ARIZONA POLICY CHOICES, 2001

FIVE SHOES WAITING TO DROP ON ARIZONA'S FUTURE

*PLEASE NOTE - Since this is a TEXT only document,Maps and some Figures are not included*

Morrison Institute for Public Policy
Arizona State University
College of Public Programs
School of Public Affairs

October, 2001

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 objective, in-depth
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 others.

Rob Melnick, Ph. D., Director, Morrison Institute for Public Policy
School of Public Affairs / College of Public Programs / Arizona State University

APC Research Team
Mary Jo Waits, APC Project Director, Associate Director, Morrison Institute for Public Policy
Mark Muro
Senior Research Analyst Morrison Institute for Public Policy
Tina Valdecanas
Senior Research Analyst Morrison Institute for Public Policy
Christina Kinnear
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

Cover Illustration by Brian Fairrington

This document is copyrighted ©2001 by the Arizona Board of Regents for and on behalf of Arizona State University and its Morrison Institute for Public Policy.


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
manufacturing?

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 it.

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 leadership," which
perceives new dynamics quicker and makes smarter adjustments faster than the competition.

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 the future.

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 the
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 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 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 from that
and other discriminating, highly mobile groups. Arizona risks losing out in the
worldwide scramble for skilled workers to improve its standing in the knowledge
economy.

The bottom line: Arizona must boost its
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
population offers.

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 represent
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 future economic
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 the
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. Many
of its leaders want to compete with California, Texas and Colorado as centers
of the knowledge economy. But just as many others are content to keep on promoting
Arizona as a perpetual construction machine or a retirement haven. This split
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 economy" ways.

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 high-tech
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
Technology 39%
Tourism 20%
Agriculture 13%
Manufacturing 8%
Real Estate 6%
Financial Services 5%

But They Think Arizona Will Be Known for Tourism and Real Estate
Tourism 38%
Real Estate 27%
Technology 19%
Manufacturing 6%
Agriculture 4%
Financial Services 2%


Lost Stewardship
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
Political Leaders with a Narrow View 33%
Weak Political Leaders 20%
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
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 leaders must
view themselves as 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. So
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 and its regions?


The Revenue Sieve
Arizona's tax system is old and full
of leaks.

Too many exemptions and too narrow a tax base hamper Arizona's ability to raise
revenues efficiently.

The proliferation of sales and income tax
credits in the last decade is one case in point.

Meanwhile, fundamental economic, technological
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
needs increase.


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
footloose talent.

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 the
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 unclear whether,
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 Arizona's
traditional resort-style retirement communities as their predecessors have.

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" by
building distinctive world-class communities with world-class amenities. To
do this, policy makers must understand precisely what the most discriminating
talent groups really want, and then deliver it with an authentic Arizona twist -
whether it be vibrant new streetscapes and good schools or more options for
continued employment later in life.

TABLE 1
Governments and Businesses Face Big Talent Shake Ups
Employer % Workers Under Age 35 % Workers Over Age 50
City of Phoenix 25% 27%
Pima County 21% 33%
Phoenix Union High School District 23% 34%
State of Arizona 27% 34%
Registered Nurses 14% 42%
APS 7% 24%
Raytheon Missile Systems 18% 31%

Source: Morrison Institute for Public Policy, 2001


FIGURE 1
Employers Say 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%

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."

Edward Glaeser
Harvard University


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 be anticipating
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 communities,
fast-growing economies and numerous options


These constituencies loom large because talent matters so much now. In this knowledge
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 Harvard economist
Edward Glaeser writes: "Skilled communities rise - unskilled communities fall."


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 or 20-
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 cosmopolitan
sensibilities and many employment options make them peripatetic pickers and choosers
among locations.


Of course, all of Arizona's talent is valuable in today's environment. Still, attracting
additional brains and hands is crucial because Arizona's homegrown talent pool is
not deep or broad enough for new economy success. Morrison Institute's recent statewide
survey of Arizona employers confirmed the importance and challenge of attracting talent.
More than half (52%) of the firms who recruit workers out of state rated poor
schools, as well as other perceived quality of life deficits, as "major barriers" to attracting
quality employees.


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 anchor
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 advantaged"
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 age. Between
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 2.7 million)
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 or
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, or 56
percent of them. Seniority alone implies that this half of the state's workforce comprises
the core of managers, supervisors and lead workers. But now, these critical producers
are entering the traditional downshifting years. In just 10 years, 500,000 Arizonans
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 care, the
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, 65 percent
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. Half of
Raytheon Missile Systems' employees are 45 or older. At APS boomers make up 70
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 of experienced
workers. Arizona's population is projected to increase by 57 percent by 2025,
but the pool from which the state draws its top employees, those aged 45 to 54, will
increase a comparatively modest 36 percent


FIGURE 3
In 20 Years, Young Workers Will Be Few in Comparison
to Older Employees and Retirees

Age Groups / Percent Growth 2001-2025

5-24: 43%
25-44: 33%
45-54: 36%
60+: 127%
All: 57%
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 of
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 migrants has
demanded a lot of Arizona. But their arrival has brought an influx of financially secure,
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. Better-educated
and increasingly affluent (see Figure 4), aging boomers are also healthier, choosier
and less group-oriented in comparison to previous generations. Amenities, aesthetics
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 patterns.

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 the congestion,
pollution and loss of open space affecting Arizona's retirement communities. Others
might avoid metro Phoenix's worsening "heat island," which has increased summer
nighttime low temperatures by 10 degrees F in the last 30 years. Other boomers may
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 experts, suspect
some empty nesters will be looking for more centrally located multi-age developments in
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 and theaters,
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 to seek
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, technical
and creative workers are also critical.
Unfortunately, Arizona now has fewer of the


FIGURE 4
Boomers are More Educated and Professional Than Their Parents
and Have Had Different Life Experiences

  Early Baby Boomers Born: 1946-1955,
Retire: 2011-2019
Boomer Parents Born: 1926-1935,
Retire: 1991-2000
Less than High School
14%
38%
College Graduate
27%
13%
Persons in Poverty
9%
6%
Women in Labor Force
77%
50%
Men with Professional/ Managerial Jobs
29%
29%
Women with Professional/ Managerial Jobs
83%
19%
Married Couple Household
64%
89%
Female-head Household
14%
10%
Non Family Household
19%
17%
Divorced or Separated
17%
7%
Never Married
11%
7%
Women Who Have Not Had Children
18%
12%
Women with Three or More Children
30%
55%

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 is twofold:
Arizona ranks only moderately well on measures of current workforce skill, and it
fares poorly on the sort of factors that young knowledge workers say affect their
location decisions.

In terms of present talent levels, Arizona cannot claim to have the critical mass of
knowledge workers that numerous commentators deem critical to economic success.
Granted, the state scores rather well on several measures of human competency. For
example, Arizona ranked 12th among the 50 states on the Progressive Policy Institute's
most recent measure of overall workforce education. This ranking, however, stems
from the educational achievement of adults (25-65 years old), many of whom have
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 boasted a
bachelor's degree or more in 2000 - an average education level. More disturbing, however, is
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 scientists
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. Similarly,
Arizona's per capita employment in high-tech, knowledge-intensive industrial sectors
ranks slightly below the national average. Arizona has 50 workers per 1,000 residents
working in knowledge-intensive sectors, compared to 207 in top-ranked Washington,
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 country.

