*PLEASE NOTE - Since this is
a TEXT only document,Maps and some Figures are not included*
Morrison Institute for Public
Arizona State University
College of Public Programs
School of Public Affairs
Morrison Institute for Public Policy is pleased to present its fourth
annual Arizona Policy
Choices volume. The purpose of Arizona Policy Choices (APC) is to provide
analysis of and recommendations on critical public policy issues. Since
the series' inception, Morrison
Institute has developed the APC volumes by engaging university scholars,
Arizona policy leaders and
national experts in the policy issue under consideration.
Previous issues of Arizona
Policy Choices include:
° Balancing Acts: Tax Cuts and Public Policy in Arizona
° Growth in Arizona: The Machine in the Garden
° The New Economy: A Guide for Arizona
But APC is much more than a
report. It is designed to stimulate debate, inform decision making and
be a reference for the future. An integral part of the APC project is
engagement of citizens and
public policy leaders in discussions of the topic and the policy choices
associated with it.
APC has garnered respect in
Arizona and across the country because the volumes have presented creative
thinking on leading-edge topics. Morrison Institute continues that tradition
this year with Five Shoes
Waiting to Drop on Arizona's Future. The research, analysis and recommendations
presented in the
following pages offer a new approach to five issues of vital importance
to Arizona. I invite you to study
the issues here and to use this publication as a basis of discussion with
Rob Melnick, Ph. D., Director,
Morrison Institute for Public Policy
School of Public Affairs / College of Public Programs / Arizona State
APC Research Team
Mary Jo Waits, APC Project Director, Associate Director, Morrison Institute
for Public Policy
Senior Research Analyst Morrison Institute for Public Policy
Senior Research Analyst Morrison Institute for Public Policy
Graduate Assistant Morrison Institute for Public Policy
With Assistance From:
Rebecca Gau, Patrick Hays, Karen Leland, Nielle McCammon, Rob Melnick,
Cherylene Schick and Alice Willey,
Morrison Institute for Public Policy
William Fulton, Solimar Research Group | Tom Rex, ASU Center for Business
Research | Karen Heard, Chalk Design
Nancy Welch, The Insight Group
Okay, so what's next?
Will the flaws in Arizona's outmoded tax system gradually render the state
unable to pay for the public
services required for economic growth?
Will the "next new thing"
in technology mean Arizona will lose its competitive edge in microelectronic
Will poor educational opportunities
for Arizona's Latino youths hold them back - and hold the state's
economy back as well?
In fast-moving times like these,
everybody wants to know: What's next? What's the next wave of social
and economic change out there? As the NASDAQ sags and uncertainty grows,
leaders especially want
to know how to ride the next wave rather than be tipped upside down by
And today, such nimbleness
matters even more. Foresight is everything now. To paraphrase the editors
of Fast Company magazine: The only sustainable form of leadership is "thought
perceives new dynamics quicker and makes smarter adjustments faster than
In that spirit of anticipation,
Morrison Institute for Public Policy presents Five Shoes Waiting to Drop
on Arizona's Future - its fourth Arizona Policy Choices report. Like its
predecessors, Five Shoes is an
attempt to help public policy makers deal with the present by anticipating
What do we mean by "shoes
waiting to drop?"
We mean the trends that are already well under way - but that we can't
quite see yet. We mean trends
that could overwhelm us if we don't spot them now and aggressively use
our knowledge to plot a
positive course for the future.
There are always plenty of
shoes waiting to drop on our society. But the five we deal with here are
most fundamental ones - those that could make or break Arizona's success
in the future. They are:
° A Talent Shake Up
° Latino Education Dilemma
° A Fuzzy Economic Identity
° Lost Stewardship
° The Revenue Sieve
All of these challenges require
us to marshal the skills and the creativity of Arizona's most important
resource, its diverse and energetic population. For in the end, Arizona's
future depends on gathering
the best efforts of all kinds of people and making sure they have the
abilities and opportunities they
need to create a prosperous, healthy society.
To do that, we have to face
the challenges head-on. Too often we say: "If only someone had warned
us we would have acted." Well, with these pages, five definite alarms
endeavor to motivate constructive
action before it is too late.
So look out, Arizona! Shoes
are waiting to drop. Let's not get stepped on.
Five Shoes Waiting to Drop
on Arizona's Future, Executive Summary:
What do we mean by "shoes
waiting to drop?"
We mean the trends that are
already well under way - but
that we can't quite see yet. These trends could
overwhelm us if we don't spot them now and aggressively
use our knowledge to plot our course for the future.
Talent Shake Up
We think we're good at attracting brain power. But we're not as good as
think we are. And we may start losing it - in both the public and private
- if we don't work harder to land and keep tomorrow's footloose talent.
Talented Prospective Workers
Have Reservations About Locating in Arizona Because of...
Poor Performing Public Schools - 52%
Lack of Workforce Training
Programs - 27%
Image of Sprawling Communities - 15%
Not Considered a "Cool" Place - 14%
Lack of Cultural Diversity - 14%
Not a Top-Tier Technology Hot Spot - 10%
Lack of Environmental Amenities - 2%
Brain power is everything for
states in the new economy, and frequently it is provided
by "yuppie baby boomers," well-educated young professionals
and highly skilled
immigrants. Unfortunately, the baby boom is aging, and uncertainties surround
Arizona's near-term ability to attract and retain the best and brightest
and other discriminating, highly mobile groups. Arizona risks losing out
worldwide scramble for skilled workers to improve its standing in the
The bottom line: Arizona must
quality of life to boost its ability to keep
and attract the world's best talent.
Latino Education Dilemma
Latino youth are upwardly mobile already. But they need better education
for Arizona to take full advantage of the possibilities this exploding
Latinos born in Arizona make
up much of their immigrant parents' educational deficits.
Still, only half of all Arizona
Latinos obtain a high school diploma. This suggests
the opportunity and challenge of educating the state's Latinos, who now
roughly half of the under-18 population in Phoenix and Tucson. With effective
education, the Latino young could become a potent new source of talent
in the state.
Without it their skills deficits will exacerbate Arizona's coming shortages
of skilled labor.
The bottom line: Arizona's
and social well-being depends heavily
on erasing the educational deficits of the
state's young Hispanic residents.
A Fuzzy Economic Identity
Arizona is growing high-tech jobs.
But we haven't yet met the challenge of ensuring that we can excel in
new economy over the long term.
Name three things Arizona says
it wants to be great in. That is hard to do because
Arizona does not approach its economic future with a singleness of purpose.
of its leaders want to compete with California, Texas and Colorado as
of the knowledge economy. But just as many others are content to keep
Arizona as a perpetual construction machine or a retirement haven. This
personality is a stumbling block. Going forward, Arizona will lead - or
not - depending
on its desire and discipline to be distinctive and great in "new
Arizona has ridden the "electronics
wave" of the emerging new economy pretty well.
But to catch the next wave, the state must overcome its narrow base of
factories, its low-wage legacy and lack of intellectual facilities and
talent working on
"the next big thing." In Arizona, we "make" but we
don't "think" and thinking is where
future economic growth is likely to occur.
Arizonans Hope Arizona Will
Be a Technology Leader in the Future
Real Estate 6%
Financial Services 5%
But They Think Arizona Will
Be Known for Tourism and Real Estate
Real Estate 27%
Financial Services 2%
Leadership has become a spectator sport in Arizona.
Less than a quarter of Arizonans
think state business and elected leaders care
about Arizona's future.
Citizens' Perceptions of Arizona's
Political Leaders with a Narrow View 33%
Weak Political Leaders
Political Leaders Who Care Deeply About My Future 16%
Visionary Political Leaders 11%
Single-Issue Political Leaders 10%
Citizens' Perceptions of Arizona's
Business Leaders with a Narrow View 28%
Business Leaders Who
Care Deeply About My Future 22%
Visionary Business Leaders 16%
Single-Issue Business Leaders 11%
Weak Business Leaders 9%
Whether Arizona evades the
threats discussed in this report or overcomes them
depends in large part on the extent to which Arizonans act as leaders.
Many appear to be
standing on the sidelines and waiting for others to make things happen.
At the same
time, tackling the future with a traditional leadership style - focused
only on single
issues, set ideology, political survival and self interest - won't help
Arizona excel in
the early part of the twenty-first century. For Arizona to succeed, its
view themselves as stewards of Arizona as a place. In the final analysis,
remains only as precious and essential as its leaders and inhabitants
believe it to be. So
we have a clear leadership search: Who has enough intelligence, imagination,
and commitment to make the best use of the opportunities and challenges
the state and its regions?
The Revenue Sieve
Arizona's tax system is old and full
Too many exemptions and too
narrow a tax base hamper Arizona's ability to raise
The proliferation of sales
and income tax
credits in the last decade is one case in point.
Meanwhile, fundamental economic,
and demographic trends are
further eroding the effectiveness of an
outmoded tax system. Most notably, the
state's continuing shift to a service economy,
the rise of e-commerce and the simultaneous
aging and Latinization of Arizona
all threaten to slow the growth of state
and local tax collections even as service
The challenge is clear: Ensuring the
integrity of the system requires fundamental
reform of a leak-filled structure that has
grown too reliant on sales taxes.
A Talent Shake Up
We think we're good at attracting
brain power. But we're not as
good as we think we are. And we
may start losing it - in both the public
and private sectors - if we don't work
harder to land and keep tomorrow's
In today's "knowledge
economy," what matters is the intellectual capacity of
the workforce. Places succeed when they can mobilize their homegrown talent
- and attract new brain power - to dream up the ideas, devise the processes,
and execute the business plans that point the way to success.
Since talent is mobile, however,
a high-stakes competition has broken out among
places to attract - and keep - three prominent demographic groups with
knowledge and skills required for a successful economy: aging baby boomers,
young knowledge professionals and highly educated immigrants.
Unfortunately, Arizona is not
positioned well to attract and keep the
knowledge workers it needs. Most of the state's immigrants tend toward
lower skill levels. Meanwhile, Arizona suffers from an image problem among
the cutting-edge young knowledge workers who increasingly make regional
economies go. These professionals tell researchers Arizona lacks the urban
fabric, "coolness" and public schools they want. Finally, it's
in the twenty-first century, Arizona can continue to attract the one well-educated
group with which it has a track record: retirees. Baby boomers begin
turning 55 this year, and there's no guarantee that they will embrace
traditional resort-style retirement communities as their predecessors
Simply put: Arizona does not
yet have what it takes to win in the scramble
for key talent.
To fill the gaps, Arizona must
boost its quality of life. Since the best workers
can choose where to live, Arizona must move beyond its traditional "niches"
building distinctive world-class communities with world-class amenities.
do this, policy makers must understand precisely what the most discriminating
talent groups really want, and then deliver it with an authentic Arizona
whether it be vibrant new streetscapes and good schools or more options
continued employment later in life.
Governments and Businesses Face Big Talent Shake Ups
Under Age 35
Over Age 50
City of Phoenix
High School District
State of Arizona
Source: Morrison Institute
for Public Policy, 2001
Employers Say Talented
Prospective Workers Have
Reservations About Locating in Arizona Because of....
Poor performing public schools:
Lack of workforce training programs: 27%
Image of sprawling communities: 15%
Not considered a "cool" place: 14%
Lack of cultural diversity: 14%
Not a top-tier technology hot spot: 10%
Lack of environmental amenities: 2%
Source: Morrison Institute for Public Policy, 2001
"The future of most
cities depends on
their being desirable
places for consumers
to live. As consumers
become richer and
firms become mobile,
location choices are
based as much on
their advantages for
workers as on their
advantages for firms."
Increasingly Arizona's success will depend on how it reaches out to the
best and the
brightest in three demographic groups:
° Yuppie baby boomers, who, at the peak of their productivity, may
an "active retirement" with perhaps a different career, a new
business or a
return to school
° Young knowledge workers, who, in their 20s and 30s, want to do cutting-edge
work in exciting places
° Highly skilled immigrants, who are choosing places with inclusive
fast-growing economies and numerous options
These constituencies loom large because talent matters so much now. In
economy, regions prosper by dint of their intellectual capabilities -
their people. The
places that can claim the hearts and minds of the people who dream up
fresh ideas and
devise new processes will prevail over those that cannot or do not. As
Edward Glaeser writes: "Skilled communities rise - unskilled communities
Talent, however, is increasingly mobile, so a high-stakes scramble for
it is in full swing.
Well-educated, creative people - whether they are foreign-born, 50-something
something - move around a lot. Such people's activities are rooted in
a global economic
system characterized by rapid migrations of capital and people; their
sensibilities and many employment options make them peripatetic pickers
Of course, all of Arizona's talent is valuable in today's environment.
additional brains and hands is crucial because Arizona's homegrown talent
not deep or broad enough for new economy success. Morrison Institute's
survey of Arizona employers confirmed the importance and challenge of
More than half (52%) of the firms who recruit workers out of state rated
schools, as well as other perceived quality of life deficits, as "major
barriers" to attracting
Baby Boomers: Will They Work or Play, Come or Stay Away?
The baby boom generation begins to turn 55 this year. Since one in four
Arizonans is a
boomer, the 55 milestone presages a potential "brain drain"
in Arizona workplaces. As
the best-educated, best-off generation in American history, baby boomers
Arizona's workforce and provide the bulk of its talent. Especially critical
are the best-educated
professional boomers. They may no longer be as youthful as they were when
their status prompted the term "yuppies," but they are still
the most valuable workers.
Regions and communities that retain and attract the mobile, "demographically
segments of the baby boom will tap into a large pool of workers, entrepreneurs
and civic participants. Regions that lack them, conversely, could struggle.
Arizona and the Baby Boom Generation
Two trends raise questions
about Arizona's standing with the baby boom generation:
1. In-state boomers' aging
and retirement could create shortages of skilled workers.
The inevitable aging of the
state's resident boomers prompts concern because more
and more of Arizona's most experienced workers are hitting retirement
now and 2030 the proportion and real size of the over-60 population will
grow from 17
percent of the population (about 900,000 people) to 27 percent (about
according to Arizona Department of Economic Security projections.
Predictions abound about baby
boomers' preferences for the future, but no one really
knows whether boomers will continue the current trend toward earlier retirement
stay in the workforce longer. What is certain is that those who are aged
39 to 55 today
account for about 1.5 million of Arizona's 2.7 million working-age residents,
percent of them. Seniority alone implies that this half of the state's
the core of managers, supervisors and lead workers. But now, these critical
are entering the traditional downshifting years. In just 10 years, 500,000
will turn 60. In the next 20 years Arizona businesses
and organizations will face
replacing hundreds of thousands of employees at the top of their games
from the smaller
"baby bust" that followed the boom.
Already, Arizona employers
are watching their workforces grow older as they struggle
with the worker scarcities created by the 1990s economic boom. In health
average age of the registered nurses now hovers at 48. In education, a
third of Phoenix
Union High School District employees are 50 or older. Among governments,
of Pima County's employees, 70 percent of the city of Phoenix's and 61
percent of state
workers are over 40. Big private-sector employers are not much younger.
Raytheon Missile Systems' employees are 45 or older. At APS boomers make
percent of the workforce; half the workers there are 45.
Staffing will only get harder.
For a while "late wave" boomers will move up to fill
more senior positions. In 20 years, though, the challenge will toughen.
Then, the smaller
size of the younger cohorts now early in their work lives hints at a shortage
workers. Arizona's population is projected to increase by 57 percent by
but the pool from which the state draws its top employees, those aged
45 to 54, will
increase a comparatively modest 36 percent
In 20 Years, Young Workers Will Be Few in Comparison
to Older Employees and Retirees
Age Groups / Percent Growth
Source: Arizona Department of Economic Security
(see Figure 3). Thus, a substantially
bigger Arizona economy could include proportionally
fewer veteran workers to run it.
2. The changing tastes of
out-of-state "empty nesters" and high-end retirees
could leave Arizona out of the game of attracting them.
The second issue that raises
concerns about Arizona's ability to attract and retain the
most desirable cohorts of aging boomers involves the increasing sophistication
those groups. The reality is that the most desirable boomers may choose
to go elsewhere
just when Arizona needs them most.
Arizona has profited from the
wealth and spending of the 15,000 to 20,000 retirees it
attracts from other states each year. To be sure, accommodating these
demanded a lot of Arizona. But their arrival has brought an influx of
active and educated new citizens to the state. Only Florida has welcomed
more of this
"advantaged" segment than has Arizona.
Yet now the process of attracting
talented retirees and
well-heeled migrants may be
changing. Migrants represent a new talent source for states, for one thing.
At the same
time, "yuppie" seniors appear to be different from their predecessors.
and increasingly affluent (see Figure 4), aging boomers are also healthier,
and less group-oriented in comparison to previous generations. Amenities,
and the environment count for a lot with them, since economic security
is not an
issue. Boomers are sophisticated consumers of "place" and appear
ill disposed to spend
their twenty "new" years of added lifespan according to old
Given that, fewer boomers may
settle for Arizona's traditional menu of retirement
options (see Table 3). Some retirees, even now, are being turned off by
pollution and loss of open space affecting Arizona's retirement communities.
might avoid metro Phoenix's worsening "heat island," which has
nighttime low temperatures by 10 degrees F in the last 30 years. Other
spurn senior-only settings altogether. Demographers William Frey and Ross
DeVol of the Milken Institute
foresee diminished demand for mass-market, age-segregated
retirement communities like Sun City. Frey and DeVol, along with other
some empty nesters will be looking for more centrally located multi-age
high-amenity communities, perhaps so they can easily continue working.
In all this, local
amenities and quality of life will be critical selection factors. Restaurants
architectural and landscape aesthetics and efficient transportation are
key draws for
these discerning consumers.
A final draw will be opportunities
for self-improvement and engagement. Quintessentially
the "education generation" and fond of work, boomers seem certain
places that facilitate lifelong learning and ongoing employment. Regions
that cater to
these passions will garner vital new stores of human capital.
Arizona Lags in Young Talent for a New Economy
Highly educated young professional,
and creative workers are also critical.
