3rd Frontier Transcript
Participants:
Dorothy Baunach
Director, NorTech
Greg Browning
Consultant/Lobbyist and former State Budget Director under Governor Voinovich (D)
Eric Fingerhut
State Senator (D)
Joe Frolik
Associate Editor of The Plain Dealer
Bruce Johnson
Director, Ohio Department of Development
Dr. Michael Schwartz
President, Cleveland State University
Steven Sims
Economic Development Director, City of Cleveland
MR. FROLIK: Hi. I want to thank you all for joining us on this 7th in our series of roundtable discussions about the Quiet Crisis and the Economy of Northeast Ohio. Today we're going to talk about the State's role in economic development, particularly as it impacts our region. I would like to start by going around the table asking each of you, what's the biggest economic challenge facing Ohio, Northeast Ohio in particular and what can the State government do to address it? Bruce Johnson, you're the State Development Director, let's start with you.
MR. JOHNSON: Well, I think short term there's a realization how competitive the economy is and what is that doing that's forcing manufacturers and other industrial partners to reduce costs. And part of that reduction in costs means reducing the number of people on the payroll. So the reality is, that there's enormous international competition that has changed dramatically in the last 40 or 50 years and the State must do everything it can to assist current Ohio employers to reducing their overall cost burden.
I think long term, the big issue is how do we help the transformation of the economy from one that is still stuck in the 40s and 50s to this innovation economy, one that is driven by knowledge in the economy. And the answer for that is investment and a lot of early start up companies that are focused on things like biotechnology and advanced manufacturing. We also have to focus on the work force. We are going to be in a work force crisis in the next 15 to 20 years, both in terms of their preparation for the jobs that are high quality jobs for the next couple generations, and the fact that, you know, as the baby-boomers retire, there's not going to be enough people to satisfy all the employment opportunities in our state.
So, short term, it's competitiveness, long term is preparation of the work force.
MR. FROLIK: Great. Steve Sims, from the perspective of the Economic Development Office from the City of Cleveland, what is the top challenge?
MR. SIMS: Well, I would agree with what Mr. Johnson said, and I do believe that a lot of what we face here locally has to do with global economy, and the fact that we do have a base here in Northeast Ohio that is more from the industrial age as opposed to, what some would define as, new economy areas. The biggest challenge is to ensure that we can support the businesses that we do have here, to keep them here and to maintain employment. I think that Mr. Johnson pointed out the fact that, in essence, we see a lot of companies that, if they're not closing down, they're definitely downsizing and we have to look to what can we do to take care of the folks that are being displaced in terms of new job opportunities and I think that there are a number of areas that have promise for this area, including technology led development in the areas of biomed, biotech, so, I would agree.
MR. FROLIK: President Mike Schwartz.
DR. SCHWARTZ: Well, you wouldn't get too much disagreement from me about any of that either. In fact, it seems to me that long term aggregating some educated intelligence and keeping it here is going to be the real challenge for us. The institutions here, which are very good institutions, here in Northeast Ohio need to be called upon to do that aggregating of that intelligence and producing more, but the work force issue is going to be very serious in the few years to come. So the universities and the schools have a great deal to do. More short run, as Stephen said earlier, I think that paying some attention to the companies that are already here and seeing to it that they're retained and that they flourish becomes a critical issue for us in the sense of how to serve their best interests, seems to me it's a real, real problem for us.
MR. FROLIK: Greg Browning.
MR. BROWNING: I think work force development both in terms of right through the system, education, higher education, but also employment and training issues for people already in the system, already working. Not just how do we need to put more money in, but how do we get smarter about the investments we're making, how can we get a better strategy that adds up for Ohio is a question that I think has to be dealt with.
MR. FROLIK: Eric Fingerhut.
MR. FINGERHUT: I guess that there's a lot of agreement here. I think that President Schwartz probably described my view the most closely, and that is to say that this has to be a place where smart, interesting, exciting people want to come because they are the ones that think of the new ideas that become new businesses and that attract investment.
The thing we have to remember is that the State or the State Government, the City Development Department, we can help individual businesses from time to time, but ultimately, that's not how the economy grows. The economy grows by creating the conditions that people, that individuals entrepreneurs and individual capitalists want to create success for us.
Having agreed with that, I really want to focus on the second half of your question if I could, which is, what is the State's role and just start this discussion about the State's role by saying, I think the State has a huge role to play, that State policy ultimately can set the tone for what kind of economy we're going to have. I think if you look at other states around the country that made this shift that we're all talking about, frankly, quicker than Ohio did, to the knowledge based innovation economy, that you see how powerful the State's role can be. And I think that many of us feel that frankly, we have come to this party a little bit late, that we were chasing smoke stacks too long and that we now have some catch up to do. And so, I think this discussion is timely and appropriate because we have got to figure out how we can get to scale quickly.
Remember, we're all talking about investments and if we all agree the State needs to make investments in work force development, education and technology, and research and development. These investments have payoffs that are many years out into the future. These are not quick payoffs, so we've got to get to them. We're seeing that some of our neighbors have gotten -- started seeing some of those payoffs quicker because they got to the investment sooner than we did.
MR. FROLIK: Okay. Dorothy Baunach.
MS. BAUNACH: Every one said almost all there is to be said, except that I think that the biggest challenge is economic growth and competitiveness. And we're certainly not growing as everyone has mentioned, quite the way other regions are growing. And really, to get there from here, first of all, we have this economic base that needs to be transformed. It will take along time and it's a big base, but it will be the platform for growth and then it's about entrepreneurship and innovations and how we can build on the assets we have and take ourselves into that next economic stage of growth and per capita income that is at least comparable, if not above average, as we have been in the past.
MR. FROLIK: Okay, great. There's a lot of good things there that I think we'll get back to in the course of this conversation. First, I want to go -- Eric talked about setting the tone. Let's go to the monitors and look at what Governor Taft said when we talked to him in the later stages when he was here actually, for one of your summits in October, about the tone for the future and the economy.
GOVERNOR TAFT: We have been involved in over 600 economic developments since I became Governor, creating, or retaining about 100,000 jobs. We also have a plan which we're implementing, the Third Frontier Project, to really position Ohio for prosperity.
MR. FROLIK: Bruce, throughout the campaign and in the last year, even non-campaign events, the Governor's talked about the Third Frontier, and obviously, it's a very broad rubric with a lot of elements, can you talk about what you see as the most important component and how it can impact the State's economy?
MR. JOHNSON: As Eric said, it's a long term approach. You can't expect success overnight. The Governor, before this year, insisted upon the Technology Action Fund. He insisted on Ohio's Tobacco Funds being spent for biomedical research in this State. And the State does have a history of trying to be and investor in innovation through the Edison Programs and through others. The governor also recognizes that we have a lot of work to do, and so, he has offered the States most aggressive package ever for technology growth in the state through state investment and that's the Third Frontier Project. It's a 1.6 billion dollar, ten year proposal that has the potential to spark new business formation in our state over time.
MR. FROLIK: Okay. In the discussion that's been -- you've heard about the Third Frontier, I would like all of you to feel free to jump in and think about; is this, does this make sense? Is this the way we should be going? Eric, what do you think, from a member of the legislature?
MR. FINGERHUT: Joe, I think the Third Frontier is a good initiative. Bruce and I have served on committees together trying to flush it out. I think that frankly though, we're not at scale yet. 1.6 billion sounds like lot of money, but over ten years you start realizing that it's really not very, not as significant as it needs to be. You know, if the Third Frontier is going to be our flagship investment, which it sounds like it is from the Governors discussion, you want to compare this to the flagship initiatives in other states, and the fact is, that it is not an investment that is at scale compared to other states, in their flagship technology investments. And again, remember the comment I made earlier, which is, we're coming to the party a little bit late. So, we're coming to the party late, I think we're still not at scale yet. It's a good start, but if that's our sole set of investments, we're really not going to be there.