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

2000
Rank
1991
Rank
Percent Change Rank
State
Estimated Percent of Population with Bachelor's Degree or More (2000)
Estimated Percent of Population with Bachelor's Degree or More (1991)
Percent
Change
44
46
6
Alabama
20.2
15.4
31.2
18
12
43
Alaska
26.0
24.5
6.1
37
20
49
Arizona
22.5
22.5
0.0
50
50
15
Arkansas
16.6
13.7
21.2
13
13
30
California
27.5
24.2
13.6
3
2
46
Colorado
33.4
32.2
3.7
4
4
24
Connecticut
33.3
28.4
17.3
19
33
2
Delaware
25.6
19.3
32.6
1
1
19
District of Columbia
41.1
34.4
19.5
28
32
18
Florida
23.4
19.5
20.0
29
27
38
Georgia
23.2
20.9
11.0
13
6
47
Hawaii
27.5
27.0
1.9
40
39
28
Idaho
21.1
18.4
14.7
15
14
34
Illinois
27.0
24.0
12.5
45
48
1
Indiana
19.9
14.7
35.4
38
43
10
Iowa
22.2
17.6
26.1
16
10
41
Kansas
26.9
25.0
7.6
49
47
26
Kentucky
17.2
14.8
16.2
46
36
44
Louisiana
19.5
18.6
4.8
35
31
27
Maine
22.8
19.7
15.7
5
11
9
Maryland
31.5
24.9
26.5
2
3
25
Massachusetts
34.9
29.8
17.1
31
44
4
Michigan
23.1
17.5
32.0
12
21
11
Minnesota
28.0
22.3
25.6
147
49
7
Mississippi
18.6
14.5
28.3
33
34
20
Missouri
22.9
19.2
19.3
19
28
14
Montana
25.6
20.5
24.9
23
19
40
Nebraska
25.1
22.7
10.6
48
41
49
Nevada
18.3
18.3
0.0
8
7
30
New Hampshire
30.0
26.4
13.6
6
8
22
New Jersey
31.1
26.2
18.7
24
24
33
New Mexico
24.5
21.6
13.4
11
16
16
New York
28.2
23.4
20.5
39
38
21
North Carolina
22.0
18.5
18.9
29
21
45
North Dakota
23.2
22.3
4.0
42
36
37
Ohio
20.7
18.6
11.3
43
30
48
Oklahoma
20.3
20.2
0.5
19
15
41
Oregon
25.6
23.8
7.6
32
39
13
Pennsylvania
23.0
18.4
25.0
22
18
35
Rhode Island
25.4
22.8
11.4
33
42
8
South Carolina
22.9
17.9
27.9
26
35
12
South Dakota
23.6
18.8
25.5
41
45
3
Tennessee
20.9
15.8
32.3
27
25
35
Texas
23.5
21.1
11.4
17
2
17
Utah
26.8
22.3
20.2
10
4
51
Vermont
28.3
28.4
-0.4
7
17
5
Virginia
30.2
23.0
31.3
9
9
32
Washington
29.5
26.0
13.5
51
51
23
West Virginia
14.1
11.9
18.5
36
28
39
Wisconsin
22.7
20.5
10.7
25
26
29
Wyoming
24.0
21.0
14.3
US Average
25.1
21.4
17.3


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 valuable workers
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 imply
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 have
documented the preferences of these vanguard workers (see Table 4). Henton says the
young itinerants gravitate to "vital centers" that provide opportunities to get together,
vibrant street scenes and quick access to urban greenspace. Clark believes they flock
to cities that are "entertainment machines" full of such things as parks, bohemian arts
scenes, and dense neighborhoods filled with exotic cuisine and nightclubs. Richard
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 were more
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 that a
third to a half of Arizona companies that recruit workers from out of state thought
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 workers with
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 neighborhoods
In-fill developments in areas of interest
Small-scale, highly urban developments
Residence: Customized diversity Single-family luxury homes on the fringe
"Convenient" suburban
Townhouses, condos (implies density)
Amenities: Sun, dry climate, proximity to ocean, Good schools if kids still at home
Performing arts
Open space/ natural environment
Efficient transportation
Lifestyle: Enlightened consumption
Entertainment options
Recreation:
Walking, hiking, biking, working out
Later Years:
"Now I can do what I really want." Self-improvement,
Different work and volunteer experiences,
"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
University areas
Cyber-districts
Revitalizing neighborhoods
Residences: "Industrial" loft spaces
Eccentric urban apartments
Convenient condos
Rehabbed housing
Amenities: Compact density
Meeting places
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 Age of
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 captures the
sort of distinctions younger cohorts make so sharply. In general high technology success
correlates with high amenity value in this analysis. Without exception Phoenix ranks
low on measures of "overall environmental quality," "overall amenities," "arts and culture"
and "coolness."


The upshot: The region's low amenity ratings represent a critical human resources problem.
Arizona does not yet have what it takes to win in the scramble for young professionals
- 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 innovations and
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. Arizona's
current immigrant population tilts to the low end of the education spectrum.
Specifically, the vast majority of Arizona's foreign-born immigrants arrive from Mexico,
where they commonly receive no more than nine years of education. Approximately four
percent of Mexican newcomers possess advanced university degrees. By contrast,
large flows of Asian and Indian immigrants, with far higher rates of college attendance
and with approximately 20 percent having advanced degrees, give a potent talent edge
to California.


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 new Silicon
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 and 1999.


Such immigrant-driven entrepreneurship highlights a potential boon from Arizona's
growing diversity, but also underscores continuing deficits. Census 2000 shows Arizona's
Hispanic population surged 88 percent since 1990, and that its Asian population grew by
67 percent. Nevertheless, Arizona's mix of people and skills remains less than optimal.
Latino education levels are comparatively low while fewer than 100,000 Asians (2%
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 skilled immigrants,
experienced boomers and young creative types throws into question the
quantity and quality of its talent base. In terms of quantity, the purely numerical
difficulty of replacing the state's retiring boomers from among the ranks of the
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, Denver,
Seattle, and Portland will continue to rise and greater Phoenix and Tucson could falter.


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 strengths in
attracting each of the future's three desirable groups.


In general terms, Arizona is growing quickly and that brings talent. According to Census
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 are increasing
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 percentages of
highly educated residents). Most notably, Arizona lies in the warm, dry West; its
economy provides easy access to services and work; and it attracts many immigrants.
These are important strengths in the search for human capital.


But as Arizona looks to the next phase of the scramble for talent stubborn uncertainties
intrude. Arizona clearly lacks the compact, walkable, heavily "amenitized" urban centers
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 makes
notoriously hot Phoenix hotter. Yet even here, Arizona possesses important edges in
the talent battles. Arizona's Sun Belt setting and proximity to California, for example,
remain powerful assets. Meanwhile, most of the state's deficits can be fixed relatively
easily. Policy makers retain substantial power to boost the state's appeal to desirable
groups by creating more vibrant, people-friendly urban scenes. Leaders can address
the state's education lags, and work to keep its older populations engaged. Should they
do so, decision makers may well find that Arizona's current demography is not destiny.

Policies to Win in the Scramble for Talent

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 preferences
of the three major talent cohorts. Cities seem to draw all of the groups. Good
schools attract knowledge workers with young families just as much as they do
upwardly mobile Latino career people. Interest in people-friendly streetscapes,
inclusiveness and gathering places seems to cut across the categories. Opportunities for
lifelong learning and retraining will also appeal widely to all three constituencies of
strivers.


Research also suggests the convergence of boomers' and young professionals' preferences
on other quality-of-place agendas, though data is thin on immigrants. Both
groups are full of "doers" who appreciate numerous venues for active recreation
throughout the city and region, including bike paths, nature preserves and mountain-bike
trails. Similarly, culture and the environment appear to be critical. Environmental,
open space and smart growth initiatives impress both well-educated groups, as do
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 emerge. A
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 compete for
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 cities are
engaged in amenity strategies that appear to be paying off.


