I. What Does the Commission Mean By Economic Development Assistance?

An inextricable link exists between the well being of tobacco farmers and that of their communities. This linkage is clearly recognized in the name of this Commission. The question arises as to what this Commission should recommend in the way of assistance to communities impacted by the decline of tobacco income. As this report indicates, the magnitude of this problem includes all 568 counties in which tobacco is grown but is really focused on the roughly eighty counties in which tobacco accounts for over 5% of personal income.

Economic development is where public policy, including expenditures of funds, intersects with the private sector for the purpose of promoting the creation of jobs, income, and wealth. There has always been a public sector role in economic development B from the early federal funding of infrastructure such as canals, roads, and railroad subsidies, to the creation of the first publicly funded and very successful technology transfer system in the form of land grant colleges and the agricultural extension system, to the national investments in space and military research and development.

At the state and local level, states at first mostly built roads and created state departments of agriculture. They got into economic development in a more formal way after World War II by creating state departments of commerce and/or departments of economic development. State and local efforts were oriented initially almost solely toward industrial recruitment B luring branch plants into communities to provide jobs. Later these policies were expanded to include services to strengthen existing business and to promote small business creation and entrepreneurship.

A new phenomenon has emerged since the 1970s as a result of the impact of technology and the consequences of globalization: large sectors of the American economy have experienced rapid and catastrophic decline. In the United States, for example, approximately 769,000 jobs were lost in the apparel and textile industries alone between 1980 and 2000. The United States lost 183,000 jobs in steel production and 92,000 jobs in the coal industry during the same period. And, of course, the decline of the family farm in the United States is well documented with the loss of 176,000 jobs during 1987-97. The Tobacco Commission=s Preliminary Report documents similar declines in tobacco farming employment and income. The federal government has often responded to these declines with multilateral trade agreements, worker retraining funds, and subsidies for some industries impacted by global competition.

The consequences of these declines on executives, workers, and their communities have often been devastating. States awakened to the fact that their economies, especially in rural areas, were not resilient enough. The workforce was insufficiently educated and trained; the local economies were based on declining sectors; and basic infrastructure was often missing. And, so, a new model of economic development assistance emerged in the past decade to help these communities.

This new model of economic development includes all of the old elements, such as industrial recruitment and strengthening the existing business base. But it also embraces a deeper and more dynamic emphasis on human resource development and entrepreneurship. It recognizes the crucial importance of community leadership and strategic planning. And, finally, it addresses the infrastructure needs of these areas, both traditionalCwater, sewer and roadsCand the new telecommunications infrastructure, needed to make these communities competitive in the 21st Century. The bottom line remains the same: public resources are needed to help create economic development in these communities.

All of these elements are especially needed in communities impacted by declining tobacco farming operations, jobs, and income. These communities need assistance in making their local economies more diversified and resilient. They need special assistance to help tobacco farmers move successfully into non-tobacco agriculture or other sectors of the economy. There are many resources currently available at the federal, state, and local level; often the challenge is getting the community organized and committed to a plan of action.

A unique opportunity for tobacco dependent communities is that substantial additional financial assistance is available from the Tobacco Settlement, and several of the states are making creative use of those funds for economic development. In addition, if a substantial quota compensation program is adopted, a major infusion of capital will be available to individuals dependent on tobacco farming. This capitalCusually not available to workers and small business people in other declining sectorsCshould be seen and utilized as an opportunity for farmers to diversify their farming operations, acquire specialized education and training opportunities, and/or capitalize businesses in other sectors.

Section two will discuss how to identify the communities that are most vulnerable to declines in tobacco receipts. Section three identifies resources available to tobacco communities for economic development and current gaps in assistance.

