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Stagnation: PA business climate remains sluggish


Pennsylvania’s business climate remains sluggish as the commonwealth continues to struggle in the aftermath of the Great Recession.  Business conditions, employment levels and sales have all backslid over the past six months with owners blaming high taxes, government regulation and a lack of skilled workers for the malaise.

The Fall 2016 Keystone Business Climate Survey conducted by the Lincoln Institute of Public Opinion Research found half of the business owners and chief executive officers survey saying the state’s economy has gotten worse over the past six months, only five percent felt Pennsylvania’s business climate had improved during that time frame.

Comparatively, one year ago 42% felt the business climate had gotten worse, while six percent at that time said it had improved.  There is little optimism that business conditions will improve soon. Forty-four percent say they expect the state’s economy to continue getting worse over the upcoming six months, five percent expect to see an improvement in the business climate.

Along with that pessimistic overall prognosis twice as many businesses report having reduced their workforce as say they have added jobs.  The majority of businesses – 66% – reported that employment levels remained about the same over the past six months.  But, 21% said they have reduced their employee compliment while 11% added employees.  The picture improves slightly as the owners/CEOs look ahead to the coming six months.  Sixteen percent say they plan to add employees, 12% expect to reduce their workforce.

Sales have also taken a hit over the past six months.  Thirty-nine percent said their sales remained about the same from March thru September.  But, 39% reported decreased sales and were off-set by only 21% having reported sales increases.  Looking forward, 51% expect sales to remain stable.  Twenty-Four percent forecast an increase in sales, 23% are braced for a sales decrease.

Factors Impacting Business Growth

Among the factors cited by businesses for why they considered expanding their businesses over the past two years, but decided against expansion taxes and regulation topped the list of barriers.  Onerous federal regulations were cited by 41% of the businesses that considered, but rejected, expansion plans.  Coming in a close second was Governor Tom Wolf’s proposed tax increases cited by 40% as a reason why they did not expand. Pennsylvania’s tax structure was listed by 29% as having frustrated expansion plans.

Thirty-six percent cited onerous state regulations as a barrier to expansion, while another 35% cited the lack of a skilled work force.  Nearly half of the businesses surveyed said they currently have open positions for which they have been unable to find qualified applicants. Forty-two percent say they have been unable to fill one to five jobs; 2% have six to ten open positions; one percent has more than ten jobs unfilled due to lack of qualified applicants.

State Issues

Pennsylvania fiscal condition continues to be of concern to the business owners and CEOs participating in the Fall 2016 Keystone Business Climate Survey.  Eighty-five percent disagreed – 70% strongly so – with Republicans in the General Assembly having agreed to a $1.4 billion spending increase and then raising taxes to enact the current year’s state budget.

Looking ahead to what will likely be another epic budget battle next summer, 92% say the General Assembly must address cost drivers such as pension reform before considering an increase in taxes.  In fact, 34% said the state’s massive unfunded pension liability has caused them to not consider expanding in Pennsylvania.

Among pension reforms being considered is moving state employees from the current defined benefit pension system to a defined contribution plan. Thirty-nine percent of the businesses surveyed said they offer employees a company administered defined contribution plan to which the company contributes.  Only 3% of the private businesses surveyed continue to offer a defined pension plan.  Another 40% offer employees no retirement plans at all.

Earlier this year the General Assembly did pass, and Governor Tom Wolf signed into law, some modest changes to the state’s century-old liquor laws. Business owners/CEOs said those reforms did not go far enough.  Fifty-two percent would like for the state to completely privatize both retail sales and wholesale distribution of alcoholic products.  Another 26% would like to see just retail sales privatized.  Twelve percent said the recent changes were sufficient.

Pennsylvania has an abundant supply of natural gas, but additional pipelines are needed to get that gas to market.  Eight-nine percent agree – 60% strongly agree – that this resource should be developed and more pipelines built.  Nine percent disagree.  Twenty-five percent said easier access to natural gas would be a benefit to their business with an additional 14% saying it would be a major benefit.  Thirty percent said they do not utilize natural gas in their business.