Seattle, Portland and Austin have become centers for the development of information
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. Both have
aggressively included cultural initiatives in their public agendas. Seattle, home to
Microsoft, has been a site of cultural as well as technological innovations, especially in
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 to be
concentrating on lifestyle also. Chicago's main industry today, according to University
of Chicago economist Terry Clark, is entertainment, defined as including tourism,
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 a distinctive
urban lifestyle from architecture to schools and parks. For example, he proudly claims
to have planted more trees than any other mayor in history, around one million, as
part of a commitment to the environment and city aesthetics. He also asked the
Legislature for authority to take over the Chicago Public Schools and the Parks
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 on public
amenities, including education, as central to urban economic development. Others
include Richard Riordan in Los Angeles, Rudolph Guiliani in New York, Ed Rendell
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 altering the
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 look closely
at the labor supply implications of the boomers' aging. They may find organizations
face greater staffing challenges than they thought. Governments should be
even more urgent about replenishing a dwindling talent pool. Paul Light of the
Brookings Institution 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 that
today's labor market expects. There is no question, for example, that young Americans
are more highly attached to work than previous generations or that the most talented
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 to
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 leader in
developing a new vision of "productive aging" aimed at engaging older citizens
in meaningful work, lifelong learning and volunteerism.


In the workplace, Arizona businesses and governments must become far more adept at
attracting, retraining and retaining top-flight older workers. Instead of nudging
older workers toward retirement, employers should be retooling their workplaces to provide
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 learning"
extends richly into the later years. This too will unleash local talent and attract
migrating boomers.


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 and community
organizations with desperately needed human resources. In light of that, Arizona
institutions must find ways to capitalize on boomers' availability. Organizations with
traditional needs for help must determine what will interest a new brand of volunteer,
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 the
country, which are now recruiting older mentors. Corporations could develop phased
retirement options that give employees the opportunity to try out options for a new
career. And Arizona governments might help unlock boomer energy. Florida and
South Carolina, for example, have facilitated the relicensing of retired physicians to
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" designed to
guide millions of aging Americans into new roles strengthening communities through
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 economy,
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 Favor
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
population offers.


Arizona's fast-growing, layered Latino (1) population offers the state tremendous
promise - and a challenge. Even more than the aging of the baby boomers, the
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 18 in
both Phoenix and Tucson is now Latino. Within 20 years, Latinos will make up
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 future
prosperity in the state. Not only are Latinos growing in population, they are
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 or fail
to obtain the sound basic education needed for more advanced study. As a result,
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 jobs
continue to absorb tens of thousands of immigrants with little formal education.
But over the long-term many of Arizona's Latino citizens remain ill prepared to
prosper in an intellectually demanding knowledge economy. And that means the
state's higher-end jobs could go begging.


The educational uplift of Arizona's huge Latino population, therefore, must
move to the center of the state's agenda. Arizona's future prosperity depends
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.

FIGURE 1

Arizona is Becoming Far
More Hispanic*...Fast

1990 Population Breakdown by Race
and Ethnicity (Total 3,665,228)
Black 3%
American Indian 5%
Asian 1%
Hispanic 19%
White 72%

2000 Population Breakdown by Race
and Ethnicity (Total 5,130,632)
Black 3%
American Indian 5%
Asian 2%
Hispanic 25%
White 64%


The Young are Even
More Often Hispanic

1990 Population Breakdown Under
18 Years by Race and Ethnicity (Total 874,777)
Black 4%
American Indian 8%
Asian 1%
Hispanic 27%
White 60%


2000 Population Breakdown Under
18 Years by Race and Ethnicity (Total 1,366,947)
Asian 2%
Black 3%
American Indian 7%
Hispanic 36%
White 50%
Multiracial 2%


* Totals may add up to more than 100% because Census 2000 permitted individuals to report
more than one race.
Source: Census 2000


MAP 1
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 national percentage.


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 more Latino
state. Other minority groups' populations have also grown significantly in recent
years. The focus here is on Latinos because of their large share of the population, but
the concerns, ideas and recommendations that follow apply equally well to, and are
equally important for, any group concerned with economic status and success in the
new economy.


"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 dramatic. Between
1990 and 2000, Arizona's Hispanic population grew 88 percent, triple the figure for
white growth. Yet the statewide picture obscures local variations in recent Latino
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, with much
of the growth concentrated in central and south Phoenix neighborhoods.


Another trend is Latinos' youthfulness. In 2000, nearly 40 percent of the state's
Latino youth consisted of those who were under age 18 at decade's end. In Phoenix
and Tucson Latino children accounted for more than 85% of the 10-year growth of
the under-18 population. Hispanics now account for half of the K-12 population in
the two cities.


Such youthfulness has implications for Arizona's schools and workforce. Within 10
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 approximately
half of the homegrown, entry-level labor pool in the state's largest economies. Today's
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 mentoring
needed to succeed in a skills-based economy. Barely half of Arizona Hispanics, for example,
obtain a high school education. In part, this reflects that half of Mexican Hispanics
are foreign-born, and that the typical Mexican immigrant has completed less than
nine years of education, a figure that depresses aggregate statistics and obscures
the greater achievements of U. S.-born Mexican Americans. The deficit also stems
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 of
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 were
"proficient" readers, according to the National Assessment of Education
Progress (NAEP).


° 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 the standard"
for math proficiency set by the Arizona Instrument to Measure
Standards (AIMS).


° In 2000 just six Arizona Latinos took the advanced placement (AP) computer
science examination, and Latinos remain underrepresented in
all AP courses.


Hispanic participation in higher education is also a concern. Eight percent of Hispanics
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 1,835
bachelor's degrees from state universities in 2000, just 12 percent of those awarded,
though Latinos represented 25 percent of the state's population. Such figures are
one reason just over 20 percent of Arizona residents 25 years and older possess a
bachelor's degree - a figure significantly below the 25.2 percent regional average.


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 or engineering
in that year.


Such outcomes challenge the state with serious skill deficits just when success
requires more intellectual resources. Given this reality, Arizona and a substantial
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 investments in
its minority communities are visible already. Too frequently, Arizona's often foreign-born
Hispanics remain stuck in low-paying, low-skill jobs. Current Population Survey data
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 whites (31
percent versus 17 percent respectively). Conversely, just eight percent of Mexican
American men worked in professional or managerial positions compared to 32 percent
of non-Hispanic white males. As a result, Latino income levels in Arizona significantly
trail those of non-Hispanic white workers. In 1999 Mexican Americans earned hourly
wages that were 40 percent lower than those of non-Hispanic white men. Recent immigrants
earned 52 percent less.


The Latino Promise: Benefits of Being a State of Immigrants

There is another side to the story though.
Latinos and other minority groups represent a tremendous opportunity for Arizona
that other states do not have. Hispanics supplied Arizona's need for entry-level labor
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 assets,
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 dynamism.
They often come from families that have taken risks for better jobs and futures.


At the same time, the upward mobility of many Hispanics shows that their lack of
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 and
daughters of recent immigrants to Arizona - close much of the education gap. Second-generation
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 of Mexican
Americans in professional and managerial occupations jump from four percent and six
percent, respectively, for immigrant men and women, to 13 percent and 17 percent for
second-generation Latinos. Such progress underscores the potential for upgrading
skills rapidly.


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 achieved
comparable or superior economic outcomes. The incomes of college-educated, U. S.-born
Mexican American men rose 42 percent between 1979 and 1998, for example, when
collegiate white men's earnings rose just 14 percent. During the same period, second-generation,
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. By
the second generation almost 60 percent do. In Arizona, Hispanics now control
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 generated more
than $4.2 billion in sales. Such figures almost certainly underestimate Latino business
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 vital contributions
to the state's economy and offer the state a tremendous human resource for the
future, if the state can make good on its promises of equal opportunity and appropriate
assistance. Already Hispanic strengths are undeniable, and, with effective educations,
many immigrants' children will emerge as upwardly mobile, educated workers to help
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 and Arizona's
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 could
cramp their prospects and undercut the state's ability to prosper in an increasingly
demanding economy. Currently, Arizona companies can hire skilled workers from a
talent pool enriched by the in-migration of relatively well-educated workers from other
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 for companies
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 at
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 high-tech workers
needed here or elsewhere. Meanwhile, estimates by the National Science and
Technology Council project a nine percent decline nationwide between 1995 and
2050 in the percentage of 22-year-olds earning STE bachelor's degrees qualifying
them to enter the technology workforce. Associated in part with low Hispanic
attainment of these degrees, this projected decline in the rate of production of technology
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 talent to
fill jobs unfilled by Hispanics and others, Arizona's largest ethnic group may be
excluded from the state's best jobs.


