Exploring and Engaging

By Dane Stangler

From the moment Ewing Kauffman established his philanthropic foundation, he wanted to do things differently.

He had already pushed out the frontier of innovation within baseball as owner of the Royals, and had innovated his way to a billion-dollar multinational company. His philanthropic work would similarly reflect that innovative spirit.

One of his most important points of guidance for the Kauffman Foundation was his desire for it to operate as an “active” foundation, rather than passively reacting to grant proposals and just writing checks. Our work in the Research & Policy department—and our ambitions for the coming years—reflects that spirit of action.

In the two areas on which Kauffman focuses—entrepreneurship and education—there are plenty of other organizations involved in research and policy in various forms. The principal seat of research in both areas tends to be academia, and Kauffman accordingly funds university research in different ways, from specific projects to more open-ended support of emerging scholars. We also work, at the other end of the spectrum, with think tanks and other advocacy groups that are intimately involved in the policymaking process.

In both of these cases, partners tend to approach us with their own ideas—ideas that, more often than not, are remarkably good. But, the reason that Kauffman has its own Research & Policy department is that, true to Mr. Kauffman’s dictum, we want to ensure we have our own in-house cognitive capabilities that enable us to be “active.” What does that mean, and what does it look like?

Across many different issues, philanthropic foundations are well-positioned to operate between universities, think tanks, and governments. Foundations often are celebrated as society’s “risk capital,” but how do foundations actually fulfill that? By playing the synthetic role: Foundations can and should be the places where new questions are kicked around, information is synthesized, and new ideas are generated. Foundations must occupy the ground between fundamental academic research, policy advocacy, and program implementation. They must synthesize the findings and insights from each.

Here are three areas where the Kauffman Foundation is attempting to play that role:

• Data. Good decisions cannot be made in the absence of good data, and in both education and entrepreneurship, there is massive room for advances in data collection. We continue to work with an array of partners on innovations in data sharing and, when possible, creating new kinds of datasets. Two examples of data platforms we have developed, and that have led to a range of studies by other researchers, are the Business Dynamics Statistics and the Kauffman Firm Survey.
• State and Local Policy. Despite the resources and attention devoted to it by the federal government in recent years, education remains a state and local issue. Entrepreneurship, too, is largely a local phenomenon. Thus, engaging state and local policymakers is essential to our ability to expand educational attainment and entrepreneurial opportunity. The challenge for philanthropic foundations is to engage with policymakers without compromising their neutrality and becoming identified with a partisan agenda. You will read more about just two of the many ways we are doing this: the Kauffman Entrepreneurship Policy Digests and our annual Mayors Conference on Entrepreneurship.
• Programmatic Research. Over the past several years, entrepreneurship education and training programs—in part instigated by Kauffman funding—have exploded all over the country, and indeed the world. What has not accompanied this growth is a systematic way to track outcomes and effectiveness. We are working with different partners to fill this gap and enable entrepreneurs and others to learn from these experiences. Studies like this one on the burgeoning St. Louis startup ecosystem is one example.

These represent some of the new and emerging priorities for our Research & Policy department. They are part of our attempt to be “active,” to instigate innovation in different parts of the economy and society, and not to sit complacently within the privileges afforded by philanthropy.

The essays that follow offer more insights into our work from a variety of perspectives—how we are engaging in local entrepreneurship policy activities to a partner’s views on state incentive policies and a researcher’s findings on how teacher pension plans can impact teacher quality.

Follow Dane Stangler on Twitter: @danestangler

How Research Can Inform Policy

By Jason Wiens, Policy Director in Entrepreneurship, Kauffman Foundation

If states are our nation’s laboratories of democracy, we can think of America’s cities as the Petri dishes.

Diverse in size, location, assets, and governance, U.S. cities are perfect proving grounds for policy innovations that can spur entrepreneurship and economic growth.

At the Kauffman Foundation, our research is increasingly pointing to the importance of location to entrepreneurship. Even in a digital and hyper-connected world, entrepreneurs are locally embedded and responsive to the distinct environments in which they exist. That means there are a set of city- and regional-specific policies that may impact entrepreneurs, which need study, thought, and elucidation.

Broadly, more research is needed to better understand the regional ecosystem of entrepreneurship and how it evolves. We are seeking to find out how entrepreneurs are connected, or not, to one another in their communities and what role local resources play in promoting entrepreneurship. 