If I could make one comment on the clip we saw from the governor, talking about setting the tone, Bruce and I have this discussion a lot. He started his conversation by talking about the 600 or so individual projects that the Department and the State has been involved in and then moved to the Third Frontier. Relating back to what I said at the beginning of this discussion, I really think we have to move away from talking about the 600 projects and, you know, however many jobs were involved in those particular projects. Not that they shouldn't keep trying to help businesses when they need help, but we really have to think in terms of setting the table for innovation and job creation that we have nothing to do with. The ideal situation here is that we created an economic environment where jobs are being created and they don't have to call Bruce and ask for help.
MR. JOHNSON: Eric, it's not either or. The people in Lorain working at the Ford plant, the people in the Lordstown plant in Youngstown are very happy that the state comes to the table to save a couple thousand jobs that means spinning off 6 to 10,000 jobs in the area. Those are important investments to work and there's a lot of competition. I said before that the most important factor is the fact that we're in international competitive situation and people have a lot of choices in terms of where they make their investment. We want them to make major capital investments in Ohio and continue to build a good quality manufacturing jobs that exist in our state. This is a recognition, the Third Frontier Project is a recognition that the State has always been engaged in the infrastructure of the economy. It used to be roads and bridges. It still is roads and bridges. It is used to be transportation, water and sewer. It still is those things, but in addition, it is the ability to attract talent. Eric is exactly right, and the other folks are exactly right, but it hasn't changed all that much. The Edisons and Wright Brothers were innovators of their time. We need to make sure that the State of Ohio has the infrastructure, the high quality, higher education institutions, quality K-12 institutions that provide an opportunity for Ohio to have its unfair share of real innovations in our economy.
DR. SCHWARTZ: It seems to me that the universities have really resonated to the governor's proposal for the Third Frontier and have been talking collaboration in ways I haven't seen before in 26 years in this state. And if anything, that's a healthy driver, it seems to me for getting some things going. And it's especially important because the areas of technology that are being talked about have been very well defined and so we can assess our strengths and development in new kinds of ways trying to bring new talent in where we might be a little bit weak and so on. So I think just the conversation about this so far has proved to be helpful. Now, whether it happens or not, that will have been okay. But we want it to happen, although we do agree that it's probably not enough, but it's a start and it's an important place to begin.
MR. FROLIK: Dorothy.
MS. BAUNACH: I'm a great supporter of the Third Frontier and the new Wright Center of Innovation, RFP that's out at this time waiting for proposal, has caused a lot of folks to start talking to each other across the State, regionally and across the State. I think the one thing we have to be careful of though, is that the first 50 million dollars is all capital dollars and that sort of leads as Ohio has always been a leader in terms of capital assets and fixed assets, property, plant and equipment, that's what we're used to investing in. Again we're looking at a knowledge economy and innovation. We're going to have to get some additional funds like the Technology Action Fund, which has been so good, but it's a small portion of the mix at this point, only 15 million dollars a year and it's probably the most important money, that early stage seed money, technology validation money, and so, a new program it's got some great potential, but I think there also will have to be some tweaking along the way.
MR. JOHNSON: Northeast Ohio has really done well with these Technology Action Funds and that's because the assets of Northeast Ohio are so impressive. One of the challenges we're going to have as we continue through this Wright Center process is to insist that the science be world class. You can't invest anymore in something that is good enough for Northeast Ohio or good enough for Ohio or good enough for the United States. You have you to invest in opportunities that are world class opportunities. And we also have to make sure that people outside politics are the ones evaluating these proposals from a science perspective and from a business commercialization perspective so that we can have real job opportunities instead of window dressing for the people of our state.
MR. SIMS: What I would add is, what I think the program will provide is a great framework for how we can invest. It finally puts the State in a position where we are focused around some very specific things. I really wouldn't want to lose the Senators point about scale and I would really also have to piggyback on the comment related to what types of funds are going to come and the timing of those funds because we are talk about something that is different than what we have had in the past, in terms of a kind of investment that is needed. But more importantly when you think about it, we've been talking about the entire State of Ohio when we talk about scale and my personal experience would be that without a doubt the entire kitty can be used in Northeast Ohio easily and meet all of the qualifications and standards regarding world class.
MR. FINGERHUT: If I can just make one final point on this, we really need to remember that we're not just, our businesses are just not in competition with each other, but the State is in competing with other states and with our countries. We want world class science. I agree with everything Bruce said. So does every other state, want world class science and the world class scientists have choices and that's where the issue of scale really comes into play. We just lost a world class scientist from the Cleveland area down to North Carolina. I'm certain that scale had something to do with that decision. We simply have to face up to, and this is, as a State Legislator, and Bruce was for many years, and still our State Director, you know, we make priority choices all the time, and I think the point that I have to make today is that we haven't made the tough prioritization decisions to get us at the scale we need to get.
We're better today than we were four years ago, there's no question about that, but we're still nowhere close. Other states took their tobacco money, for example, and invested for more of it in the types of technology initiatives that we're talking about, than Ohio did. Other states have taken their flagship proposals comparative to the Third Frontier and invested more. That's our competition, we have to be aware of that. I'm glad it's stirring conversation, Doctor Schwartz, and I'm glad that it's getting people working together. Those are all positive things and I support them, but we have to realize those conversations are all happening next door and all around the world.
MR. JOHNSON: I love this proposal. I think, obviously it can be bigger, everything can always be more. I really have to disagree with Eric's assumption that, and just blank statement that Ohio's proposal is not on par with what other states are doing. If you look past just the announcement of the governor and actually look at what their implementing. Every state in the union is under the same economic situation that we are in. Many of them have announced programs and not followed through on the programs that they've announced. On a per capita basis, Ohio's Technology program is very competitive with virtually every other state in the union, is far ahead of most of them. So, in the last four years, we've made a decision to reprioritize exactly like Eric has suggested and has been suggesting for a long time. And while, yes, we would like to have more, we think getting a good start on this first 1.6 billion dollars and seeing where it takes us, is, at least good news for the people of our state
MR. BROWNING: In terms of scale, because scale as we all know, goes to numbers, but it also goes to choices. And in Ohio we have these great city states and we're sitting in one of them, of course, Cleveland, Columbus, Cincinnati, Toledo, you name it, and we have a great tendency to react to those city states and spread money around, and it's a great bipartisan tradition. Leaders of the state react to the needs and move money around, but is it strategic? Is it making tough choices, saying look, we're going to leverage our strengths and that means we're going to rifle most of our money into a fairly short list of places. Well, that might sound good, actually doing that is very difficult to do. I remember when I was Budget Director, going with the Board of Regents to North Carolina to visit the Research Triangle. It was very interesting, but I walked away thinking, well, we would have to have 7 or 8, you know, and people who didn't live in big cities would feel that they got shortchanged in the process. It's, we all laugh about these things but it is a serious issue.
MR. JOHNSON: If I can get Cleveland legislators to recognize that if some other place has the best proposal as evaluated by the National Academy of Sciences, or somebody like that is who we're being to be asking to do that, then it ought to go in a different direction.
MR. FINGERHUT: Have you had objection to that, because I have no problem with that.
MR. JOHNSON: We have had no objection. I said the same thing with a group of Cincinnati legislators, that if the first 7 best projects were in Cleveland, all 7 of them ought to be funded in Cleveland. You need to say that in Toledo, and Youngstown, and Dayton, and Marion and Columbus. But more important than that, we need to have multi-regional collaborations. Maybe the best asset is GE Aircraft Engines working with the University of Akron and somebody up at one of the health organizations in Cleveland with Battelle Memorial Institute in Columbus, Ohio. Maybe the best talent in one state is not located in one community. And so, Dorothy is right about not over investing in capital assets, new building and equipment, but to have that second round of 500 million dollars that the governor wants so badly, that we're going to put on the ballot next year for the people of the State of Ohio to say you need money to attract the best and brightest, either keep them here. You know, we have a hundred higher education institutions in and around the state and we keep losing people to other places. Keep them here or bringing them here so that Ohio can have a strong future.