Arizona invests almost nothing in
financial aid for low-income students
and families.
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 the
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 the Legislature
failed to address a January 2000 ruling that the state was discriminating against
students with limited English skills by scrimping on dollars for language instruction.
Such delays cannot continue. Arizona leaders need to place the educational interests
of Latino young people at the top of the state's agenda.


Doing so, moreover, will require reinventing the education system that currently fails
many Latinos. Today, most Arizona school districts still operate on an industrial-era
model designed for a homogeneous clientele. Uniform funding formulas, standard curricula
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 Hispanic
school population and other specific groups. High standards for all students
must be complemented by the freedom to customize educational activities to address
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 need.
Experimentation to find what works and support to implement the best practices
must replace rigid notions about how to teach. Banning bilingual education, for
example, serves no purpose because it eliminates a viable teaching option. In addition,
Latino students with substantial needs should benefit from extra funds for creative
curricula, "safety net" programs and family assistance. Charter schools and tools of
choice (such as vouchers) hold promise for Latino students because of the inadequate
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 them
first in Latino neighborhoods.


Arizona has long needed to commit to early childhood education, and it would especially
benefit Latino and other minority students. Numerous studies show that every year of
delayed entry into American education significantly reduces an immigrant child's
subsequent achievement. Therefore, a top priority for unleashing Latino talent is to
improve Latino children's access to quality preschool programs. Universal Head Start,
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 classrooms.
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. This discourages
schools from offering or housing these vital early programs.


Another way to improve the prospects for young Latino students and others is to
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 tutoring
designed exclusively for low-achieving first-graders. Individual students receive a
half-hour lesson each school day for 12 to 20 weeks from a specially trained Reading
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 work:
Numerous evaluations conclude that 82 percent of students who complete the full
series of lessons can read and write within the average range of performance of their
class. Follow-up studies indicate most Reading Recovery students also do well on
standardized tests and maintain their gains in later years. Although Reading Recovery
costs about $4,000 a student, a 1997 report to the Massachusetts Superintendent's Task
Force on Special Education showed that $3 invested in Reading Recovery saved $5 in
other costs.


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 obtains
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 academic
foundation, particularly in math and science, to every Hispanic youth. To that end the
state, cities and businesses should mount aggressive inner-city education initiatives to
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 funding
and curriculum formulas are not sufficient, given the poverty and limited
English proficiency with which their immigrant students often contend. Accordingly,
Arizonans should move to focus more money and innovation on places where the needs
are greatest, whether it be through existing school districts, charter schools, voucher
initiatives or new structures.


As to the directions of such reform, the National Science Foundation's Urban Systemic
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 curriculum
with careful assessment, professional development for teachers and investments in such
activities as tutorial programs, Saturday Academies, algebra study labs and summer
enrichment programs in science and technology. Graduation rates have increased in
USI schools, despite tougher requirements. USI, in which a number of Phoenix schools
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 or
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 models
for helping minority students. Many of these efforts engage elementary students in
thinking about and planning for college. Other programs build awareness of the


MAP 3
Gila River
Indian Community
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)
MARICOPA (41)
MESA USD (65)
LIBERTY ESD (41)
DEER VALLEY USD (71)
KYRENE ESD (77)
DYSART USD (51)
PEORIA USD (61)
CAVE CREEK USD (68)
MARICOPA (41)
CHANDLER USD (65)
GILBERT USD (70)
MARICOPA (41)
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)
ISAAC ESD (34)
RIVERSIDE ESD (30)
CREIGHTON ESD (41)
MURPHY ESD (26)
OSBORN ESD (40)
WILSON ESD (70)
TOLLESON ESD (39)

Maricopa County, Arizona
Map Area

Low: 32 or Less
Low/ Medium: 33 to 43
Medium/ High: 44 to 65
High: 66 or More

Data Source: Arizona Department of Education

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 in middle
or high school through mentors, exposure to collegiate role models and support for
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 way
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 by providing
webs of support. The Meyerhoff Scholarship Program at the University of Maryland/
Baltimore County, for example, complements full science scholarships with summer
"bridge" programs, group study, tutoring, mentoring and a close-knit community. In
the Meyerhoff program individual achievement becomes a group accomplishment.
A similar approach is now underway in Arizona, under the auspices of the newly
formed Metro Phoenix ENLACE, or Engaging Latino Communities for Education. With a
$1.5 million grant from the W. K. Kellogg Foundation and Houston Endowment Inc.,
Arizona State University expects to increase the number of Hispanics earning bachelor's
degrees by 50 percent over the next four years by creating a strong support system
for Latino youth. ENLACE will support
achievement in higher education through
college preparation and advising, mentoring, cross-age tutoring, parent and community
outreach and linkages to high schools.

But Arizona also needs to consider bolder initiatives. Two examples illustrate the
possibilities:

Guaranteed College Financial Aid
Washington state is removing the financial barriers that often impede minority and
low-income students' progress beyond high school. In the last decade Washington has
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 and
universities. Now, Washington is developing a program to reserve a GET "account"
and tuition credits for every Washington kindergarten student. Additional credits
will be deposited for students who pass fourth and seventh-grade assessment tests.
Likewise, the accounts create a means for employers to contribute to employees' college
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. Cal Grants
is an entitlement program. Every student who meets income criteria and graduates
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 institution.

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. He also
would offer 100,000 promising high school students $20,000-a-year fellowships contingent
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 the desired
outcomes. Targeted toward minority students and BAs in technical disciplines, a
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 System
of Georgia regarding "undocumented" students. Last September, Georgia's university
leaders declared that "there is no impediment to the admission of any academically
qualified student who attends or graduates from a high school in Georgia." Their purpose
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 anticipate minimal
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.

Finally, Arizona's congressional delegation needs to take the lead in obtaining federal
money to help defray the extra education costs associated with Arizona's (and other
states') status as gateways for Latino immigration. Earlier this year Arizona Senator
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 immigrants
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 same way?
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 cause whose
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 the
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 by
opening new retail stores, construction companies and high-technology manufacturing
plants - as Arizona has done - but if you aren't also increasing job
growth in advanced technology and advanced services, you won't really have a
knowledge economy.

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 is focused
on just a handful of electronic and aerospace sectors. Economic expert Michael
Crow of Columbia University recently warned that Arizona is not even among
the top 30 locations making investments in the kinds of science-based high-tech
sectors likely to produce rapid job growth in the future - sectors like biotechnology,
nanotechnology and artificial intelligence. Crow advises that the Greater
Phoenix region alone will not be able to build a diverse economy without at least
$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 the cheap
- 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 success
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 future -
one that depends not just on the traditional Arizona advantages of weather,
scenery, and so forth, but also emphasizes investment in cutting-edge sectors
and the development of a strong and educated labor force.



24 Arizona Policy Choices 2001: Five Shoes Waiting to Drop on Arizona's Future 24
24 Page 25 26
A Fuzzy Economic Identity 25
Quintile
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


FIGURE 1
Arizona is Barely Second Tier

Funding In-flows
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
Human Resources
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.
Outcome Measures
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 is Excelling

Michigan Shows Advances are Rapid in the Rust Belt


As we enter the twenty-first century, Arizona has a solid foothold in the
new economy - but the state is not well positioned to take advantage of the
"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 emerging
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 output. Using
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 clusters further
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 presence in
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 to the
Milken Institute. We may keep the factories, but we don't have the facilities and workers
that will decide what "the next big thing" is.


