer in subsidies. The results appear to justify its philosophy, as the city's economy has done well compared to other parts of the region over the last decade than in early periods. Other cities, from Stamford and White Plains to Newark and Bridgeport, are focusing on infrastructure and amenity improvements in their downtowns as their primary economic engines. The Obama administration is also beginning to provide incentives for greater regional collaboration through its Sustainable Communities program and other initiatives.

The Excelsior Jobs Program proposed by Governor Paterson may also be an opportunity for a more strategic state economic development process, although the details are still sketchy and its implementation could take a number of forms. At a minimum, it would have a number of improvements over the expiring Empire Zone program. Companies would be required to demonstrate that they actually create the jobs promised in return for subsidies, and tax credits would be more targeted than they are now.

Eliminating intra-regional bidding wars will be a tall order, even though it would be in the best interests of the region as a whole, as long as firm location determines the tax base of states and municipalities. However, there are a range of incremental steps that should be taken to limit public costs and encourage more productive forms of investments. States and localities need to enforce stronger requirements for the creation of jobs, payrolls and other benefits in return for subsidies. At a minimum, total subsidy amounts should be capped and used only when they support a clear strategy, ideally one that incorporates smart growth and sustainable development goals.

Cities, counties and towns can also take their own initiatives to create a more receptive environment for both large firms looking for new space and home-grown small business. Investments in public spaces, transit and other infrastructure, or untangling the web of excessive regulatory hurdles that many localities have spun, can bring longer-term returns than one-shot deals. Better still, pooling resources to collaborate on infrastructure and joint development projects could end up being far less expensive than playing poker with tax dollars.