DR. SCHWARTZ: That is exactly my point and the point is, when all is said and done, this is about people. This is about the best educated intelligence we can bring into this state or keep in the state, one or the other. The focus on the capital might be the city state's problems because we're trying to find a way to spread the money around, but when push comes to shove in all of this, if we can't attract the very best people in science and technology and mathematics we are going to suffer as a state for a very long time. When Case Western Reserve University was able to bring an eminent scholar here from Los Alamos, that struck me as one of the best things to happen to this region. We offset it was losing one, but we got him and he's here and here a very collaborative person so we're seeing some great interactions with him. We need much more of that kind of money to bring folks here and keep them and that goes for out-of-state students, too. We need to bring as many of them here as we can in the hopes that they'll keep their educations here as part of the aggregation of intelligence.
MR. FROLIK: We mentioned at one point the priorities of the Third Frontier. Can you run down the five or six categories that you have sort of targeted as the many areas when investing?
MR. JOHNSON: Yes, I can. Instruments and controls and electronics. Let's explain it first. When I first became Development Director we asked Battelle Memorial Institute to give us a report on how Ohio can best compete in the technology economy. It's several hundred pages, it's on the governor and the Web site, you can look it up if you want to. The theory is, you need to build on your strengths. Okay, you can't just create something from nothing.
And so, Ohio has incredible industrial strength that is world class. And so, we believe once you have identified what those are, that you can make strategic competitive investments that are targeted to grow new innovation out of the industrial strength. The business community has to be the driver. They have to define what the problems are that need to be solved in order to take new product to a commercial opportunity. But all this talent that is at the universities also has to be called on to solve those problems.
So, like I said, there's instruments, controls and electronics. There's biosciences. There's information technology. There's something we call advanced materials, which is you know all the composites, the titanium, et cetera. The last category is power and propulsion, that's the automobile industry, but it's also the electric utility industry, and it's something that I'm very hot on, which is fuel cells. I think the real key is capturing what we call disruptive technologies. Technologies that have the opportunity to change an industry. Fuel cells will change the automobile industry, the electric utility industry, change what operates your home energy appliances some day and there's a whole conversion from oil and gas to the hydrogen economy that will taken place in this country over the next 50 years and it will either create hundreds of thousands of new jobs or it will destroy thousands of jobs. We have to seize that opportunity, and that's why the governor has announced 100 million dollar fuel cell initiative for our state.
MR. FROLIK: We have talked a little bit about the disbursement of money. I want to really expand on that, but let's go to something, we have a clip of the governor talking about that issue.
GOVERNOR TAFT: Well that's going to be based on a competitive process for the most part. There will be criteria, we want to promote partnerships between university research centers and businesses. We want to promote partnerships among businesses, among research centers, so that will be one of the criteria. What kind of a partnership are you developing? We want to attract federal research dollars. That will be one of the criteria. Do you have a project that is going to attract substantial federal funding into Ohio to create more research and development job. It's going to be competitive process. I believe Northeast Ohio is well positioned to do well.
MR. FROLIK: Let's start with Dorothy and Steve in particular, with what the governor said about Northeast Ohio being well positioned on this issue, would you agree with that? What are the areas based on what Bruce talked about, what are the areas of the targeting of the Third Frontier that you think were particularly well positioned on.
MS. BAUNACH: Well, Ohio has strengths in all the areas that Bruce mentioned and Northeast Ohio, in particular has strengths in all those areas. As you know, we have a tremendous initiative in the biosciences, bio-enterprise looking to grow that. The commercialization of technology, we have a wonderful research base, we're trying to grow the technology businesses.
We do have an electronics industry in Ohio and Northeast Ohio. We don't think of ourselves as electronics place. We don't manufacture silicon chips and probably never will, but we use silicon chips to drive advanced manufacturing. All the machines and controls and activities that we see today are driven by chips and software to make our manufacturing as competitive as possible. Fuel cells, we have tremendous automotive suppliers, but we also have people looking at the next generation of fuel. The hydrogen economy is coming and we have people looking at that. Advanced materials, polymers, you know, you can't get a stronger base of research between University of Akron and Case Western reserve University. And then with all the polymer companies, I believe it's the largest industry in the state, and in particular that nexus is right here in Northeast Ohio. And information technology, as you know, Joe, we just hosted a seminar last week where we've shown that we have somewhere between 65 and 75,000 information technology jobs and we hope to double that amount by 2010. So, again, we'll be competitive in that arena.
And just one last comment about getting to scale. This isn't about just Northeast Ohio competing against Southwest or Southeast Ohio, this is about the whole state getting together and making sure this gets done. Two points, one is we do have an opportunity in that 500 million dollars bond issue that is coming up for the operating portion of this Third Frontier. Maybe we need to look and see if we can take and make that bigger, really get ourselves to scale. So in the legislature, when we are reviewing that, maybe it's not 500 million, maybe it's 1 billion dollars that we should look and see if we could bond at this point. The other part is, the Third Frontier doesn't stand alone, that is going to be leverage by investments from industry and also the Federal Government so we should be able to quadruple that investment over those ten years if we do it right.
MR. JOHNSON: The way it's designed, the 1.6 billion becomes 6 billion, and that's a minimum. Most of the time when the State puts money out, we always require matching, we're requiring business involvement and we're also looking forward to being very competitive for federal research grants. So, we think it will result in just the 1.6 and if it's 2.6 that's great, 6 billion dollars in new investment in this state, but what will really drive it as Eric said before, is the individual innovation of all these talented people that will be in Ohio.
MR. FROLIK: You talked about in the criteria, is one of the aspects going to be how much a project or collaboration believes, legitimately, can show that they have a potential to leverage in terms of dollars?
MR. JOHNSON: It's much more than believe they can show. Demonstrate and when I say business involvement, I mean separating the business from cash. Because, I think that says about how far down the pipe you are with realizing commercial potential. You know, if some business is willing to say this project has so much potential I'm willing to invest as opposed to provide somebody on a part-time basis to shepherd it through, that shows a real opportunity in my opinion, an opportunity we hope to capture in Ohio. So, yes, there are matching requirements, people are complaining about matching requirements but this is not just another stream of dollars from the State to do what you were going to do already. This is about new projects. This is about new partnerships and this is about world class collaboration.
MR. SIMS: I think going back to the governor comments, Dorothy indicated very clearly that Northeast Ohio and the City of Cleveland are well positioned in all of those areas. We have done, you know, a zillion studies to show that these are clusters that have strength and the wonderful thing about it is that partly, some of it will represent new uses and new opportunities, but to a large extent, it really represents investing in businesses that we already have here because they are technology users and are not necessarily producers. The bioscience area as an example, produces an opportunity to have a step off and to do something in this community at a larger scale than we have had a chance to do before but we have a platform to do it with. And so, with respect to his comments, I would think that we would have every opportunity of benefiting and leveraging the resources that are going to be made available at the State level.
MR. FINGERHUT: Just a couple quick things. One is, I want to come back to a little dialogue Bruce and I had. Competition is the only answer and he's absolutely right to say that if the top 7 projects come from Cincinnati, then the people of Northeast Ohio have to live with that. That's the only way for this really to work. We know that won't happen because we are well positioned here in Northeast Ohio and let's face it as a legislator who has watched the Northeast Ohio delegation diminish in size relative to the rest of the state, we know from the Northeast Ohio legislative delegation we can win on the merits. If this is about political clout and cutting up the pie, we're going to lose, so we have to win on the merits, that's one thing.
The second point I want to make, maybe it's a bit of a challenge to President Schwartz is, one of the real assets we have in Northeast Ohio where we get regular investment from the State, regardless of how big the Third Frontier turns out to be, is our public universities. We have Cleveland State, Kent State, University of Akron, Youngstown State. We have got community colleges, at least three that are statewide leaders, Tri-C, Lakeland, Lorain Community College. Every year in the state budgets, no matter what else is happening, they're going to get a lot of money.
And I think that as leaders in Northeast Ohio, we have to expect, we have a right to expect the universities to become even more active in the economic development picture in this region, really focusing on how they can commercialize what's happening in the laboratories and how, you know, how they can become our Northeast Ohio equivalent of the research triangle, of the research park. That's really, if you look at Northeast Ohio, that's the future. It's what is happening at University Circle, what is happening in the corridor from Akron to Kent and the collaborations between those places. We're really counting a lot on that leadership to provide the competitive proposals that are going to win the day with whatever funds come out of Columbus.