The Challenge of the Thinking Economy

As 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 second 100
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 economic
tasks that are dreamed up by knowledge workers elsewhere. In the words of Columbia
University's Michael Crow, Arizona must become a "knowledge producer" rather than
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 based on
the exploitation of ideas rather than material things. But at the same time, manufactured
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 new intellectual
products and services and the most recent technologies. Those areas strong in knowledge
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

FIGURE 2
Average Annual Growth Rate, 1989 to 1999 State Growth Rate 4.1%
2.5
2.0
1.5
1.0
.5

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 the Nation
(National Concentration
1.0)

High-Tech - 103,227

Environmental Technology - 13,425

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 the state's
share of jobs is higher than the national average and indicates a potential competitive strength
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 concentrated. With
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
right-hand quadrant.


Areas dependent on knowledge imports - manufacturing and processing centers, like Arizona
is today - will be stuck with the blue-collar, back-office parts of the new economy.

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
science-based technology.

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 Changing Your
Life, Work, Health and Wealth
. In a Fast Company magazine interview Enriquez
discussed his outlook. He explains the next Cisco Systems, the next Microsoft, is going
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 the
human genome. So it may be a computer company, but it may be a cosmetics company
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 - a
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 five general
trends. Understanding these is critical to positioning Arizona for the future.


° Movement away from a silicon-based electronics economy

° Increased rates of technical advance and revolutionary breakthroughs on
the smallest of scales (even molecular manipulation)

° The nanotechnology - the science of the extremely small - wave of technology
integration and societal transformation (artificial cells, artificial enzymes)

° Convergence of diverse fields of study and development, such as information
technology and biotechnology

° Genetically modified everything

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 smart people.
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 there
are really smart people around, where there's financing and where there's a future.

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 29, 2001:

It is now clear that the entire digital revolution is only the first phase of
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.


FIGURE 3
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

U. S. Average Salary = $29,245

Given the move to science-based technology, an economy like Arizona's, whose technological
realm is focused on manufacturing in just a handful of electronic and aerospace
sectors, is in line for tremendous "pain and gain cycles," warns Crow.

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, however,
this seemingly positive trend obscures a deeper, more worrisome concern: Most of
these new jobs don't pay well because most of the new jobs aren't about thinking.
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, travel and
reservation services, telephone call centers, and collection agencies. Where are the jobs
of the future? According to the Arizona Department of Economic Security, they're
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, most require
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 to
2008.) Only one of the 25 requires more than a bachelor's degree (general managers
and top executives), while two occupations require a bachelor's degree (elementary
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 per 1,000
residents compared to 207 in top-ranked Washington, D. C. and 64 in Colorado (see
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, scientific and
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. Arizona ranks
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 Arizona
merely as the perpetual construction machine or a retirement haven. (See Figure 4.)

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.

TABLE 1
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 United States

Rank and Total per Capita
Technology Manufacturing
Information
PST**
Education Services
Health Services
1. Washington, D. C. 207 1. New Hampshire 23 1. Washington, D. C. 14 1. Washington, D. C.124 1. Washington, D. C. 57 1. Minnesota 16
2. Massachusetts 94 2. Washington 23 2. Colorado 11 2. Virginia 36 2. Massachusetts 18 2. Massachusetts 15
3. Connecticut 72 3. Connecticut 19 3. Massachusetts 11 3. Maryland 33 3. Vermont 13 3. Connecticut 15
4. New Hampshire 72 4. Vermont 19 4. Nebraska 10 4. Massachusetts 32 4. Rhode Island 12 4. New Hampshire 14
5. Washington 66 5. Massachusetts 18 5. Virginia 10 5. New Jersey 28 5. New Hampshire 11 5. Rhode Island 14
6. California 65 6. Kansas 18 6. New Jersey 9 6. Colorado 27 6. Pennsylvania 10 6. Wisconsin 14
7. Vermont 65 7. South Dakota 18 7. Georgia 8 7. California 27 7. New York 9 7. Washington 14
8. Virginia 65 8. California 15 8. Utah 8 8. New York 26 8. Connecticut 9 8. Florida 14
9. Colorado 64 9. Minnesota 14 9. California 8 9. Illinois 25 9. Utah 8 9. Vermont 14
10. Minnesota 63 10. Arizona 14 10. Missouri 7 10. Connecticut 23 10. Iowa 7 10. Pennsylvania 14
ARIZONA 50 ARIZONA 14 ARIZONA 5 ARIZONA 19 ARIZONA .8 ARIZONA 11
United States 52 United States 8 United States 6 United States 22 United States 5 United States 12

* 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 culture and
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 and Glendale,
play to the past (" The West's Most Western Town" and "Arizona's Antique Capital,"
respectively), while Tempe, Chandler and others play to the future (" High-tech
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 the World").
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?" He points
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 ever.

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 tradeoffs. You
can decide which opportunities are good for your future and which are not.

The Challenge of Moving from Being Fortunate to Being Smart

In a lot of ways, Arizona is successful today because it has been lucky. Air conditioning,
the shift toward the Sun Belt, the whole trend of retirement communities, even
Motorola's decision to build a plant in Phoenix some 50 years ago: All these breakthroughs
came about in large part through luck. But Arizona can't rely forever on being
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 the good
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 "strategic principle"
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 technologies
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 control growth.
The city leveraged its university resources and the attraction of MCC and Sematech -
two major research and development partnerships formed in the 1980s - to
become a top-tier technology center. The three-year average annual growth rate in
per capita income for Austin is 9.6 percent, just slightly below San Jose's 10 percent.

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 and engineering
degrees, online population and access to venture capital.


FIGURE 4
Arizonans Hope Arizona Will Be a Technology Leader in the Future

Technology - 39%
Tourism - 20%
Agriculture - 13%
Manufacturing - 8%
No Answer - 8%
Real Estate - 6%
Financial Services - 5%

But They Think Arizona Will Be Known for Tourism and Real Estate

Tourism - 38%
Real Estate - 27%
Technology - 19%
Manufacturing - 6%
Agriculture - 4%
No Answer - 4%
Financial Services - 2%

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. Mayor
Kirk Watson and a visionary group of local business, academic and city leaders are
determined to make Greater Austin a world-class international region. They recognize
that the knowledge economy is a global economy where strategic advantage and
opportunities are often overseas. Lacking global experience, indigenous high-tech
companies are more apt to react to global pressures than to be strategically aggressive.


To move forward, Arizona must focus on strategic goals. Now is the time to start
thinking about the next Arizona economy and how we will prepare ourselves and our
communities for what lies ahead. We need a dialogue about what comes next and how
Arizona can create a future that works for everyone. The state's leaders must answer
the question:

What are three things that Arizona - or its largest region - is striving to be
great in?

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 commentator
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 with unparalleled
opportunities and an endless supply of competitors. High-tech hubs now dot the
globe, serving as outposts for big-brand corporations, generators of homegrown
companies and incubators for emerging industries like e-commerce, mobile communications
and biotechnology. In its July 2000 issue, Wired magazine showcased more
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 and Greater
Phoenix needs one that fits the times.

Metropolitan 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 economic
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 shines. Unfortunately,
those two factors don't produce the standing they once did. Milken Institute economist
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 that existing
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 from Kotkin,
DeVol and other highly regarded researchers present the question: What does the
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 questions
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 to
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 to promote
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 below.

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

7. Western heritage . . . . . . . . . . . 7.2

8. Low taxes . . . . . . . . . . . . . . . . . 7.0

9. Professional sports . . . . . . . . . . 6.8

10. Real estate booms . . . . . . . . . . . 6.0

11. Fast growth . . . . . . . . . . . . . . . . 5.4

12. Conservative politics . . . . . . . . 5.5


Women tend to favor the desert environment and tolerance images, whereas men favor
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 technology leadership
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 technology savvy.
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 tourism image.

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, western
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.

