Future Erie Industries, Methods for Recruitment to the Region, and Large Scale State Investment.

The future could be much brighter for Erie with the right emphasis on the industry with a detailed vision of the sectors and industries we recruit to the region, as well as strategies for recruitment

May 05, 2023

As a fair warning, this is a very lengthy piece. Still, I believe it to be important and think it’s worth reading through as it presents several new ideas - some outside of the box - for bringing new business to Erie, achieving city development goals, and steps we need to take to make Erie a thriving city.

Erie faces structural decline, a shrinking industrial base, and a declining population. Our finances are in bad shape, and there seem to be no solutions or ideas from the city government. At this point, many believe bringing new business, including industries like manufacturing, can’t be done, but I remain optimistic. We have yet to max out our tools for this tax, and in fact, including some of our most powerful. I see a future for Erie with a thriving population, a financially stable and well-financed government, and a booming economy - all driven by a new business-led city renaissance as new companies start here or flock to our region. It’s a bold and challenging vision. Many things to work on require serious steps, substantial collaboration, and creative policy solutions, but it can be done.

How?

One first step could be recruiting data warehouse companies to take advantage of the cheap land, cheap utilities, and close regional access to three major cities. Edge Data - a localized data warehouse close to customers - will become more and more of a thing where tech companies disperse data storage facilities on a more regional basis rather than a few extensive facilities. This allows them to deliver content more smoothly and cheaply as the content literary slices closer to the end user. It’s something to keep an eye on. Netflix, Amazon, Microsoft, Google, and many others are aggressively pursuing this strategy.

Also, as the technology matures, network demands will rapidly increase, and the current system of extensive centralized data facilities will either need help to support users or support users at a prohibitive cost to technology companies. This new cloud and networking infrastructure breed is smaller and visually more adaptable to urban and city ecosystems. Electricity costs are a significant factor in deciding where to place one of these facilities, as servers run very hot (an added bonus, the snow won’t deter them!).

Erie’s average kWh energy cost is around .15-.17 cents, with rates as low as .08 kwh. This is between 10.5% and 58% cheaper than the national average - even a minor reduction in electric costs can financially improve margins for these companies. If they add solar to their facilities, as many are now doing, they can drive those costs down even further.

Another strategy is to leverage our strengths and play true to our historical identity. Erie is also a large plastics hub. Pursuing a strategy that encourages leveraging this strength and fosters a new additive manufacturing and precision manufacturing ecosystem makes abundant sense. We need to cluster these firms, which leverage each unit's combined economic power and fosters improved performance, growth, and efficiency. Erie also has a supply of skilled labor that can be tapped into and a history of manufacturing mastery. We have a city footprint built for it, ready to be revitalized by new business investment into modern facilities.

Further strengthening this position is that the world is de-globalizing for various reasons, and companies are rapidly onshoring manufacturing and production back to the USA. Companies are looking for cheap options for relocation and real estate footprints that can support a manufacturing base. Additionally, we are logistically well suited for this type of manufacturing, well-placed in the supply chain, near universities where talent for innovation can be recruited, and ready access to significant metro hubs and waterways.

We can be the testing ground and a prototype market where companies leverage automation and robotics, working with a skilled labor force to create low-cost, high-efficiency manufacturing plants. We can rebuild a modern American manufacturing economy through additive and high-precision manufacturing by taking advantage of these traits.

One industry that is probably off most people’s radar is the financial industry - but it is one of the most powerful wealth-creating industries, creating many high-paying jobs and making a big impact on the tax base. Financial services might seem odd, but we already have a massive financial institution operating downtown that produces a lot of income for the city. It powers a sizeable economic ecosystem around its headquarters and creates many good-paying jobs. Imagine having a few more financial institutions and how their presence would ripple across the broader economy.