Over the past nine years since the passage of Act 44 the Pennsylvania Turnpike Commission has diverted $5.2 billion to PennDOT to help pay for state highways and public transit.  This has resulted in annual fare increases for turnpike travelers.  Sixty-three percent of those participating in the Fall 2016 Keystone Business Climate Survey said this should end and fare revenue be used only to maintain and improve the turnpike.  Twenty-nine percent felt the sharing of revenue should continue.

Job Approval Ratings

President Barack Obama and Governor Tom Wolf continue to suffer from significantly low job approval ratings among the business community.  Eighty-four percent have a negative view of the President’s job performance; 86% disapprove of the job being done by Governor Wolf.

U.S. Senator Pat Toomey, who faces re-election in November, received a 50% job approval rating against 23% with a negative view of his job performance.  The job being done by U.S. Senator Robert P. Casey, Jr. is viewed negatively by 56% of the business owners/CEOs, 18% give him positive marks.  Likewise, 54% say Federal Reserve Chair Janet Yellen is doing a poor job, 15% approve.

Pennsylvania has three statewide constitutional or “row” offices. Two are serving by appointment, their elected predecessors having resigned after being convicted of crimes.  Auditor General Eugene DePasquale is the surviving official elected in 2012 still in office.  Seventy-three percent have no opinion of his job performance, with 14% saying he is doing a good job and 14% having a negative opinion of his job performance.  Likewise about two-thirds offered no opinions on state Treasurer Tim Reese or Attorney General Bruce Beemer.  Of those who did, 18% give Beemer a negative rating, 6% a positive one while 15% hold a negative view of Reese, 5% a positive view.

As has been the case throughout the Keystone Business Climate Survey’s 22-year history the owners and chief executive officers hold the federal congress and the state legislature in very low regard.  Just 8% approve of the job being done by the United States Senate, 11% approve of the job being done by the U.S. House of Representatives.  Seventeen percent approve of the job performance of the Pennsylvania Senate; 19% approve of the job being done by the Pennsylvania House of Representatives.

Finally, the Lincoln Institute asked participants in the survey who they support for President of the United States and United State Senator from Pennsylvania in the upcoming November General Election.  Seventy-three percent said they will vote for the Republican nominee Donald Trump, 12% support the Democratic nominee Hillary Clinton and 6% say they will vote for Libertarian Gary Johnson.   Republican incumbent U.S. Senator Pat Toomey has the support of 81% of the owners/CEOs, Democratic challenger Katie McGinty has 12% support.

Methodology

The Fall 2016 Keystone Business Climate Survey was conducted electronically by the Lincoln Institute of Public Opinion Research, Inc. from September 13 through October 5, 2016.  A total of 370 businesses responded to the survey invitation.  Of those 81% are the owner of the business, 14% are the CEO/COO/CFO and one percent a business manager.

Twenty-five percent of the responses came from the Philadelphia/southeastern part of the state; 18% from Pittsburgh/southwestern Pennsylvania; 16% from south/central Pennsylvania; 13% from northwestern Pennsylvania; 11% from northeastern Pennsylvania; 10% from north-central Pennsylvania; 4% from the Lehigh Valley and 3% from the Altoona/Johnstown area.

Complete numeric results are posted on-line at http://www.lincolninstitute.org

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Results of the Public Opinion Focus Group on Educating for Opportunity and Social Impact Financing on November 19, 2014


Compiled by Erik Randolph on behalf of the Lincoln Institute of Public Opinion Research, Inc.
Revised February 2, 2015

ABSTRACT: With the assistance of the Pennsylvania Association of Nonprofit Organizations, the Lincoln Institute of Public Opinion Research convened a public opinion focus group on the issue of social impact financing (SIF) as an innovative approach to using private dollars to fund increases in public programming and reduce the need for costly social services in the future.