An economic identity will only transform an area if it is supported by wise decisions and
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 assets,
talented people and quality communities is one and the same. For example:

° World-class educational institutions build strong talent pools and provide
community amenities

° 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 the places
where today's breakthrough technologies and cutting edge organizations are born.
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 from
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, education,
and lifestyle assets. Map 1 shows the metro Phoenix assets. But it is much harder
to create a place where the highest brain power resides, ideas flow freely among public
and private institutions and businesses and people easily find the support they need to
develop desirable companies. Setting this dynamic in motion and sustaining it
requires genuine collaboration and significant investment. A short-term vision and
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


FIGURE 5
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


Start publicizing 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 to boost
education funding by nearly $460 million a year for 20 years. The three state universities
receive approximately 12 percent of the dollars annually for research and for infusing
new knowledge into the economy. Arizona's universities have worked together to identify
areas where they have foundations on which to build. Some of the areas are complementary,
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 to distinguish
themselves nationally in the areas of bio-science and biotechnology and information
science and technology. In addition, the universities are developing initiatives in
manufacturing, environmental engineering, environmental science, water sustainability
and optics.

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 cannot
think its work is done. This is just one-tenth of the annual amount that Columbia
University's Michael Crow suggests is necessary just for the Phoenix area. Moreover, even
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. Many places
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 can
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 being different.

Wisdom about strategic positioning from one of the world's most known business-school professors, Harvard University's
Michael E. Porter. Although Porter is talking to businesses, his advice is equally solid for states and communities in the
21st century.

Harvard Business Review, March 2001

Lost Stewardship

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 problems
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 the
states elected officials with narrow agendas. Other observers complain that CEOs
are sitting on the sideline and that government-by-ballot measure has increased
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 to
lack a civic involvement ethic, while political leaders seem to focus on re-election
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 changes.
Fewer people in Arizona than in some other states have deep roots here. In part,
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 matter
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 stewardship
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 do not
know what other leaders are doing or have a hard time linking their efforts with
those of others. Many of those leaders lack the big picture of where Arizona is
heading. Under these circumstances, the overall impact of strategies developed
by even the most innovative, aggressive leaders is limited because affecting the
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 lie in
emerging groups including entrepreneurs, Latinos and generation Xers. Very
often as well, civic leaders sit on the sidelines because no one has asked them to
be involved. Or, the civic involvement dictated by their corporate position fails
to connect with their true passions. For example, one 40-something Arizona CEO
said that he serves on numerous boards because it is traditional for his corporation
to do so, but his personal passion actually shows in the numerous weekends he
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 in this
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 or conservative,
but whether it is in tune with the new economic, technological and social challenges
facing our society. Specific communities and issues will require increasingly
innovative and place-specific answers. In the final analysis, a location remains
only as precious and essential as its inhabitants and leaders believe it to be.

FIGURE 1
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 - 11%
Single-Issue Political Leaders - 10%
No Answer - 10%

Perceptions of Arizona's Business Leaders
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 Answe
r - 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 states as
prime leadership material. Two frequent examples of this phenomenon are Mike
Welborn, former CEO of BankOne in Arizona, who was promoted to a national
position in Chicago, and John Oppedahl, former publisher of The Arizona Republic,
who went to San Francisco when Gannett Inc. bought Phoenix Newspapers Inc., the
Republic's parent company. The second idea is that the captains of new economy start-ups
do not assume the mantle of civic leadership in the same ways as the heads of traditional
industries. The third response is that Arizona's political leaders are missing in
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, the
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? Do we
empower 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 leadership
structure has asked them to step forward. Our leaders may be simply invisible, doing
important civic work in nontraditional realms or ways. Perhaps nobody quite knows
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 debates
need to take place to understand this complex phenomenon better.

° Are CEOs sitting on the sidelines?

° 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
than others.

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 has
meant that corporations must now compete on a world-wide basis, often with investments
in many different regions. CEOs of most large corporations have fewer roots
in a single region and make less time for regional civic affairs. The greatest impact
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, regional
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 by
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 more
than $100 million in revenues in 2000) and plenty of large publicly held companies
consider Arizona home. In addition, Arizona has significant divisions of some of
the world's most recognizable and important corporations including Motorola, Intel
and Honeywell.

Morrison Institute's look at CEO tenure among these companies shows significant
churn in the public companies but not the private ones. Comparing The Business
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
different situation.

° 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 companies. In
fact, Arizona's CEO stability among this latter group is better than in Georgia, another
fast-growing Sun Belt state that provides a good comparison. Georgia's private company
CEO turnover was 31 percent over four years, compared to Arizona's 22 percent. At
Georgia's public firms, CEO churn was slightly less than Arizona's: 42 percent
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 as
notable as Greater Phoenix Economic Council and many other bodies in such institutions as
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 problem.

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 and
issues that fit with their personal interests? A study of corporate community involvement
in the Austin area found that chief executives became involved with community organizations
and issues because of personal interests (64%) or they were asked (32%). On the
other hand, the problem may well be a mismatch in public and corporate expectations
for community involvement. The Austin study found that corporations think their
level of involvement is sufficient and meets community expectations, but that other
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 - membership
on dozens of community boards - and more as a process of doing - a set of actions.
One 40-something CEO in Arizona reported that he belongs to numerous boards because
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 leaders are
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 to predominate.

Under these circumstances, the overall impact of strategies developed by even the most
innovative, aggressive leaders is limited because the complex challenges facing
Arizona require focused, coordinated and integrated approaches to problem solving.
Thus, while it is essential to have leaders, those who lead in fragmented, disconnected and
uninspired ways can be ineffective or even detrimental to Arizona's overall well-being.


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 the Governor's
Partnership for the New Economy sought members, it was hard to locate potential
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 starting
and building a fast-growth company can be all-consuming. As one biomedical CEO
explained, "I care deeply about my region, but here are my priorities: building my
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 Foundation to
which they contribute stock. In Arizona, entrepreneurs have created a Social Venture
Fund, which uses a venture capital model for investing to improve community well-being.

TABLE 1
Arizona Propositions on the Ballot

Placed on Ballot by Legislature
# of Legislature Ballot Measures Approved
% of Legislature Ballot Measures Approved
Placed on Ballot by Citizens
# of Citizens Ballot Measures Approved
% of Citizens Ballot Measures Approved
Total on Ballot
Total Approved
% Approved
1912-1919
7
5
71%
47
28
60%
54
33
61%
1920-1929
19
6
32%
26
1
4%
45
7
16%
1930-1939
11
4
36%
18
5
28%
29
9
31%
1940-1949
11
7
64%
18
12
67%
29
19
66%
1950-1959
23
16
70%
16
3
19%
39
19
49%
1960-1969
19
16
84%
8
7
88%
27
23
85%
1970-1979
33
23
70%
6
4
67%
39
27
69%
1980-1989
46
32
70%
11
4
36%
57
36
63%
1990-2000
37
21
57%
35
19
54%
72
40
56%
Total
206
130
63%
185
83
45%
391
213
54%

Sources: Arizona Secretary of State, 1998; Morrison Institute for Public Policy, 2001


Generation Xers - and young adults generally - are developing their own leadership styles
that emphasize more direct action and one-on-one service. In a 1998 survey by pollster
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 humble.
Washington Post columnist E. J. Dionne Jr. also has noted the different outlooks of
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 political arena.
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 between the
Lion, the Scarecrow and the Tin Man and state policy makers are rooted in many
things. One is public doubt that much thought or brain power goes into making
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 respondents characterized
elected officials as leaders with a narrow view (33%) or single-issue leaders (10%)
(see Figure 1). An additional 20 percent of the residents felt that Arizona has weak
political leaders. Perhaps most important, the overall view of Arizona's political leadership
is quite negative. Indeed, the state's resi
dents seem to think that policy makers are
as heartless as the Tin Man. Only 16 percent of the respondents said they believe leaders
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 thinking puts
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 key policy
directions adds enormously to the perception of a legislature struggling to stay relevant,
especially when tackling strategic issues facing the state. In the last decade, various
courts forced the Arizona Legislature to address school finance, mental health care,
clean air and bilingual education. Tim Hogan, executive director of the nonprofit, nonpartisan
Center for Law in the Public Interest, said the center has had to ask the courts
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, the
Center for Law in the Public Interest sued the state in Roosevelt Elementary School
District No. 66 v. Bishop to force the Legislature to reform Arizona's school
financing system. In 1994 the Arizona Supreme Court ruled that the great disparities
in school funding between districts were a problem the Legislature had to
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 Supreme
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 taxes to
fund education, the Legislature delegated that decision to voters. Legislators placed
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, policy making
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 Lisa
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.