MR. FROLIK: President Schwartz, I was going to ask about, do you see among your colleagues, there's obviously a lot of talk about a need for the Universities to collaborate with one another, with industry. Is that mindset there? Are the universities ready to step up to that challenge?
DR. SCHWARTZ: More and more. It's not a new phenomenon. More than a decade ago Kent State University became a National Science and Technology Center, the National Science Foundation. It's the only one ever in the State of Ohio and it led a coalition of institutions in a liquid crystal and polymer combination that included the University of Akron and Case Western Reserve University as important partners. So the idea of that kind of collaboration has existed here but it hasn't flourished. I think what's happening now is, there's a good deal of understanding that it has to flourish because among other things, alone we don't necessarily have the resource that it would taken for any one of us to pull off a major advance in any of the areas that you mentioned earlier.
So, if we're going to do instruments, controls and electronics for example, Cleveland State's College of Engineering and the one at Case Western and the University of Akron are going to have to team up with the technology school at Kent for example. Those things we understand are going to have to happen. It's very important to us that Case was able to attract an eminent scholar in fuel cells research and in fact, he's going to be giving lecture on that very topic on our campus in a week. We're getting to know each other in ways that we haven't in the past. And as competitive as we have been, there's a real temperament, I think, out there to set that aside for the common good of this region.
MR. JOHNSON: Let me just mention the eminent scholar piece because that is a state initiative, is state funded with the support of fine members of the general assembly and it probably is under funded, but we have funded a lot of these eminent scholars around the state and one of the keys is that the non state institutions like Case Western Reserve are eligible for this type of funding, but if we adopt the plan that the governor has laid out for the Third Frontier Project, we'll be able to more than double the availability of world class talent in our state.
DR. SCHWARTZ: Let me go back for a minute because it's not just the university stepping up to the plate. We have developed something called the Industrial Technology Institute at Cleveland State. It involves Cleveland State, the City of Cleveland, NASA Glen Research Center and Camp. All these institutions that have a contribution to make, it seems to me university and beyond need to be able to come together in new and innovative kinds of ways. This Industrial Technology Institute is designed to do something it should have been obvious, and that is to take existing patents, whether at NASA or Camp and engineer them into new products and transfer them as rapidly as possible into the economy. That's the kind of collaborative relationship that we all have to be thinking about, the universities included but beyond that.
MS. BAUNACH: Michael, I would like to go back to something you said before about the Liquid Crystal Institute in Kent and the ALCOM collaboration that was funded by the NSF for 11 years. It was 11 years of funding, and it points out the long term nature of this and it's just today that we're actually looking at, after that 11 years is over, 6 to 10 brand new companies that were formed out of that consortium and they're trying to grow and thrive right here in Northeast Ohio. But it takes that long, it takes that initial investment, all that collaboration and eventually you get the economic return from it.
DR. SCHWARTZ: One of those companies which is in this region is really very interesting, it depends on Kent State for liquid crystals technology and depends upon the University of a Akron for polymer technology and they've called us up for help with advanced manufacturing processing. That's the kind of thing that keeps the area going.
MR. BROWNING: I think the area obviously has a public private track record from downtown development and beyond, that can build on and need to, going forward.
MR. FROLIK: Dorothy mentioned an important point about this, a lot of these technology innovations, a lot of these investments would be long term results before it begins to bear fruit. Whenever we've had these discussions in the past, I always get a number of phone calls or letters or e-mails from people who say, Gee, that technology future, that sounds really interesting, but you know, my father worked at LTV and, you know, while the plant started out that's with half the work force or they were at TRW. What do we do more short term to keep this a place where people can still make a good living.
MR. FINGERHUT: I'll just start, short term what we need to say to the people who call you and lament that their children can't work at LTV the way their fathers and grandfathers did is, say that we want you to go to college and enhance your education because we all know that it's, not only is that going to be good for the region it's going to be good for the individual. The higher your level of education the higher your earning power, the higher you are going to, the better job you are going to be able to get. We have to say to our kids all over this region, high school education isn't good enough. It's important, a quality high school education and we're still not there yet, where we need be, but it's not good enough. Even in many cases you know two year and four years degree isn't good enough.
We need to encourage people to go into sciences and engineering schools and what the State's role in this as Bruce knows I'm going to say making those higher education opportunities as affordable as possible. And, unfortunately, because of the budget crisis over the last couple of years we have backtracked a little bit. We have to plunge back into that full steam ahead, making college education affordable and say to every single one, I get those, e-mails, we all get those e-mails, that that is the answer. Ultimately, I mean, Bruce's comment very early on, the existing industries are going to become more efficient, they're going to employ fewer people. Those who are employed there are going to need to be higher skilled, capable of running the new machines and technology that are replacing the bodies that used to work there. That's the future. That's what we have to say to those people. That's a major role of the State. The state does invest in higher education in Northeast Ohio. We think it should be more affordable. We're going to keep pushing on that, but it's also a major role for the universities.
MR. JOHNSON: Tough competition is a good thing for the overall economy. It drives prices down, but the truth of the matter is, any business that comes into me and says, Director, I need a solution because I have been doing the same thing for the last 20 years and I'm planning on doing the exact same thing for the next 20 years, and I want to know what you are going to do for me. I say exactly nothing. You are on your road to extinction. You have to consistently make innovations in your product line. You have to show and demonstrate new capacity and new capability. You have to become more efficient. That's true for the employee as well.
We're in a situation where a period of lifetime learning, you can't just take your college education, drop it, or taken your high school education, drop it in and expect it to sustain you for the next 60 years. You have to continually educate yourself. So while it might be college for some people, it also might be adult training, you know, in one of the other various avenues for other people. You have to start to sharpen your skills because the truth of the matter is, it's only going to be more competitive tomorrow.
And for those people who are in commodity manufacturing, if the Chinese can do it, paying somebody 17 cent an hour, it don't bode well for you for the next 10 or 15 years. The question is, can we move up in manufacturing? Can we move up that value added training so that we're producing niche market things that might have a huge application and we might be able to employ thousands of people in it. It's the fact that somebody else with lesser capability can't do it, because if they can, they can find other places in the world to do it cheaper.
MR. FROLIK: Steve, what roles can the public sector play in addressing the situation that Bruce was just talking about?
MR. SIMS: Well, in regard to the point that he was making, I think that it's important for our core industries that we have currently, to reinvest and to move up the value chain as far as efficiencies and the kind of production that we can expect. But at the same time, it's very important to have tools and initiatives that are in place to continue to support that possibility. And so, a part of my answer would be, to the caller or the person that would write to you and say, what about these old line companies?
Well, part of my response would be, we have at that make sure that we definitely are focused on those companies and we're working with them in a way that we can help them with a path to greater efficiency and that we're working with them in away that we can help them understand how they may fit into an evolving economy, into a new economy, because not everyone of those companies are going to reach a point where they don't have any benefit to our local economy or to our overall economy. We have to figure out where they fit in and where they fit in we have to make sure we're giving the kind of support that is necessary.
MR. FROLIK: Greg, when we were talking last week, you mentioned something, there's been a history of skepticism in Ohio about picking winners and losers economically. Are you -- is the kind of process we're talking about here with the Third Frontier been helping individual corporations with a problem, are we already doing that? Are we picking winners and losers? Are we getting more into that?
MR. BROWNING: I don't think the problem has been with leveraging strengths. I think there's been a long history of common sense, pragmatic mid-Westerners figuring out who are we, what are we good at and let's leverage that. The bigger question is allocation of resources, public resources, and doing that in a strategic fashion which, of course, goes to choices and yet we have all these city states, we have a very diverse state and we have great strengths all over, so how do you walk away from that. And, of course, you don't want to walk away. You want to capitalize on it. I think the short answer to your question is I think every one is saying, yeah, we're doing some of that and we're being cautious and careful, but we need to do some of that to succeed, not to pick the winners and losers but to -- as from on high but to, in a more positive way, go back, work with the private sector and go after the strengths and capitalize on them and in the process say, yes, and in the process say, no, to other in many cases good opportunities, but you have limited resources and you go and you take your best shot.