We also are conducting research on economic development strategies and how these policies either support or fail to support entrepreneurs. And being engaged in research, we want to know what additional methods of data collection can be employed to inform future work.

With our expertise and resources, the Kauffman Foundation is uniquely positioned to pursue these questions and translate our findings into actionable policy prescriptions.

Already, our research has looked at the geography and characteristics of fast-growing firms. Importantly, this work found that innovative, fast-growing companies are located in cities across the country in a variety of sectors and that the presence of a highly skilled workforce is more significant to growth firms than commonly assumed assets like the presence of venture capital investment or high-quality research universities.

This implies that policies to develop and attract talented labor are especially important when it comes to local and regional economic growth.

Other studies are dispelling myths about which cities are hubs for technology startups – those companies known for growth and innovation – and the roles universities, entrepreneurship programs, and local governments play in their development.

“Research universities and other post-secondary institutions are important for metropolitan entrepreneurship, but are not the sole cause in spurring such activity. Instead, the most fertile source of entrepreneurial spawning is the population of existing companies, which has implications for economic policymaking and economic development strategies.”

We also are beginning to explore how local entrepreneurship programs influence startup education and networking. An initial project surveyed participants in 1 Million Cups (1MC) Kansas City, which is a Kauffman program designed to engage, educate, and connect entrepreneurs. Our researchers studied participants’ networks to learn how entrepreneurial communities form and grow. Dozens of cities host 1MC and this research can be replicated in those locations to provide unique insights while also allowing us to draw broad conclusions.

The findings reinforce the importance of a local support system. Entrepreneurs follow local entrepreneurs on social media more than the well-known national “gurus,” for instance. We also learned important insights about how entrepreneurs are connected not only to one another, but also to support organizations.

Notably, the survey results indicate the existence of different programs and events that engage entrepreneurs at different stages of the entrepreneurial journey—a sign of a healthy ecosystem. We look forward to expanding on this research and sharing lessons with policymakers as we learn them.

As part of our continuing interest in immigrant entrepreneurship, Foundation-funded research on the geographic distribution of high-tech immigrant entrepreneurs found that 80 percent of immigrant high-tech entrepreneurs operate in the twenty-five largest U.S. metropolitan areas, compared with just 57 percent of their U.S.-born counterparts. This clustering has implications for regional economic development and cities hoping to attract foreign entrepreneurs.

The unique influences of location necessitate policy engagement with municipal leaders so that mayors are equipped with data and research-backed ideas to support entrepreneurs. We are cultivating relationships with local policymakers to arm these leaders with the information and policy tools they need to foster entrepreneurship.

For instance, the Kauffman Foundation collaborated with Kansas City Mayor Sylvester James to convene a gathering of mayors and city leaders from across the country to discuss their role in supporting entrepreneurship.

This first-ever Mayors Conference on Entrepreneurship in 2013 illuminated the distinction between small businesses and young businesses and served as a forum for discussion of ideas and policies that can help young businesses grow.

The second Mayors Conference, held in Louisville, Kentucky, and hosted by Louisville’s Mayor Greg Fischer, focused on the “Maker Movement.” Meanwhile, many who attended the first Mayors Conference also joined city and state leaders from around the country for a conference at the Foundation focused on incentives that can jumpstart entrepreneurship at the state and local levels.

Mayors have been energized by these events and have expressed a hunger for more data and policy ideas. To meet that need, we are distilling our research into short educational policy briefs specifically designed for policymakers. We also are exploring partnership opportunities with organizations that can expand our reach and magnify our impact. With more than 700 incorporated cities and towns in the United States with populations greater than 50,000, the value and necessity of partners are clear.   
 
Federal and state laws certainly also have an impact on an entrepreneur’s business. Our role in learning about state and national policy challenges will continue, as will our efforts to educate policymakers in Washington, D.C., and state capitals. However, the importance of local policy combined with the opportunity to help cities become more supportive of entrepreneurship compels us to move in this direction.