Unfortunately, Arizona now has fewer of the
Boomers are More Educated and Professional Than Their Parents
and Have Had Different Life Experiences
Baby Boomers Born: 1946-1955,
Parents Born: 1926-1935,
than High School
in Labor Force
with Professional/ Managerial Jobs
with Professional/ Managerial Jobs
Who Have Not Had Children
with Three or More Children
Sources: Milken Institute,
U. S. Census Bureau
prized, young knowledge
workers than it should have, and the state lags behind on the
assets, amenities and reputation that might attract them. The problem
Arizona ranks only moderately well on measures of current workforce skill,
fares poorly on the sort of factors that young knowledge workers say affect
In terms of present talent
levels, Arizona cannot claim to have the critical mass of
knowledge workers that numerous commentators deem critical to economic
Granted, the state scores rather well on several measures of human competency.
example, Arizona ranked 12th among the 50 states on the Progressive Policy
most recent measure of overall workforce education. This ranking, however,
from the educational achievement of adults (25-65 years old), many of
moved to Arizona, rather than from young homegrown talent ages 20-24.
Indicators of Talent Problems
As Table 2 shows, Arizona ranks 37th among the 50 states on the percentage
of the population
with a bachelor's degree. Just 22.5 percent of Arizona's over-25 population
bachelor's degree or more in 2000 - an average education level. More disturbing,
the fact that Arizona's standing deteriorated from 20th among the states
in 1991 to 37th
in 2000. Nor does a tighter focus on high tech improve the picture. Civilian
and engineers make up just .35 percent of the state's workforce, compared
to a national
incidence of .43 percent, according to the Progressive Policy Institute.
Arizona's per capita employment in high-tech, knowledge-intensive industrial
ranks slightly below the national average. Arizona has 50 workers per
working in knowledge-intensive sectors, compared to 207 in top-ranked
D. C. and 64 in Colorado.
But those numbers refer to
who is here now. What may matter more to Arizona (or to
any of the state's regions) is the ability to add to the present talent
base by attracting
well-educated 20-somethings and 30-somethings from other parts of the
TABLE 2 Arizona's Ranking Among the 50 States Dropped from 20th
in 1991 to 37th in 2000 for Residents with a Bachelor's Degree
Estimated Percent of Population Over 25 Years of Age Attaining
a Bachelor's Degree or More By State: 1991 & 2000
Percent of Population with Bachelor's Degree or More (2000)
Percent of Population with Bachelor's Degree or More (1991)
Sources: State Science & Technology Institute, www.census.gov
Experts associate economic success with clusters of these frequently unattached
young workers with the latest and greatest skills. At the same time, these
move far more frequently than less-educated individuals, and they often
pick locations as
much as, or more than, they choose jobs. Such mobility and adventurousness
that these young itinerants could be recruited.
Arizona, however, faces problems on this front.
New economy observers Richard Florida, Terry Nichols Clark and Doug Henton
documented the preferences of these vanguard workers (see Table 4). Henton
young itinerants gravitate to "vital centers" that provide opportunities
to get together,
vibrant street scenes and quick access to urban greenspace. Clark believes
to cities that are "entertainment machines" full of such things
as parks, bohemian arts
scenes, and dense neighborhoods filled with exotic cuisine and nightclubs.
Florida tallies interest in diversity; subways or light rail; places to
see "visibly active
young people;" and casual gathering places. Morrison Institute's
recent survey of metropolitan
Phoenix residents revealed similar currents. Respondents under age 30
likely than older ones to support promoting the state for its "great
quality of life," its
"smart people" and its arts scene. Such views highlight what
appeals to the young
here and elsewhere.
Arizona May Not Have What Young Workers Want
Yet other research suggests that Arizona does not yet offer what many
of the nation's
smart young workers say they want. The institute's employer survey showed
third to a half of Arizona companies that recruit workers from out of
that recruits did not perceive Arizona as a "cool," vibrant
place for young professionals.
Fourteen percent of companies thought this a major barrier to attracting
the types of
workers they want and need.
Richard Florida has cross-referenced various cities' densities of knowledge
their amenity rankings in Money Magazine
TABLE 3 Advantaged Boomers
Define the Good Life Ages 39 - 55 Defining Experiences: The Sixties and Watergate Common Ideas: Achievement, quality, individuality, meaning Outlook: Youthful, cosmopolitan Ethic: Striving, seeking, adventuring Habitat: Outlying planned communities, plus In-town established
in areas of interest
Small-scale, highly urban developments Residence: Customized
diversity Single-family luxury homes on the fringe
Townhouses, condos (implies density) Amenities: Sun,
dry climate, proximity to ocean, Good schools if kids still at home
Open space/ natural environment
Efficient transportation Lifestyle: Enlightened
Recreation: Walking, hiking, biking, working out
Later Years: "Now I can do what I really want." Self-improvement,
Different work and volunteer
"Back to school at 60 - start a business at 70"
Computer rooms, health spas, classrooms
Sources: Rocking the Ages: The Yankelovich Report on Generational Marketing;
Meyers Real Estate
Information Inc.; Age Power; "The Consumer City;" "The
City as Entertainment Machine"
TABLE 4 Young Knowledge Workers Redefine the Good Life Ages 20s and 30s Defining Ideas: Pluralism, tolerance, the Web
Outlooks: Precocious, entrepreneurial
Ethics: Adaptability, pragmatic Habitats: Urban centers
Revitalizing neighborhoods Residences: "Industrial"
Eccentric urban apartments
Rehabbed housing Amenities: Compact
Light rail or subways
Vibrant night life
Environmental quality Lifestyle: Exotic consumption, Alternative entertainment
Independent theater and
film Recreation: Roller-blading, mountain biking
Sources: Rocking the Ages:
The Yankelovich Report on Generational Marketing; "Competing in the
Talent;" "Linking the New Economy to the Livable Community;"
"The City as Entertainment Machine"
and POV Magazine. While not focused solely on those under 30, the analysis
sort of distinctions younger cohorts make so sharply. In general high
correlates with high amenity value in this analysis. Without exception
low on measures of "overall environmental quality," "overall
amenities," "arts and culture"
The upshot: The region's low amenity ratings represent a critical human
Arizona does not yet have what it takes to win in the scramble for young
- a scramble that is growing urgent.
Immigrants: Potential Sources of Skills and Strength
Arizona, finally, is fortunate
to be a gateway state for new residents from other countries.
Numerous studies associate economic strength with the readiness to "harness
diversity," welcome newcomers and turn their energy and ideas into
wealth. One expert goes so far as to correlate high-tech industry with
the percentage of a
region's population that is foreign born.
The issue for Arizona, though,
is that while foreign-born residents bring benefits,
the state's newcomers come with a wide array of educational experiences.
current immigrant population tilts to the low end of the education spectrum.
Specifically, the vast majority of Arizona's foreign-born immigrants arrive
where they commonly receive no more than nine years of education. Approximately
percent of Mexican newcomers possess advanced university degrees. By contrast,
large flows of Asian and Indian immigrants, with far higher rates of college
and with approximately 20 percent having advanced degrees, give a potent
The Immigrant Advantage
Witness the human capital advantage enjoyed by Silicon Valley, thanks
to its highly
educated, highly entrepreneurial immigrants. Nearly a quarter of the population
there is foreign-born;
and almost one-third of Silicon Valley's scientists and engineers
hail from foreign countries. Even more strikingly, roughly a quarter of
Valley businesses started since 1980 have been started by someone who
was born in
China or India. The figure increased to more than 30 percent between 1995
Such immigrant-driven entrepreneurship highlights a potential boon from
growing diversity, but also underscores continuing deficits. Census 2000
Hispanic population surged 88 percent since 1990, and that its Asian population
67 percent. Nevertheless, Arizona's mix of people and skills remains less
Latino education levels are comparatively low while fewer than 100,000
of the population) reside in the state. For now, at least, California
still dominates the
contest for high-skill immigrants among Western states.
And So the Shoe Could Drop
The implication is clear. If it is unable to prevail in the race to woo
footloose talent as
the boomers retire, Arizona could see its recent new economy progress
stall. Put it
this way: Arizona's second-tier ability to augment its workforce with
experienced boomers and young creative types throws into question the
quantity and quality of its talent base. In terms of quantity, the purely
difficulty of replacing the state's retiring boomers from among the ranks
smaller baby bust alone foretells problems. Absent the recruitment of
new talent from
elsewhere, shortages of skilled labor seem likely. But the quality of
the state's workforce
also hangs in the balance, since every community's prospects turn in part
on luring the
world's best-educated, most creative and mobile people. By that formula,
Seattle, and Portland will continue to rise and greater Phoenix and Tucson
Cause for Optimism
But those are the fears. For all this Arizona seems well enough positioned
that if it
moved with dispatch it
could still help itself in the talent race. In this regard, the state's
recent population growth across all age and racial groups points to general
attracting each of the future's three desirable groups.
In general terms, Arizona is growing quickly and that brings talent. According
2000, Arizona added 1.5 million new residents in the last decade, more
than all but four
states. Likewise, five of the nation's fifteen fastest growing cities
with populations more
than 100,000 are in Arizona. By contrast, other states and their cities
slowly, or shrinking. That places Arizona emphatically among the states
that are gaining
raw human capital.
Indeed, Arizona offers several of the attributes that Edward Glaeser's
analyses for the
Brookings Institution associate with fast growth (though it lacks high
highly educated residents). Most notably, Arizona lies in the warm, dry
economy provides easy access to services and work; and it attracts many
These are important strengths in the search for human capital.
But as Arizona looks to the next phase of the scramble for talent stubborn
intrude. Arizona clearly lacks the compact, walkable, heavily "amenitized"
that increasingly appeal to highly educated residents. Arizona also faces
a serious environmental
hurdle in selling itself to choosy migrants as the heat island effect
notoriously hot Phoenix hotter. Yet even here, Arizona possesses important
the talent battles. Arizona's Sun Belt setting and proximity to California,
remain powerful assets. Meanwhile, most of the state's deficits can be
easily. Policy makers retain substantial power to boost the state's appeal
groups by creating more vibrant, people-friendly urban scenes. Leaders
the state's education lags, and work to keep its older populations engaged.
do so, decision makers may well find that Arizona's current demography
is not destiny.
Policies to Win in the Scramble
Turning the scramble for talent
into a human resource bonanza depends on providing
attractive places for all people to call home.
To succeed at this, Arizona must:
Put ambitious, Arizona-style quality of life upgrades near the center
of state and
regional economic development efforts.
Policy makers should notice that several themes run through the expressed
of the three major talent cohorts. Cities seem to draw all of the groups.
schools attract knowledge workers with young families just as much as
upwardly mobile Latino career people. Interest in people-friendly streetscapes,
inclusiveness and gathering places seems to cut across the categories.
lifelong learning and retraining will also appeal widely to all three
Research also suggests the convergence of boomers' and young professionals'
on other quality-of-place agendas, though data is thin on immigrants.
groups are full of "doers" who appreciate numerous venues for
throughout the city and region, including bike paths, nature preserves
trails. Similarly, culture and the environment appear to be critical.
open space and smart growth initiatives impress both well-educated groups,
performing arts venues. Conveniently, such agendas popular with highly-educated
potential Arizonans enjoy broad popular support within the state as well.
With these trends in mind, very different choices for economic policy
decade ago, cities and states studied what individual
companies wanted and competed
for them with "private goods," or customized tax breaks and
other incentives to lower costs.
Now with a knowledge and service-centered economy, the new choice is to
talent groups with "public goods" - amenities such as clean
air, interesting public
spaces and good schools.
Understanding the desires for amenities is, of course, far more complex
than deciding on
tax breaks. Nevertheless, Seattle, Portland, Austin and Chicago and other
engaged in amenity strategies that appear to be paying off.
Seattle, Portland and Austin have become centers for the development of
technology in part because of their lifestyle amenities. Both cities have
set the pace in
implementing smart growth strategies, and in their recent dramatic growth.
aggressively included cultural initiatives in their public agendas. Seattle,
Microsoft, has been a site of cultural as well as technological innovations,
youth culture. Austin, with its country music,
also fostered rich connections between
its youth culture and its technology sector.
Chicago, which recently took Boeing's headquarters from Seattle, appears
concentrating on lifestyle also. Chicago's main industry today, according
of Chicago economist Terry Clark, is entertainment, defined as including
conventions, restaurants, hotels, and related amenities. Conscious of
this new role for the
city, Mayor Richard Daley has focused on enhancing the many aspects of
urban lifestyle from architecture to schools and parks. For example, he
to have planted more trees than any other mayor in history, around one
part of a commitment to the environment and city aesthetics. He also asked
Legislature for authority to take over the Chicago Public Schools and
District. Both moves were part of Daley's agenda "to do all those
things which make a
city a livable and pleasant place."
Daley is one of several big-city mayors who in the past decade focused
amenities, including education, as central to urban economic development.
include Richard Riordan in Los Angeles, Rudolph Guiliani in New York,
in Philadelphia and Stephen Goldsmith in Indianapolis.
Prepare for the talent crunch. Arizona policy makers need to develop a
nuanced understanding of the age and migration trends that are rapidly
size and character of labor markets, and begin improving Arizona's public
and private institutions'
standing in the talent competition.
Businesses and agencies concerned with the economy, for example, should
at the labor supply implications of the boomers' aging. They may find
face greater staffing challenges than they thought. Governments should
even more urgent about replenishing a dwindling talent pool. Paul Light
warns that government's problem in competing for talent is
twofold. "First, its hiring system for recruiting talent, top to
bottom, falls short at almost
every task it undertakes. It is slow in hiring, useless in firing out
of touch with actual
performance rewards, penurious in training...
Second, government appears less and less able to provide the kind of work
today's labor market expects. There is no question, for example, that
are more highly attached to work than previous generations or that the
among them can demand more from their employers." Light also writes
that "if governments
do not want to be the employer of last resort, they must become the recruiters
of first approach. They can derive little comfort from having hundreds
of names on
their application lists if those names come from the bottom quarter of
classes or are
drawn to government for the security."
Ease the coming skills crunch by keeping boomers engaged through initiatives
promote "productive aging," "rehiring" and retraining.
A final way to increase Arizona's talent stock is to ensure that fewer
of its mainstay workers
disengage from productivity. Arizona should therefore make itself a national
developing a new vision of "productive aging" aimed at engaging
in meaningful work, lifelong learning and volunteerism.
In the workplace, Arizona businesses and governments must become far more
attracting, retraining and retaining top-flight older workers. Instead
older workers toward retirement, employers should be retooling their workplaces
the flexible schedules, phased retirements and skill updates that will
help keep aging
boomers in the workforce.
In like fashion, Arizona must become an education mecca where "lifelong
extends richly into the later years. This too will unleash local talent
More and more older Arizonans may also want to give back to society in
the next two
decades. Their energies could flood Arizona neighborhoods, schools, parks
organizations with desperately needed human resources. In light of that,
institutions must find ways to capitalize on boomers' availability. Organizations
traditional needs for help must determine what will interest a new brand
whether a voucher for a free class or flexible scheduling. Meanwhile,
new avenues for
civic engagement should be opened.
Neighborhood groups might emulate Big Brothers/ Big Sisters branches around
country, which are now recruiting older mentors. Corporations could develop
retirement options that give employees the opportunity to try out options
for a new
career. And Arizona governments might help unlock boomer energy. Florida
South Carolina, for example, have facilitated the relicensing of retired
encourage their service in free clinics for the uninsured. On a grander
scale, Arizona might
adapt author Marc Freedman's proposal for a national "Third Age Bill"
guide millions of aging Americans into new roles strengthening communities
volunteerism. Such creative approaches to aging would set Arizona apart
as a destination
for highly educated older workers.
In the end, Arizona leaders need to think far more strategically than
they have about what
prized groups want in a place and then work to provide it. In the knowledge
what the talented desire must be served.
Arizonans Want the State to be Known as...
Best Quality of Life - 35%
Best Educated Population - 28%
Best Place to Retire - 14%
Highly Ethnically Diverse Population - 9%
Best Managed State - 8%
Best Place to Start a Business - 5%
No Answer - 2%
Percentage of Respondents Who
Various Reputations for Arizona
Source: Morrison Institute
for Public Policy, 2001
Latino Education Dilemma
Latino youth are upwardly mobile
already. But they need better education
for Arizona to take full advantage
of the possibilities this exploding
Arizona's fast-growing, layered Latino (1) population offers the state
promise - and a challenge. Even more than the aging of the baby boomers,
fast growth of Arizona's Latino population is altering the state dramatically.
Immigration and natural increase have added 600,000 young Latino residents
to the state's population in the last decade. Half of the population under
both Phoenix and Tucson is now Latino. Within 20 years, Latinos will make
half of the homegrown entry-level labor pool in the state's two most important
labor market areas.
At a time when many states are suffering labor shortages because of modest
population growth, this is a great opportunity to build a foundation for
prosperity in the state. Not only are Latinos growing in population, they
also upwardly mobile - when they get a good education. Most people don't
notice it, but Latinos born in Arizona already make up much of their parents'
economic and educational deficits in a single generation.
Unfortunately, Arizona and its Latinos may not be able to seize their
opportunity. Far too many of Arizona's Latinos drop out of high school
to obtain the sound basic education needed for more advanced study. As
educational deficits are holding back many Latinos - and the state as
well - as
the economy rushes forward. To be sure, construction and low-end service
continue to absorb tens of thousands of immigrants with little formal
But over the long-term many of Arizona's Latino citizens remain ill prepared
prosper in an intellectually demanding knowledge economy. And that means
state's higher-end jobs could go begging.
The educational uplift of Arizona's huge Latino population, therefore,
move to the center of the state's agenda. Arizona's future prosperity
heavily on making high quality early education ubiquitous in Latino neighborhoods,
launching an urgent urban schools initiative and improving the "pipeline"
that moves Latino students
from high school into higher education, particularly
in technical fields.
(1) The words Latino and Hispanic are used synonymously in this publication.