 

Social impact financing, also known as social impact bonds or pay for success financing, is an innovative financing mechanism whereby private investors finance social programs with the objective of increasing positive outcomes and decreasing public dollars spent on remedial measures. If the programs are successful in meeting benchmarks specified in the contract and verified by an independent third party evaluator, the investors receive a return on their investments based on the public sector savings. Discussion points included the following:

 

* What is Social Impact Financing?

 

* What types of programs are best suited for Social Impact Financing?

 

* What is the government’s level of involvement?

 

* What levels of government can successfully use Social Impact Financing?

 

* What happens to the savings that are realized through social impact financing programs?

 

* What other non-monetary benefits can result from social impact financing projects?

 

o The use of an independent evaluator can help service providers effectively quantify their programs and benefits and can help public funders reduce wasteful spending to ineffective programs.

 

o The level of collaboration necessary for a successful Social Impact Financing Program requires improved efficiency and collaboration among government agencies and service providers.

 

* What is currently being considered in Pennsylvania and where are we in the process?

 

Public Opinion Focus Group: Beyond Poverty-November 19, 2014 Session 1: Educating for Opportunity: Social Impact Financing: 10 a.m. – 12 noon

 

Background

During the 2013-2014 legislative session, the Majority Policy Committee of the Pennsylvania House of Representatives created the Empowering Opportunities: Gateways-Out-of-Poverty Initiative. This Republican Caucus initiative recognizes that current efforts to address poverty are in need of revision and subsequently searches for opportunities to address barriers that entrap individuals in impoverished conditions and to replicate outcome-based solutions.

 

The initiative is divided into five broad areas for the development of policy and legislative proposals: Outcomes That Matter, Life Skills 101, Benefits That Work, the Essentials, and Educating for Opportunity. With the assistance of the Pennsylvania Association of Nonprofit Organizations, the Lincoln Institute of Public Opinion Research convened a focus group on proposals in the areas of Educating for Opportunity and Outcomes That Matter.

 

The focus group consisted of leaders from the non-profit sector who provide human services to alleviate social problems associated with poverty. The Honorable Todd Stephens, State Representative for the 151st Legislative District of Pennsylvania, presented on the topic of Social Impact Financing (SIF) for early childhood education programs as part of a developing legislative proposal.

 

Social impact financing, also known as pay for success financing, is an innovative financing mechanism whereby private investors use private dollars to fund increases in public programming in order to reduce the need for costly social services in the future. For example, if a program meets specified goals as measured by an independent third party evaluator, then the governmental entity responsible for funding that program pays the investors a return on their investment. If the SIF-funded programs are successful in producing the desired outcomes, governments save money through the averted future costs, more efficient implementation, or both. If the programs do not meet the negotiated benchmarks that result in reduced government spending, the government does not pay a return on the investment.

 

Social impact financing is a fairly new concept. While examples of its implementation are relatively few, they are increasing steadily throughout the United States across a variety of programs. The focus group was presented with some examples, including details describing how New York and Massachusetts utilized the social impact financing mechanism to help fund job training and rehabilitation of former convicts as a way of reducing recidivism. By reducing recidivism rates, the states save money on their criminal justice and prison systems, and a portion of those savings are used to repay the investors.

More pertinent to the legislative proposal being considered for Pennsylvania, Salt Lake City and Chicago have utilized social impact financing to fund early childhood education programs. According to materials provided to the focus group, the Utah program provides early childhood education services to 3,500 children and the Chicago program provides early childhood education services to 2,600 at-risk children.

Make-Up of Focus Group

The leader of the discussion was Rep. Todd Stephens. The session was moderated by Lowman Henry, chairman and CEO of the Lincoln Institute of Public Opinion Research, Inc., and recorded by Erik Randolph, Erik Randolph Consulting. Staff in attendance were Brianda Freistat, Research Analyst, Majority Policy Committee; Ashley Grimm, Legal Counsel for the House Republican Caucus; Jenny P. Stanton, Executive Director, House Majority Policy Committee.