The financial sector goes beyond just insurance. The industry includes hedge funds and venture capital funds, private equity firms, investment management companies, corporate bank offices, fintech (financial technology) firms, and more. Some of these business models are highly profitable, especially hedge funds and venture capital firms. Venture capital in Erie might be a bit of a

challenge as we aren’t a large start-up hub. Still, we do have access to several universities in the region and, even more, highly respected programs within 100 miles in several directions. Suppose someone or a group with enough capital comes here to set up shop and invest in start-ups, and entrepreneurs in those universities hear about the new potential investment source. In that case, relocating to Erie becomes a real possibility.

Of all the business types listed, hedge funds make the most sense. A hedge fund in its simplest form is a firm that manages a large portfolio of stocks and bonds, usually managing 100s of millions of dollars on the low end and many billions on the high end. If we had 1 or 2 headquartered here, the tax revenue alone from the employees of those firms would dramatically increase city revenue. It is not uncommon for people in the industry to make five to ten million a year, and in more senior positions, tens of millions, and all the way up to hundreds of millions - or even billions.

We are close to Chicago, and proximity is becoming more important in financial markets. The internet speed and latency on your connection to the exchange you are trading at make a huge difference in profit and loss when everything is netted out at the end of the year. The closer you are to Chicago, the better your latency and order execution quality.1 Proximity to New York is also a big advantage. We are located right in the middle of the two financial centers, where connection to Chicago is very reasonable and the same for a connection to New York. If you trade in both markets, Erie is a great choice as you have good access to both - which is better than great access to one and bad access to another, or worse yet, bad access to both. With Vnet rolling out fiber, this connection advantage only increases.

People who work at hedge funds are largely private people and want to avoid media and people nosing around their business or approaching them asking for money. That makes Erie a great location for that type of actor. Furthermore, with real estate (land) being quite cheap in Erie, you could build an extremely lavish home on a significant property for, from a wealthy fund manager’s perspective, very little. For him, the ongoing cost of ownership is almost an afterthought with regard to utilities like electricity. There is great property in the exurbs with decent to great privacy, but it still has a (relative to big cities) very short commute and get to the office in under half an hour, whereas in New York, if you wanted to live in a suburban or more exurb type area, you could see commute times of 1-2 hours or more.

Another selling point for hedge funds - and all financial firms for that matter -, Penn State’s finance program and other universities offering similar solutions, there is a steady supply of potential labor to intern and/or hire. Finally, the cost of living here is extremely low for someone with a lot of wealth, so a young manager could run his hedge fund here in Erie and unlike New York, live extremely comfortably for a fraction of his earnings, while able to save the vast majority, compounding his wealth dramatically and quickly, allowing for a very early retirement or some new pet project investment.

All of these things are a recipe for financial firms, such as larger investment firms or hedge funds with a small staff, to relocate here - tapping into a trend of firms in the financial sector leaving their large metro hubs and a widespread desire to live in a smaller community with good access to universities, cheap cost of living, and good recreation. I will try my best to help make this a reality in Erie.

One specific policy idea proposal that could help in these recruitment efforts, especially for the heavy industry, would be the formation of designated “Industry Development”: or “Growth Zones.” These zones would focus on location and investment in specific city regions. The local government and the nonprofit community have identified these regions in many planning and strategy documents. Potential targeted efforts should be focused on economic dead zones/economic vacuums (certain sectors of 12th street, neighborhoods with large surface lots, regions of eastern Erie along the Bayfront Connector, and central city) that are currently unproductive.

These areas detract from the tax base, lead to crime, and worsen the aesthetics and streetscape of Erie (aesthetics are an important factor in younger generations’ decision-making for where to live and start a family).

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The focus and establishment of these “Growth Zones” should be centered on areas that the combined nonprofit and government (local, state, and federal) community has prioritized for development through leveraged resources and policies. These efforts to highly target the community’s combined resources and powers would result in economic growth that aligns with long-term city planning (and this applies to the County as well).