Arizona is Becoming Far
1990 Population Breakdown by
and Ethnicity (Total 3,665,228)
American Indian 5%
2000 Population Breakdown by
and Ethnicity (Total 5,130,632)
American Indian 5%
Young are Even
More Often Hispanic
1990 Population Breakdown Under
18 Years by Race and Ethnicity (Total 874,777)
American Indian 8%
2000 Population Breakdown Under
18 Years by Race and Ethnicity (Total 1,366,947)
American Indian 7%
* Totals may add up to more than 100% because Census 2000 permitted individuals
more than one race.
Source: Census 2000
Fast-Growing Hispanic Populations Give Arizona
and the Sun Belt Demographic Advantages
Source: Steve Doig, Arizona State University. Based on map by William
H. Frey for American Demographics,
June 2001. Used by Permission.
How to Read This Map: Nationwide, Blacks account for 12.6% of the total
population. In areas shaded grey they account for more than
12.6% of that region's population. Similarly, Hispanics comprise 12.5%
of the country's total. In areas shaded red they make up more than 12.5%
of the region. Asians account for 5% of all Americans. In areas shaded
green their numbers exceed the national average. Native Americans make
up 5% of the country's total. Sections shaded brown have a Native American
population greater than that. In areas shaded blue there are
concentrations of two or more minority groups. Finally, white sections
may have minority representation, but no one ethnic group exceeds its
Hispanics now represent 25 percent of all Arizonans and 36
percent of those under 18 years of age. Large-scale migration - superimposed
on a sizable native Hispanic population - is creating a significantly
state. Other minority groups' populations have also grown significantly
years. The focus here is on Latinos because of their large share of the
the concerns, ideas and recommendations that follow apply equally well
to, and are
equally important for, any group concerned with economic status and success
"Latinization," meanwhile, is affecting all of Arizona, although
its impacts are felt more
keenly in some places than in others. To be sure, the broad trends are
1990 and 2000, Arizona's Hispanic population grew 88 percent, triple the
white growth. Yet the statewide picture obscures local variations in recent
growth and the fact that Hispanics are clustering in the state's most
urban areas (see
Map 2). The city of Phoenix, for example, absorbed more than 40 percent
of the state's
Latino growth. Latinos now make up 39 percent of Phoenix's population,
of the growth concentrated in central and south Phoenix neighborhoods.
Another trend is Latinos' youthfulness. In 2000, nearly 40 percent of
Latino youth consisted of those who were under age 18 at decade's end.
and Tucson Latino children accounted for more than 85% of the 10-year
the under-18 population. Hispanics now account for half of the K-12 population
the two cities.
Such youthfulness has implications for Arizona's schools and workforce.
years in the state's biggest cities, the number of Latino high school
graduates will equal
the number of white graduates. Within 20 years Hispanics will make up
half of the homegrown, entry-level labor pool in the state's largest economies.
young Latinos will be entering their prime working years just when experienced
employees will be needed
to help replace the baby boomers.
The Education Fault Line
Too many Latinos, however, fail to acquire the education, training and
needed to succeed in a skills-based economy. Barely half of Arizona Hispanics,
obtain a high school education. In part, this reflects that half of Mexican
are foreign-born, and that the typical Mexican immigrant has completed
nine years of education,
a figure that depresses aggregate statistics and obscures
the greater achievements of U. S.-born Mexican Americans. The deficit
from an annual high school dropout rate for Hispanic students that, at
over 15 percent,
doubles the figure for white students, according to the Arizona Department
Education. Either way, just 52 percent of Hispanics in the West possess
a high school
education. That compares with an 85 percent diploma rate for whites.
Nor is the achievement
of the Hispanic students who stay in school adequate.
° In 1998 just eight percent of Arizona Hispanic fourth-grade students
"proficient" readers, according to the National Assessment of
° In 1996 Hispanics' eighth-grade science and math NAEP scores lagged
the white national average by 36 and 30 points respectively.
° In 2000 88 percent of Hispanic 10th graders fell "far below
for math proficiency set by the Arizona Instrument to Measure
° In 2000 just six Arizona Latinos took the advanced placement (AP)
science examination, and Latinos remain underrepresented in
all AP courses.
Hispanic participation in higher education is also a concern. Eight percent
over 25 in the West have completed four years of college, compared to
31 percent of
whites, according to the U. S. Census Bureau. In Arizona, Latinos earned
bachelor's degrees from state universities in 2000, just 12 percent of
though Latinos represented 25 percent of the state's population. Such
one reason just over 20 percent of Arizona residents 25 years and older
bachelor's degree - a figure significantly below the 25.2 percent regional
Among Hispanics who do graduate, moreover, few have chosen science, technology
and engineering (STE) fields. In those areas, Arizona Latinos are significantly
underrepresented, obtaining 221, or nine percent, of the state's STE bachelor's
degrees in 2000. Just four Arizona Hispanics received Ph.D's in science
in that year.
Such outcomes challenge the state with serious skill deficits just when
requires more intellectual resources. Given this reality, Arizona and
portion of its citizens
face the future from a position of disadvantage.
Low Wages and Few Opportunities
The consequences of the state's failure to make appropriate educational
its minority communities are visible already. Too frequently, Arizona's
Hispanics remain stuck in low-paying, low-skill jobs. Current Population
from 1999 confirm that Mexican American men are nearly twice as likely
to be employed
as laborers, machine operators or low-skill fabricators as are non-Hispanic
percent versus 17 percent respectively). Conversely, just eight percent
American men worked in professional or managerial positions compared to
of non-Hispanic white males. As a result, Latino income levels in Arizona
trail those of non-Hispanic white workers. In 1999 Mexican Americans earned
wages that were 40 percent lower than those of non-Hispanic white men.
earned 52 percent less.
The Latino Promise: Benefits of Being a State of Immigrants
There is another side to the
Latinos and other minority groups represent a tremendous opportunity for
that other states do not have. Hispanics supplied Arizona's need for entry-level
during the recent hot growth years, easing a labor
shortage that could have slowed growth.
In addition, Hispanics guarantee the state an ample labor pool for decades
just when many
other regions lack young workers. Mexican Americans, moreover, offer special
including a slightly higher rate of participation in the labor force than
the rest of the
population (67 percent to 66 percent). In short, these new and future
workers - mostly
from immigrant families - bring a welcome energy that adds to the state's
They often come from families that have taken risks for better jobs and
At the same time, the upward mobility of many Hispanics shows that their
preparation can be overcome. Many Latinos, especially the U. S.-born,
are making substantial
progress in education and work. U. S.-born Latinos - including the sons
daughters of recent immigrants to Arizona - close much of the education
Mexican Americans, for example, manage an average of 12 grades of education.
That means they erase 70 percent of their parents' lag behind third generation
whites' roughly 14 years of schooling (see Figure 3). Similarly, the numbers
Americans in professional and managerial occupations jump from four percent
percent, respectively, for immigrant men and women, to 13 percent and
17 percent for
second-generation Latinos. Such progress underscores the potential for
Education is good for
state revenue: In Arizona, 31% of white 25 to 65-year-olds hold a bachelor's
degree, compared to 12% for all other races. This year, if all ethnic
groups in Arizona had the same
educational attainment and earnings as whites, total personal income in
the state would be $5.9
billion higher, and the state would realize an estimated $2.1 billion
in additional tax revenues.
Latino economic progress has been impressive also. By 1998, 41 percent
of U. S.-born
Mexican-headed households were "middle-class," defined as an
annual income above
$40,000. More broadly, Latinos who attained comparable schooling to whites
comparable or superior economic outcomes. The incomes of college-educated,
Mexican American men rose 42 percent between 1979 and 1998, for example,
collegiate white men's earnings rose just 14 percent. During the same
college-educated Mexican American women's hourly wages exceeded those
earned by white women.
Hispanics are, meanwhile, assembling significant economic clout in Arizona.
Nationally, just under half of immigrant Mexican Americans own their homes.
the second generation almost 60 percent do. In Arizona, Hispanics now
about 12 percent of the state's total buying power, a $13 billion share.
Similarly, in 1997
nearly nine percent of all Arizona businesses were Hispanic owned and
than $4.2 billion in sales. Such figures almost certainly underestimate
activity in the state, since the figures predate the more detailed data
by Census 2000.
Ultimately, then, the prospects are mixed. Arizona's Latinos are making
to the state's economy and offer the state a tremendous human resource
future, if the state can make good on its promises of equal opportunity
assistance. Already Hispanic strengths are undeniable, and, with effective
many immigrants' children will emerge as upwardly mobile, educated workers
replace the retiring boomers.
At the same time, though, no one can deny that turning the state's Latinos
into a topflight
workforce represents a stern challenge - because the numbers are large
history includes some perceptions and actions of which no one can be proud.
And So the Shoe Could Drop
Unaddressed, the unmet education needs of Arizona's Latino population
cramp their prospects and undercut the state's ability to prosper in an
demanding economy. Currently, Arizona companies can hire skilled workers
talent pool enriched by the in-migration of relatively well-educated workers
states and leave others to fill unskilled jobs. But the retirement of
the baby boomers
combined with Latino deficits points toward difficulties. At the entry
level, slower growth
rates may create more competition for low-skill jobs, displacing Latinos.
At the higher
end, shortages of Latinos ready to move up will make it that much harder
to staff high-skill positions. The bottom line: Latinos' low education
levels could leave the
state with too many low-end laborers and too few skilled ones. Skills
deficits could stunt
Arizona companies' growth, and relegate many Latinos and their families
to a life of
low pay and little prospect of advancement.
The high-tech sector is a case in point. Technology workers here and elsewhere
present remain overwhelmingly
white and largely male. Yet after 2010 the white male
segment of the STE workforce will shrink in absolute as well as relative
size, as retirements
begin and the white share of the nation's population declines from 74
percent in 1995
to 52 percent. That suggests white males are not likely to provide the
needed here or elsewhere. Meanwhile, estimates by the National Science
Technology Council project a nine percent decline nationwide between 1995
2050 in the percentage of 22-year-olds earning STE bachelor's degrees
them to enter the technology workforce. Associated in part with low Hispanic
attainment of these degrees, this projected decline in the rate of production
workers confronts Arizona with two scenarios. If Arizona's tech companies
lose out in the
scramble for talent, they will be forced to scale back or relocate to
places with more
skilled workers. Conversely, if such firms succeed at attracting out-of-state
fill jobs unfilled by Hispanics and others, Arizona's largest ethnic group
excluded from the state's best jobs.
Arizona invests almost
financial aid for low-income students
Measuring Up 2000:
The State-by-State Report Card
for Higher Education
What should Arizona do to capitalize on its
Latino and other talent?
Educate, educate, educate! Arizona's future, and the well-being of its largest minority group,
hinges largely on
the quality of the K-12 education Latino youngsters receive and on increasing
number of Latinos who participate in higher education. Yet recent court
rulings, as well
as test scores and past experiences, indicate the state has failed to
face that fact. This
summer, for example, a federal court set a 2002 deadline for action after
failed to address a January 2000 ruling that the state was discriminating
students with limited English skills by scrimping on dollars for language
Such delays cannot continue. Arizona leaders need to place the educational
of Latino young people at the top of the state's agenda.
Doing so, moreover, will require reinventing the education system that
many Latinos. Today, most Arizona school districts still operate on an
model designed for a homogeneous clientele. Uniform funding formulas,
and rigid approaches continue to prevail. Yet such rigidity can only be
a formula for
failure given the state's growing diversity.
What is needed is a far more dynamic responsiveness to the needs of the
school population and other specific groups. High standards for all students
must be complemented by the freedom to customize educational activities
various local needs,
clienteles and learning styles such as those found in big-city Latino
neighborhoods. Extra resources, likewise, should go to areas of greatest
Experimentation to find what works and support to implement the best practices
must replace rigid notions about how to teach. Banning bilingual education,
example, serves no purpose because it eliminates a viable teaching option.
Latino students with substantial needs should benefit from extra funds
curricula, "safety net" programs and family assistance. Charter
schools and tools of
choice (such as vouchers) hold promise for Latino students because of
performance of traditional schools and the willingness of alternative
schools to find the
techniques that will best serve the students.
Four interventions appear important for Latino students.
1. Make high-quality early childhood programs universal and implement
first in Latino neighborhoods.
Arizona has long needed to commit to early childhood education, and it
benefit Latino and other minority students. Numerous studies show that
every year of
delayed entry into American education significantly reduces an immigrant
subsequent achievement. Therefore, a top priority for unleashing Latino
talent is to
improve Latino children's access to quality preschool programs. Universal
for example, makes sense, which is why Georgia, Oklahoma, New York and
Connecticut are moving in that direction.
So does complementing Head
Start or full-day kindergarten in Latino neighborhoods
with tutoring and English literacy programs.
Helping schools to provide
classrooms for preschool and full-day kindergarten also
will be a vital step. One way to do that is to adjust the state funding
formula for school
space to reflect preschool and full-day kindergarten students' need for
Currently a kindergartner only counts as half a student in the funding
of school space,
and preschoolers, including those in Head Start, do not count at all.
schools from offering or housing these vital early programs.
Another way to improve the prospects for young Latino students and others
provide intense, individualized attention at the onset of grade school.
Here, the Reading
Recovery program suggests a model. Reading Recovery, which now serves
more than a
million first-graders nationally, uses a short-term intervention of one-to-one
designed exclusively for low-achieving first-graders. Individual students
half-hour lesson each school day for 12 to 20 weeks from a specially trained
Recovery teacher. As soon as students can read within the average range
of their class,
their lessons are discontinued, and new students begin. And it seems to
Numerous evaluations conclude that 82 percent of students who complete
series of lessons can read and write within the average range of performance
class. Follow-up studies indicate most Reading Recovery students also
do well on
standardized tests and maintain their gains in later years. Although Reading
costs about $4,000 a student, a 1997 report to the Massachusetts Superintendent's
Force on Special Education showed that $3 invested in Reading Recovery
saved $5 in
2. Recognize that one-size-fits-all
funding and curricula formulas are not doing the
job. Launch an urban schools initiative to ensure that every Latino student
the K-12 education he or she needs to succeed in the new economy.
Upgrading the skills of Arizona's Hispanics depends on imparting a sound
foundation, particularly in math and science, to every Hispanic youth.
To that end the
state, cities and businesses should mount aggressive inner-city education
invest extra effort in raising achievement levels in the struggling K-12
schools of the
state's urban cores. The neediest kids live in central cities, and urban
schools with many
Latino students face exceptional challenges. For these schools, one-size-fits-all
and curriculum formulas are not sufficient, given the poverty and limited
English proficiency with which their immigrant students often contend.
Arizonans should move to focus more money and innovation on places where
are greatest, whether it be through existing school districts, charter
initiatives or new structures.
As to the directions of such reform, the National Science Foundation's
Initiative (USI) program offers some guidance for Arizona. As noted in
the new report
Academic Excellence for all Urban Students, impressive achievement gains
in science and
math among inner-city students are emerging from a combination of a rigorous
with careful assessment, professional development for teachers and investments
activities as tutorial programs, Saturday Academies, algebra study labs
enrichment programs in science and technology. Graduation rates have increased
USI schools, despite tougher requirements. USI, in which a number of Phoenix
participate, may well offer a model for helping all Arizona students to
learn and achieve more.
3. Improve the "pipeline" that moves Latino students from high
school into higher
education, particularly in technical fields.
Arizona also must improve the rates at which Latino students enter universities
community colleges, and the technical fields that
are, and will be, so much in demand.
Fortunately, numerous programs in Arizona and throughout the country offer
for helping minority students. Many of these efforts engage elementary
thinking about and planning for college. Other programs build awareness
Percent Rank* of Stanford
9 Test Scores, 4th Grade Math, in Metropolitan Phoenix by Unified (USD)
and Elementary (ESD) School District, 2000
Williams AFB (closed)
MESA USD (65)
LIBERTY ESD (41)
DEER VALLEY USD (71)
KYRENE ESD (77)
DYSART USD (51)
PEORIA USD (61)
CAVE CREEK USD (68)
CHANDLER USD (65)
GILBERT USD (70)
SCOTTSDALE USD (77)
UNION ESD (16)
LITCHFIELD ESD (67)
PARADISE VALLEY USD (71)
TEMPE ESD (48)
LAVEEN ESD (23)
WASHINGTON ESD (51)
QUEEN CREEK USD (60)
HIGLEY USD (50)
LITTLETON ESD (28)
ROOSEVELT ESD (27)
AVONDALE ESD (49)
MADISON ESD (71)
PHOENIX ESD (43)
GLENDALE ESD (33)
FOWLER ESD (30)
BALSZ ESD (42)
PENDERGAST ESD (48)
FOUNTAIN HILLS USD (75)
ALHAMBRA ESD (64)
CARTWRIGHT ESD (42)
RIVERSIDE ESD (30)
CREIGHTON ESD (41)
MURPHY ESD (26)
OSBORN ESD (40)
WILSON ESD (70)
TOLLESON ESD (39)
Maricopa County, Arizona
Low: 32 or Less
Low/ Medium: 33 to 43
Medium/ High: 44 to 65
High: 66 or More
Data Source: Arizona Department
Map created by Summer
2001 IT Research Support Lab GIs Services Arizona State University
rewards and prerequisites of
technical careers among middle-school students, parents
and guidance counselors. Others foster achievement in math and science
or high school through mentors, exposure to collegiate role models and
participation in AP courses. Some of the good ideas include:
Development Fees for Literacy
Many cities and regions are aware that their problem is not a lack
a workers, but
too few who can fill the jobs the economy is creating. In urban areas,
it has become
good politics to provide "skills training" for immigrant groups
even if the skills are
pretty basic. For example, Boston Mayor Thomas Menino created an interesting
to pay for literacy programs. Development fees are being used to fund
the city's literacy
and English proficiency program. In Boston at least, immigration is being
viewed as a workforce issue instead of a social service issue.
