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State gets poor grade in manufacturing, logistics report

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Brooks McCabe Brooks McCabe
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Brooks McCabe is managing member and broker of West Virginia Commercial LLC. He has been involved in commercial and investment real estate for more than 30 years, and he also is general partner of McCabe Land Co. LP. He has served in the West Virginia Senate since 1998, and is a special project consultant to The State Journal.

The 2014 Manufacturing and Logistics Report prepared by Ball State University’s Center for Business and Economic Research ranked West Virginia with an “F” in “human capital,” “worker benefit costs” and “expected liability gap.” The “D” rating was given for “productivity and innovation” while a “C” was given for “manufacturing, logistics, tax climate and sector diversification.” The only “B” was for “global reach.”

It is easy to be defensive at such ratings and to explain how the data presented do not represent true reality. A good example is the “F” in the “expected liability gap.” The indices used for this category were unfunded liability per capita and the percentage of GDP, average benefits and bond ratings. West Virginia has a good bond rating and has been on a prolonged mission to improve its unfunded liabilities. The state has come a long way and continues to improve in this area. But when one looks at our unfunded liability per capita and as a percentage of GDP along with the average benefits, West Virginia has a long way to go in comparison to many other states. The fact that West Virginia has a corrective plan and has been true in following it still does not make the raw data look any better.

Rather than being defensive, we need to look at what we can learn from the report, because the reality of the situation is that West Virginia needs to be much more competitive in the manufacturing and logistics arena. The human capital measurement ranked educational attainment for high school and college, first year retention rates in the community and technical colleges, the number of associate degrees awarded annually on a per capita basis, and the share of adults enrolled in adult basic education. It is common knowledge that our state ranks low in this area and the “F” rating is one more validation of how far we still need to go. West Virginia has come a long way in improving higher education; we just have a long way to go. More resources need to be allocated to education and workforce training if the state is to become truly competitive at the national level. An educated workforce is at the top of the list in priorities and West Virginia needs to do more in this regard.

Worker benefit costs is another area where West Virginia needs major improvement. Although the state has made major strides in controlling workers’ compensation costs, the state’s residents do not have, as a general rule, healthy lifestyles. The state’s incidence of heart disease, obesity, diabetes and other indicators of chronic illnesses are very high. Many of these costs become non-wage labor costs. The cost of casualty insurance, one of the indices used in the report, is above the national average, especially in the southern counties. These non-wage labor costs, which are higher in West Virginia, provide for the basis of the “F” rating. West Virginia needs to be proud of what it accomplished in the workers’ comp arena. Now the state needs to exhibit the same will and determination by attacking our public health issues. This has the potential to be the biggest cost driver in both the public and private sector. Lifestyle issues and chronic diseases may very well be West Virginia’s Achilles’ heel unless we change our policies and focus.

The report measures for productivity and innovation included manufacturing productivity growth, industry research and development expenditures on a per capita basis, and the number of patents issued annually per capita. The question is not whether West Virginia has a capable and productive workforce, because it does. The questions should be what is the annual growth of our productivity and what is the educational attainment of the work force? With a tax structure that penalizes reinvestment in modernizing equipment and our aging workforce, the state is not on the cutting edge of productivity growth. Furthermore, the state’s investment in research and creation of patents is not comparable to the states around us.

Manufacturing industry health is, in many ways, the key to West Virginia’s future. The report rated West Virginia with a “C-.” The three variables considered were the share of total income earned by manufacturing employees in the state, the wage premium paid to manufacturing workers relative to other employees in the state, and the share of manufacturing employment per capita. West Virginia has been losing manufacturing jobs for over a generation. These jobs have not been replaced by other skilled jobs so the state’s manufacturing industry health is poor. Capturing midstream and downstream manufacturing jobs from the development of regional ethane crackers will be the major task for West Virginia in the next 10 years.

West Virginia is at least in the middle of the pack in the other areas identified in the Manufacturing and Logistics Report. Grades of “C” were given in the categories of logistics industry health, tax climate and sector diversification. These ratings need to be improved by bringing the planned intermodal facility in Prichard online, eliminating the state tax on equipment and inventory along with the ever-present need to improve the diversification of the economy thru a significant increase in manufacturing facilities. The highest rating the state received in the report was a “B-” and that was for “global reach.” That rating should improve with the addition of foreign investment related to the expansion of the natural gas industry. New pipelines, development of LNG processing plants and port facilities and the shipment of new products produced form derivatives of the state’s wet gas should all help shore up the currently strong exports from coal.

West Virginia did not fare well in the 2014 Manufacturing and Logistics Report. But by stripping away the emotion surrounding the methodology and comparative ratings with the states surrounding West Virginia, we can more clearly see the things West Virginia needs to do to become a national leader in energy, manufacturing and logistics. Rather than firmly planting our feet on the ground and defending our past practices while criticizing the methodology of reports that don’t necessarily accentuate our strengths, we need to avail ourselves to all opportunities for improvement and the 2014 Manufacturing and Logistical Report offers one such opportunity.