II. Targeting the Most Vulnerable Tobacco-Producing Communities

Tobacco farming is broadly distributed across 568 counties, mostly in the Southeast. Tobacco is grown in most counties of KY, NC, and TN, and is considered

an important part of both the economic and social fabric of the community in parts of other states, such as southern VA; the Coastal Plain of SC, GA, and FL; and southern parts of IN, OH, and MD. The largest flows of tobacco income are in the Coastal Plain of NC. Most of the top 20 counties in 1997 tobacco sales, according to the Census of Agriculture, were in this region. Farm sales of tobacco in these counties generally run between $20 million and $50 million per year, and several counties also obtain significant income from stemming and redrying businesses. Tobacco sales are between $1 million and $9 million in most other tobacco-growing counties.

Traditionally, economic vulnerability to reductions in tobacco production has been estimated by determining the share of a county=s total income derived from tobacco farming. Using the tobacco-personal income ratio measure, analysis by the Economic Research Service at USDA reveals that 80 to 214 counties may be particularly vulnerable. Of the 568 tobacco growing counties, 28 had tobacco-personal income ratios exceeding 10 percent, 52 counties had ratios of 5 to 10 percent, and 135 counties had ratios between 1 and 5 percent. The remainder (353) had ratios under 1 percent. Using just this measure, 80 counties can be identified that are particularly tobacco-dependent and potentially the most vulnerable to declining tobacco receipts. The 135 counties with a ratio of 1 and 5 percent may also be vulnerable depending on the stability of other local economic activity.

Other analyses have looked at proximity to metro areas as an indicator of vulnerability to the decline in tobacco income. Such analysis finds counties in or adjacent to growing metropolitan areasCwhether small cities such as Danville, VA, or Rocky Mount, Greenville, and Goldsboro, NC, or larger cities such as Lexington and Louisvile, KY or Knoxville, TNCaccount for 73 percent of estimated tobacco receipts. Proximity to population centers means greater immediate opportunities for non-farm jobs, rising land values, and a ready customer base for non-tobacco farm products such as fruits, vegetables, pick-your-own, and other on-farm business ventures. In a sense, then, proximity to metro economies often means that these communities are less dependent on tobacco income. Alternatively, a large number of tobacco counties (193) are not adjacent to any metro area. Though these counties account for only about one-fifth of tobacco receipts, the tobacco farmers and their communities face greater challenges in finding non-tobacco income and therefore more dependent and vulnerable.

A more complete analysis of county-level economic conditions is needed to gain critical information on the true vulnerability of a county to reductions in tobacco-related activities and help identify those most in need of economic development assistance. Of particular importance is identifying the full range of economic linkages within a county=s economy attributable directly to various tobacco-related activities, including the so-called Amultiplier@ or secondary economic effects that can measure the extent to which other businesses rely on the circulation of tobacco receipts. The degree to which the tobacco industry is vertically integrated in the community will also be significant. The diversification of a county=s economic base and the extent to which the county is dependent on other declining sectors will also be relevant. And finally, broad measures of long-term economic distress, such as relatively high poverty and unemployment rates, are general indicators of local economic vitality and should be considered in any vulnerability analysis.

III. Resources and Gaps

What resources are currently available and what are the remaining resource gaps to address the economic dislocation of tobacco communities?

Existing federal and state programs for economic and community development can provide substantial resources to help transitioning tobacco-producing communities develop new on-farm and off-farm enterprises. Programs range from grant and loan funds for water and sewer and other industrial infrastructure to small crop agriculture and small business development technical assistance grants. Communities may avail themselves of all these resources and should seek assistance from their state and local economic and agricultural development offices as to program requirements and application procedures.

The existing Master Settlement Agreement (MSA) funds (see Footnote 1) from both Phase I and Phase II, as well as payments from any tobacco equity reduction arrangements, provide additional significant resources (from a national public policy perspective) to fund economic development initiatives in tobacco communities. Gaps remain, however, in the ability of states to distribute available resources in a strategic manner likely to have the long-term, beneficial impact intended.

Phase I of the MSA will pay states a total of $206 billion over 25 years. States have authority to distribute Phase I funds according to their legislative priorities. Typically tobacco-producing states have allocated these funds among economic development activities, health and tobacco cessation programs, and indemnification of farmers and allotment holders. Of the eight largest tobacco-producing states, most will allocate a significant share, from 25% to 75%, to economic development and/or tobacco farmer indemnification. Phase II of the MSA will pay $5.15 billion, which will be in direct payments to tobacco farmers and allotment holders.