MR. FROLIK: Is the political will going to be there to do that? You have mentioned earlier we have to spread things around. I think you call it the peanut butter approach down in Columbus. Everybody gets a nice thin coating. Will the will be there from the executive and from the legislative side to make tough decisions like that?
MR. JOHNSON: So far, so good. So far the general assembly allocated $50 million. The Third Frontier project did not come with stipulations about X amount of this money has to go to the following project located in Warren County. That's a good thing. That's -- an earmark strategy would be -- would so emasculate the program, in my view, that I would want to walk away from it. I would say if the State is going to borrow, because that's what we're doing, we're borrowing money based upon the taxpayers' ability to fund that over time. If we're going to borrow on our future, we have to invest in excellence and world class opportunity. So Northeast Ohio is well positioned to utilize its strengths to catch and capture a huge proportion of these funds and they ought to leave it to a competitive process and I think they will. The question is will everyone in the General Assembly look at their resources and say, you know, Cleveland got three out of the first five projects and Cincinnati got the other two and here I represent far northwest Ohio. I'm not very hopeful that one of the projects will come my way.
You know, we have to have other opportunities for people including the capital budget process that has this community pot that everybody hopes to play in. There are other processes that they could use to develop their local economic development infrastructure and hopefully they won't be dabbling in the Third Frontier project because Eric believes and I believe to some degree the Third Frontier project would be better if it were larger, but if it starts getting spread around, we may as well not do it.
MR. FINGERHUT: I'll just say, obviously there's going to be pressure in the out years. I think the early years, Bruce is right, we're doing well so far and there's a certain amount of excitement and purity to the effort, but when you're talking about a ten-year proposal, this is something we're going to have to guard against. And, you know, there's even more dangerous than the peanut butter approach, which surely does exist in Columbus, is a sort of resentment that comes when those who are strong appear to be getting stronger, and we have this problem in Northeast Ohio we have to be very clear about amongst ourselves that -- but that's the whole idea of centers of excellence. They have to get stronger. Those that already appear strong have to get stronger. Once they get to that elite, world class level that Bruce speaks about and that we all desire, you're talking a magnitude.
You know, back to the politics of scale that we were talking about earlier. So we have to encourage those that are big to get bigger and not feel that somehow that is taking away from others because it is really benefiting the whole region. And I want to also -- Bruce mentioned the Capital Bill, but, you know, again, I'm good at nudging the State when I think the State needs to do more, but one of the ways the Capital Bill works is there's usually an amount that is set aside for each region to decide how to spend its own money. Right now I think it's less this time than it's been in a long time.
There's still about $30 million on the table for Northeast Ohio, and we, as community leaders in Northeast Ohio, have to decide are we willing to taken the piece that we have some discretion over and add it to this Third Frontier pot and make our investments in technology and infrastructure even stronger. I would say we should, but, you know, frankly, our history is, you know, we have got stadiums and museums and city halls and all sorts of other things that we like and that we value, but we have to realize that we're at a stage in our history where we've got to make some critical investments and they will pay off. The idea here is to have a growing economy with rising personal incomes with people paying taxes and earning money so they can privately donate and we can publicly support these other projects, but right now we've got to transition the economy.
MR. FROLIK: Part of the raising the money for this is going to be going to the voters, possibly sometime in 2003. In Missouri earlier this month, there's a proposal on the ballot to help fund that state's rather ambitious foray into life sciences and it was turned down. So these things aren't necessarily slam dunks. How difficult do you think it's going to be to convince the voters this is a good idea and something they should take a chance on?
MR. BROWNING: I think it depends in part on what else is going on. We're sitting in the middle of a budget crisis, conversations about raising taxes, questions about the Ohio Supreme Court, finalizing the DeRolf school funding case which may require action that pushes a tax measure to the ballot statewide. So I think timing is important on these matters, and my hunch is the administration and others are thinking about timing in term of what makes sense as exactly when you go on the ballot. Whether -- there's more than one choice. You can go in the spring, you can go in the fall, looking at next year, at least. Beyond that, I've found it interesting over the last few years that, I mean, we have be focusing most of our attention on the Third Frontier, but, of course, state government is a lot bigger than that and I think there's increasingly attention on related issues and a growing consensus that we need to do more in terms of higher education. We need to do more research and development. We need to do it the right way. We need to not just invest in a more costly version of the status quo. But I think all of this, at least in the policy community in Columbus, there's growing consensus that we need to do something, and my sense is that, in part, is a reflection of what voters are thinking, as well. And we may have -- I haven't done any polling on it, but my sense is there's a growing awareness that we need to do something to move the State ahead.
MR. JOHNSON: We went to the voters for the Clean Ohio fund. It's a long-term project to help clean up the environment and create economic opportunity in our state, but people, once the message was out there, people understood it and they were willing to make that investment based upon wanting to protect their children and grandchildren and provide them an opportunity. I think the message is very similar for the Third Frontier project. It's a longer-term project, but it's about your children and grandchildren and what their opportunities will be in the future and, frankly, it doesn't raise your taxes. That's always one of the great things about this particular initiative and the Clean Ohio Fund initiative was that while the State is going to leverage its current income stream to make targeted investments, it doesn't raise your taxes and so there's some opportunity. When people have to tomorrow start paying more money, it's a much more difficult burden.
MR. FROLIK: I want to build. Greg mentioned the higher education and we've got a clip here of the Governor talking about the importance of higher education.
GOVERNOR TAFT: We have many projects and programs that have made college more affordable for our people. For example, we have an income tax deduction under the State income tax. We have expanded very significantly our low income scholarship money. We have preserved that and protected that from cuts, and one result of our efforts is that college enrollment has grown by about 30,000 students in Ohio over the last four years. When I took office we were behind. We are behind. We've had a tough budget recently, so our tuitions took a hit in the last few years or so, but going forward, higher education will be a priority, and we have worked hard to increase our scholarship dollars to help families of all types of different incomes to be able to afford to go to college, and we're very pleased to see enrollment up 30 percent. We think that's significant. We do have to have more people in Ohio taking up higher education, two-year, four-year colleges graduate degrees and also people who are in the work force now going back to college, very important for our future in the knowledge economy.
MR. FROLIK: Michael Schwartz, there's a lot in these discussions when we've had them here in the past and wherever you go, there's a lot of talk about work force and how important that is. Ohio has historically been undereducated in relation to the rest of the country. How do we change that and how do we do it particularly in the tough economic climate and tough budget times?
DR. SCHWARTZ: Those are good questions. It's good to hear the Governor say those things about higher education. It's important to us. In the meantime, however, we still have on average about seventh or eighth highest tuitions among the states and state support is 42nd or something like that. There has to be some encouraging public policy made here starting with the Governor and certainly has to emerge from the legislature. We're facing situations now where many of the universities collect more money in tuition from their students than they get from the state, that those lines have now crossed. That's true at Cleveland State. I believe it's true at Ohio State University, as well.
So the students' share of the cost has gone well up and so we don't compete well with the other states, therefore, it's not an encouraging policy, therefore, fewer people are lured into the colleges and universities in the state, and to the extent that personal income is related to education, which is a point that's been made here before at this table, personal income declines as education seems to decline in the state, so that kind of investment ultimately comes back to the state in tax dollars. And we've got some data at Cleveland State to show that for a Baccalaureate degree holder, for every dollar you invest in that student in higher education, that will come back as about $6 in tax return. That's an important thing to keep in mind. That's an investment strategy and I think the Governor understands that. He said it over and over again.
Now what we need to do is to see that the kind of budget balancing on higher education that has gone on starts to diminish if not stop and cease and desist all together and the formulation -- I'll say it as many times as I can and as many places as I can -- the formulation of encouraging public policy has to emerge from this legislature. When that happens, I believe we will see these gloomy statistics on degree holders, for example, turn around. The number of women in this state who hold degrees is really very poor and the number of our citizens who are educated just to the Baccalaureate level, that's not good either. So it's good to hear these things and it's good to see that enrollments are increasing, but being able to maintain those enrollments and seeing that people are able to complete because it's an affordable exercise, that's a different story.