The participants were as follows:

* Anne Gingerich, Executive Director, Pennsylvania Association of Nonprofit Organizations (PANO);

* Blair Hyatt, Executive Director, Pennsylvania Head Start Association;

* Daniel Leppo, Director, Grants Management, Community Action Association of Pennsylvania;

* Caryn Long, Executive Director, Feeding PA;

* Ashlinn Masland-Sarani, Policy and Development Director, ARC of Pennsylvania;

* Britton Miller, Director of Public Policy and Civic Engagement, PANO;

* Michelle Sanchez, Director of Program Evaluation and Reporting, Maternal and Child Health Consortium of Chester County;

* Eric Saunders, Executive Director, New Hope Ministries.

Discussion Points

The following summary is a compilation of the points made during discussion of the focus group and does not necessarily reflect the opinions of all participants.

The concept of social impact financing was generally well-received as a potential new source of funding, and the participants were interested in learning about the idea.

After an overview of the social impact financing concept, a discussion was had on the benchmarks that would need to be met in order to repay investors. There was some concern that some of the benefits that service providers provide to those in need of their services are difficult to quantify.

However, it was noted that many funders have already been requiring service providers to quantify the benefits, and as a result many non-profits have been moving toward greater quantification of the benefits of their services.

Representative Stephens and his staff explained that social impact financing programs can be used at all levels of government, including state, county and municipal governments. Any government that realizes a reduction in future costs by investments in preventative measures is able to structure a social impact financing program. Many questions from the participants focused on who would be responsible for repaying the investors in the benchmarks were achieved. Representative Stephens and his staff explained that the government who was ultimately receiving the benefit of reduced special education costs (in the early childhood education context), would be responsible for repaying the investors at the end of the program.

Social impact financing requires a significant government commitment to make it successful. The legislature is necessary to pass enabling legislation and provide for the appropriations necessary to cover the cost of the repayment if the benchmarks are achieved. The executive branch is necessary, because the agencies are administering the government programs and are contracting with service providers to provide the needed social services. In the difficult economic climate that Pennsylvania finds itself, the participants were concerned that social impact financing programs could be used as a way to divert traditional state funding away from programs to fund other areas of need rather than be used to supplement the traditional state-funding to expand the programs. Some of the participants suggested that any money saved by the government ought to be reinvested back into the same program areas and not diverted for other uses. There was also some concern about whether the government would be able to set aside a yearly appropriation in an amount that would cover the Commonwealth’s liability if the benchmarks were met under the contract and a repayment to investors was necessary. Potential solutions may include creating a mechanism to set aside the money, such as a revolving fund. These were also discussed in depth.

Discussion points included that unless the government realizes an overall drop in the demand for funding of a program, it is unclear where the money would come from to pay the investors for their return. Consider the starfish analogy, whereby throwing a starfish back into the ocean will help that particular starfish, but there are thousands of other starfish stranded on beaches. In other words, while a government program might help a select group of people, there are still many others who still need help from that same government program, thus the demand for the government program funding may not be reduced.

In response to the starfish analogy, it was stated that an independent third party evaluator would use data to verify savings specific to the definitions and terms that are set forth in a contract whereby the government would be a party to that contract. Also, if the program doesn’t achieve those specified outcomes, the risk is on the investors who would lose out and the governmental entity would not be liable to pay the return to the investors.

Besides, there are several examples today where these contracts are being implemented. Nonetheless, it is important to note that a willing government partner is a crucial component of any social impact financing arrangement.