Typically, tobacco dependent states do not cite the need for additional financial resources as a pressing need. The following non-financial needs, however, are considered significant barriers to revitalizing tobacco communities by those states that have already begun to distribute economic development assistance:

_ Strategic planning and other community readiness activities are cited by both the states and the communities as critical to formulating proposals capable of having long-term impact.

_ Technical assistance to help communities identify which are the most advantageous economic development opportunities for them to pursue.

_ Entrepreneurial development assistance to farmers and agricultural economies.

_ Technical assistance resources to supplement agricultural development for small farmers.

The needs and problems of tobacco dependent communities are diverse. Some farmers are looking to remain in farming but need to shift the emphasis from tobacco to other crops while others may want to explore non-farm business ventures. Workers whose livelihoods are attached to the warehouses or stemming and drying operations may have few transferable skills and need retraining. And the community businesses that support the tobacco producer and workers and rely on their income for their livelihood are faced with the need to change the business or perish. Simply making funds available for economic development is not sufficient to help communities with such diverse needs.

IV. Recommendations

While the tobacco producing states have substantial financial resources at hand to support community revitalization, few if any are set up to provide the substantial programmatic support that these communities and farmers need to make the successful transition from a single crop agricultural economy to a thriving post-tobacco economy. As such, we are not proposing substantial additional financial resources for economic development; rather, we think the challenge is to completely identify existing resources, fully utilize them, and to create a learning network among tobacco dependent communities as follows:

1. Create a Center for Tobacco Dependent Communities that would be an active agent of assistance to help communities that are transitioning from tobacco-based economies craft and implement economic development strategies.

_ Provide targeted technical assistance: Tobacco dependent communities could benefit from technical assistance specially oriented toward their particular needs. High-level specialists could provide invaluable assistance to these communities. They could also convene meetings and conferences around particular issues and topics. Those of us in rural economic development have consistently found that technical assistance is often the missing link in community revitalization.

_ Clearinghouse for best practices: Many innovative practices are underway at the community level; but many other communities have no way to learn about these innovations and to adapt them to their own situation. At the Appalachian Regional Commission, one of the strongest features of its program is that states and communities actually learn from each other. The clearinghouse function of this Center is crucial.

_ Research and policy: Assist states and localities in research and policy development that will facilitate revitalization of tobacco dependent communities; for example, help states to identify all available resources from state, federal, and private sources and help states identify the most vulnerable tobacco communities.

_ Structure: The Center should be a regional center serving the heavily tobacco dependent states. It should not be in the federal government but lodged in a regional organization like the Southern Growth Policies Board, a private non-profit corporation like MDC of Chapel Hill, or a consortium like the Oakridge Associated Universities (ORAU). Furthermore, the governing board of the Center needs to be structured in a non-political fashion with a long-term view of its work and staffing needs.

_ Funding: Recommended funding at an amount to be determined for at least ten years. Possible funding sources include but are not limited to an annual funding stream from Settlement money or Tobacco Equity Reduction Program money, or an initial endowment sufficient to fund the Center in the long term.

2. Create an incentive for tobacco growers, allotment holders, and others receiving Phase II and other tobacco equity reduction or indemnification payments, to use those funds to capitalize new business ventures, on-farm or off-farm, that have the potential to create new economic activity and community revenue. The incentive should be market-based, for example preferential tax treatment if funds are invested within a certain amount of time for business activities.

3. Leverage federal economic and business development program funds (grants and loans) and create an interagency awareness of and commitment to transitioning tobacco-based economies at the federal level.

Footnote 1:

National legislative proposals prior to the Master Settlement Agreements included significant funds for economic development assistance to tobacco producing communities. For example, the LEAF Act provided $8.3 billion solely for economic development activities over 25 years. In lieu of a legislative solution, the states= attorneys general reached a national settlement agreement with the cigarette industry.