Nurturing Connections Other programs seek to boost students' progress in higher education
webs of support. The Meyerhoff Scholarship Program at the University of
Baltimore County, for example, complements full science scholarships with
"bridge" programs, group study, tutoring, mentoring and a close-knit
the Meyerhoff program individual achievement becomes a group accomplishment.
A similar approach is now underway in Arizona, under the auspices of the
formed Metro Phoenix ENLACE, or Engaging Latino Communities for Education.
$1.5 million grant from the W. K. Kellogg Foundation and Houston Endowment
Arizona State University expects to increase the number of Hispanics earning
degrees by 50 percent over the next four years by creating a strong support
for Latino youth. ENLACE will support achievement
in higher education through
college preparation and advising, mentoring, cross-age tutoring, parent
outreach and linkages to high schools.
But Arizona also needs to consider
bolder initiatives. Two examples illustrate the
Guaranteed College Financial
Aid Washington state is removing the financial barriers that often impede
low-income students' progress beyond high school. In the last decade Washington
tripled to more than 50,000 the number of needy students to whom it provides
Guaranteed Education Tuition (GET) grants for the state's public colleges
universities. Now, Washington is developing a program to reserve a GET
and tuition credits for every Washington kindergarten student. Additional
will be deposited for students who pass fourth and seventh-grade assessment
Likewise, the accounts create a means for employers to contribute to employees'
savings, and encourage children to achieve in school.
California has another approach.
Its "Cal Grant" program of need-based financial aid
is expected to double over the next six years to $1.2 billion per year.
is an entitlement program. Every student who meets income criteria and
with a 3.0 grade point average is eligible for full tuition and fee payments
at the state's
public colleges and universities and up to $9,708 to attend a private
Rewards for More Graduates
Stanford University economist Paul Romer offers another approach.
He wants the
federal government to offer $1 billion in rewards, at perhaps $10,000
per person, to
institutions that increase their output of undergraduate science majors.
would offer 100,000 promising high school students $20,000-a-year fellowships
on their going on to graduate study in science.
The numbers and targets of this
approach would need adjustment for use at the state level. Still, Romer's
idea has merit.
It would create incentives to nudge both universities and students toward
outcomes. Targeted toward minority students and BAs in technical disciplines,
Romer incentive in Arizona would fill the skills pipeline.
Send a Signal of Welcome
Another gesture might be to emulate an announcement made by the University
of Georgia regarding "undocumented" students. Last September,
leaders declared that "there is no impediment to the admission of
qualified student who attends or graduates from a high school in Georgia."
was to underscore that higher education has become a right for everyone
and a necessity
for the state to remain "viable and prosperous." Though officials
demand initially, the clarification has helped to dispel any doubt that
young Latinos can,
and should, go to college.
4. Press for a federal education initiative for border states.
Arizona's congressional delegation needs to take the lead in obtaining
money to help defray the extra education costs associated with Arizona's
states') status as gateways for Latino immigration. Earlier this year
Jon Kyl introduced a bill in Congress asking for $200 million a year over
the next four
years to reimburse states for medical services provided to undocumented
across the U. S. border region, on the theory that localities are bearing
the costs of a
federal immigration policy. Why not treat extra education costs in the
Education is just as important, and sizable, a cost to society as health
care. With that in
mind, Arizona's delegation should become Congress' top advocates for a
time has come.
A Fuzzy Economic Identity
Arizona is growing high-tech jobs.
But we haven't yet met the challenge
of ensuring that we can excel in the
new economy over the long term.
Our state's prosperity isn't
based on sustainable high-tech job growth yet.
Arizona has made progress in getting and keeping technology jobs. But
state's "economic miracle" is really based on other trends that
may not be healthy
for Arizona in the long run.
Arizona has for years posted
stunning numbers in both population growth and
job growth. But have we created the diversified high-tech infrastructure
required for long-term success? You can keep increasing overall job growth
opening new retail stores, construction companies and high-technology
plants - as Arizona has done - but if you aren't also increasing job
growth in advanced technology and advanced services, you won't really
The state isn't strong in fast-growth
technology sectors - and it has an image
that may not fit the times. Currently, the state's technological realm
on just a handful of electronic and aerospace sectors. Economic expert
Crow of Columbia University recently warned that Arizona is not even among
the top 30 locations making investments in the kinds of science-based
sectors likely to produce rapid job growth in the future - sectors like
nanotechnology and artificial intelligence. Crow advises that the Greater
Phoenix region alone will not be able to build a diverse economy without
$500-600 million (in 2001 dollars) per year in fundamental science expenditures,
at least half of which must be on biological endeavors.
Furthermore, Arizona businesses
report difficulty in selling Arizona to prospective
employees because of its image. Arizona has a reputation for growth on
- for being a place of poor schools, poorly planned communities and second-tier
tech investment. That's a huge disadvantage in a world where economic
is determined more than ever before by a place's image.
Arizona must create a strong,
clear economic identity. The state must define a
clear set of goals that matches the high-potential opportunities of the
one that depends not just on the traditional Arizona advantages of weather,
scenery, and so forth, but also emphasizes investment in cutting-edge
and the development of a strong and educated labor force.
24 Arizona Policy Choices 2001: Five Shoes Waiting to Drop on Arizona's
24 Page 25 26
A Fuzzy Economic Identity 25
5th 4th 3rd 2nd 1st
How Does Arizona Measure Up in New Economy Science and Technology Assets?
Note: Long bars denote a high ranking and short bars a low ranking. See
Sources and Notes for definitions of terms.
Sources: The Dynamics of Technology-Based Economic Development, State
Science and Technology Indicators, Office of Technology Policy, Technology
Administration, U. S. Department of Commerce, June 2000
Arizona is Barely Second Tier
R& D Expenditures/$ 1,000 of GSP
Industry R& D $/$ 1,000 of GSP
Federal R& D $/$ 1,000 of GSP
University R& D $/$ 1,000 of GSP
Federal Obligations for R& D/$ 1,000 of GSP
Funding-Fed Lab Campuses/$ 1,000 of GSP
SBIR Awards/ 10,000 Businesses
SBIR Award $/$ 1,000 of GSP
STTR Awards/ 10,000 Businesses
STTR Award $/$ 1,000 of GSP
NAEP Science Test Scores
% of Population Completing High School
% Associate's Degrees Granted /Pop 18-24
% Bachelor's Degrees Granted /Pop 18-24
% S& E Bachelor's Granted /Bach's Granted
% Grad Student (S& E)/ Pop 18-24
% of Workforce with Recent Bachelor's Degree (S& E)
% of Workforce with Recent Master's Degree (S& E)
% of Workforce with Recent PhD (S& E)
Capital Investment & Business Assistance
Venture Capital Invested/$ 1,000 of GSP
SBIC Funds Disbursed/$ 1,000 of GSP
IPO Funds Raised/$ 1,000 of GSP
Business Incubators/ 10,000 Businesses
Patent Attorneys/ 10,000 Businesses
Technology Intensity of Business Base
% Establishments in Tech Intensive SICs
% Employment in Tech Intensive SICs
% Payroll in Tech Intensive SICs
% Business Births in Tech Intensive SICs
Net Tech Intensive Formations/ 10,000 Estab.
Patents Issued /10,000 Businesses
Inc 500 Companies/ 10,000 Businesses
FAST Companies/ 10,000 Businesses
Average Annual Earnings/ Job
% Population Above Federal Poverty Level
Per Capita Personal Income
Labor Force Participation Rate
% of Workforce Employed
Colorado is One State That
Michigan Shows Advances are Rapid in the Rust Belt
As we enter the twenty-first century, Arizona has a solid foothold in
new economy - but the state is not well positioned to take advantage of
"next wave." Meanwhile, Arizona's deep, broad and longstanding
economic sectors -
tourism, golf, construction and retirement - are based on the state's
traditional "old economy"
assets such as climate and low costs.
Taken together, these realities
set Arizona up for "blue collar" status in the new economy.
The trajectory must be altered.
For Arizona to have a more
prosperous future, the state must move beyond its low-wage,
retirement-driven legacy and focus intensely on the new opportunities
in a rapidly evolving economy. In other words, it is time for Arizona
to move from
being fortunate to being smart.
The popular view - held by
analysts across the ideological spectrum - is that even though it
is not first-tier, Arizona is a solid location for high-tech companies.
The Milken Institute
ranks Arizona among second-tier high-tech states on both employment and
a wider array of measures, the Progressive Policy Institute ranks Arizona
10th among the
states in the new economy.
But these high rankings hide
two big problems.
First, Arizona's high-tech strength rests on a narrow base.
The state has developed technology clusters in only four of 14 sectors:
electronic components, aircraft, space vehicles and navigational equipment.
Furthermore, as Figure 2 shows,
Arizona does not have a competitive strength in software,
plastics or bioscience - three areas in which Arizona
has focused its strategy in the past 10
years. To excel in the twenty-first century Arizona needs to move its
into the figure's upper right-hand quadrant.
Second, Arizona's technology
growth is based mostly on manufacturing. In Arizona, we
"make," much more than we "think" and thinking is
where future economic growth is
likely to occur. Intel, Raytheon and Motorola all have a strong manufacturing
the state and that is good. But the research and development activities
of these firms
typically are located outside Arizona and even beyond the Southwest according
Milken Institute. We may keep the factories, but we don't have the facilities
that will decide what "the next big thing" is.
The Challenge of the Thinking Economy
Seth Godin of Fast Company magazine writes, "The first 100 years
of our country's
history were about who could build the biggest, most efficient farm. The
years were about the race to build efficient factories. The third 100
years are about ideas."
To succeed in the long run,
Arizona must participate in the process of generating ideas
and finding better ways of doing things, rather than simply executing
tasks that are dreamed up by knowledge workers elsewhere. In the words
University's Michael Crow, Arizona must become a "knowledge producer"
a "knowledge importer."
Knowledge production is important
not only in dreaming up new products and
processes but also in upgrading products that already exist. It's true
that a growing
chunk of production in the modern economy comes in the form of intangibles
the exploitation of ideas rather than material things. But at the same
goods, from Mercedes to Nike, have "knowledge" embedded in them.
Thus, the twenty-first century
economy will favor areas that are "knowledge producers,"
places flush with research and development activities, the creation of
products and services and the most recent technologies. Those areas strong
production will be the white-collar, front-office parts of the new economy.
Key Arizona Industry Clusters* by Employment Size,
Concentration and Growth, 1989-1999
Source: Collaborative Economics
Average Annual Growth Rate, 1989 to 1999 State Growth Rate 4.1%
Note: Numbers below the cluster
name indicate total employment.
* The Optics Cluster is not included because of incomparable data.
Employment Concentration in
AZ Relative to
(National Concentration 1.0)
High-Tech - 103,227
Environmental Technology -
Plastics - 11,760
Bioscience - 9,392
Food & Fiber - 52,261
Software - 30,023
Tourism - 189,131
A well-rounded portfolio of growing, concentrated industry clusters is
a good indicator of
competitive advantage. Figure 2 shows the concentration of employment
in seven export-oriented
clusters in Arizona. An employment concentration above 1.1 means that
share of jobs is higher than the national average and indicates a potential
for the state. In 1999 High Tech (electronics and aerospace manufacturing)
was 2.3 times more
concentrated in Arizona than in the nation with Tourism 1.4 times more
concentrations of less than 1, bioscience, software, plastics and optics
(not shown) are not yet
areas of strength. To excel, cluster growth and concentration gures must
move into the upper
Areas dependent on knowledge imports - manufacturing and processing centers,
is today - will be stuck with the blue-collar, back-office parts of the
Given its lack of a high-tech
base as recently as 50 years ago, Arizona has ridden the
"electronics wave" of the emerging new economy pretty well.
But to catch the next
wave, the state must overcome its narrow high-tech base and its paucity
of assets in
One only has to listen to the
stem cell research debate today to surmise that science
will be the undisputed primary driver of economic and cultural change
in the twenty-first
century. Harvard University scholar Juan Enriquez drives this point home
in his new
book, As the Future Catches You: How Genomics and Other Forces are
Life, Work, Health and Wealth. In a Fast Company magazine interview
discussed his outlook. He explains the next Cisco Systems, the next Microsoft,
to be a life-sciences company. It could be a company today that calls
itself a computer
company. IBM's largest project is Blue Gene. Sun Microsystem's largest
project is deciphering
protein. Compaq Computer's driver is the alpha chips used for sequencing
human genome. So it may be a computer company, but it may be a cosmetics
like Procter & Gamble. Just as information technology
isn't a business category or an
industry - but a crosscut that changes every business
and every industry - genomics is a crosscut.
One review of Enriquez's book
concludes: When the history of our time is written, the digital revolution will
not be the lead story. The lead story will be the genomics revolution
crosscut that really changes everything. And virtually no one knows
anything about it.
When asked to advise ASU's
Greater Phoenix 2100 project, Michael Crow suggests it is
reasonable to think that the next 100 years will include the following
trends. Understanding these is critical to positioning Arizona for the
° Movement away from a silicon-based electronics economy
° Increased rates of technical advance and revolutionary breakthroughs
the smallest of scales (even molecular manipulation)
° The nanotechnology - the science of the extremely small - wave of
integration and societal transformation (artificial cells, artificial
° Convergence of diverse
fields of study and development, such as information
technology and biotechnology
° Genetically modified
The other critical thing to
understand, say Crow
and Enriquez, is that if you want to
compete in such areas as bioinformatics you need to compete for really
You need really smart people who under-stand how to manipulate nanomolecules.
Those really smart people want to live someplace where they're safe, where
are really smart people around, where there's financing and where there's
Future Shock and The
Third Wave authors, Alvin and Heidi Toffler, share Crow's and
Enriquez's views. The Tofflers wrote in the Wall Street Journal on May
It is now clear that the entire digital revolution is only the first phase
an even larger, longer process. If you think the revolution is over, get
ready to be shocked again as information technology fully converges
with and is, in turn, remade by, the biological revolution.
In the first phase, information
technology revolutionizes biology. In the
next phase, biology will revolutionize information technology. And
that will totally, once again, revolutionize economies. Together these
represent a turning point not just in economies, but in human history.
The upheaval in the stock
market is extremely painful. But we will look
back on it as a minor spike in the early history of the new economy of
the 21st century.
The Challenge of a Low-Wage Legacy in Arizona
Average Annual Wages in 10 Industry Sectors
Source: Center for Business
Research, Arizona State University
Retail Trade 14% - $18,784
Health Care, Social Assistance 11% - $26,768
Accommodation & Food Services 11% - $10,814
Administrative Support 10% - $18,498
Construction & Real Estate 10% - $25,386
Manufacturing not "High-tech" 7% - $28,528
Professional, Scientific, Technical Services 6% - $31,968
Finance & Insurance
5% - $38,847
Wholesale Trade 5% - $35,439
High-tech Manufacturing 5% - $49,071
Largest Employment Sectors
and Percent of Total Employment in Arizona
S. Average Salary = $29,245
Given the move to science-based technology, an economy like Arizona's,
realm is focused on manufacturing in just a handful of electronic and
sectors, is in line for tremendous "pain and gain cycles," warns
The Challenge of a Low-Wage
Legacy Arizona always looks like an economic success
because the state racks up impressive job growth numbers. Once again,
this seemingly positive trend obscures a deeper, more worrisome concern:
these new jobs don't pay well because most of the new jobs aren't about
They're about building and entertaining (see Figure 3).
What are the areas in which
Arizona has a strong concentration of jobs? They're all in
the backside of the economy: administrative support, construction services,
reservation services, telephone call centers, and collection agencies.
Where are the jobs
of the future? According to the Arizona Department of Economic Security,
mostly at the lower end.
According to the state forecasts
for 2008, half of the state's workforce will be
employed in either tourism or retail at an average wage of about $12 per
hour, or less
than $25,000 per year. Of the 25 fastest-growing job types in the state,
no higher education and pay, on average, less than $11 per hour. (One
of the fastest-growing
occupations in this group is tele-marketers at 9 percent growth from 1998
2008.) Only one of the 25 requires more than a bachelor's degree (general
and top executives), while two occupations require a bachelor's degree
school teachers and paraprofessional and technical workers).
So it is not surprising that
Arizona ranks below average in residents working in
knowledge-intensive industries - those that are dependent on workers with
at least a college
degree. Consider that Arizona has 50 workers in knowledge-intensive sectors
residents compared to 207 in top-ranked Washington, D. C. and 64 in Colorado
Table 1). The state ranks 21st among the 50 states and the District of
Columbia. Four New
England states are among the top 10 and the Virginia/
D.C./ Maryland region is among the
top 11. Three Western states are also among the top 10. California, sixth
overall, is among
the top 10 in high-tech manufacturing, information, and professional,
technical services. Among the Western states, Utah and Oregon also have
a higher overall per
capita figure than Arizona. Utah is in the top 10 in information and education.
in the top 10 only in high-tech manufacturing.
The Challenge of a Split
Personality Arizona does not approach its economic future with a singleness of
purpose. Many of
its leaders want to compete with California, Texas or Colorado as centers
of the knowledge
economy. But just as many leaders are quite content to keep on promoting
merely as the perpetual construction machine or a retirement haven. (See
This split personality plays
itself out in many ways. As a state, Arizona cannot quite make
up its mind whether to be urban or rural, nostalgic or cutting edge. On
the one hand,
there's the "Old West" image, Grand Canyon, Sonoran desert,
sunsets, and orange trees; on
the other hand, there's the "built world" of Lake Powell, America
West Arena, red-tile
roofs, world-class resorts, and Sun City.
Below Average Numbers of Arizonans Work in Knowledge-Intensive Sectors*
of the Economy Per capita Employment
(number of workers per 1,000 residents)
Washington, D. C. has 207 workers in knowledge sectors for every 1,000
residents, while second-ranked Massachusetts has 94.
With 50 per 1,000 residents, Arizona is not only not in the top ten, the
state is below the national average.