Follow Jason Wiens on Twitter: @JwIeNz

By the Honorable Elizabeth Kautz, Mayor of the City of Burnsville, Minnesota, and former president of the U.S. Conference of Mayors (2009-2011)

Mayors across the country are capable of leading city efforts to build an environment and structures of support that allow entrepreneurs to flourish. That was the message mayors and local officials from nearly two dozen cities heard at the first-ever Mayors Conference on Entrepreneurship hosted by the Kauffman Foundation in November 2013.

As co-chair of the U.S. Conference of Mayors task force on Small Business, Franchising and Entrepreneurship, I have been delivering that same message to my mayoral colleagues throughout the United States. Mayors are receptive and eager to boost entrepreneurship, but they need guidance to pursue the most effective actions.

Local leaders often have sought to help entrepreneurs by building incubators, offering incentives, or investing public monies in entrepreneurial ventures. Pursued with good intentions, these tactics, unfortunately, frequently fail to produce the desired results.

Entrepreneurs may need office space and capital, but their fundamental needs often are more relational in nature. Entrepreneurship is personal and it is local, which means entrepreneurs need relationships with other entrepreneurs who can support and mentor them along the entrepreneurial journey.

Mayors are in a position to facilitate connections and champion entrepreneurial efforts that provide real support to entrepreneurs. These actions may seem soft, but their impact can be profound as entrepreneurs begin to be embraced by the city in which they live.

Just as entrepreneurs learn from one another, so do mayors. The Kauffman Mayors Conference on Entrepreneurship facilitates collaboration and conversation, which continues through the U.S. Conference of Mayors network.

Entrepreneurs enrich our communities with their creativity and generate economic opportunity for others. I have seen the impact entrepreneurs make in Burnsville and am helping my mayoral colleagues understand how to foster entrepreneurial transformation in the cities they lead.

By Jeff Chapman, Director, Economic Development, State Fiscal Health and Economic Growth, The Pew Charitable Trusts

States spend billions of dollars a year on tax incentives meant to encourage businesses to create or retain jobs and make investments. When designed and managed well, these credits, deductions, and exemptions can strengthen a state’s economy.

But research by The Pew Charitable Trusts shows that lawmakers often approve incentives without knowing their potential cost or whether they will work. State leaders need better information to avoid unexpected budget challenges, identify programs that are effective, and modify or end programs that do not achieve their intended purpose.

Know Your Goals

To determine how well an incentive is working, it is essential to know its aim and specific goals. Yet many programs are enacted without clear and measurable objectives. When Nebraska’s legislative audit office set out to examine the state’s rationale for major economic development tax incentives in 2012, it found vague and overbroad statements of intent, such as, “encourage new businesses to relocate to Nebraska.” Since lawmakers had not provided guidance on the economic benefits they hoped to see or how much they were willing to pay, the auditors concluded that “any activity could be deemed a success and any cost acceptable.”

Motivated by this report, Nebraska is putting together a legislative committee to develop specific and measurable goals for each of the state’s tax incentive programs. The committee also will be responsible for recommending metrics and developing a schedule for assessing how well each program is meeting its objectives.

Other states have taken similar steps. Vermont and Washington passed laws in 2013 requiring legislative proposals for new incentives to include plans for measuring whether goals have been achieved. Vermont went a step further by setting up a plan to identify the purposes of all tax expenditures.

Closing the Data Gap

Accurate data on performance can greatly enhance the ability of decision makers to craft policies that deliver the strongest returns at the lowest possible cost. Unfortunately, there currently is no source that has identified and compiled the best practices on how to gather the information needed to ensure that a tax incentive produces the expected outcome.

To fill this gap, Pew is partnering with the Center for Regional Economic Competitiveness, a nonpartisan policy organization, to launch an initiative that will engage teams of policymakers and practitioners from seven states over the next eighteen months. These teams will work together to identify effective ways to manage and assess economic development incentive policies and practices, improve data collection and reporting, and develop national standards and best practices that all states can adopt.

Evaluating Impact

To determine whether a tax incentive is working, state lawmakers need an accurate picture of its outcomes and how much it costs to achieve them. This requires evaluations that analyze the extent to which a program improves the state’s economy by influencing businesses to make decisions they otherwise wouldn’t have made, such as hiring more workers, investing in research, or locating in disadvantaged neighborhoods.

