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Bold economic acts vowed, small steps taken in RI

David Klepper and Erika Niedowski, Associated Press

PROVIDENCE, R.I. (AP) -- Rhode Island's unemployment rate has stayed stubbornly high for years. The state is losing population, and food stamp use has doubled since 2007. Taxes are high, roads are bad and housing is expensive.

This year, state leaders vowed urgent action. "Improving Rhode Island's business climate is the Senate's single highest priority this session," said Senate President Teresa Paiva Weed.

But while other states debate sweeping tax overhauls, craft big incentives to lure businesses or pass billion-dollar higher education expansions, Rhode Island lawmakers seemed to indicate much of the problem was because of public perception. They passed bills to reshuffle an economic development agency, renamed a small business loan program and created councils to study the economy.

Their search for solutions hasn't matched the gravity of the crisis or addressed its root causes, critics say.

"Rhode Island is in the midst of an economic stagnation, and we're spending time and energy focusing on bureaucratic restructuring," said Gary Sasse, the director of administration under former Republican Gov. Donald Carcieri who is now director of Bryant University's Institute for Public Leadership.

Karl Wadensten, a small businessman who sits on the board of Rhode Island's quasi-public Economic Development Corp., was more blunt. "What has anybody done?" he said of the state's efforts. "It's a lot of talk. I don't see anything on the ground."

Though lawmakers have passed dozens of bills that they say will help, few take significant steps to boost education or workforce training, lower the cost of housing, repair streets, reform the tax code or set up new incentives to help businesses expand. One bill puts a new name — "Rapid Rhody" — on an old small business loan program.

Even the bigger-ticket items are dwarfed by action in other states.

One major expenditure in Rhode Island was a $40 million increase on education, which will help avoid tuition hikes and meet the minimum goal of the state's K-12 finance formula.

Lawmakers in neighboring Connecticut, meanwhile, passed a $1.5 billion expansion for UConn intended to spur science, technology and math education and attract research investment. And New York Gov. Andrew Cuomo proposed tax-free zones around college campuses to attract new businesses.

Rhode Island legislators have spent much of the session debating the fallout from the spectacular failure of its last big economic development initiative: a $75 million loan guarantee given to former Red Sox pitcher Curt Schilling's now-bankrupt video game company, 38 Studios. The EDC, whose board approved the deal, has been in turmoil since 38 Studios' meltdown.

Part of the discussion has been whether to rename it and place a new Secretary of Commerce in charge. The proposals also call for a new mission statement, code of ethics and rules on incentives. The handful of lawmakers who voted against them say the changes won't amount to anything significant.

"We're just going to change the sign," said Rep. Joseph Trillo, R-Warwick.

Lawmakers have also been caught up debating a potentially disastrous default on the money the state owes for the 38 Studios debacle. The deal cost the state $112 million overall, including some $90 million owed in future years to the bond holders who financed the investment.

Reacting to public outrage, many lawmakers want the state to default on the bonds — which bond analysts say could tarnish the state's financial reputation and cost many millions in higher borrowing costs. Last week Moody's Investors Services downgraded the bonds, citing uncertainty over whether the legislature would honor the debt, and is reviewing another $2.1 billion for potential downgrades.

The state must move past the "pall" of 38 Studios or it could hamper the state's future economic development efforts, according to Laurie White, president of the Greater Providence Chamber of Commerce.

"We need to catch up and catch up rapidly," she said. "We cannot look backward and keep looking at everything through the lens of 38 Studios."

State officials defend the work they've done, and note the jobless rate has fallen — albeit slowly — to 8.9 percent, from its peak of 11.9 percent. Major tax cuts and significant investments in education or infrastructure are unrealistic given the state's financial problems, they argue, saying it will take many incremental steps to fix the economy.

"You don't pass the bill and see a difference the next day," said Paiva Weed, who was elected in 1992 and is in her fifth year in charge. "We didn't get a reputation for not being business-friendly overnight. ... It takes awhile."

The $8.2 billion House budget plan sets aside $4.5 million for new workforce training programs, authorizes $35 million in historic redevelopment tax credits and eliminates sales taxes on artistic works. Lawmakers have approved proposals to allow more companies to pay workers every two weeks rather than weekly to save administrative costs and provide unemployment benefits and child care assistance to individuals in job training programs. Chafee has launched an effort to review all 1,600 business regulations to eliminate onerous red tape. And Providence and the state hope the development of the so-called Knowledge District will attract high-tech companies.

In recent years, the General Assembly has also overhauled the income tax, state pensions and the fire code. This year the Senate passed a package of 25 economic bills.

But some existing programs to assist startups or small businesses have been underutilized or axed. The EDC's Wadensten notes the loan guarantee program under which 38 Studios got its $75 million still has over $43 million left. It has assisted only three other companies since 2010. The House budget plan would eliminate the program entirely.

Providence's Innovation Investment Fund, which offered $50,000 in seed money to startups if they met certain job creation benchmarks and agreed to stay in the city for a year, ended this year when the federal funds were exhausted.

"Capital support is really huge for small business," said Hannah Chung, co-founder of Sproutel, which makes interactive teaching toys for children with chronic illness. She said the program helped her startup locate in Providence.

Not nearly enough of the state's jobs are in health care, education and other growth sectors that pay good wages and are more resilient when the national economy slows down, said Saul Kaplan, a former EDC executive director who is head of the Business Innovation Factory. He points to cuts in state support for higher education as one reason.

"We've gone the wrong way in terms of making it a priority to create a 21st century workforce," he said. "We have a workforce that's mismatched with those industries and those jobs that are most likely to allow you to afford to live here in the Northeast."

He said solutions to the state's broader economic problems won't be found without a strong vision at the top.

"Leadership is the asset that's in most in need here," he added. "I don't think it's renaming the EDC. I think it's leadership that gets below the rhetoric."