Top 10 States, Arizona, and
and Total per Capita
Washington, D. C. 207
New Hampshire 23
Washington, D. C. 14
Washington, D. C.124
Washington, D. C. 57
New Hampshire 72
Rhode Island 12
New Hampshire 14
New Jersey 28
New Hampshire 11
Rhode Island 14
New Jersey 9
South Dakota 18
New York 9
New York 26
10. Arizona 14
Five sectors were analyzed because they are dependent on workers with
at least a college degree. These included professional, scientific, and
technical services (PST), most ambulatory health services, portions of
the manufacturing sector, the information sector that depends on professional,
technical talent, and parts of educational services (private sector higher
education and computer training).
** PST - Professional, Scientific and Technical Services
Source: U. S. Department of Commerce, Bureau of the Census, 1998 County
Business Patterns and Census 2000
Residents recognize that population growth provides the market base for
sophisticated consumption, symphony, art galleries, restaurants, but don't
want a state
that forgets its setting and history.
This contradictory sense of
self is expressed in the ways the cities in Phoenix metropolitan
area represent themselves to the world. Several cities, like Scottsdale
play to the past (" The West's Most Western Town" and "Arizona's
respectively), while Tempe, Chandler and others play to the future ("
Oasis"). The biggest city, Phoenix has chosen an identity tied to
neither of these,
but one that projects efficient government (" The Best Run City in
Maricopa County appears to be following Phoenix's lead.
Does it matter that Arizona
- and its largest region - are lacking a strong, distinct identity?
Yes, it does. Economic analyst
Joel Kotkin, author of The New Geography: How the
Digital Revolution is Reshaping the American Landscape, argues that
the defining question
of the twenty-first century is likely to be: "Who wants to live where?"
out that "today, people and businesses can search the entire country
to find the places
most desirable to them. Freed from old ties to raw materials or pools
of cheap labor, the
Information Age businesses
that drive the economy, and their employees, can be anywhere
they want." In this context, Arizona's image is more important then
In addition, a more strategic
approach to the state's "economic identity" forces Arizona's
leaders to answer two fundamental questions that are easy to overlook:
1. What is our most important asset?
2. Where do we want to go?
Answer these questions by creating
an economic identity, says Harvard Business
School's Michael Porter, and you can begin to think about how to make
can decide which opportunities are good for your future and which are
The Challenge of Moving
from Being Fortunate to Being Smart
a lot of ways, Arizona is successful today because it has been lucky.
the shift toward the Sun Belt, the whole trend of retirement communities,
Motorola's decision to build a plant in Phoenix some 50 years ago: All
came about in large part through luck. But Arizona can't rely forever
fortunate. It's time to be smart.
Maybe the best example for
Arizona to learn from is Austin, another high-profile Sun
Belt location that could have attempted to live
off of its luck for a long time. When the
Sun Belt boom began, Austin was a small but sophisticated town that had
fortune to be located in a desirable state and to house both the state
capital and a state
university. Instead of simply riding that wave, the city established a
more than 20 years ago.
Local leaders adopted the mantra
"Austin is poised for greatness." But they did more
than that. They decided Austin would be great in two areas: information
and quality of life. From then on, the city leveraged its music scene
and its independent
film community, and it launched strategies to preserve open space and
The city leveraged its university resources and the attraction of MCC
and Sematech -
two major research and development partnerships formed in the 1980s -
become a top-tier technology center. The three-year average annual growth
per capita income for Austin is 9.6 percent, just slightly below San Jose's
Of the 50 largest metropolitan
areas in the nation, Austin was ranked recently as the
second-best place for the knowledge economy. This overall ranking was
earned by being
one of the top three in technology and professional jobs, patents, science
degrees, online population and access to venture capital.
Arizonans Hope Arizona Will Be a Technology Leader in the Future
Responses in Percentages
Source: Morrison Institute for Public Policy, 2001
But the same index rates
Austin merely 12th on export performance, which is actually
much higher than it would be without the presence of a few large exporters.
Kirk Watson and a visionary group of local business, academic and city
determined to make Greater Austin a world-class international region.
that the knowledge economy is a global economy where strategic advantage
opportunities are often overseas. Lacking global experience, indigenous
companies are more apt to react to global pressures than to be strategically
To move forward, Arizona must focus on strategic goals. Now is the time
thinking about the next Arizona economy and how we will prepare ourselves
communities for what lies ahead. We need a dialogue about what comes next
Arizona can create a future that works for everyone. The state's leaders
What are three things that
Arizona - or its largest region - is striving to be
The Challenge of Global
Geography Whatever choice is made, the race to get there will be different from
what it was 20
years ago or even five years ago. Nothing can be left to chance. As urban
William Fulton says, "when it comes to the new economy, no metropolitan
area is without
assets - and precious few have a monopoly on success." In addition,
"global" is the new
context and new scale. As in business, this new geography presents places
opportunities and an endless supply of competitors. High-tech hubs now
globe, serving as outposts for big-brand corporations, generators of homegrown
companies and incubators for emerging industries like e-commerce, mobile
and biotechnology. In its July 2000 issue, Wired magazine showcased
international locales than U. S. regions on its list of the top 46 "locations
that matter most
in the new digital geography."
The message is clear: All economic
hot spots are now competing in a global race.
Economic Identity: It matters
Phoenix needs one that fits the times.
regions are overtaking states as the drivers of economic growth. Arizona
is no exception. Metropolitan Phoenix currently accounts for 70 percent
of the state's
total personal income and is responsible for over 70 percent of new job
growth. As goes
Phoenix, so goes Arizona. The time has come to decide on the Phoenix region's
identity and goals.
For Arizonans, it's hard to
imagine Phoenix being "outclassed" in economic growth or
quality of life. After all, its costs are still low and the sun still
those two factors don't produce the standing they once did. Milken Institute
Ross DeVol suggests Phoenix represents the classic case
of a 'middle-tier' tech region.
Companies locate production and
customer support facilities to take
advantage of low costs and relatively
cheap labor, but few place their top
scientist and engineers there.
Recent quality of life rankings
by the Milken Institute and others show Greater Phoenix
in the middle of 315 metropolitan areas with a ranking of 169, far below
Denver and Salt
Lake City. Still worse, Arizona businesses, especially high tech, report
and prospective employees are becoming disenchanted with Greater Phoenix.
The region "must look
to make something more of itself if it wishes to be something
other than an also-ran in the digital age," warns Joel Kotkin. Warnings
DeVol and other highly regarded researchers present the question: What
Phoenix region want to be known for? What economic identity and lifestyle
goals is it
striving to achieve? Morrison Institute asked the region's residents those
in a representative survey.
In June 2001 Morrison Institute
surveyed metropolitan Phoenix residents to understand
more about what matters to them and what image they would like the region
project to the rest of the world. Residents rated 12 potential images
for the Phoenix
area and then chose the one they liked most. Metropolitan residents are
most likely to
feel the Phoenix area should promote itself as a region characterized
by its great quality
of life and unique environment. Fewer than half felt that it was desirable
metropolitan Phoenix as a real estate boom town or an area of fast growth.
Valley residents were asked
to pick one image they would most like for the Phoenix
region on a scale of "0" to "10" with "10"
meaning the Phoenix region should actively
promote the image, and "0" meaning it should not promote the
image at all. The average
scores for each image from most favored to least favored are presented
1. Great quality of life. .
. . . . . . . . 8.3
2. Sonoran Desert, mountain preserves and open spaces . . . . 8.1
3. Smart people and education
opportunities . . . . . . 8.0
4. Technology leadership .
. . . . . . 7.7
5. Art and cultural entertainment . 7.6
6. Diverse ethnic and cultural heritages . . . . . . . . . . . 7.5
Women tend to favor the desert environment and tolerance images, whereas
great quality of life and technology leadership. Support for promoting
the region as a
desert environment with open spaces and a great quality of life, or for
are favored more among those with higher incomes.
Going further, the Morrison
Institute survey asked residents to distinguish between an
economic identity and a lifestyle identity for the region (see Figure
5). For an economic
identity, a third of valley residents want the region to be viewed as
Another one in five prefers the talent and education image. Taken together,
a majority of
residents appear to favor a "knowledge-based" or new economy
image for metropolitan
Phoenix. One in four residents prefers the more traditional resort and
Survey respondents were split
on their outlooks on lifestyles. Approximately one
quarter of respondents selected a causal lifestyle image, and another
one in four
selected the desert environment and outdoors as the primary lifestyle
image for the
region. There was little interest in the images of professional sports,
heritage, or a retirement paradise.
With this concrete data as
a starting point, the challenge now is to establish and maintain
an image that distinguishes the Phoenix region - and thus Arizona - as
a winner in
the economic race of today, not yesterday.
Economic Identity is Only
the First Step.
Strategy is the Next and Harder One.
economic identity will only transform an area if it is supported by wise
initiatives by business
and government. Assuming the state and its major regions
establish a strategic principle something like - "the site of technology's
future"- the focus
and tools required to get there are different from those of the past.
Now economic, education, technology,
amenity and community development
strategies must go together. The battle for leading edge industries, knowledge
talented people and quality communities is one and the same. For example:
° World-class educational
institutions build strong talent pools and provide
° Communities with respected
education and research institutes and distinct
cultural identities attract leading-edge industries
° Natural and cultural
amenities draw talented people
These dynamics describe, of
course, many of the factors driving high-tech and technology
services location decisions. But just as important, these factors describe
where today's breakthrough technologies and cutting edge organizations
They form a "virtuous circle."
But the idea of a virtuous
circle is ushering in yet another change. It's no longer enough
for states like Arizona
to have top engineering schools, venture capital pools, job training
programs and urban growth plans. States have to put the pieces together
to create advantages
from the parts' interaction. Advantage depends on capturing the synergies
the interaction of the critical parts.
Assets alone do not guarantee
a place at the winner's table. The key is to connect them
to create regional advantage. Many areas can accumulate an array of technology,
and lifestyle assets. Map 1 shows the metro Phoenix assets. But it is
to create a place where the highest brain power resides, ideas flow freely
and private institutions and businesses and people easily find the support
they need to
develop desirable companies. Setting this dynamic in motion and sustaining
requires genuine collaboration and significant investment. A short-term
yesterday's fragmented strategies won't do it.
Arizona will lead - or not
- depending on its desire and discipline to:
° Build the technology
and knowledge assets that will advance technology
and launch high-value new ventures
° Develop and grab talent
in every way possible
° Build desirable places
to live and work
Residents Want Technology Savvy + Desert Lifestyle to Equal Greater Phoenix
Responses in Percentages
Technology is the Desired Economic
Identity for the Phoenix Region
Technology Savvy - 32%
Resort & Tourism - 24%
Talent & Education - 18%
Real Estate & Construction - 8%
International Business - 8%
The Four Cs - 7%
Don't Know - 3%
Desert and Casual Living Best
Capture the Image of the Phoenix Region's Lifestyle
Casual Living - 28%
Desert & Outdoors - 26%
Low Costs, Low Taxes - 16%
Arts & Culture - 10%
Retirement Paradise - 9%
Western Heritage - 7%
Professional Sports Choices - 4%
Source: Morrison Institute for Public Policy, 2001
the right image and spend as much on promoting knowledge
images as tourism.
Fortunately, Arizona is building
its universities, R& D base and intellectual capital. In
November 2000 state voters approved an increase in the state's sales tax
education funding by nearly $460 million a year for 20 years. The three
receive approximately 12 percent of the dollars annually for research
and for infusing
new knowledge into the economy. Arizona's universities have worked together
areas where they have foundations on which to build. Some of the areas
while others are unique to an institution.
Together, however, these university
specialties begin to map where the state has the potential
to lead in the future. Arizona's universities are laying the groundwork
themselves nationally in the areas of bio-science and biotechnology and
science and technology. In addition, the universities are developing initiatives
manufacturing, environmental engineering, environmental science, water
Unfortunately, hardly anyone
outside of Arizona knows about Proposition 301 and its
potential to shape the state's future. Yet this major accomplishment could
start to change
the old perception of miserly Arizona when it comes
to education and university research.
The university portion of 301 totals $1.1 billion over 20 years, a figure
on par with
what the national press is touting as monumental investments. But Arizona
think its work is done. This is just one-tenth of the annual amount that
University's Michael Crow suggests is necessary just for the Phoenix area.
a cursory look at state initiatives shows that every other state - and
many countries such
as Israel and Ireland - are mastering the new rules of economic development.
have set their sights high and are taking risks to get there. The question
is which ones will
have the discipline to remain focused over the long haul. Will one of
them be Arizona?
Of course strategy is
hard - it's about making tough
choices. It's about deliberately choosing to be different.
If you want to make a difference
as a leader, you've got to make time for strategy.
The essence of strategy is choice and trade-offs and fit. Only strategy
create sustainable advantage.
Great leaders are able to enforce
the tradeoffs A leader also has to make sure that everyone understands
the strategy. They go out and they repeat, "This is what we stand
for, this is what we stand for." So everyone
understands it. Strategy becomes a cause. That's because strategy is about
Wisdom about strategic positioning
from one of the world's most known business-school professors, Harvard
Michael E. Porter. Although Porter is talking to businesses, his advice
is equally solid for states and communities in the
Harvard Business Review, March
Leadership has become
a spectator sport in Arizona.
Every flourishing place has
people who act as its stewards. They are
committed to and actively work for the long-term economic and social success
of their locale - advocating for it, nurturing it, wanting to solve its
and improve it.
But, most Arizonans, according
to a statewide survey, think the state lacks
such leadership today. What lies behind this view? Many citizens identify
states elected officials with narrow agendas. Other observers complain
are sitting on the sideline and that government-by-ballot measure has
because business and elected officials remain passive.
Given the facts of corporate
life today - national and international perspectives,
merger mania, executive churning - finding and supporting stewards among
business leaders is harder than ever. Meanwhile, many entrepreneurs appear
lack a civic involvement ethic, while political leaders seem to focus
or narrow ideological issues.
"Stewards of place"
seem like they are harder to find in Arizona than they are
elsewhere. In part, that is due to the state's rapid growth and dramatic
Fewer people in Arizona than in some other states have deep roots here.
too, it's because Arizona is not a first-tier corporate center. But is
that why many
seemingly simple challenges are not met in Arizona? Not entirely.
The facts of leadership may
not be quite what they seem. The situation's not
perfect, but the CEO numbers and turnover are not the only problems. No
how you count them, Arizona has enough potential leaders to run a small
nation. Unfortunately, too many of them are sitting on the sidelines.
At the same
time, however, a substantial number of business executives and other potential
leaders actually are engaged in civic affairs, just not in ways that reflect
or in the ways we traditionally expect.
Many leaders are working on
single issues or causes - tax cuts, a football stadium,
desert preservation or transit - but their work is narrow. Often they
what other leaders are doing or have a hard time linking their efforts
those of others. Many of those leaders lack the big picture of where Arizona
heading. Under these circumstances, the overall impact of strategies developed
by even the most innovative, aggressive leaders is limited because affecting
complex challenges facing Arizona requires focused, coordinated and integrated
approaches. Thus, leaders who lead in fragmented, disconnected and uninspired
ways simply won't get the job done.
Arizona's next generation of
leaders may simply be hiding. We also may not be
looking in the right places for potential leaders. New sources of talent
emerging groups including entrepreneurs, Latinos and generation Xers.
often as well, civic leaders sit on the sidelines because no one has asked
be involved. Or, the civic involvement dictated by their corporate position
to connect with their true passions. For example, one 40-something Arizona
said that he serves on numerous boards because it is traditional for his
to do so, but his personal passion actually shows in the numerous weekends
spends building Habitat for Humanity homes.
Arizona needs a new job description
for leadership. Good, bad or indifferent,
states get the type of leadership they expect. Citizen surveys discussed
report show that Arizonans seem ready to raise expectations for Arizona's
role in the
new century and for the leadership required to get there. Today the increasingly
relevant questions for leaders will not be whether an idea is liberal
but whether it is in tune with the new economic, technological and social
facing our society. Specific communities and issues will require increasingly
innovative and place-specific answers. In the final analysis, a location
only as precious and essential as its inhabitants and leaders believe
it to be.
Arizonans See State Business and Political Leaders as Having Too Narrow
a View and Not Caring Enough About Arizona's Future
Responses in Percentages
Perceptions of Arizona's Political Leaders
Political leaders with a Narrow View - 33%
Weak Political Leaders - 20%
Political Leaders Who Care Deeply About My Future - 16%
Visionary Political Leaders
Single-Issue Political Leaders - 10%
No Answer - 10%
Perceptions of Arizona's Business
Business Leaders with a Narrow View - 28%
Business Leaders Who
Care Deeply About My Future - 22%
Visionary Leaders - 16%
Single-Issue Business Leaders - 11%
Weak Business Leaders - 9%
No Answer - 13%
Source: Morrison Institute
for Public Policy, 2001
Imagine Arizona's Future With
More Leaders Like This...
"A rare intelligence,
a prodigious energy, the ability to persuade
and explain, a sense of humor that erases tensions and makes
friends, an instinctive understanding of process, an innate
sense of justice, a good heart, and uncommon courage never
runs from a fight, not a person of ill will, nor a kamikaze legislator
bent on suicide missions just to grab a headline or embarrass
a colleague for partisan gain knows the value of honorable
compromise in the political arena - that half a loaf is better than
no bread at all is not afraid to do battle when the cause is
just proves ahead of the times and may not live to see some
improvements is fair-minded, and cares."
CNN's Larry King describing
Morris K. Udall, who represented
Arizona's second district in Congress 1961-91 and ranks as one of the
state's truest stewards.
These days the most popular parlor game in Arizona policy circles is:
"Where have all the leaders gone?" The players usually come
up with a number
of answers to this vexing question.