Through the targeted formation of Economic Zones, such as the 12th Street corridor, would benefit from new economic activity and logistically make sense for operations. These zones could come with specific subsidies and access to lending programs (more on this topic and ways to create lending programs will come soon) to help underwrite the investment cost of building infrastructure, relocation, and initial operations. This could come in the form of subsidies, similar to the LERTA program, and access to favorable financing facilities.

Special economic and growth zones could also include direct investment into these new industries by leveraging stand expanding the investment mandate of the City’s investment account, as well as the Pension - a fund that already invests in much riskier assets and could invest in private equity, venture capital, and private credit and equity. Those alternative asset investments from the investment fund and pension system could serve a dual purpose while leveraged to help grow and improve the region. Some might hesitate and say that we can’t use pension money to invest in local businesses, but I ask, why not?

There is plenty of precedence. Investing in alternative assets (investments beyond simple stocks, bonds, CDs) is standard practice for many pensions across the country - most pensions hold private investments in various ways through allocation to various types of “alternative investments,” including private equity, hedge funds, venture capital funds, private direct investment, and other asset classes.

Investing a portion of the pension into local private enterprises and allocating capital targeting the investments mentioned above or that would thrive in our region would help incentivize businesses to move to Erie. And it's not in violation of any pension rules. As previously mentioned, countless pensions make direct private investments - this would be no different than that standard practice. But instead of sourcing potential investments nationally and sending cash out of city and state, we would focus the investments in our own backyard.

The Ontario Teacher’s Pension successfully implements this policy, making targeted investments into industries critical to Ontario’s economy and helping fuel a vibrant entrepreneurial ecosystem.

This pension investment program would enhance Erie-based businesses' capital position, increasing their operational capacity and the likelihood of success. This policy would also create new sources of investment income for the pension that, given the higher rates of return for private investments relative to the public stock market, would enhance the returns of the pension system that are currently meager to outright poor (more of this to come in a future article). More on the status of the current position can be found below in a footnote.2

To be eligible for these investments from the City’s pension (and the County could certainly employ the same strategy), requirements would be tied to the potential investments and locked into place through a contract. Through these contracted agreements, the city can advance its long-term agenda, make progress on city development plans, and improve citizen welfare, which has the added benefit of increasing the tax base.

Achieving long-term city development goals can be done in many ways, some more untraditional or creative than others - in this case, it's harnessing the power of capital, using investment to entice new business growth, and guaranteeing certain outcomes through binding contracts.

These covenants could include a minimum time commitment for operating in Erie and require businesses, through best effort, to source materials and services from the Erie region that are available in the local market. Another stipulation could have the city play a role in determining where to locate the business - advancing city planning efforts. Additionally, the terms of the investment could contain commitments by the business to offer competitive pay and create a minimum number of jobs for the region.

These requirements could be contractual between the Pension, City, and any business that secures investment. The city could be protected by requiring a "break up fee," a standard practice in finance, that would require a substantial payment to the city for breaking the contract.

This is just one idea for making Erie a desirable domicile to build and grow a business - but there are many other reasons Erie could be an attractive new home for businesses. A proposal like the one just suggested stems from thinking outside the box and thinking through the lens of how every last resource could be most effectively used to achieve an outcome for the city. The City needs a lot more of this, as many past and present elected officials suffer from a collective failure of the imagination.

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Between local and nonprofit resources that can be harnessed in a targeted, concentrated way, and this pension investment policy proposal just outlined, when all added up, collectively maximizes the leverage of all resources at our disposal to grow the city’s industrial and service industry base. Every dollar possible can be put to work. None of this has been done before, but look where we are today. Does it feel like our strategy was a winning one? It seems like attempting new. Bold strategies makes sense at this point so that we may have a different, more positive outcome. After all, what do we have to lose?3

Another easy step for the City to take to help reinvigorate the business base located here in Erie is hiring a full-time, well-networked city ambassador with substantial corporate experience to serve as a liaison to potential businesses, targeting recruitment efforts on industries located in higher-cost municipalities or businesses who have recently signaled plans to move to a new location.