MR. FINGERHUT: Joe, I just think the big transformation that is occurring here, it's occurred in other places around the country and is starting to occur in Ohio is to realize that investments in higher education are no different than investments in any other economic development policy in the state of Ohio, whether it's the Third Frontier or Tech Action Fund or any of these other programs. The benefit of higher education, if it gets to the level that Dr. Schwartz has just described, is not just to the individual student but to the state because, hopefully, they will stay here, they will create businesses here, they will earn those higher incomes here, they will pay taxes here.
I was very encouraged to see the new president of Ohio State University coming from the University of Georgia where a state that really did turn this around dramatically in the last ten years decide that they want their university system to be a magnet for they're top students, you know, the best people coming out of every high school to -- wanting, making an investment. They have a Hope Scholarship program which I think we ought to have in Ohio to make an investment to get those kids to stay in Georgia and then start their businesses there. They really began to see it as part of the economic development strategy of the state. I'm hopeful she'll bring that vision to Ohio. I'm sure she will. And that's the transformation. We really need to see not only the students and their own opportunities, which we all get excited about, but see that it really means something for the state.
MR. SIMS: The only comment that I would add to that is it's also especially important for businesses that are outside of this community that would consider setting up a major division here or -- in the state of Ohio I'm speaking overall in general, and it's important because we have to create an image of being a highly-educated community because those are the communities that businesses are interested in locating in. And so to the extent that we want to do attraction not just what we have on the table in terms of what we're trying to generate internally because we mostly focused on how we build from within, but when we look outside of this community and we look at the opportunities to relocate businesses that are growing in other regions and that are looking for other places to set up and we have the platforms to do those things, one of our major disadvantages will be the image that we have relative to the educational levels of our work force.
MR. FROLIK: Dorothy, do you hear that from your members at NorTech? Is that a concern of them?
MS. BAUNACH: Absolutely. We have got to link this education thing to the technology thing. They're inseparable, and I think everyone would agree that the investment is needed in both places and the attraction strategy in particular, we have been trying for a long time to grow our own based on our research strengths, but we've got to get better at attraction and not just attracting from other parts of the state or the community.
I mean, we've got to go outside of the state, probably outside of the country to attract companies that want to come and live in Ohio because from Ohio you can have access to one of the biggest markets in the world. And we should be able to be competitive to any state in that regard, and they do want highly-educated workers. They want to know if they're going to build a bioscience company that you have the technicians and Ph.D.s and Master students that can support them or an engineering activity. In software engineering, you've got to have the computer science graduates and we're sorely undereducated in that regard. The programs at the institutions have to be strong and the kids coming out of there have to be strong and they have to be here ready for those jobs if we're going to bring the companies in.
MR. FROLIK: Is that an issue you encounter?
MR. JOHNSON: All the time. Talented is a key ingredient, especially for attracting high value added companies. They want to know what is going to be their access to a wide array of very talented people, so I agree. That's why the Governor has insisted upon continuing to make these investments even though the budgetary situation has been very bleak. Let me just say that I don't believe that all education is equivalent, and so maybe I'm throwing a little water on this parade, but you can't just fund education and leave it at that. You have to understand what you are trying to fund, what specific parts of the work force development structure need to be improved, what are weaknesses are.
We can't afford to have ten world class research universities in our state. We're hoping to get one or two, frankly, with a series of investments, and so -- but each university can build upon its strength and build real niche strengths. And you can sell that, you can sell that to a company that the computer technology services at Wright State University are world class and they work together with a lot of different businesses in the area and they really do have a strength. So you can build on your individual strengths, but the same thing about the State in terms of investing in its strength is true at the universities. They just can't say give us more money and jobs will come. I don't think that that's an investment strategy. I do think that they have to have a plan, a business plan, for the growth of their university and where they intend for that growth to aid the local and statewide economy.
MR. FROLIK: President Schwartz, do you have a plan like that in terms of as you think of Cleveland State and do you think your colleagues at other campuses around the state do?
DR. SCHWARTZ: No. I think that the reason for that is the current system of funding the public institutions in this state, which is a very complex and opaque formula that is really hard to understand. It looks like the funding of K-12 education. Most people can't figure that out either. In fact, I was thinking on my way here today that what we ought to have is a requirement for some business plan showing where our strengths are, where we want to grow and development and so on and then go to the State realistically saying this is how we think we can do these things, this is what it would mean economically as well as educationally, and I don't know about my colleagues, but I would not object to that. I think that that would be a very good development for us as long as the base funding of the institution so that we can carry out our general educational mission is not injured. But as far as growing our strengths, I think we should be put in the corner a little bit here and say where do you want to make it and then giving us some help, give us some help with it.
MR. FROLIK: Greg, Bruce used the word "bleak" to describe the State budget. Somebody who's b put a lot of these together, it seems like higher education often is seen as one of the things that perhaps is more discretionary, ends up on the chopping block. Is that a fair sort of statement to make? Do you see any way to change that?
MR. BROWNING: As I said before, I think consensus is building that higher education needs to be more of a priority. Historically, it tends to be the balance wheel of the budget, getting cut disproportionately in bad times but also benefiting disproportionately in good times. That tends to be a pattern across the country. My sense is that you're asking the right questions about in terms of this discussion because in many ways what we're talking about is possibly spending more state money balancing the budget, more investments in education, more investments in R and D. My concern is, and I have the biases of a former budget director, but my concern is that we could put substantially more money into the state budget, spend it consistent with the broad contours of that budget today and be back here two years from now having the same conversation.
So you would buy stability and it would be important, but at the same time, what we're talking about is changing the status quo, moving the State forward and that requires I think some very serious discipline and serious conversations on the investment side. What do the universities want to be, where are they going. I'm a university trustee. I feel that way about what I think is a great institution, but who are we, where are we going, what is our niche, are we on a team, so to speak, are we going to play a position or are we going to do certain things well and not do other things, even though they are very legitimate things for a university to do. We have some, certainly have some of that in Ohio today. Do we need more of it? Probably. Would the Third Frontier push more of that to happen if it is successful? I think so. So, again, I think we can get beyond it, but we hav
e to have a real awareness of who we are and where we want to go and then go through the tough decision making process of getting a plan, adjusting it as necessary but, as Eric said, you have to sustain it year after year. It's just not like we're going to cut a deal on a budget for a couple years and it's going to work out. I mean, it's years later.
MR. FROLIK: One other area, another area that I wanted to get into and talk about because it's very important, obviously, to business formation and growth is capital, and we've got a clip from the Governor talking about that aspect of things .
GOVERNOR TAFT: We're using State dollars out of the Third Frontier project to help seed venture capital funds across the state of Ohio because so many entrepreneurs tell us the hardest thing to get is that early stage venture capital.
MR. FROLIK: Dorothy, I'm sure you hear that a lot. I was at your NorTech conference. I think whenever -- I was going to say two or more. Maybe if one entrepreneur looks in the mirror, the first thing they talk about is capital to the person staring back at them. As you understand the Third Frontier, is this going to help address that situation?
MS. BAUNACH: I think that it will. I think much of the Third Frontier is in the earlier stages where innovations and institutions just begins and begins to turn into technologies that start to reach the doors of the institutions that can either go to existing businesses or create new businesses. In the new business creation world, that very early stage technology validation money is critical. The Technology Action Fund has been addressing it, but as I said earlier, I think that's probably a small fund compared to what the entrepreneurs perceive the gap to be.
Now, not every entrepreneur with a business plan is fundable. Many people think they have a great idea and a great plan for getting to where they want to go, but it's really the market that will judge whether or not they have that plan and can get there. However, market forces where people are returning -- where people are investing for a return on investment are very different than those early stages where you really have to take a pretty broad portfolio approach and bet on a number of different technologies and projects to see which ones can really get out the door.
