Carolina Journal Weekly Report

December 23, 2002

In This Issue:
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Feature 1 - Brothers' Bumper Crop

Feature 2 - Free Trade in N.C.

Feature 3 - Dangerous Schools
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Feature 1
Brothers' Bumper Crop
Officials harvest Golden LEAF for soybean business

Two brothers, one the chairman of Golden LEAF and the other a director of a grain growers cooperative, own businesses associated with a $10 million foundation grant to build a soybean-processing facility and a related biodiesel fuel plant.

Under plans for the grant, announced by Golden LEAF on Aug. 14, 2002, the North Carolina Grain Growers Cooperative would operate the facilities, estimated to cost about $40 million. Plans for the operations apparently were worked out by Lawrence Davenport — chairman of Golden LEAF, the organization that receives half of North Carolina’s funds from the 1998 Tobacco Settlement — and his brother Charles Davenport, who was the founding vice chairman of the co-op and who still sits on its board of directors.

Competition with the co-op’s biodiesel project was thwarted Nov. 8 when Golden LEAF turned down Charles Jackson’s request for $215,000 to help launch a $2 million biodiesel fuel production plant. The co-op’s soybean plant would also be competing with two existing North Carolina companies that process soybeans.

In order to “develop value-added market opportunities for soybean and grain farmers,” the grain growers co-op was formed Sept. 29, 1999 by eight members of the board of directors of the North Carolina Soybean Producers Association. Charles S. Davenport of Greenville became vice chairman of the organization. According to corporation documents filed with the N.C. Secretary of State’s office, Charles Davenport is still the registered agent for the co-op, and the principal office for the organization is 591 Hwy 264 East in Greenville.

That address is also the address for J. P. Davenport and Son. Charles Davenport is also vice president of J. P. Davenport and Son, a Greenville-based agribusiness and farming company. He is a past president of the soybean association and is also one of only two North Carolina members of the United Soybean Board, a national industry association committed to expanding soybean markets.

His brother, S. Lawrence Davenport, is president of J. P. Davenport and Son. Lawrence Davenport was appointed to the initial board of Golden LEAF as one of House Speaker Jim Black’s five appointments. The total board is comprised of 15 members – five by the speaker, five by State Senate President Pro Tem Marc Basnight, and five by Gov. Mike Easley.

Golden Leaf was officially formed Oct. 22, 1999 — three weeks after the growers co-op. Since that time, Golden LEAF has made three rounds of grants. Through the N.C. Agricultural Foundation, the co-op has received grants in all three years.

Ahead of the Curve

• Stories in The Free Press of Kinston last week reported that leaders of the besieged Global TransPark believe their problems stem from poor marketing and public-information efforts. “We haven’t done a good job of marketing ourselves in the past,” said GTP interim Director Charles Edwards. Heavily subsidized by taxpayer funds, the GTP for years has been criticized for its inability to lure business tenants. GTP supporters viewed last week’s long-awaited opening of its 11,500-foot runway as a “rebirth,” according to The Free Press. Several state legislators have called for an end to state funding of the GTP. “The worst time to pull the plug on a project is when it’s at the bottom,” said Isaac Manning, who completed a business plan for the GTP earlier this year. Both Edwards and Manning blamed part of the project’s publicity problems on its original estimate several years ago to bring the region 50,000 new jobs.

• Attention on U.S. Sen. John Edwards’ future intensified last week, after former Vice President Al Gore announced he would not run for the presidency in 2004. The Gallup News Service reported Tuesday that Edwards received only 5 percent of support among Democratic presidential race contenders in its most recent poll of voters.

However, Gallup cautioned that history shows the Democratic Party runs highly competitive races for nominations, with nominees often not emerging from the pack until well into the campaign.

Feature 2
Free Trade in N.C.
Pain wanes while benefits accrue, professor says

Earlier this year, Business Round Table commissioned Dr. Roland Stephen of North Carolina State University and Dr. Thomas Oatley of the University of North Carolina at Chapel Hill to study the effects of free trade on the economy of North Carolina’s 8th Congressional District. Stephen, a professor of international and comparative politics at NCSU, presented the study’s results Dec. 16 at a John Locke Foundation luncheon.

Stephen characterized the situation in the 8th District as a classic political economy problem. “The costs [of free trade] fall in a concentrated manner and are highly visible. Benefits are more evenly distributed,” he said.

Stephen noted that the 8th District in particular, and North Carolina as a whole, are exposed to fluctuations in international trade and payments because of the preponderance of manufacturing and agriculture in the state’s economy. Forty percent of the population in the district is exposed to the effects of free trade, he said.

He also noted that the other 60 percent of the population, as consumers, benefit from free trade as their wages go further buying lower-priced imported products.

Increased free trade has had a significant impact on the 8th District in the last decade. However, despite job losses in traditional industries, the economy has recovered its losses in other sectors, Stephen said. Currently, 9,300 jobs in the 8th District are tied to international trade and payments, including jobs with airplane- and automobile-parts manufacturers that export their products both regionally and internationally and benefit from open markets, he said.