FIGURE 2
Types of Propositions Since Statehood

Proposition on Ballot by Operation of Law
(Legislative Pay Raises) - 3.34%

Popular Referendum - 8.74%

Constitutional Proposition by Citizen Petition - 15.42%

Statutory Initiative by Citizen Petition - 22.88%

Statutory Proposition by the Legislature - 4.88%

Constitutional Proposition 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 narrow
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, the
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 the opportunity
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 legislature can
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 and approved
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 the
initiative process itself is often, according to Washington Post columnist David Broder,
"manipulated by moneyed interests, often funded by out-of-state millionaires pursuing
their own agendas on a new frontier of American politics operating virtually without
public scrutiny."

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 that operated
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 with Native
American tribes, and the 1988 constitutional amendment making English the official
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 the following
history:

° 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 in
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, and an
appointed Redistricting Commission to determine legislative and congressional
districts, respectively.

° Propositions in 1992 and 1998 limited legislative discretion by requiring a
two-thirds majority in both legislative houses to raise taxes or fees and by
placing limits on the ability of governors and legislators to tamper with voter-approved
measures.

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 are growing,
especially as ballot measures are used to write tax laws or other complex legislation.
Suppose Alt-fuels had been a voter-approved initiative instead of legislation: What would
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 that most
people were baffled by it and worried about unintended consequences. Today many people
are expressing surprise at what was in the successful education finance initiative in
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 than originally
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 because there
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 organization
and institutions. In the 1950s, for example, the legislature referred a number
of constitutional amendments dealing with government structure to the ballot. Citizens'
initiatives dealt with employment issues such as workers compensation and social
security. During the 1970s the overarching theme was again government organization.
For example in 1972, technical constitutional amendments defined recall elections
and senate appointments. During the 1980s, most ballot measures were advanced by the
legislature and dealt with tax structure - an echo of California's Proposition 13.

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 and legislative
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 state tobacco
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 care. Also
in 2000 voters approved Proposition 301 to raise sale taxes to fund teacher salaries, university
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 elected officials,
and that gives the politicians one more reason to kick the next tough decision to
the voters.

Do We Need a New Job Description for Leaders?

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 and issues
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 or caring
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 about the
future. However, business leaders are also viewed as having narrow interests and
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. He says
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, and
ethnic community leaders, but even with these traditional forms of leadership, why
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. Derived
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 for action.
They have 360-degree vision, recognizing the interdependencies between the economy,
environment and social equity. Stewards operate at the center of the tough issues,
not on the edges. They are risk takers. They are passionate and energetic. They are people
of vision.


TABLE 2
Ballot Measures Dictating State Revenue Allocation 1990-2000

Year
Proposition Number
Purpose
Adopted
Type
Total* on Ballot that Year
1990
200
Earmarks state lottery money for Heritage Fund (parks and trails)
Yes
Citizen Initiative
12
1992
None
13
1994
200
Increases state tax on tobacco to use for health care, education, and research
Yes
Citizen Initiative
8
1996
203
Makes more low-income persons eligible to receive healthcare under AHCCCS; sets aside lottery funds for 6 programs
Yes
Citizen Initiative
8
1998
200
Establishes publicly funded campaigns; establishes surcharges and other fees and earmarks for campaigns
Yes
Citizen Initiative
15
303
Earmarks $20 million annually to purchase state lands for preservation
Yes
Legislative Referral
2000
200
Directs tobacco settlement money over the next 25 years to a Healthy Children, Healthy Families Fund
Yes
Citizen Initiative
13
204
Directs tobacco settlement money to be used for low-income health care (AHCCCS)
Yes
Citizen Initiative
301
Increases state sales tax and earmarks revenues for specific education purposes
Yes
Legislative Referral
302
Increases "tourist" tax to fund football stadium
Yes
Legislative Referral

* Excluding salary commission ballot measures.
Source: Morrison Institute for Public Policy

Policies to Keep the Shoe from Dropping

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 forms of
leadership. Three ideas are presented to add fodder to Arizona's leadership debate and
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 themselves as
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 self-interest
at a time when major challenges - such as Latino education, economic excellence and
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 committed
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 other things,
these leaders delivered federal approval and enormous amounts of federal funds to
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 by environmental
groups, which where major constituencies of both Udall and Babbitt. Moreover,
Udall was opposed philosophically to many aspects of the CAP and Lake Powell developments.
But both men put aside their personal causes to secure Arizona's future.
Republicans Goldwater and Rhodes had their own conflicts, but they never wavered
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 ideological
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. They must
have an unswerving devotion to positioning Arizona well in the new economy of the
twenty-first century.

End term limits, with some stipulations.
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 the challenges
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 drain" from
political leadership just as it must stem the brain drain from the state's businesses.

For Arizona to attract the best leaders, the state should consider "upgrading" the Arizona
Legislature by repealing term limits, increasing lawmakers' pay and moving to
nonpartisan elections. Such reforms would extend the state's commitment to enhancing
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 accountable to
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 may
provide a clue for how to do this. There, a commission formed by the Speaker of the
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 or growth
management in a collaborative way that respects existing local autonomy. Regional
collaboration should be promoted through incentives and options provided by the state
to local governments rather than by mandates. Moreover, regional collaboration should be
promoted across environmental, economic and social issues - not one issue at a time.

TABLE 3
Stewards Go Beyond Traditional Forms of Leadership.
They are Committed to the Long-Term Well Being of Places.

Traditional Leadership
One jurisdiction, one organization
Specific problem or goal
Single network
Commitment to an idea/cause

Regional Stewardship
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, Arizona tracked
with tax experts' suggestions that low rates maintained across a diversity of tax
bases (including income, property and sales taxes) provide the most stable revenue
yields in changing times. Now, however, cuts in income and vehicle license taxes and
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 and
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 compared
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 and the
state may each be forced to increase their sales tax rates repeatedly to generate
revenue for basic services. In the other, holding the line on rate increases may
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 close
dozens of the exemptions, credits and other tax breaks that cost the state millions
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 and
sales taxes. Such changes would not just ensure future revenue flows, but also
restore balance and fairness to the system.


FIGURE 1
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

Sales
Individual Income
Corporate Income
Other
Fiscal Year 1992
43%
35%
6%
15%
Fiscal Year 2002
53%
36%
8%
4%

Source: Arizona Joint Legislative Budget Committee


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 tax
squabbles of the Legislature, the challenges differ from the issues raised by Arizona's
comparatively light overall tax burden and heavy business assessments (see Table 1).
Moreover, budget surpluses generated during recent years of extraordinary economic
expansion have obscured the new threats. Nevertheless they may subvert the
ability of Arizona's tax mechanisms to raise adequate revenue for needed investments.
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 tax bases
(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 to other
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 of their
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 tax structures
behind. The state's continuing shift to a service

TABLE 1
Arizona Taxes Business Heavily and Households Lightly
Household and Business Tax Burden*, Fiscal Year 1995-1996

Household Taxes per $1,000 of Personal Income National Rank Business Taxes per $1,000 of Gross State Product National Rank
ARIZONA $66.51 32 $42.60 14
California 70.02 22 36.30 26
Colorado 64.10 36 31.60 39
Idaho 73.40 18 34.40 32
Nevada 73.70 17 31.00 42
New Mexico 76.38 9 38.00 23
Oregon 69.39 24 31.30 41
Texas 46.98 48 42.60 13
Utah 76.67 8 33.40 35
Washington 59.40 40 52.00 2
UNITED STATES 68.00 - 38.40 -

* 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 Policy.