And I think that's where the State can play the primary role with the Technology Action Fund, technology validation funds, some of the money from the Third Frontier major investments I think will be used for those technology validations, so we have to do that. And probably while we're talking about early stage investment, we should also talk about our favorite Senate Bill 180 which is another way to take a look at how do we get more early stage capital into the marketplace, and this would be a way to get up to potentially another $100 million of State dollars into the economy that would be leveraged by other investors investing in funds. So that would be one way.
I think we also have to get the Ohio pension funds to be a little bit more risk taking. Not that any of us want our pension funds put into bad deals, but certainly I think that other states have shown that they can invest a certain amount of their portfolios into very early stage venture funds as long as they're managed professionally and, actually, the professional management is something that we have to build in Ohio and that's one of the things that NorTech believes that Senate Bill 180 will do is actually build management capacity so that we have more people understanding how to invest in those very early stages.
So I think there's all kinds of ways that the State can participate in the early stage funding. They're doing a great job of that now and I know that Bruce is committed to working on the pension funds and Senate Bill 180 and all the different -- the Technology Action Fund, but it's a long-term stick-with-it activity before you get to the guy that's at a conference in Cleveland, Ohio some day saying, I have got this business plan, I have got a great idea, I just can't get it funded. I don't have enough resources myself to do it. So that's all got to trickle down to that one person, the one with the good plan and the energy to take it forward.
MR. FROLIK: Eric, you're a co-sponsor. Can you talk a little bit about that and how, if it would be passed and implemented, how you see it leveraging more money into the early stage capital?
MR. FINGERHUT: I would be happy to. Ultimately, venture capital comes from the private sector and over the last decade, frankly, the capital has been voting with its feet and going other places. Everything we have talked about up to this point, the creation of good ideas of commercialized technology, that's what's really going to attract the big venture capital back to Ohio. But in the meantime, we do have to show that we're going to try to provide some liquidity out there so that we can help people who are here trying to do this get started.
You mentioned the Tech Action Fund. You know, there was an increase in the first budget of Governor Taft's administration. There was a small cut in the second budget. I know you don't like to have other newspapers mentioned, Joe, but the headline in this week's Crain's Cleveland Business is "Entrepreneurs' Interest in State Money for Technology Startups Continues to Grow as the Pot of Dollars Continues to Shrink." So we have got to expand. On Senate Bill 180, the frustration here is that this bill has now been in the legislature for well over a year. Some people think we don't do anything on a bipartisan basis. The original cosponsors were Senator Armbruster, a Republican, Senator Harris, a Republican, and myself. The idea here is really just to get the State involved in providing a pool of money that can be used for the kinds of venture capital startups. That funding mechanism is one that doesn't put State tax dollars at risk. It simply provides a guarantee, if you will, if the fund, $100 million fund if -- it guarantees a certain rate of return to the investors over a period of time. The hope, of course, is that they'll achieve that rate of return on their own, but we're willing to provide the backup in case, the guarantee in case they don't achieve that rate of return.
It's really a pretty simple concept. We did get it through the Senate finally after some tortuous work. I know the Governor has indicated it's a priority of his for this lame duck session, and, hopefully, Bruce can speak to that and how close we are to final passage. But I guess the frustration, as Greg mentioned, that he thinks that the policy community is starting to come to a consensus around some of the issues we talked about today. We have got to make that consensus gel a lot faster than we have before because we're moving way too slowly on some of these really pretty simple ideas like Senate Bill 180.
MR. FROLIK: Bruce, anything to say on that?
MR. JOHNSON: Well, capital formation is probably the most important issue in developing a small business and what we're talking about is spinouts. We've had a number of different strategies that we think will culminate in a successful strategy over time. We allow the university professors now to participate at a level that they couldn't participate before in spinouts. and investing and reaping the benefits of their knowledge.
We have invested with the Technology Action Fund in virtually every region of our state to begin to build venture capital capacity in our state. We're behind in this area. Most of the venture capital gets focused in companies on the coasts, either on the East Coast or the West. We're not behind much in terms of the Midwest with the possible exception of Chicago, but we are behind in terms of the coasts, and so we have to grow our venture capital community. The venture capital community in Ohio is really just a capitalist community. It's not willing to take very many risks in Ohio and the key is deal flow. The key is to put good ideas into the pipeline that have the eligibility of being funded.
So that's why the Third Frontier is focused on those opportunities, but we also have to make sure an adequate State policy to encourage venture capital funding in our state. Senate Bill 180 is a key part of making that happen. It has two relatively minor problems we hope we can get through. One is refundable tax credits which means the State would be writing checks out to people who should be venture capitalists and we believe ultimately it's still a capitalist economy and we shouldn't be writing the checks out. We would be willing to give them a tax credit on their tax liability. And the other issue is Ohio focus. The way the bill passed the senate, there was no Ohio focus. These venture capital firms could be out of state firms investing in venture capital opportunities in Australia. The Governor believes that these investments should be predominantly located in Ohio if they are going to be supported by state tax dollars.
MR. FROLIK: Steve, you're often in the position where people come to you, they need a little bit of help to maybe put the deal together to package something. How do you evaluate and obviously the City of Cleveland and before you were at the County, both a limited amount of money that you can have for loans and grants in economic development projects. How do you decide how you allocate that limited amount of pool that you've got.
MR. SIMS: I think largely we're talking about a group of companies that is different than what the Third Frontier would have an opportunity to assist. Primarily it goes back to the issue of whether a project is a good project, and the Third Frontier, and especially in the area of venture capital, would really be around the venture itself supporting the business and the venture, trying to get it from one stage of development to another stage of development. So when we look at the different companies that come to us for support, they're generally looking to expand. They want to buy new equipment, they want to buy real estate. That's pretty plain. But now you have an opportunity to take a look at it. You have an opportunity to see whether the business is viable, whether they have potential for success in the future and whether or not you have collateral or security for the public money that you may put into the project and so the allocation is not as difficult in that situation.
MR. FROLIK: There was some talk in the gubernatorial campaign about tax reform. Greg, as you look at the tax code in the State, are there things that we could do or change that perhaps would make this a more attractive state for investment, in particular, as the economy changes from, you know, as Bruce said, it's like we have had a very much similar to what you would have seen 50 years ago in Ohio. As we change from a very mature industrial economy to one which one would hope is a lot more innovative and encouraging to startups., are there things that need to change to foster that kind of environment?
MR. BROWNING: I think so. There are a number of study groups moving through this same question in Columbus and it is a question that, I mean, if you look at Ohio, in many ways you look at a kind of industrial era, tax code operating in an increasingly postindustrial society to boil it down to a sentence, and that we could talk about for a long time. In a nutshell, if you look at state and local taxes in Ohio, we're a midrange state. We used to be very low. We have come up to the midrange We tend to be higher on state and local income taxes, personal income taxes. We tend to be lower on sales taxes, certain business taxes, not so much the rates but the take on a per capita basis, although there are outliers there where we tend to, again, consistent with an industrial era economy, we, and tax code, we have heavy taxation of property. Tangible personal property in particular has been an outlier. It tends to be anti-competitive. If you can't control your inventories carefully and they tend to grow when business isn't good, then you get hammered even harder in a downturn, and I think there there's been strong bipartisan support for changing that and that rate is being tiered down 1 percent a year as we sit here.
So, yes, changes can and will be made I believe over time. Another question will be what happens inside of a budget struggle where you have got a need for additional revenue. You don't want to exacerbate existing problems and is it an opportunity to make things better. And so one tax study group, in fact, is looking at it from a revenue neutral vantage point basically saying how do you restructure the code and then set it at whatever level you need to set it at relative to your need but have the structure right. So taking away the tax increase question, at least for the period of the analysis, look at it and try to figure out what makes sense.
I think that the business community and other communities are watching carefully, concerned that things get better and not worse, even if taxes go up. There are many, many questions we could talk about on this front. Taxation of Internet sales is becoming increasingly prevalent. Though people are supposed to pay a use tax on that, it may be the case that not everybody does it and we may be losing a lot of revenue, "we" being the citizens to the State and to their government inside of all of that and that's not going to get smaller. It's going to get bigger. How do you deal with that? So there are lots of questions and I think, consistent with this overall conversation, adjusting the tax code consistent with moving to a knowledge-based world economy is an important and legitimate question and it's being reviewed as we speak.
