Return to Virginia Business - February 2004

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Virginia Business
February 2004

Ed Wegener, a top executive of AFG Industries, was looking for the best place to build a glass-coating plant when he visited Washington County in late 2002. Eager to make a good impression, county officials took him to the Southwest Virginia Higher Education Center, an ultramodern facility with a gleaming glass facade. “He took one look at the building and said, ‘If this glass has AFG on it, you’ve got a deal,’” recalls Rachel D. Fowlkes, the center’s executive director. Fowlkes and Assistant County Administrator Christy Parker held their breath while Wegener inspected the glass. “Yep,” he said, “this is AFG.”

Wegener was clearly impressed, but it took more than a serendipitous discovery of his company’s glass to attract AFG’s $30 million plant. The real deal-clincher was a $2 million incentive package that included a $350,000 grant from the Virginia Tobacco Indemnification and Community Revitalization Commission. “I think that every bit of that [grant] was needed,” Wegener says. “But our decision was not just based on incentives. No amount of money can make a bad place a good place.”

Attracting new companies to the struggling Southside and Southwest regions is a key goal for the 31-member tobacco commission. In four years it has spent more than $278 million to compensate tobacco farmers for their losses and to pay for hundreds of community revitalization projects.

The hope is that the money will help overcome the staggering losses these regions have endured. For generations, people here have earned a living growing tobacco, mining coal or working in local textile and furniture plants. But these mainstay industries have sustained severe job losses — victims of reduced tobacco quotas, overseas manufacturing and factory automation. What the commission has been charged by law to do is nothing short of huge: turn these economically depressed areas around.

“... We can sit back and wait for these traditional industries to come back — which they will not — or we can set all of that aside and try to reinvent our economy from the ground up,” says the commission’s chairman, state Sen. Charles R. Hawkins, R-Chatham.

Yet, decreasing Virginia’s dependence on the golden leaf, still the state’s largest cash crop, will take time. And some people question the very premise of reinventing a regional economy. “Attempts to figure out what these regions could do best now that what they used to do is no longer viable … is like pushing a boulder up a steep hill,” says Russell Roberts, a professor of economics at George Mason University.

It’s hard to say exactly how well the effort is going — now in its fifth fiscal year — because there’s no data on the total number of jobs created, workers retrained, investment by outside businesses or tax revenues generated. The commission’s seven-person staff has not tallied such information, now scattered throughout hundreds of files, a situation the commission plans to remedy with new computer software and the recent hiring of additional staff. However, it does have figures on one of its largest job-creating programs, the Tobacco Region Opportunity Fund, a deal closing fund similar to the Governor’s Opportunity Fund. To date, $8.3 million spent from this fund has assisted with the creation of 5,751 jobs, facilitating $367.4 million in private investment.

Commission members cite several examples of how their efforts are making a difference. The AFG plant, for instance, is hiring 70 workers at wages averaging $15 an hour. The commission is in the enviable position of having plenty of money to finance projects. Funds come from a master settlement agreement between 46 states and four major cigarette manufacturers. In 1998, the companies agreed to pay an estimated $206 billion over 25 years to cover the states’ health care costs related to tobacco use.

Virginia’s share of the settlement is about $4 billion, and half of that goes to the commission. Another 40 percent goes into Virginia’s general fund and 10 percent goes for tobacco prevention, primarily efforts to curb youth smoking. The legislation that allocated the money and created the commission was endorsed by a coalition of tobacco farmers, health advocacy groups and economic developers and won unanimous approval from the General Assembly in 1999.
In its first year, the commission spent 80 percent of its $74 million budget on payments to tobacco farmers and quota holders. Commission members admit that those payments helped the “old economy” more than the “new economy,” but insist the payments were necessary. “We would have lost a lot of family farms,” says Hawkins. “A number of them would have ended up in bankruptcy.”