This ambassador (and a potential team) would spend most of their time attending trade shows and business conferences where there is easy access to networking with business owners. These industries also use those events as forums where their needs and requirements are presented. They also serve as platforms for new businesses to present their company, its products, and growth plans.

Knowing those facts would greatly enhance our representatives’ ability to understand and point out how our region can serve them. Companies at these trade shows (in targeted industries that align with the Citys strengths) should be aggresively pursued. Furthermore, this position and team would be charged with networking and building working relationships with the venture capital and angel investment community, tapping into the entrepreneurial ecosystem, and recruiting them in their earliest development stages.

These groups largely finance start-ups and have significant sway over their portfolio companies (investments made into new, small emerging companies) and corporate decision-making, including where to locate new business operations. This representative can argue that the low fixed costs of Erie, its logistical position, its pool of future labor stemming from our large university ecosystem, and the low cost of living and housing that potential employees would benefit from.

This ambassador or his deputies would also serve as a full-time liaison with the business community, ensuring their needs are met and addressing problems they face to the extent of the city’s limitations.

Putting this resource in place and a team that supports it will help stabilize the industry base in Erie and help prevent more companies from leaving the region. I have heard from many business owners that they feel like the city ignores their needs and fails to include their input or help address challenges to their businesses that a city can help address (such as upkeeping and improving logistic resources companies depend on).

After speaking to many business owners, my sense is that the business community in Erie feels like second-class citizens and that, in the eyes of the city, they are, at best, an afterthought and, at worst, a nuisance. (In future articles, this topic will be expanded, where the case will be made for why Erie can be an attractive location for expansion or relocation).

In summary, we need first to identify what the future of the industry looks like in Erie. What type of city are we, and what type of businesses make their home here? Once we know that, we need to be proactive in recruiting them, a process that can be multi-faceted and ongoing. We need to understand the needs of businesses and their hesitations about moving to Erie. We have some great attributes, but we remain uncompetitive in some categories. A large part of that has to do with State law (something I will be addressing in the near future), but there are still steps we can take locally, some more obvious, some more complex and sophisticated.

What’s important is getting the whole community on board, coordinating, and marshaling our resources. Lots of tiny investments yield lots of tiny outcomes. On the other hand, combined resources and planning that incorporates all aspects and members of the community with a capacity to help make investments, introduce a leverage effect where each dollar exponentially increases the impact of the previous dollar. The city can help, and there are some concrete steps they can take to grow our industrial base, but the desire to be proactive has to be there.

These steps don’t necessarily have to be expensive or require huge budgets. While tax incentives and financing are an option, there are other tools on the table to recruit new companies to Erie without breaking the budget. Importantly, a good first step would be for the city to thoroughly survey local businesses and identify what challenges they face and what the city can do to help alleviate them. Sometimes, it’s something very simple. Other times, the city might not be able to help, but by building a comprehensive central database of resources and partners in the business ecosystem, they could point the firms in the right direction and facilitate communication and implementation of whatever solution is demanded.

We are in a tough spot facing significant headwinds, the population decline slows down economic growth and shrinks the tax base. This is a major structural challenge for a financially tight city. Beyond those issues, median incomes are low in Erie as there is a shortage of in-city employment opportunities that pay good wages. Yet I remain optimistic.

There are lots of incremental steps the City can make that, down the road a decade or so, in the aggregate, would translate into major transformation. I will do my part and continue to propose ideas and solutions, but the whole community needs to participate and pool ideas so that the best ones emerge with public support to get them done.

I appreciate you taking the time to read this lengthy article, but the issues addressed couldn’t be more critical to the future of our home. The sky is dark now, but I do see a glimmer of hope on the horizon, and I hope you see the possibility of a brighter future, too.

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