MR. FROLIK: You're on one of those committees, aren't you, Eric?
MR. FINGERHUT: I am. Bruce and I are on the same committee.
MR. FROLIK: You're on the same committee?
MR. FINGERHUT: We are. Sometimes more than what people might think. I think that I agree with everything that Greg said. There is major tax reform that's needed. He's identified some of the key areas that are holding us back, and, actually, I think there's a broad consensus on some of these points. Of course, actually doing it and figuring out how to replace the revenues, for example, if you're going to eliminate inventory tax, then you've got a replacement revenue that you have to identify. I think those are very difficult questions.
I, for one, and I think this is an area where there's a lot of bipartisan agreement at least on those of us on the committee who have been studying the question, think it's time that we really swing for the fences on some of these proposals, that Ohio has to reposition itself in the country. It has to change its image. It has to become an attraction as a place to come and start businesses and start building businesses. I think we have some serious work to do and we will do it.
One of the issues that Bruce and I debate a lot, there was an earlier question that I didn't get to jump in on and that was about the picking winners and losers. One of the debates that we have and I actually feel relatively strongly about is a lot of what's in our Code, a lot of the tax credits and tax initiatives and various programs that end up keeping other rates high because we have -- because we give initiatives to individual programs, projects, kinds of businesses is, in my opinion, the equivalent of picking winners and losers because we have decided at various times over the last decade or so that this business needs to have a tax initiative to grow or we have to have this initiative in order to keep this type of business from leaving for another state or to compete with someplace else.
And as a practical matter, as a theoretical matter, what we ought to be doing is eliminating as many of those initiatives as possible and replacing them with lower rates across the board that every business can take advantage of whether they have been in business for a long time, whether they're a new business, whether they're growing, and I think that's a goal we share. The difficulty is in, again, getting to that point. Actually eliminating an initiative once it's been in place is very, very difficult, but we're going to have to do some of that to provide lower rates overall to make the business climate more attractive here.
MR. FROLIK: Do you agree?
MR. JOHNSON: I agree in part and disagree, respectfully. If he can do it with that simple equation, I would support it. The initiatives are there in order to get somebody at their point of decision when they're deciding where to buy and we want them to buy in Ohio. We want to reduce the cost of their investment to make it attractive. It's like finding the people who are in the market for an automobile and giving them an initiative to buy now. And when you lose, you lose big. When somebody decides to make their major investment in Alabama or Pennsylvania or Michigan, you lose beg because lots of jobs go with them in certain circumstances.
So if you could just reduce the initiatives in the state and dramatically reduce the rates at which corporations pay income or net worth tax and property tax, I would be for it. But the truth of the matter is because the initiatives, especially the targeted initiatives, are derived from a decision to invest capital at a given time, the amount of money we actually spend in that period of time is very small. So you wouldn't have a very big impact on rates if you reduced all the initiatives in the State development department's initiative portfolio. So you really need to do comprehensive tax reform that is focused on the reality that Ohio's tax structure penalizes capital investment in this state, discourages investment. If you do that, I'm for the reduction or elimination of initiatives. If you don't do that, you're talking about unilateral disarmament in a very competitive economic development climate and you will, in fact, raise the cost of making an investment in Ohio and aid the economic development of places like Alabama, Pennsylvania and Michigan.
So if you're serious about the tax reform, fine. If you are going to play in the fringes, then you have to keep the current initiative portfolio together because it reduces the cost of a capital improvement agenda for a company, and if we're taxing at 45 percent and Michigan is taxing at 23 percent, I can tell you where the investment is going to happen.
MR. FINGERHUT: I just want to say that what we've done over the last decade or so in this country and we have done it really well in Ohio, is we have created an industry of professionals like Steve Sims and Bruce Johnson and in every city and in every county and in every state who are aggressive marketers of their communities and their state and they use these initiatives to go out and compete to, you know, bring a business here or encourage investment here. But right now we're sort of at the mutually-assured destruction level. Everybody has got them and everybody is trying to one up the other, so at some point we're certainly not calling for unilateral disarmament, but we've got to de-escalate and get back to the days where you have -- you create a business climate and then all -- then you let businesses make their own investment decisions on a neutral playing field and not because Steve got to them first or his counterpart in Akron or Pittsburgh got to them first.
MR. JOHNSON: I've been saying the same thing for ten years in the General Assembly. The question is, can you do it, or will we make relatively minor changes in the tax code and eliminate very important initiative programs? That would be a -- that would mean in Lorain, an auto assembly plant would likely have chosen one of the ten or twelve competing assembly plants because, you know, the $16 million the State puts into that project is important to that company. And I'm not saying that you would lose them all. You probably wouldn't lose half, but the half that you did lose would be very significant.
MR. BROWNING: I think consistent with -- we'll probably end up with both patterns that we're just talking about, the move to a broader base and either keep down rates or lower them and at the same time have some initiatives, some targeted tax credits, et cetera. And I would just argue that with the latter, we should evaluate them, and that's easier said than done. It's very tough to evaluate whether or not these things add up or not. You can provide anecdotal evidence, but it's hard to really step back and say, did this work over time to produce what it was intended to produce. And it's not a criticism of the development department or anybody else. It's just fundamentally tough to do, but I think we need to do more of it going forward so the people who are in the game, whether they're businesses or taxpayers, understand what they're getting out the back end.
MR. FROLIK: One last real quick question and I just want a short answer from everybody. If we were to sit down here five years from now and go over a lot of these same topics, how will be know if the things we're trying to do have worked? Let's go this way this time.
MS. BAUNACH: I would think that the economy would be growing at a rate hopefully above the national average and per capita income would be growing at at least the average if not above. And five years may be a little bit ambitious for that goal, but we've got to see an expanding economy and we've got to see more entrepreneurial new businesses and new innovation and people looking at Ohio and Northeast Ohio and saying, that's the place we want to be.
MR. FROLIK: Eric.
MR. FINGERHUT: I agree. Rising personal income is far and away the best measure. Secondary measures, education levels of the work force, attraction of capital investment, new business startups. and job creation. But rising personal income far and away the best measure.
MR. FROLIK: Greg.
MR. BROWNING: I agree. I'd just say have the benchmarks now so you can measure them because if we don't have them now, we'll argue about it.
DR. SCHWARTZ: Well, I think we've got a bunch of those benchmarks out there. College presidents, we have all of them up here. But otherwise, nothing to add to that.
MR. FROLIK: Steve.
MR. SIMS: I think she nailed it. I think it's important, you know, to focus on the idea that it would be clear what type of talent is here, whether it has changed vis-à-vis what we have today. The entire culture, that it would be a culture of innovation and that it would be clear on its face.
MR. FROLIK: Bruce.
MR. JOHNSON: More high-wage jobs and high-growth industries. As a target, I'm not sure five years is a realistic time line. In the meantime, how much federal additional assistance are we getting for research projects. I think the most important thing that we're talking about is changing the reputation of our state. In fifth grade, the kids get a map of Ohio and Pennsylvania and every other state and in Ohio it has a cog on the front of it and wheat or corn or something like that. We're very proud of our manufacturing heritage and we want to sustain it. We're very proud of our agricultural heritage and we want to sustain it, but we have to add some symbol of innovation like the Bunsen burner, or maybe that's because I'm too old and I don't recognize it. Something else, a computer. We have to be known for the innovations that occur in our state and we have to have the people at the Research Triangle look at Ohio and say, wow, what are they doing that we need to copy.
MR. FROLIK: Okay. Great.
MS. BAUNACH: I have one more, Joe. In five years, let's never write an article called "The Quiet Crisis." let's talk about the comeback state, the comeback region, and that would be a great measure.
MR. FROLIK: When we see the benchmarks, we'll be happy to change it. On that note, I thank you all for the conversation.
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