One of them might have been the farm of Robert Robertson, 62, who has grown tobacco for decades. “In 1998, it started going downhill, and now I have about half of what I did,” says Robertson, who owns a 250-acre tobacco farm near Danville. “I put my life savings into it, and it has just disappeared.” His dream was to acquire enough tobacco quota to support himself and his children, but his quota acquisitions have been offset by government cuts — more than 10 percent for flue-cured tobacco this year — and his children have long since moved away to pursue careers elsewhere.

In addition to his shrinking tobacco quota, Robertson struggles with higher prices for labor, equipment, fertilizer, chemicals, electricity and natural gas. Meanwhile the price he receives for his tobacco has declined. Robertson also grows wheat, but says the economics of that crop have been even worse. “People say farmers are making a killing, but they are not.”

Robertson got $8,000 from the commission last year, plus $20,000 from a separate legal settlement between the cigarette manufacturers and 14 tobacco-producing states. That’s more than most farmers and quota owners received last year, when the average payment was $826. The largest check was $101,279, and the smallest payment was 7 cents. “If it wasn’t for the checks that I get, I just couldn’t make it,” he says. Robinson already works full-time at Collie Equipment Co. in Danville. He’s getting his general education diploma and plans to study agribusiness at Danville Community College.

Hard-working farmers such as Robertson are a valuable resource for the region, says Paul Combs, director of the Appalachian Regional Development Institute at Appalachian State University and a retired economics professor. “Farmers are very entrepreneurial,” he says. “They are used to running their own businesses. They are willing to take risks.” The commission should put money into building support structures for entrepreneurs who want to remain in the region, Combs says, because, unlike younger workers just entering the job market, they’re less likely to leave the region for jobs elsewhere. “The social and psychological costs are just too high,” Combs says. “People are more likely to look at something else [locally], where they are a little more in control of their own destiny.”

The commission is funding research into agricultural alternatives to tobacco. It gave $500,000 to the Southside Value-Added Beef Initiative, a regional effort to improve the production, management and marketing capabilities of beef-cattle farmers in Halifax, Mecklenburg and Pittsylvania counties. If it’s successful, the pilot program could be expanded to all of Southside and possibly Southwest Virginia. The best way to diversify rural economies, agrees Carthan F. Currin III, the commission’s executive director, is “to develop a climate that’s more conducive to entrepreneurial growth.”

After those initial payments to tobacco farmers and quota holders, the commission has been investing a greater percentage of its money in long-term economic development initiatives. In its first four fiscal years, it has spent $148.6 million on indemnification payments and $125 million on economic development. Of that latter amount, $56.6 million has gone for education and training and $49.4 million for infrastructure such as industrial parks, sewer lines and telecommunication networks. It also includes $8.2 million for deal-closing incentives like the one that helped bring AFG Industries to Washington County. The Virginia Tobacco Settlement Foundation, a separate organization, has spent $37 million on efforts to curb smoking.

Most of the commission’s investments are long term, so it’s too early to say if they’re working. GMU professor Roberts says that successful economic makeovers are rare, but even he concedes that it is politically impossible to write off entire rural regions. “The money to the tobacco farmers at least does what it was intended to do,” he says. “Infrastructure is a good idea, and education per se is always good, but you have to look at individual programs to see what kind of bang you are getting for your buck.”

One way to encourage entrepreneurial activity in rural areas is to build advanced telecommunication networks, says Combs. The commission is spending tens of millions of dollars to establish high-speed Internet access and better cell-phone coverage in both regions. “They are just as important as water and sewer were 20 years ago,” Currin says.

The commission also is trying to create entrepreneurial opportunities at the Institute for Advanced Learning and Research. It has invested $12.7 million in the institute, which is scheduled to open early this year in Danville. Virginia Tech will manage the institute with help from Averett University and Danville Community College. The facility’s faculty and graduate students will focus on research that builds on existing assets, including advanced polymers, motor sports, robotics, biodefense, bioinformatics, horticulture and forestry.

Motor sports research, for example, will be a partnership between the Department of Mechanical Engineering at Virginia Tech and Virginia International Raceway in Halifax County. (See story on page 11.) The institute hopes to attract intellectual talent and entrepreneurs, says Timothy V. Franklin, executive director of the institute and of Virginia Tech’s outreach programs in Southside. The approach is similar to Tech’s Corporate Research Center, which has grown rapidly in Blacksburg in the past 18 years.