The first is that company mergers
and acquisitions are consuming Arizona's talented
CEOs. Business heads heed the corporate call and then resurface in other
prime leadership material. Two frequent examples of this phenomenon are
Welborn, former CEO of BankOne in Arizona, who was promoted to a national
position in Chicago, and John Oppedahl, former publisher of The Arizona
who went to San Francisco when Gannett Inc. bought Phoenix Newspapers
Republic's parent company. The second idea is that the captains of new
do not assume the mantle of civic leadership in the same ways as the heads
industries. The third response is that Arizona's political leaders are
action, especially when it comes to tackling the critical issues facing
the state or bringing
help home from Washington D. C. For a fourth group of leadership watchers,
problem is with citizen demand, not leader supply. That is, leadership
quality can turn
on a dime if citizens "demand it" and hold their leaders accountable.
Nearly everyone who enters
into the leadership debate wonders: Where will our future
leaders come from? Do we grow them? Do we recruit them? Do we train them?
But the problem may not be
a lack of potential leaders. Perhaps our leaders are keeping
quiet because they do not know how to get involved or no one in the current
structure has asked them to step forward. Our leaders may be simply invisible,
important civic work in nontraditional realms or ways. Perhaps nobody
the recipe for successful leaders now.
Are we sure we know what's
wrong - and right - with Arizona leadership? What are
the forces shaping leadership quality and opportunity? At least five principal
need to take place to understand this complex phenomenon better.
° Are CEOs sitting on the
° Are we looking in the
wrong places for new leaders?
° Are our elected leaders
really as irrelevant as they appear?
° Have ballot measures
replaced policy makers?
° Do we need a new job
description for leaders in the twenty-first century?
Although all of these questions
are critical to debate and resolve, some are more on target
Are CEOs Sitting on the
Sidelines? A recent Harvard Business School study shows that corporate boards
are 30 percent
more likely to oust a CEO than they were 10 years ago. Merger-mania, consolidations,
and globalization all speed the churn. As one observer notes, "Globalization
meant that corporations must now compete on a world-wide basis, often
in many different regions. CEOs of most large corporations have fewer
in a single region and make less time for regional civic affairs. The
has been on Fortune 500 companies that were anchored in their regions."
Although Arizona has never
been home to many Fortune 500 companies, some very
big firms have a long history here. Chief executives of global corporations,
and local banks and utilities traditionally have been a large, reliable
source of community
leaders. But many of these companies have been, or are being, transformed
the complex set of forces already mentioned.
So, it is only natural to worry about Arizona's leadership.
What do we know now? Arizona
does not lack for big company CEOs. While there are
few Fortune 500s headquartered here, 34 privately held companies (grossing
than $100 million in revenues in 2000) and plenty of large publicly held
consider Arizona home. In addition, Arizona has significant divisions
of some of
the world's most recognizable and important corporations including Motorola,
Morrison Institute's look at
CEO tenure among these companies shows significant
churn in the public companies but not the private ones. Comparing The
Journal Company Rankings for 2000 and 1996, Morrison Institute found:
° Of the largest 25 Arizona-based
public companies appearing in both lists,
slightly more than half (52%) experienced at least one CEO or principal
turnover in the last four years.
° Of the largest 25 employers
(including divisions of Motorola, Intel, Honeywell,
and Raytheon as well as large government employers) appearing in both
lists, 65 percent experienced at least one CEO or principal turnover between
1996 and 2000.
A look at the large private
companies and their CEOs who reside in Arizona reveals a
° Of the 34 largest private
companies in Arizona (grossing more than $100
million) appearing in both lists, 22 percent experienced CEO or principal
turnover from 1996 through 2000.
So while rotating public company
CEOs might pose problems for sustainable leadership
for Arizona and its regions, that's not the issue with privately held
fact, Arizona's CEO stability among this latter group is better than in
fast-growing Sun Belt state that provides a good comparison. Georgia's
CEO turnover was 31 percent over four years, compared to Arizona's 22
Georgia's public firms, CEO churn was slightly less than Arizona's: 42
turnover versus 52 percent in Arizona.
Amid these ranks, then, there
is still enough potential leadership to run a small nation.
Yet, many seemingly simple challenges are not being met in Arizona. Organizations
notable as Greater Phoenix Economic Council and many other bodies in such
universities, chambers of commerce, nonprofit organizations and local
and state government
find it increasingly difficult to fill their boards, commissions, task
forces or fundraising
committees from outside a narrow circle of business leaders.
So what gives? Perhaps the
answer is that many of the potential leaders are "spectating,"
standing on the sidelines and waiting for others to make things happen
for the state
or region. That's the view of many analysts - not just in Arizona but
elsewhere. Yet a
lack of desire - or a focus on global corporate goals - might not be the
Could it be, for example, that
CEOs are not involved because they have not been asked
to assume leadership roles or they find it difficult to connect to organizations
issues that fit with their personal interests? A study of corporate community
in the Austin area found that chief executives became involved with community
and issues because of personal interests (64%) or they were asked (32%).
other hand, the problem may well be a mismatch in public and corporate
for community involvement. The Austin study found that corporations think
level of involvement is sufficient and meets community expectations, but
firms should be doing more. Few firms though said they measure their involvement
in the community.
It may also be that CEOs are
involved deeply in civic affairs - but not in the arenas we are
accustomed to. Many younger adults see leadership less as a state of being
on dozens of community boards - and more as a process of doing - a set
One 40-something CEO in Arizona reported that he belongs to numerous boards
it is traditional for his corporation, but his real contribution - and
passion - comes into
play with the numerous weekends he devotes to Habitat for Humanity.
Considerations like these reveal
some paradoxes about Arizona's corporate leadership
situation. Leaders still exist, but they may be working on single issues
or causes - tax
cuts, football stadium,
desert preservation or transit - and ignoring other related, but
unaddressed problems. Leaders still exist, but they do not know what other
doing, and have a hard time linking their efforts. Leaders still exist,
but they are not
unanimous in the goals they seek for the state. To the extent leaders
in each industry
pursue their own interests, construction, real estate and retail are likely
Under these circumstances,
the overall impact of strategies developed by even the most
innovative, aggressive leaders is limited because the complex challenges
Arizona require focused, coordinated and integrated approaches to problem
Thus, while it is essential to have leaders, those who lead in fragmented,
uninspired ways can be ineffective or even detrimental to Arizona's overall
Are We Looking in the Wrong Places for New Leaders?
As global, technological and
demographic forces reshape the Arizona economy, so are
they remaking the profile of the state's leadership talents. Entrepreneurs,
Latinos and generation
Xers come to mind as untapped talent.
Is it possible to develop a
more inclusive leadership cadre that would include entrepreneurs,
women, Latinos, young people and others, instead of just the "usual"
CEOs? Is it
possible to make civic responsibility attractive enough that potential
leaders will come off
the sidelines and onto the playing field?
Arizona has seen some of the
challenges with recruiting young technology and
Internet entrepreneurs for traditional civic roles. For example, when
Partnership for the New Economy sought members, it was hard to locate
leaders to involve because many new economy entrepreneurs are not yet
part of traditional
networks. Once found, keeping them on board proved to be difficult because
and building a fast-growth company can be all-consuming. As one biomedical
explained, "I care deeply about my region, but here are my priorities:
company, building a new industry, and building my region, in that order."
The difficulty of identifying
and tapping executives in fast-growing companies for
leadership positions is striking when you consider that:
° Between 1996 and 1999,
30 new companies were added to the roster
of Arizona's 50 fastest growing high-tech companies
° In addition between 1999
and 2000 alone, 28 more new firms made the list
At the same time, these groups
are finding their own paths to leadership. For example,
high-tech entrepreneurs in Austin have created the Austin Entrepreneur's
which they contribute stock. In Arizona, entrepreneurs have created a
Fund, which uses a venture capital model for investing to improve community
Arizona Propositions on the Ballot
on Ballot by Legislature
of Legislature Ballot Measures Approved
of Legislature Ballot Measures Approved
on Ballot by Citizens
of Citizens Ballot Measures Approved
of Citizens Ballot Measures Approved
Sources: Arizona Secretary
of State, 1998; Morrison Institute for Public Policy, 2001
Generation Xers - and young adults generally - are developing their own
that emphasize more direct action and one-on-one service. In a 1998 survey
Peter Hart, the research showed that young people have a vision of leadership
that is less
directive, top down and charismatic and more empowering, bottom up and
Washington Post columnist E. J. Dionne Jr. also has noted the different
today's young adults. He calls them the "Reformer Generation"
but the question he
poses is whether their community mindedness will transfer over to the
So far they have shown little interest in elective offices and voting.
Are Our Elected Leaders
Really as Irrelevant on Big
Policy Decisions as They Seem?
The public seems to be growing impatient with the "wizard of oz"
policy making -
short on brains, heart and courage - going on in the state. The similarities
Lion, the Scarecrow and the Tin Man and state policy makers are rooted
things. One is public doubt that much thought or brain power goes into
public policy. Such events as the recent alternative fuels (1) fiasco
bolster skepticism about
"thoughtful" leadership. Also, the strong role ideology plays
in Arizona's elected officials'
decision making fosters this impression.
(1) As described
by Arizona political scientist David Berman, the alternative fuels program
came in the form of legislation,
hastily passed at the insistence of House Speaker Jeff Groscost in the
spring of 2000, which provided large tax rebates to
purchasers of alternative fuel vehicles. As originally adopted, the law
rebated the entire cost of converting a vehicle to run on
natural gas or propane and a third of the vehicle's price. Lawmakers,
acting hastily and without full information, underestimated
how many people would take advantage of the program. As more and more
people (over 20,000 in all) requested the rebate,
the Legislature's original estimate of a $3 million cost to the state
and the $10 million figure from the governor rose to
over $500 million. Critics also doubted whether the program would have
any effect on pollution since people who
added alternative fuel tanks were not required to use them.
Ideology provides elected officials
with simple stock answers to big, complex problems,
thus relieving them of the obligation for the heavy thinking and comprehensive
analysis that's necessary to sort out complicated public policy issues.
Morrison Institute's recent
statewide survey made it clear that Arizonans want less of
this kind of "leadership." Forty-three percent of the survey
elected officials as leaders with a narrow view (33%) or single-issue
(see Figure 1). An additional 20 percent of the residents felt that Arizona
political leaders. Perhaps most important, the overall view of Arizona's
is quite negative. Indeed, the state's residents
seem to think that policy makers are
as heartless as the Tin Man. Only 16 percent of the respondents said they
care deeply about the future of Arizonans.
Finally, frustration with the
Legislature's unwillingness or inability to handle big,
strategic issues is widespread. Indeed, the tough political choices in
the state seem like
they are made increasingly at the ballot box or in the courts. Conventional
the rise of ballot initiatives and referendums - where voters decide directly
on issues - at
the heart of this image. But defaulting to Arizona courts the job of deciding
directions adds enormously to the perception of a legislature struggling
to stay relevant,
especially when tackling strategic issues facing the state. In the last
courts forced the Arizona Legislature to address school finance, mental
clean air and bilingual education. Tim Hogan, executive director of the
Center for Law in the Public Interest, said the center has had to ask
to do "what our elected officials should have been doing - enforcing
laws that are
important to the health, welfare and pocket-books of Arizona's citizens."
In the case of education finance,
the Arizona courts and the voters stepped up to
make the tough decisions that the Legislature dodged. In the early 1990s,
Center for Law in the Public Interest sued the state in Roosevelt Elementary
District No. 66 v. Bishop to force the Legislature to reform Arizona's
financing system. In 1994 the Arizona Supreme Court ruled that the great
in school funding between districts were a problem the Legislature had
resolve. Furthermore, the court held that the "Arizona constitution
requires the legislature
to enact appropriate laws to finance education in the public schools in
a way that
does not itself create substantial disparities among schools, communities
or districts" as
had been the situation leading up to the suit. In 1996 and 1997 the Arizona
Court rejected plans proposed by the Legislature, but eventually the "Students
First," plan was accepted which directed that the
many billions of dollars needed to correct
disparities come from general fund revenues rather than new taxes.
However, it was clear immediately
that "Students First" was not going to fix
the school funding problem. But rather than make the decision to raise
fund education, the Legislature delegated that decision to voters. Legislators
Proposition 301, a measure to raise the state's sales tax by .6 percent
to fund education
needs, on the 2000 election ballot. The measure passed. In this case,
followed a disturbing pattern: a court ruling kick started a discussion
about an urgent
policy issue that should have been addressed long before. The Legislature
attempted to solve the problem too late in the process; and eventually
the voters had to
make the final call.
Of course, Arizona elected
officials are not all cut from the same cloth. Republicans
Governor Jane Dee Hull and former Superintendent of Public Instruction
Graham Keegan provided the intellectual capital, passion and courage it
took to propose
the first tax increase after a nine-year run of tax cuts.
Types of Propositions Since Statehood
Proposition on Ballot by Operation
(Legislative Pay Raises) - 3.34%
Popular Referendum - 8.74%
by Citizen Petition - 15.42%
Statutory Initiative by Citizen
Petition - 22.88%
Statutory Proposition by the
Legislature - 4.88%
by the Legislature - 44.73%
Source: Pieces of Power, Governance
in Arizona, 79th Arizona Town Hall, 2001
But the perception remains that state political leaders work to advance
agendas or on issues of special interest to them, but they sit on the
sidelines when the
biggest, most difficult issues come up.
Have Ballot Measures Replaced Policy Makers?
No assessment of trends affecting
Arizona leadership can avoid the issue of ballot initiatives
and referendums. In Arizona, and other states particularly in the West,
initiative and referendum are historical tools that still allow citizens
to speak directly
to today's political issues. Through the initiative process, voters can
pass new state laws or
amend the state constitution; through the referendum, voters also have
to prevent laws from going into effect (see Figure 2). Citizens can put
an issue to a vote
by obtaining the requisite number of signatures. Alternatively, the state
also refer a measure - to amend the state constitution or make statutory
changes - to
the ballot. All constitutional amendments must be placed on the ballot
by the voters.
The original idea of the initiative
and referendum was to give citizens the ability
to wrest power from legislatures dominated by special interests. But today
initiative process itself is often, according to Washington Post columnist
"manipulated by moneyed interests, often funded by out-of-state millionaires
their own agendas on a new frontier of American politics operating virtually
In this regard, examples in
Arizona include the "medical marijuana" initiative in 1996
and the lottery measure put on the ballot in 1980 by an out of state company
state lotteries, both measures opposed by key elected officials. In this
group is also
the 1996 measure that requires the state to enter into gaming compacts
American tribes, and the 1988 constitutional amendment making English
language of the state after the legislature had refused to take action.
But in terms of the central
question concerning the lack of legislative leadership
and how this void may
have been filled by citizens groups both in terms of numbers
and in regard to major policy decisions, the "protest" or popular
referendum and the
citizen initiative are the best indicators.
In this regard, Arizona ranks
among the top six states in terms of its use of these two
vehicles, according to national observers. What's more, there has been
an increase in
protest referendums in recent years ( 6 in the 1990s, compared to 0 in
the 1980s and 0
in the 1970s, by one expert's analysis) and in the initiative (22 in the
1990s, 11 in the
1980s, and 4 in the 1970s).
Belief that elected officials
are not responsive to the public or not leading in the desired
policy direction seems to be a key reason behind these measures. Consider
° Propositions in 1990,
1994, 1996 and 2000 were successful initiatives to
earmark lottery revenue for the Heritage Fund, to increase state taxes
on tobacco products to fund health care, to earmark lottery revenues for
health care, and to require Arizona to deposit tobacco settlement money
a Healthy Children, Healthy Family Fund, respectively.
° Propositions in 1992,
1998, and 2000 were successful ballot measures to
establish term limits for elected officials, public funding of elections,
appointed Redistricting Commission to determine legislative and congressional
° Propositions in 1992
and 1998 limited legislative discretion by requiring a
two-thirds majority in both legislative houses to raise taxes or fees
placing limits on the ability of governors and legislators to tamper with
Arizona may soon find that,
as the ballot is increasingly the policy making vehicle of last
resort, it is also an unpredictable one. The risks of unintended consequences
especially as ballot measures are used to write tax laws or other complex
Suppose Alt-fuels had been a voter-approved initiative instead of legislation:
be the remedy to undo the potential $500 million
tax break to a special interest? The
Citizens' Growth Management Initiative on the ballot in 2000 was so complex
people were baffled by it and worried about unintended consequences. Today
are expressing surprise at what was in the successful education finance
2000, despite drafts of it having been vetted through the legislative
process. Similarly, the
campaign finance initiative approved in 1990 may cost the state much more
anticipated because many candidates are taking advantage of it.
One can, of course, write such
instances off as aberrations that prove nothing in general
about ballot policy making. But Arizonans should be reluctant to do that
is a clear trajectory emerging for increasing ballot policy-making.
Analysis indicates that there
has been a growth in ballot propositions. As Table 1
shows, 30 percent of all ballot measures ever voted on in Arizona have
appeared on the
ballot in the last 20 years.
Moreover, the ballot measures
in recent years seem to differ significantly in intent
from those in the past. Most measures in the early years dealt with government
and institutions. In the 1950s, for example, the legislature referred
of constitutional amendments dealing with government structure to the
initiatives dealt with employment issues such as workers compensation
security. During the 1970s the overarching theme was again government
For example in 1972, technical constitutional amendments defined recall
and senate appointments. During the 1980s, most ballot measures were advanced
legislature and dealt with tax structure - an echo of California's Proposition
But in the last decade, the
range of issues decided by the ballot has grown. In addition
to several significant government organization and operation issues (legislative
redistricting commission, public finance of campaigns), citizens' initiatives
referrals tackled aspects of education, health care, growth management
and crime. Perhaps
most significant, the
ballot measures, for the first time, dictated state budget or spending
decisions (see Table 2). In 1994 voters approved a measure to raise the
tax and earmark the new revenue for health care for poor families. In
2000 voters passed
Proposition 200 that requires Arizona to deposit the money it receives
over the next
25 years from the 1998 Tobacco Settlement agreement into a fund for health
in 2000 voters approved Proposition 301 to raise sale taxes to fund teacher
research and other educational needs.