The ability to develop the necessary metrics to make the concept work appears to be a challenge. Although some non-profits do a good job at program evaluation, many others do not. Additionally, the nature of the populations may contribute to the difficulty because the populations tend to be transient, thus, among other things, making the ability to do longitudinal metrics arduous, especially without additional funding. These concerns would again be addressed at the discretion of the investor/third party intermediary as a negotiating party.

Furthermore, some aspects of providing human services are very difficult to measure. In some cases, good metrics just do not exist. These programs may not be a good fit for social impact financing. Finally, there is a difference between priorities of human services and those aspects of human services that are conducive to measurable outcomes. Subsequently, social impact financing may not be applicable to all social programs, meaning that it may be suitable only for those areas that can be easily measured. Social impact financing bases the repayment on quantifiable measurement. If a program is unable to quantify its data, social impact financing is not the right funding model. That is why it is important to use social impact financing as a supplement to traditional state funding rather than to repay it completely.

However, as was presented, from the experience of several social impact financing deals now being implemented in the United States, representatives from those nonprofit organizations were amazed at what they could measure when an expert was brought in to help with their quantification systems. While it was significant work to upgrade those data systems, the nonprofit organizations indicated it was well worth the effort.

Additionally, the metrics for measuring program outcomes are evolving and improving with time. For example, Goldman Sachs sponsored a social impact financing deal in Salt Lake City, and it recently financed another deal in Chicago. For the subsequent deal, Goldman Sachs revised the metrics for repayment based on lessons it learned from the Salt Lake City deal. The second deal was increased by a substantial hike in investment amounts, climbing from $7 million for the first investment in Salt Lake City and secondly $17 million, in Chicago.

Follow-Up Comments

Bringing in private investors to fund social programs raises fascinating questions. Why is it that government often cannot make programs or assets work financially when for-profit companies using those same assets can? Is there perhaps not some other way for government to become more disciplined? While these questions were left unanswered, social impact financing may be a way to bring discipline into the system, enabling government to become quantitatively-based with measurable outcomes. And once those systems are in place, it may no longer be necessary to continue social impact financing for that specific program.

Representative Stephens introduced a co-sponsorship during the last legislative session and has spent the last seven months touring the Commonwealth to meet with social service providers, school districts, philanthropists and investors. Representative Stephens explained that it was his intention to sponsor legislation that would enable a social impact financing pilot program in early childhood education to take place in Pennsylvania. He suggested that the proposed pilot program have pilots in each of the following areas: Philadelphia, Pittsburgh, a third class city, and a rural setting to evaluate the ability to replicate social impact financing programs throughout Pennsylvania.

About the Author:

Erik Randolph is an independent researcher who specializes in evaluating government policies, programs, budgets, and legislation, quantitative analysis, and fiscal and economic modelling. As a consultant, he has provided assistance to organizations, legislators, and governments in four different states in the areas of welfare policy, budgeting, transportation policy, and criminal justice.

Erik has twenty-seven years of extensive experience in government and for seventeen years taught principles of economics for the Harrisburg Area Community College. He developed the first microeconomic model to test how welfare benefits influence behavior when he was a special assistant to the Secretary of Public Welfare for the Commonwealth of Pennsylvania, and he led a chartered team at the department to evaluate the problem of economic disincentives. Prior to his service to the department, he spent nineteen years as an analyst for the Committee on Appropriations of the Pennsylvania House of Representatives. While working for the Committee, he evaluated and forecasted costs for legislation, worked on and analyzed state budgets, handled analysis of special fund revenue and capital budgeting, researched and wrote legislation, and conducted special research projects for the chairman.

In the early part of his professional career, Erik worked in the field science and technology policy for the U.S. General Accounting Office (since renamed the Governmental Accountability Office), New York State, and the Commonwealth of Pennsylvania.

Mr. Randolph has a Master’s Degree from the College of Humanities at Rensselaer Polytechnic Institute in science and technology studies, where he concentrated on the economics and policy of science and technology. He has two Bachelor degrees from the Pennsylvania State University, one majoring in mathematics and the other in political science.

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