Combs says he would propose shifting some of Virginia’s infrastructure dollars into education, although he realizes that educated young people are more likely to move away from rural regions. “It’s a Catch-22,” he says, “but building that education base is critically important.”

The region has strengthened its education offerings. Nancy Breeding, who grew up on a tobacco farm, returned to the region a few years ago when her husband retired from the State Police and took over his father’s tobacco and beef-cattle operation in Russell County. Her tobacco ties qualified her for a tobacco-commission scholarship. She earned her master’s degree in education from Virginia Tech by attending classes at the Southwest Virginia Higher Education Center and by working online.

Breeding, 53, wanted to use that degree to become an agricultural extension agent, but state budget cuts eliminated her position with the Virginia Cooperative Extension Service. She found a temporary job — filling in for a secretary in the extension service’s Wytheville office — but the daily commute was 90 miles one way. “It was either that or go home,” Breeding says. “Jobs just aren’t that plentiful in Southwest Virginia.”

Eventually, Breeding’s master’s degree helped her secure a better job at the Higher Education Center. She now manages the same scholarship program that helped her three years ago. So far, it has awarded 787 grants to students from tobacco farm families. Breeding received $500, and current recipients receive $1,200.

Students in the program may attend any accredited college or university, but they must complete a career-planning workshop that highlights job opportunities in Southwest Virginia. Breeding also runs a loan-forgiveness program for 725 aspiring teachers, who qualify for $4,000 in annual loans to pay for schooling but can have that amount forgiven for every year they teach in Southside. Breeding wishes more people would take advantage of these grants and loans, but many tobacco families do not value formal education, she says. “And you can’t want what you don’t know.”

The region’s education problems could be eased, Combs says, by attracting talented people who want a rural lifestyle. With high-speed Internet connections, some of the people who can work anywhere will choose to work in Southside and Southwest Virginia, he says. In fact, investments in telecommunications make more sense to him than pumping money into small industrial parks in every locality. “Throwing money at infrastructure in the hopes that it will generate economic development can be futile,” he says. “If every little community is going to do that, then no one is going to succeed.”

The commission has assisted more than 40 industrial parks in various stages of development, generally providing higher levels of funding to regional industrial parks that benefit several localities. Todd M. Yeatts, Danville’s director of legislative and public affairs, praises the commission for fostering regional cooperation. “It’s a tool that helps us help ourselves. This way we don’t have to go begging to Richmond.”

Maybe not, but the beneficiaries of the tobacco money realize that it would be easy for the governor and the General Assembly to grab a greater share of tobacco-settlement payments at any time, particularly as they try to close a budget gap this year of $1.2 billion. Many states are using tobacco-settlement funds to balance their budgets. North Carolina, for example, has raided the fund it established for its tobacco farmers, and Tennessee has used all of its tobacco-settlement payments to balance its budget. In 2001, Virginia used $15 million from the state’s tobacco settlement foundation to address budget shortfalls — money that has not been restored for smoking prevention.

So far, Gov. Mark R. Warner has resisted that temptation, and commission members predict that he will stay the course in this year’s General Assembly. Still, there’s always some risk that the funds will be taken away, and as urban areas gain more representation in the General Assembly, that risk may grow, says Michael J. Schewel, a member of the commission and Virginia’s secretary of commerce and trade. “But as long as this governor is governor, there’s not much chance of that. He has a commitment to use this money to help Southside and Southwest Virginia.”

That party line has remained the same no matter which party occupies the governor’s mansion, and members of the commission say that commitment will continue as long as they keep partisan politics out of their decisions. “This commission was forged with a bipartisan approach,” says Del. Joseph P. Johnson Jr. (D-Abingdon). “We came together to do the right thing. … The states that put their [tobacco settlement] money into their budgets — it’s gone, while ours lives on.” So do the challenges of these struggling rural areas.

Return to Virginia Business - February 2004