Thus, as a leadership issue,
ballot measures present a very legitimate catch-22: Every
successful ballot measure gives the public one more reason to distrust
and that gives the politicians one more reason to kick the next tough
Do We Need a New Job Description
Whether Arizona evades the
threats of the "shoes" discussed in this report or overcomes
them depends in large part on the extent to which Arizonans act as leaders.
At the same
time, tackling the issues with a traditional leadership style will not
help Arizona excel in
the early part of the twenty-first century. The world is very different
and enormously more
competitive than just 10 years ago. That reality requires more than ever
that leaders -
whether in business, government, schools and universities, or nonprofits
- ask the right
questions and implement answers that work not just for them, but for Arizona
as a whole.
Today the increasingly relevant question for leaders, say national experts,
will not be
whether an idea is liberal or conservative but whether it is in tune with
the new economic,
technological, and social challenges facing our society. Specific communities
will require increasingly
innovative and place-specific answers.
Most Arizonans do not see the
state having that style of leadership today. For example,
Morrison Institute's survey found that the respondents believe the state
is led by business
and political leaders with narrow interests or single-issue agendas. Only
about a quarter
of the respondents said they view their political leaders as being visionary
about Arizona's future.
Interestingly, however, the
respondents trust business leaders more than politicians.
They believe business leaders are stronger, more visionary and care more
future. However, business leaders are also viewed as having narrow interests
focusing on single issues.
What Arizonans described in
the survey is a traditional style of leadership, says Doug
Henton, coordinator of the national Alliance for Regional Stewardship.
that Arizona, like many places, is beginning to see the limitations of
traditional forms of
leadership: "Traditional leadership may exist in a region in the
form of CEOs of
major corporations, issue advocates, neighborhood activists, social entrepreneurs,
ethnic community leaders, but even with these traditional forms of leadership,
are the most pressing and most difficult regional issues not finding resolution."
These types of leaders are still essential to states and communities,
says Henton, but
another type of leader is necessary going forward, namely regional stewards.
from the word "stewardship," which refers to "the careful
and responsible management
of something entrusted in our care," stewards are leaders who are
committed to the long-term
well-being of places.
As Table 3 shows, stewards
go beyond traditional forms of leadership: They are leaders
who cross boundaries, take an integrated approach, and build coalitions
They have 360-degree vision, recognizing the interdependencies between
environment and social equity. Stewards operate at the center of the tough
not on the edges. They are risk takers. They are passionate and energetic.
They are people
Ballot Measures Dictating State Revenue Allocation 1990-2000
on Ballot that Year
state lottery money for Heritage Fund (parks and trails)
state tax on tobacco to use for health care, education, and research
more low-income persons eligible to receive healthcare under AHCCCS;
sets aside lottery funds for 6 programs
publicly funded campaigns; establishes surcharges and other fees
and earmarks for campaigns
$20 million annually to purchase state lands for preservation
tobacco settlement money over the next 25 years to a Healthy Children,
Healthy Families Fund
tobacco settlement money to be used for low-income health care (AHCCCS)
state sales tax and earmarks revenues for specific education purposes
"tourist" tax to fund football stadium
* Excluding salary commission
Source: Morrison Institute for Public Policy
Policies to Keep the Shoe
Based on the surveys discussed
in this report, Arizonans seem ready to raise expectations
for Arizona's role in the twenty-first century and for the leadership
required to get it there.
So the challenge now is to come up with ways to move beyond the traditional
leadership. Three ideas are presented to add fodder to Arizona's leadership
encourage more stewardship in Arizona.
Demand that business and
elected leaders first be stewards of Arizona.
Given all these realities, it's clear that Arizona needs a new model of
leadership in both the
civic and political realms. For Arizona to succeed, its leaders must view
stewards of Arizona as a place. In the final analysis, a location remains
only as precious
and essential as its leaders and inhabitants believe it to be. Thus, we
have a clear leadership
search: Who has enough intelligence, imagination, cooperation and commitment
to make the best use of the opportunities and challenges before the state,
some of which are
outlined in this report?
From CEOs to elected officials
to entrepreneurs to citizens groups, leaders cannot be
focused only on single issues, set ideology, political survival or short-term
at a time when major challenges - such as Latino education, economic excellence
other issues - demand long-term, integrated solutions.
Arizona has good models of
the sort of leadership needed. One has only to recall Mo
Udall, Barry Goldwater, John Rhodes, and Bruce Babbitt - all of whom were
to the long-term future of Arizona as a place.
Water is an important example.
Decades past, Arizona "entrusted" its economic
future to these political
leaders and others, and they delivered in a big way. As a result of
their stewardship, this desert state has a secure water supply. Among
these leaders delivered federal approval and enormous amounts of federal
design and build the Central Arizona Project (CAP) to bring Colorado River
water to Arizona. While CAP was critical to Arizona, it was widely opposed
groups, which where major constituencies of both Udall and Babbitt. Moreover,
Udall was opposed philosophically to many aspects of the CAP and Lake
But both men put aside their personal causes to secure Arizona's future.
Republicans Goldwater and Rhodes had their own conflicts, but they never
from the job of being "responsible" for Arizona's future.
Many see that type of stewardship
as missing today. Indeed, Greater Phoenix the economic
engine of the state - felt that it had to print a "federal agenda"
to get the attention of the
state's Congressional delegation. Tired of inaction and stonewalling on
grounds (funding for transit, for example), Greater Phoenix placed in
its agenda a subtle
reminder of accountability and responsibility for the future of the state
and its regions.
For Arizona to excel, our state
leaders must move beyond narrow special-interest agendas.
They mush operate at the center of the tough issues, not at the edges.
have an unswerving devotion to positioning Arizona well in the new economy
End term limits, with some
Term limits are a politically popular idea, and limits have some merit.
Yet it's exactly
the sort of issue that
has eroded both political will and political leadership in Arizona.
On the surface, term limits
fix what voters say they do not like about politics. But decisive,
collaborative, thoughtful leadership is essential for Arizona to face
outlined here. The short-term horizon created by the nine-year-old term
limits law and low
pay work against achieving that goal. The state needs to stem the "brain
political leadership just as it must stem the brain drain from the state's
For Arizona to attract the
best leaders, the state should consider "upgrading" the Arizona
Legislature by repealing term limits, increasing lawmakers' pay and moving
nonpartisan elections. Such reforms would extend the state's commitment
the quality of its leadership as it did through the public financing of
elections and a non-partisan
redistricting commission. On the one hand, better pay and an end to term
limits might draw more of the state's best leaders into government. On
the other, legislators
who are elected without party affiliation would be held more strictly
the ideal of public service and this would possibly facilitate stewardship.
Surely it's time to ensure
that Arizona's Legislature can compete in the age of talent.
Embrace a local option approach
to regional collaboration. One of the tallest orders for Arizona leaders remains finding ways
to connect diverse
local agendas into a web of cooperation across the state's regions. California
provide a clue for how to do this. There, a commission formed by the Speaker
California Assembly is developing plans for evoking regional thinking
by mandating a
menu of fiscal reforms but leaving specific choices to local discretion.
Collaboration matters hugely
in a regional world, where problems like traffic constantly
spill over local boundaries. At the same time the state's traditions of
local control aren't
soon going anywhere. That means that the key challenge for leaders today
is to craft
new ways to address problems like traffic congestion or workforce training
management in a collaborative way that respects existing local autonomy.
collaboration should be promoted through incentives and options provided
by the state
to local governments rather than by mandates. Moreover, regional collaboration
promoted across environmental, economic and social issues - not one issue
at a time.
Stewards Go Beyond Traditional Forms of Leadership.
They are Committed to the Long-Term Well Being of Places.
One jurisdiction, one
Specific problem or goal
Commitment to an idea/cause
Multiple jurisdictions and organizations
Integrated vision for the region
Diverse collaborative networks
Commitment to place
Source: Alliance for Regional
Stewardship, Regional Stewardship: A Commitment to Place
The Revenue Sieve
Arizona's tax system is old
and full of leaks.
Arizona no longer has a balanced
and efficient tax structure. Not so long ago
Arizona earned plaudits for the "balance" of its system. Then,
with tax experts' suggestions that low rates maintained across a diversity
bases (including income, property and sales taxes) provide the most stable
yields in changing times. Now, however, cuts in income and vehicle license
other moves have left the state heavily dependent on collections from
a sales tax
base that is already narrow - and getting narrower because of e-commerce
the shift to a service economy.
State lawmakers' penchant for
handing out tax exemptions to special interests
has further disrupted the balance and efficiency of the system. The result
is a system
that has a light overall tax burden - but a heavy assessment on businesses
to other Western states.
This weakened, unbalanced tax
system could harm the state - at the exact time
when Arizona must upgrade its public services to ensure a prosperous future.
Two equally distasteful scenarios are possible. In one, local governments
state may each be forced to increase their sales tax rates repeatedly
revenue for basic services. In the other, holding the line on rate increases
simply preclude necessary investments, whether in education, quality amenities
or well-targeted tax cuts.
To avoid these scenarios Arizona
must update its tax systems for the new
economy by rebalancing its revenue mix and broadening its tax bases. Sales
taxes should be applied to services, as well as goods. Lawmakers should
dozens of the exemptions, credits and other tax breaks that cost the state
of dollars each year. And, too, personal income tax increases and the
use of more
impact fees should be considered to finance reductions in high business
sales taxes. Such changes would not just ensure future revenue flows,
restore balance and fairness to the system.
The Tax System Lacks Balance
The State of Arizona's Dependence on Sales Tax Collections for
Revenue Increased Dramatically Over the Last Decade. Today
53% of Total Revenue Comes from This One Tax.
Sources of State Revenue, Fiscal
Years 1992 and 2002
The changing base: It
took the telephone
35 years to get to 25% of all homes in the United States.
It took TV 26 years. It took radio 22 years.
It took PCs 16 years. It took the Internet 7 years.
Fast Company September 2001
Economic, technological, social and political forces are undermining the
viability of Arizona's tax system. More significant than the ritualistic
squabbles of the Legislature, the challenges differ from the issues raised
comparatively light overall tax burden and heavy business assessments
(see Table 1).
Moreover, budget surpluses generated during recent years of extraordinary
expansion have obscured the new threats. Nevertheless they may subvert
ability of Arizona's tax mechanisms to raise adequate revenue for needed
Indeed, the current projection calls for a significant shortfall in state
revenues in a
year in which a recession was not expected.
Deep-set and structural, the
threats to the system center on the growing obsolescence
of Arizona's present mix of revenue sources, with its heavy reliance on
sales taxes. Tax
experts, whether liberal or conservative, generally agree that wide, diverse
(income, property and sales) yield the most stable revenue flows. Arizona
in fact rated
well on measures of balance, fairness and diversity of sources in comparison
states as late as the mid-1990s. But the state has lost its balance.
Most important, Arizona now
depends much more than most states on sales taxes for general
fund revenue. In 1997, for example, just nine states raised larger percentages
combined state and local revenues from general sales taxes than Arizona's
35 percent. In
1999, only eight state governments depended more on sales taxes (see Figure
4). Since then
the state's dependency (leaving aside local levies) has gone even higher
with the implementation
of the state's new six-tenths of a cent sales tax hike earmarked for education
(see Figure 5).
The problem with this is that
economic and social changes are rushing past the narrow
foundation of Arizona's tax system. Years ago, a more industrial economy
traded mostly in
tangible goods, so focusing taxation on purchases of goods made sense.
But now the
new economy, lifestyle changes and population trends are leaving Arizona's
behind. The state's continuing shift to a service
Arizona Taxes Business Heavily and Households Lightly
Household and Business Tax Burden*, Fiscal Year 1995-1996
Taxes per $1,000 of Personal Income
per $1,000 of Gross State Product
* A lower rank signifies a
higher burden. Arizona's business tax burden is 14th highest in the nation.
Sources: Center for Business Research, Arizona State University. William
Seidman Research Institute,
College of Business. Gross state product is from the U. S. Bureau of Economic
Analysis. Estimates of percent
of taxes incident on business are from the Institute on Taxation and Economic
economy, the rise of e-commerce
and the simultaneous aging and Latinization of
Arizona's population all could reduce state and local tax collections
as service needs
increase. Further leakage is also resulting from Arizona lawmakers' fondness
exemptions that riddle an already narrow tax base with costly new holes.
Five key trends have important
implications for Arizona's ability to make needed investments
in its future:
1. The shift to a service
economy is moving more purchases beyond the reach of
This "leakage" is
happening because Arizona's definition of its sales tax base (most purchases
of "goods" are taxed now at 5.6 percent but "services"
as varied as haircuts and legal
advice are exempt) no longer reflects Arizona's economy adequately. Most
new consumption patterns associated with the rise of a service-oriented,
economy have seen residents' spending go more to untaxed services and
tangible goods. Nationally, spending on goods declined from 53 percent
of consumption in
1979 to 41 percent in 1998. Service consumption rose from 47 percent to
59 percent. In
Arizona, this has meant that taxable retail sales growth has lagged personal
growth, increasing by just 87 percent in dollars between 1985 and 2000,
while income grew
by 106 percent. The result is a net shrinkage of the state's sales tax
base relative to the
overall economy, and a lag of tax collections behind growth.
This loss of revenue is not
just theoretical, either. State tax administrators and academic
specialists have each analyzed the situation and found it costly. In 2000
exemption of professional, business and personal services from the state's
privilege" (sales) tax cost the state at least $1 billion, according
to the Arizona
Department of Revenue. Looking forward, public finance experts Donald
William Fox of the University of Tennessee's Center for Business and Economic
forecast an additional two percent ($ 218 million) loss in potential Arizona
local revenue in 2003, absent new rate hikes,
as purchasing continues to tilt toward
services. About a quarter of those losses would be visited on cities and
given how the state shares revenues with localities. The bottom line:
to change its sales tax base to conform to new economic realities has
left the state
unable to tax its fastest-growing sales sectors and vulnerable to chronic
2. E-commerce continues to grow and bypass the state's tax system.
crux of this problem is the inability of states and localities to collect
sales tax on purchases made via the Internet. Although most such "remote"
are subject to taxes, the administrative hurdles to collecting them are
the effect that states rely on voluntary compliance. Furthermore, a federal
on Internet sales levies precludes a state response. The result is that
millions of dollars of Arizonans' purchases of software downloads, books
from Amazon. com
and laptops from Dell currently go untaxed. Such untaxed retail e-commerce
spread, moreover. Notwithstanding the current "dot. gone" shakeout
of e-tailers, market
research firm Forrester Research forecasts e-commerce
growth at 84 percent a year in
the next two years as "dot. com" survivors mature and national
retailers develop online
systems to complement their storefronts. Analysts Bruce and Fox calculate
Arizona's e-commerce levels could reach $5.1 billion by 2003. That implies
could lose another 1.5 percent ($ 183 million) of its total state and
local revenue in 2003.
The cost to cities and counties would total as much as $45 million.
3. Demographic changes such as the Latinization of Arizona and the
the baby boom could constrain revenue growth further.
Both these trends imply shifts
in income and consumption patterns that could narrow
the tax base and slow collections from Arizona's current tax code. Latinos'
heavy expenditures on untaxed food and relatively lower incomes could
revenue growth compared to population growth. The aging of the baby boom
has fiscal implications because older citizens earn and spend in unique
ways - ways that
frequently go untaxed at present. Much of older citizens' income, for
from pensions and retirement benefits (including
Social Security checks) not from
wages. Large portions of such income go untaxed, given the state's $2,100
exemption for taxpayers 65 and older and the $2,500 deduction from Social
or railroad retirement income. Typically the combined cost of those benefits
million annually, according to the Arizona Department of Revenue. On the
side, older citizens spend more on health, medical services and prescription
are rarely taxed in Arizona. In this fashion, Arizona state and local
tax policies toward
older citizens provide another example of how the revenue structure may
behind social change.
4. The coming crash of capital gains collections adds another variable.
it a hangover from the go-go stock market of the late 1990s. Regardless
description, Arizona will soon lose another source of revenue associated
economic change, namely the realization of capital gains from recent stock
sudden loss is the downside of the increased income tax collections that
capital gains on stocks in the 1990s. In the mid-to late-1990s the state
enjoyed a series
of pleasant "April surprises" when income tax revenues were
counted. Those surprises
accounted for some $70 million of the state's average annual revenue growth
late 1990s, according to ASU economist Dennis Hoffman. Now, with the stock
in a slump, Hoffman estimates that the state soon will experience a $100
in collections due to a corresponding decline in capital gains. This too,
points to the fundamental
weaknesses of the state's tax system.
5. The proliferation of tax credits, exemptions and other breaks has
billions of dollars from current and future tax revenues.
To be sure, some recently legislated
exemptions, such as the corporate income tax credit
for research and development, comport with sound tax policy. Other exemptions
like those of school lunches and university tuition from sales taxes -
desirable ends. Nevertheless, even the most
Arizona Loses $1 Billion a Year in Revenue from the Exemption of Services
from Sales Taxes
Some are Justifiable Exemptions (such as for Business
Services) but Many are Not
Exempted Service Type
- Cost to State (in millions of dollars) of Exemption From 5% Transaction
Privilege ("Sales") Tax PROFESSIONAL SERVICES
Legal - $88.90
Engineering - 63.50
Architectural - 19.20
Surveying - 2.15
"Accounting, auditing, bookkeeping" - 38.50
Physicians - 148.60
Optometrists - 4.60
Chiropractors - 8.10
Dentists - 41.40
"Physical, occupational and speech therapists" - 7.20
Nursing and personal care facilities - 41.60
Outpatient care - 17.50
Home health care services - 18.00
Other ambulatory professional services - 12.00 Total Reportable Professional Services - 511.60 BUSINESS SERVICES
Services to dwellings and other buildings - 32.90
"Credit reporting, collection agencies" - 10.80
Advertising direct mail services - 21.90
Public relations - 1.40
Market research - 4.90
Telemarketing bureaus - 11.50
Document prep services - 2.30
Stenographic services - 1.00
Graphic design - 5.67
Commercial photography - 1.00
Computer programming - 21.00
Computer systems design services - 30.30
Management consulting - 37.90
Environmental consulting - 3.20
Scientific and technical consulting - 5.90
Scientific research and development - 13.00
Testing laboratories and facilities - 8.60
Investigation and security services - 15.50
Interior design - 5.30
Telephone answering services - 5.50
Business service centers - 11.30
Employee leasing services - 62.80
Temporary help services - 64.70
Linen and uniform supply - 8.10
Parking - 2.00
Auto repair - 84.30
Other auto services - 18.20
Electronic and machinery repair - 36.10
Re-upholstery and furniture repair - 1.40
"Watch, clock and jewelry repair" - 0.60
Miscellaneous repair and related services - 2.80 Total Business Services - 511.60 PERSONAL SERVICES
Dry cleaning and laundry - 6.30
"Hair, nail and skin care services" - 13.10
"Footwear, leather and garment repair and alteration" - 0.40
Death care services - 6.90
"Photographic studios, portraits" - 2.60
Diet reducing services - 1.90
Personal and household goods repair - 11.60
Miscellaneous personal services - 1.70
Child day care - 9.40
Other social services - 13.90
Technical and trade schools - 8.00 Total Personal Services - 75.80
Total Services Exemptions
$1.1 billion Source: Arizona Department of Revenue, FY2000
justifiable of such provisions poke holes in the state's tax base and
reduce tax revenues.