Better, higher-paying jobs, such as in distribution and marketing, are created as free trade is introduced, Stephen said. Stephen also noted that as wages increase in export-related jobs, the service sector of the economy will grow in response.

Although the 8th District lost jobs in the transition to free trade, Stephen said, the district’s integrated economy offset any losses for a net gain of 28,000 jobs in all sectors from 1993 to 2000.

The loss of jobs in the trade sector “is largely over,” Stephen said. The professor’s research indicates that North Carolina has already suffered most of the pain associated with the changing economy and the move to free trade.

Many facets of international trade and payments are ultimately tied to North Carolina’s economy, Stephen said. In the 8th District alone, 225 manufacturing companies that contribute to the world economy employ thousands of people. And foreign investment in North Carolina has increased by 30 percent in the last five years.

To illustrate the futility of the imposition of tariffs by the United States, Stephen told of a manufacturer of metal furniture in Hickory, N.C. who buys steel protected by U.S. tariffs, exports his products to dealers in London, and pays retaliatory tariffs in order to import his furniture to the European Union. The Hickory manufacturer’s plight should serve as a reminder of the impact of trade on North Carolina’s economy, Stephen said.

He emphasized that, as the United States’s economy becomes more integrated with the international economy, protectionism becomes more short-sighted and ineffective.

Capital Quotes

“We do it all the time.”

— John Williamson, manager of the N.C. Department of Transportation’s Right of Way Branch, discussing with The News & Observer of Raleigh the agency’s purchase of a house owned by Rep. Rick Eddins and his wife. The department recently agreed to purchase the property on U.S. 401 for $100,000 plus $30,000 in administrative costs. By acting early to buy the house, the state will forego federal funding that would have covered 80 percent of the cost of the purchase. The tax value of the property is $41,685.

“I have a lot of questions that the City is going to have to answer... They have some explaining to do.”

—Michael Handley, housing rehabilitation officer with the N.C. Housing Finance Agency, talking with The Daily Advance of Elizabeth City about Elizabeth City’s success in administering a grant to repair 10 houses damaged by Hurricane Floyd. Under the state grant, repairs were originally supposed to have been completed by Sept. 1, 2001. The NCHFA later granted an extension to March 1, 2002. So far, however, only three of the homes have been repaired, while work is under way on an additional house.

“It will be a significant change. There may be more people who will not be able to teach.”

— Brock Murray, N.C. Department of Public Instruction spokesman, talking to the Shelby Star about the impact of the new federal No Child Left Behind Act on lateral entry into teaching. Under lateral entry, a college graduate having a degree in a field other than education and work experience, becomes a teacher. The No Child Left Behind Act reduces the amount of time such teachers have to become fully certified from five years to three years. It also requires that a lateral-entry teacher have a degree in the field they would be teaching or pass a subject matter test.

Feature 3
Dangerous Schools
Deadline approaches for students to transfer

Persistently dangerous schools now stand to lose students. The school- choice option under the No Child Left Behind Act could present students with an out, and like the failing-schools provision, leaves it to parents and school districts to work out the details.

A “persistently dangerous” school in North Carolina has been defined as one in which five or more violent offenses were committed per 1,000 students during each of the most recent two school years, with the likelihood of crimes continuing in a third consecutive year. The number of acts per 1,000 students in North Carolina is now at 9.482 annually, according to the Department of Public Instruction. This is up from 6.083 per thousand in 2000-01.

Although a report in The News & Observer of Raleigh notes that the percentage of students reporting crimes has decreased overall in the United States, there is still a significant incidence of school crime nationally. The North Carolina DPI calculates that school violence in the state’s public schools increased by about 28 percent over 2000-01 levels.

The unsafe school-choice option requires districts to allow transfer to other, safer schools for two reasons: 1) when a school is “persistently dangerous,” and 2) when a student becomes the victim of a violent crime at school. The provisions outlined at www.ed.gov.offices/OESE/SDFS/unsafeschoolchoice.doc give guidance on these issues.

While there is no guarantee that the transfer school will the meet the adequate yearly progress requirement, the document indicates that transfers should take place to schools that are making adequate progress “to the extent possible.”

The timeline for full compliance with the unsafe school-choice option has been set for no later than July 1, 2003. States are directed to look for trends in the data, or patterns of incidents within the most recent school year, to determine whether a school should be designated as persistently dangerous.

Since states develop the criteria themselves, and then decide which schools fall into the unsafe category, they may be reluctant to make the call. North Carolina revised its own report on acts of violence in schools shortly after it was initially released. The Department of Public Instruction said single incidents caused dual reporting, and revised the figures downward.

A new process for collecting school crime and violence data was introduced by North Carolina’s State Board of Education in November 2002. The new process and report are called Disciplinary Data Collection.

The system combines and replaces two previous reports, the Suspension and Expulsion Report, and the Annual Report on School Crime and Violence.

Three new offenses have been added to the list of 14 standing acts of violence. These are serious enough to be reported to law enforcement.

The new crimes that principals must report are bomb threats, possession of alcoholic beverages, and burning of school buildings. These are added to possession of a weapon (other than a firearm or powerful explosive), possession of a controlled substance, assault with or without serious injury or a weapon, sexual assault, sexual offense, possession of a firearm, robbery with or without a weapon, taking indecent liberties, rape, death (by unnatural causes), and kidnapping.