 

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 for tax
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
sales taxes.

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 notably
new consumption patterns associated with the rise of a service-oriented, knowledge-based
economy have seen residents' spending go more to untaxed services and less to
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 income
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 alone, Arizona's
exemption of professional, business and personal services from the state's "transaction
privilege" (sales) tax cost the state at least $1 billion, according to the Arizona
Department of Revenue. Looking forward, public finance experts Donald Bruce and
William Fox of the University of Tennessee's Center for Business and Economic Research
forecast an additional two percent ($ 218 million) loss in potential Arizona state and
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 counties,
given how the state shares revenues with localities. The bottom line: Arizona's failure
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 revenue lags.


2. E-commerce continues to grow and bypass the state's tax system.

The crux of this problem is the inability of states and localities to collect the customary
sales tax on purchases made via the Internet. Although most such "remote" sales technically
are subject to taxes, the administrative hurdles to collecting them are daunting, with
the effect that states rely on voluntary compliance. Furthermore, a federal moratorium
on Internet sales levies precludes a state response. The result is that hundreds of
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 will likely
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 that
Arizona's e-commerce levels could reach $5.1 billion by 2003. That implies Arizona
could lose another 1.5 percent ($ 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 aging of
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' proportionally
heavy expenditures on untaxed food and relatively lower incomes could slow
revenue growth compared to population growth. The aging of the baby boom also
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 example, derives
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 income
exemption for taxpayers 65 and older and the $2,500 deduction from Social Security
or railroad retirement income. Typically the combined cost of those benefits exceeds $40
million annually, according to the Arizona Department of Revenue. On the consumption
side, older citizens spend more on health, medical services and prescription drugs that
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 be lagging
behind social change.


4. The coming crash of capital gains collections adds another variable.

Call it a hangover from the go-go stock market of the late 1990s. Regardless of the
description, Arizona will soon lose another source of revenue associated with rapid
economic change, namely the realization of capital gains from recent stock run-ups. This
sudden loss is the downside of the increased income tax collections that resulted from
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 in the
late 1990s, according to ASU economist Dennis Hoffman. Now, with the stock market
in a slump, Hoffman estimates that the state soon will experience a $100 million decline
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 subtracted
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 - promote socially
desirable ends. Nevertheless, even the most


TABLE 2
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 myopic.
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 two most
important revenue systems, its sales and income tax structures.

Sales Tax Exemptions
Arizona forgoes some $2 billion a year in consumer sales tax exemptions, according
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 exempts businesses'
purchases of "business inputs." By comparison the $2 billion in consumer sales tax
exemptions approaches five years' worth of the collections projected under the state's
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 benefits
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 a plethora
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 $17 million last
year. Agriculture breaks are on the books for breeding goats, animal vitamins, livestock feed
and egg packing machines. Dozens more business interests have persuaded lawmakers
to poke holes in Arizona's tax base. The state's 111 sales tax exemptions include breaks for
stock sales ($ 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 of construction
materials and donations of school sites to the installation of pollution control devices.
Granted, these concessions generate less impact than the income tax rate cuts initiated
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 corporate
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 license tax
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 ability to
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 their sales
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 Governor Jane
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 would affect
localities' use of the tax.


FIGURE 6
The Number of State Income Tax Credits Proliferated
in the 1990s and So Did Their Cost

Corporate Individual
1991 $607,000 12,885
1992 $960,000 6,937,000
1993 $2,100,000 6,834,000
1994 $6,500,000 7,353,500
1995 $31,100,000 29,143,000
1996 $20,000,000 30,822,000
1997 $13,700,000 42,940,000
1999 $11,992,000 54,590,000

Source: Arizona Department of Revenue



Policies to Craft a 21st Century Tax System

How can Arizona update its unbalanced and leaky tax structure to sustain
Arizona's prosperity?

Modernizing Arizona's state and local revenue system must focus on broadening
and diversifying a narrow, exemption-riddled tax base. Such adjustments will help
Arizona to regain a stable, rational tax system that keeps pace with a changing economy
and population. But other reforms make sense too. The best package will include
raising some taxes and lowering others to give Arizona a more balanced tax system
than it struggles with now.

Four strategies are recommended:

Close or limit tax exemptions and special preferences.

Some clean up is a good first step. Arizona lawmakers need to stop and reverse the
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 benefits for
narrow industries or interest groups. They create complexity. They promote extraneous
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 service economy,
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 taxation. Narrow
industry concessions and special interest perks, such as the sales tax exemption for
health club dues, all require scrutiny. All such programs should be reviewed with an
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 income
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 also
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 goods to
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 professional
services. Nevertheless, fairness as well as fiscal health counsel a systematic broadening of
the sales tax combined with a substantial lowering of rates for both goods and services.

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 that
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 might
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 primarily to
businesses, would remain untaxed. Such adjustments would minimize business sector
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.

Stopping the leak of tens of millions of dollars of potential revenue to untaxable e-commerce
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 that
are currently participating in a national Streamlined Sales Tax Project to develop
model legislation and technology improvements to make it easier for remote sellers of
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 enterprise,
having already signed reform legislation. Arizona should move now to update its
most important tax for the online era, and use that work to spur a broader rethinking
of the sales tax as well.

Widen the use of impact fees; raise some low rates.

Finally, Arizona needs to broaden its use of impact and user fees and raise some of its
"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 the system.

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 that the
state impose a $1,000 fee on the sale of new homes to help fund transportation upgrades.
Imposing more of such fees would promote balance, while linking revenue creation to
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 and
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 threaten
the future viability of Arizona's state-local tax structure. If not confronted, these changes
could undermine the state's ability to make choices and invest in its future.



Sources and Notes


Survey 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 half selected
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 level.

° 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 Terms
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 engineering degrees

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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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

Drew Brown
Managing Director and President
DMB Associates, Inc.

Robert Bulla
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

Sue Clark-Johnson
Chairman, CEO and Publisher
Phoenix Newspapers, Inc.

Jack DeBolske
Former Executive Director
Arizona League of Cities and Towns

Catherine Eden, pH D.
Director
Arizona Department of Health Services

Ed Fox
Chairman, Morrison Institute Board of Advisors
Vice President, Communications, Environment
& Safety, Pinnacle West

Grady Gammage
Vice Chairman, Morrison Institute Board of Advisors
Attorney, Gammage and Burnham

The Honorable Randall Gnant
President of the Senate, Senator, District 28
State of Arizona

Alfredo Gutierrez
President, Jamieson and Gutierrez

Chris Herstam
Government Relations Director, Lewis & Roca

Honorable Jane Dee Hull
Governor, State of Arizona

Honorable John Keegan
Mayor, City of Peoria

Cathy McKee
Corporate Vice President and Director,
Strategic Business Services, Motorola IISG

Richard Morrison
Attorney, Salmon, Lewis & Weldon

Kathryn Munro
Chair and CEO, BridgeWest LLC

Daniel Ortega
Partner, Ortega & Associates, PC

A. J. Pfister
Vice President, Institutional Advancement
Arizona State University

Gary Richardson
Consultant, Gary Richardson Consulting

Anne Schneider, Ph.D.
Dean, College of Public Programs
Arizona State University

Dick Silverman
General Manager, SRP

Quentin Smith, Jr.
President, Cadre Business Advisors LLC

Mary Upchurch
Vice President, Integrated Services
AT& T

Martin Vanacour, DPA
City Manager, City of Glendale

Acknowledgements
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 & Associates


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
nonpartisan advisory board of leading Arizona business people, scholars, 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.


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