Moreover, many of Arizona's tax exemptions - the number of which have
exploded in the
last decade - flout the tenets of good tax policy. Oftentimes the breaks
are too broad or too
narrow, making them inefficient. Frequently their creation seems piecemeal
And then there is the cost: The exclusions are reducing the amount of
revenue available for
current state (and local) programs, or better designed, more efficient
and meaningful tax
cuts. In this regard, the $200-million "alt fuels" debacle this
year looks more indicative
than aberrant. Consider some of the other holes in the state of Arizona's
important revenue systems, its sales and income tax structures.
Sales Tax Exemptions Arizona forgoes some $2 billion a year in consumer sales tax exemptions,
to annual estimates by the Arizona Department of Revenue. That is in addition
to the $1 billion it forfeits by not collecting on purchases of services
(see Table 2) and the
more than $2 billion from the "wholesale trade" provision that
purchases of "business inputs." By comparison the $2 billion
in consumer sales tax
exemptions approaches five years' worth of the collections projected under
new sales tax for improving K-12 education.
This sizable revenue giveaway
stems from a hodgepodge of isolated political decisions
since the 1980s and particularly throughout the 1990s.
Some of these 100-plus tax
decisions are longstanding and justifiable, such as the
exclusion of groceries from sales taxes, yet inefficient. The food exemption
poor Arizonans, but it also costs $280 million a year because it also
subsidizes many affluent
residents. Other exemptions serve plausible economic or social ends, but
at the cost of
dollars and code complexity. As for many other exemptions, they constitute
of tax breaks that are not easily justified. For example, Arizona's general
contractors get a
break on construction materials, and a mining machinery exemption cost
$17 million last
year. Agriculture breaks are on the books for breeding goats, animal vitamins,
and egg packing machines. Dozens more business interests have persuaded
to poke holes in Arizona's tax base. The state's 111 sales tax exemptions
include breaks for
stock sales ($ 96 million), airline food, purchases of lottery tickets
($ 12.7 million),
fitness club dues ($ 16.7 million), sales to golf booster groups and hotels'
purchases of soap.
Income Tax Credits Income tax credits also have grown significantly since 1992. Before
1993, no more
than 10 individual or
corporate reductions in tax liability were available from the state.
Now in 2001, 46 credits are available, covering everything from purchases
materials and donations of school sites to the installation of pollution
Granted, these concessions generate less impact than the income tax rate
in the 1990s (which have subtracted as much as $2.5 billion from what
would have been
the state's revenue stream). Still, the credits have poked holes in the
tax structure, with
little apparent consideration for the state's future. In 1999, the last
year for which figures
are available, individual and corporate income tax credits cost the state
at least $66
million (see Figure 6). In addition, more than $600 million of unused
credits remain available for future tax years.
Put All This Together, and
It Is Clear Another Shoe is Dropping
To be blunt, an outmoded tax
system is leaking hundreds of millions of dollars each
year that might otherwise be applied more systematically to investments
in the state's
future. No doubt, the forfeitures lack the visibility of cuts to the vehicle
and other levies in the 1990s, but the lost dollars count at budget time
just as much.
That being the case, two equally distasteful scenarios are plausible.
In one scenario, lagging
revenues unaddressed by tax rate increases could simply reduce Arizona's
invest in education, provide quality amenities or institute bolder tax
cuts. In the other
scenario, local governments and the state could each be forced to increase
tax rates repeatedly to support basic services or needed investments.
In this regard, the
Proposition 301 sales tax increase for education could presage a future
in which counties
and the state compete to hike increasingly burdensome levies. Even now
Hull's Vision 21 Transportation Task Force is considering recommending
a staged .75
percent sales tax hike to provide $21 billion in transportation funding
over the next 20
years. That would push the state-only sales tax to 6.3 percent and clearly
localities' use of the tax.
The Number of State Income Tax Credits Proliferated
in the 1990s and So Did Their Cost
Source: Arizona Department
Policies to Craft a 21st Century Tax System
How can Arizona update its
unbalanced and leaky tax structure to sustain
Modernizing Arizona's state
and local revenue system must focus on broadening
and diversifying a narrow, exemption-riddled tax base. Such adjustments
Arizona to regain a stable, rational tax system that keeps pace with a
and population. But other reforms make sense too. The best package will
raising some taxes and lowering others to give Arizona a more balanced
than it struggles with now.
Four strategies are recommended:
Close or limit tax exemptions and special preferences.
clean up is a good first step. Arizona lawmakers need to stop and reverse
proliferation of tax breaks that has riddled Arizona's tax base with more
than 100 new
holes in the last decade. These provisions have damaged the state sales
and income tax
bases. They cause most taxpayers to pay higher rates and create unequal
narrow industries or interest groups. They create complexity. They promote
agendas in ineffective ways. Worst of all, tax exemptions and various
loopholes cost the
state billions of dollars by reducing the tax base when the shift to a
e-commerce and demographic change are already challenging the tax system.
Lawmakers therefore should
reduce significantly the number of tax preferences that
exempt certain groups or certain categories of purchases from Arizona
industry concessions and special interest perks, such as the sales tax
health club dues, all require scrutiny. All such programs should be reviewed
eye to their true cost and whether their aims could be better achieved
in other ways. For
example, the state might better serve the social goal of its exemption
of food purchases
from sales taxes by taxing grocery sales and then targeting low-income
residents for an
income tax rebate. Such reform, extended to the 46 corporate and individual
tax exemptions on the
books, could begin to modernize Arizona's leaky, outdated tax
system. By widening the tax base and streamlining a messy system lawmakers
could generate significant new revenue without raising tax rates.
Widen the sales tax base
to include services.
Arizona also needs to rethink what it chooses to tax, if it is going to
continue to depend
heavily on sales taxes for revenue. As purchasing continues to shift from
services, it becomes imperative to safeguard the effectiveness of the
sales tax by taxing
sales in at least some of the fast-growing service sectors of the economy.
Granted, an extension of taxation
is a tall order since nobody likes new taxes. Even
Minnesota Governor Jesse Ventura failed to win a fight over taxing some
services. Nevertheless, fairness as well as fiscal health counsel a systematic
the sales tax combined with a substantial lowering of rates for both goods
Arizonans, in this vein, should
take a look at the list of exempted services and consider
removing some. One guide to selection: Adopt public finance experts' notion
consumption taxes should only apply to the final sale to the consumer,
and not to so-called
business inputs. On that theory, auto repair work, dry cleaning and haircuts
all enter the tax base (total net revenue gain could be $100 million)
but many professional
services, legal, accounting and advertising, for example, which cater
businesses, would remain untaxed. Such adjustments would minimize business
outcry, reduce the need for future rate hikes and protect the viability
of Arizona's sales
tax. They also could fund an across-the-board reduction in sales tax rates.
Join the "streamlined
sales tax" movement to improve collections in the digital age.
the leak of tens of millions of dollars of potential revenue to untaxable
sales is another reason to simplify and modernize sales and use tax administration.
Currently dozens of jurisdictions
in Arizona and 7,500 more across the country define
and tax thousands of products differently. This dizzying patchwork is
the main reason
Internet and catalog businesses say they cannot collect and remit sales
taxes to states
and localities. To remedy this confusion, Arizona should join the 38 states
are currently participating in a national Streamlined Sales Tax Project
model legislation and technology improvements to make it easier for remote
goods to remit sales taxes to states. Arizona has not been a participant
in this project. By
contrast, Utah Governor Mike Leavitt has been a national leader in this
having already signed reform legislation. Arizona should move now to update
most important tax for the online era, and use that work to spur a broader
of the sales tax as well.
Widen the use of impact
fees; raise some low rates.
Arizona needs to broaden its use of impact and user fees and raise some
"low" rates on certain taxes to allow reductions in "high"
taxes elsewhere. Figure 5 compares
Arizona's per capita tax burden to the U. S. average and suggests the
outline of an agenda.
Based on the figures presented there, Arizona should cut some business
taxes, such as the
corporate personal property levy, and raise its income tax rates. Such
an agenda would offer
tax relief to the job creation sector, while creating more balance across
Arizona also should expand
its use of user and impact fees providing legal ambiguities
can be worked out. In this regard, Vision 21 scores with its recommendation
state impose a $1,000 fee on the sale of new homes to help fund transportation
Imposing more of such fees would promote balance, while linking revenue
the growth of the state's economy.
Together, these reforms could
restore the resilience of an increasingly ineffective tax
system. If undertaken together, such changes would improve the stability
fairness of a structure that has grown rickety and overly complex. Of
course, tax reform
requires hard choices. Still, the work of such rebalancing is worth it,
for Arizona faces big
challenges. Vast economic, technological, demographic and political trends
the future viability of Arizona's state-local tax structure. If not confronted,
could undermine the state's ability to make choices and invest in its
Sources and Notes
Morrison Institute for Public Policy commissioned surveys representative
of the state
of Arizona and metropolitan Phoenix to provide new insights into the public's
perceptions for this report.
° In March 2001, O'Neil
and Associates conducted a statewide survey of Arizona employers.
A total of 800 employers were surveyed with half contacted at random and
from a list of business participants in the Arizona School-to-Work Program.
The margin of error is plus or minus 3.5 percent at a 95 percent confidence
° In April and June 2001,
Morrison Institute participated in
surveys of approximately 400 Arizona residents through the
WestTrack Market Monitor, a service of WestGroup Research.
The surveys have a margin of error of plus or minus 5 percent
at a 95 percent confidence level.
° In June 2001, Morrison
Institute also used the WestTrack
Market Monitor to survey approximately 400 residents of
metropolitan Phoenix. The survey has a margin of error of
plus or minus 5 percent at a 95 percent confidence level.
Science and Technology Indicator
Used on Page 25
R& D Research and
development expenditures per
$1,000 of gross state product (GSP)
SBIR Small Business
Innovation Research Program Awards
STTR Small Business Technology Transfer Program Awards
NAEP National Assessment of Educational Progress in
Science Test Scores
S & E Science and
SBIC Small Business Investment Company Program provides capital
for small businesses in start-up and growth situations
Technology (Tech) intensive
SIC Codes refer to the number of
establishments within a state that fall into one of the 28 3-digit SIC
codes included in the Bureau of Labor Statistics' definition of high-technology
industries. These SIC codes represent the industries
with the highest percentages of workers engaged in some form of
R& D activity.
Patents Issued refers
to the average number of U. S. patents of U. S.
origin issued during the three-year period 1996-8. The level of
patent activity is one measure of the amount of intellectual property
being created within a state.
Inc 500 companies: Inc.
magazine publishes an annual list of 500
privately held companies that are ranked on their revenue growth
over the last five years. The list provides a picture of where the
fastest growing, privately held companies are being created.
The 1999 Deloitte &
Touche Technology Fast 500 ranks the fastest
growing U. S. technology companies over a five-year period.
Companies qualify as technology companies if they produce technology,
manufacture a technology-related product, are technology
intensive, or devote a high percentage of effort to R& D.
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Randolph H., The New Economy
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New Global Economy Leaving State-Local
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of Morris K. Udall, University of Arizona Press, 2001.
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Workforce Training, From Jobs for
Workers to Workers for Jobs: Better Training for Minnesota,
Minneapolis, MN http://www.citizensleague.net/studies/workforce/report1.htm,
Clark, Terry Nichols, Kenneth
K. Wong, and Pushpam Jain, The Post
Industrial City: Why Is It and How to Get There?, Urban Affairs
Association Annual Meeting, Detroit, Michigan, April 26-29, 2001.
Collaborative Economics, Linking
the New Economy to the Livable
Community, The James Irvine Foundation, 1998.
Crow, Michael M., "How
Will Trends in Science and Technology
Affect the Development of Metropolitan Regions During the Next
100 Years?", Greater Phoenix 2100, Arizona State University, 2001.
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a High-tech Cluster, Milken Institute
Policy Brief, Number 17, August 8, 2000.
Florida, Richard, Competing
in the Age of Talent: Quality of Place
and the New Economy, R. K. Mellon Foundation, Heinz Endowments
and Sustainable Pittsburgh, 2000.
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Technology and Tolerance: The
Importance of Diversity to High-Technology Growth, The Brookings
Institution Center on Urban & Metropolitan Policy, 2001.
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Security: The Local Aspects of an
Aging America, The Brookings Institution Center on Urban &
Metropolitan Policy, 1999.
Frey, William H., Melting Pot
Suburbs: A Census Study of Suburban
Diversity, The Brookings Institution Center on Urban &
Metropolitan Policy, 2001.
Frey, William H. and Ross C.
DeVol, America's Demography in the
New Century: Aging Baby Boomers and New Immigrants as Major
Players, Milken Institute. 2000
Glaeser, Edward and Jesse Shapiro,
City Growth and the 2000
Census: Which Places Grew, and Why, The Brookings Institution
Center on Urban & Metropolitan Policy, 2001.
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and Albert Saiz, Consumer City,
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50 Page 51 52
The Honorable Carolyn Allen
Majority Leader, Representative, District 28
State of Arizona
Board of Directors:
The Honorable Betsey Bayless
Secretary of State, State of Arizona
Managing Director and President
DMB Associates, Inc.
President and CEO
Blue Cross & Blue Shield of Arizona
Jeffrey Chapman, pH D.
Director, School of Public Affairs
College of Public Programs
Arizona State University
Chairman, CEO and Publisher
Phoenix Newspapers, Inc.
Former Executive Director
Arizona League of Cities and Towns
Catherine Eden, pH D.
Arizona Department of Health Services
Chairman, Morrison Institute Board of Advisors
Vice President, Communications,
& Safety, Pinnacle West
Vice Chairman, Morrison Institute Board of Advisors
Attorney, Gammage and
The Honorable Randall Gnant
President of the Senate, Senator, District 28
State of Arizona
President, Jamieson and Gutierrez
Government Relations Director, Lewis & Roca
Honorable Jane Dee Hull
Governor, State of Arizona
Honorable John Keegan
Mayor, City of Peoria
Corporate Vice President and Director,
Strategic Business Services, Motorola IISG
Attorney, Salmon, Lewis & Weldon
Chair and CEO, BridgeWest LLC
Partner, Ortega & Associates, PC
A. J. Pfister
Vice President, Institutional Advancement
Arizona State University
Consultant, Gary Richardson Consulting
Anne Schneider, Ph.D.
Dean, College of Public Programs
Arizona State University
General Manager, SRP
Quentin Smith, Jr.
President, Cadre Business Advisors LLC
Vice President, Integrated Services
Martin Vanacour, DPA
City Manager, City of Glendale
Many people and organizations helped with the preparation of this report.
At the same time, the research and views presented here remain
solely those of Morrison Institute for Public Policy. Morrison Institute
bears full responsibility for all errors of fact or interpretation.
The contributions of the following people are gratefully acknowledged.
Julie Alvarado, Motorola | Dan Anderson, Arizona Department of Economic
Security | Bill Arnold, Arizona State University
David Berliner, Arizona State University | David Berman, Arizona State
University | Paul Bessler, The Del Webb Corporation
Thomas Bonnett, Public Policy Consulting | Judy Bontrager, Arizona Board
of Nursing | Donald Boyd, Rockefeller Institute of Government
Steve Doig, Arizona State University | Harley Duncan, Federation of Tax
Administrators | Christine Forester, Arizona Board of Regents
Bill Frey, Milken Institute | Deborah Froelich-Freeman, PinnacleWest Capital
Corporation | Patricia Gober, Arizona State University
Arturo Gonzalez, University of Arizona | John Stuart Hall, Arizona State
University | Dennis Hoffman, Arizona State University
David Longanecker, Western Interstate Commission for Higher Education
| Sharon Megdal, MegECON Consulting
Louis Olivas, Arizona State University | A. J. Pfister, Arizona State
University | Jim Rounds, Arizona Joint Legislative Budget Committee Leonard
Valverde, Arizona State University | E. H. Warren, Thomas, Warren &
MORRISON INSTITUTE FOR PUBLIC POLICY ° School of Public Affairs °
College of Public Programs ° Arizona State University
PO Box 874405, Tempe, AZ 85287-4405 ° (480) 965-4525 voice ° (480)
965-9219 fax ° www.asu.edu/copp/morrison
Morrison Institute for Public Policy conducts research which informs,
advises, and assists
Arizonans. A part of the School of Public Affairs (College of Public Programs)
at Arizona State
University, the Institute is a bridge between the university and the community.
Through a variety
of publications and forums, Morrison Institute shares research results
with and provides services
to public officials, private sector leaders, and community members who
shape public policy. A
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public officials, and public
policy experts assists Morrison Institute with its work. Morrison Institute
was established in 1981
through a grant from Marvin and June Morrison of Gilbert, Arizona and
is supported by private
and public funds and contract research.