On The Cutting Edge

Unemployment Insurance

• Chile, the first country in the Western Hemisphere to set up a social security system, and the first country in the world to reform it using individual investment accounts, has again broken new ground by becoming the first country to use individual accounts in an unemployment insurance system.

The system now being implemented builds on Chile’s success with individually owned retirement accounts. Workers will pay 0.6 percent of their wages into individual accounts, while employers will pay a 2.4 percent payroll tax divided between individual accounts and a “joint account.”

The accounts will be administered by the same private pension funds that manage Chilean workers’ retirement accounts, and the funds will invest conservatively in a variety of securities.

The individual account will be in the worker’s name and will not be paid out until the worker becomes unemployed or retires.
Unemployed individuals will be able to draw 30 percent to 50 percent of their previous wages for up to five months. The joint account will provide benefits to unemployed people who exhaust the balances in their individual accounts.

Unlike the U.S. unemployment system, Chileans will be able draw the funds out even if they quit or were fired from their last jobs. This will allow workers more flexibility in changing jobs.

Workers with money left in their unemployment-insurance accounts at retirement will roll the money into their individual social security accounts.

This greatly changes job search incentives. Workers who find jobs more rapidly will build up a larger retirement nest egg. With the unemployment-insurance account appearing on the same statement as the social security account, workers will clearly see the connection between rapid re-employment and retirement funds.

Researched by William B. Conerly as “Chile Leads the Way with Individual Unemployment Accounts,” Brief Analysis No. 424, Nov. 12, 2002, National Center for Policy Analysis.

Bankruptcy

• Personal-bankruptcy laws affect small firms’ access to credit. When a firm is unincorporated, its debts are personal liabilities of the firm’s owner, so lending to the firm is legally equivalent to lending to its owner.

If the firm fails, the owner has an incentive to file for personal bankruptcy, because the firm’s debts will then be discharged and the owner is obliged only to use assets above an exemption level to repay creditors. The higher the exemption level, the greater is the incentive to file for bankruptcy.

Data from the 1993 National Survey of Small Business Finance show that the supply of credit falls, and the demand for credit rises, when noncorporate firms are located in states with higher bankruptcy exemptions.

If small firms are located in states with unlimited rather than low homestead exemptions, for example, they are more likely to be denied credit, they receive smaller loans, and interest rates on those loans are higher.

Small corporations are also subject to credit restrictions, and lenders to small corporations often require that the owner guarantee the loan or give the lender a second mortgage on his house. Lenders often disregard a small firm’s organizational status in making loan decisions and primarily consider size.

The findings show that laws exempting assets from bankruptcy can harm the small businesses they are meant to help. Small businesses are the primary job engine in the U.S. economy despite their natural volatility. More than 13 percent of U.S. jobs in 1995 were in firms that did not exist before 1990, and more than 12 percent of jobs in 1990 were in firms that had ceased to exist by 1995.

Reported in NBER Digest, November 2002; based on Jeremy Berkowitz and Michelle White “Bankruptcy and Small Firms’ Access to Credit,” NBER Working Paper No. 9010, June 2002, National Bureau of Economic Research.

401 (k) Plans

• For the first time in nearly 20 years, many employees are abandoning 401(k) retirement plans for a variety of reasons, analysts report.

In the past year, the average participation rate fell 2.5 percentage points to 75 percent, according to a survey from PlanSponsor.com.

Workers’ savings rates have also fallen for the first time, dropping to 7 percent from a peak of 8.6 percent in 1999, according to the consulting firm Spectrem Group. The drop in worker participation was even more dramatic among large plans, where participation fell nearly 6 points from 2001 to 2002, to 73.7 percent.

The new trend is a source of great concern to plan sponsors, who fear that employees will not have adequate financial resources when it comes time to retirement.

Explanations for the falloff include an aversion to risk in the current stock market, job layoffs, and shaky personal finances, as well as escalating health insurance premiums that are reducing workers’ disposable income.

Reported in USA Today, 11-14-2002.

Coming Up

• On Jan. 27, the John Locke Foundation will welcome renowned author and reporter Bill Gertz to speak at a special luncheon. The national security and defense writer has just released his new book, Breakdown: How America’s Intelligence Failures Led to September 11.

Gertz is an internationally recognized newspaper reporter who has specialized in writing major stories on a wide variety of defense, intelligence, and international security issues.

A veteran defense writer who specializes in coming up with inside stories, often based on classified documents, he is widely viewed as one of the best reporters in his field. His sources within government are extensive. Gertz has broken a number of stories with international implications. As former CIA Director R. James Woolsey put it, “When I was DCI [Director of Central Intelligence] Bill used to drive me crazy because I couldn’t figure out where the leaks were coming from. Now that I’ve been outside for two years, I read him religiously to find out what’s going on.”

For more information or to pre-register visit the new John Locke Foundation Website at http://www.johnlocke.org/events/event.html?id=3D7 or contact Kory Swanson or Thomas Croom at (919) 828-3876 or events@johnlocke.org.

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