This type of evaluation can yield useful results. In Louisiana, businesses benefiting from the state’s Enterprise Zone program reported creating 9,000 jobs. However, an evaluation by the state’s economic development department found that the new jobs in hotels, restaurants, retail, and health care largely displaced existing jobs. The agency estimated that the program netted only 3,000 new jobs and identified several ways the incentive could be strengthened. The Louisiana legislature has adopted many of the suggestions.

Informing Policy

When incentives are enacted as permanent parts of state tax codes, lawmakers often have little impetus to review them. Unlike direct state spending, which must be renewed with each budget, incentives frequently continue indefinitely without policymakers revisiting their cost or effectiveness. By integrating evaluation into the policymaking process, states can ensure that incentives are reconsidered regularly and that elected officials base their economic development decisions on evidence rather than anecdote.

For example, Rhode Island approved a law in 2013 that builds review of tax incentives into the annual budget process. Each program will now be evaluated by the state’s revenue office every three years. Informed by the findings, the governor’s proposed budget will include recommendations on whether to continue, change, or end the incentives. The governor’s recommendations then will be the subject of legislative hearings, where lawmakers can assess the results of the evaluations and weigh economic development investments alongside other state spending.

In March 2014, Indiana enacted a law that takes a different approach to achieving the same goal. A legislative commission will regularly review the state’s tax incentives and provide detailed recommendations prior to each legislative session. The general assembly will use the results of these evaluations in policy and budget deliberations. Several other states are considering similar proposals.

Moving Forward

With better data and ongoing evaluation of their tax incentive programs, states will be able to make better use of scarce resources. Pew has been working to promote stronger evaluation practices through advocacy and technical assistance at the state level. We welcome additional partners and opinion leaders in this important effort.

Follow Jeff Chapman on Twitter: @JeffSChapman

Educator Pensions, School Staffing, and Teacher Quality

By Michael Podgursky, Professor of Economics, University of Missouri-Columbia

Imagine a technology firm that wanted to move a talented IT professional from an office in Kansas City, Kansas, to an office in Kansas City, Missouri. You wouldn’t expect that IT professional to lose thousands of dollars in pension wealth because she made the move.

Indeed, in the face of such a large penalty, few professionals would move and productivity in that enterprise, and the regional economy as a whole, would suffer.

Now enter the world of public K-12 education. If Kansas City Public Schools (KCPS) wants to recruit a talented school leader from a suburban district to take over a struggling public school, or an innovative charter school like KIPP wants to move a staff member from a KIPP school in Chicago to Kansas City, the professional educator will incur a penalty that can be in the tens or even hundreds of thousands of dollars for making such a move.  

The source of the penalty is the bizarre structure of educator pension plans. Educators (teachers, principals, and most other school employees) in Kansas City district and charter schools have their own plan. Teachers on the Kansas side of the state line, or in any other state, are in a different plan. And Kansas City-area educators not working within the boundaries of KCPS on the Missouri side are in still another statewide plan. 

To complicate matters further, the first two groups of educators are in Social Security and the suburban Missouri teachers are not. There is no reciprocity between plans in different states, and restricted reciprocity within the state. 

In addition, employer contributions, which represent one half or more of total contributions, cannot be withdrawn when an employee leaves. This contrasts with typical retirement plans in many other sectors—a 401(k) or 403(b) with some sort of employer match— which are entirely mobile. In short, public school teachers who switch pension plans almost certainly will, in the lingo of the financial world, “take a haircut,” and possibility a very big haircut, if they switch pension plans during a career.

The mobility penalties associated with crossing pension boundaries act like a tariff on the import and export of human capital into Kansas City public schools—whether charter or district. These tariffs can have huge consequences for Kansas City-area students and schools. 

Research on student performance consistently identifies teacher quality as one of the most important determinants of success in schools.

Michael Podgursky

Research on student performance consistently identifies teacher quality as one of the most important determinants of success in schools. A recent survey of research on teacher effectiveness finds that a typical student with a teacher at the seventy-fifth percentile of performance exceeds that of a twenty-fifth percentile teacher by a half year of learning growth. A long-term study of several million New York City students demonstrates that exposure to high quality teachers in K-12 schools raises matriculation to college, increases early career labor market earnings, lowers teen pregnancy, and positively affects related consequential outcomes.

There are features of educator “defined benefit” plans, in particular their reliance on the highest few years of earnings to determine the pension (rather than career average earnings, as in Social Security) and  peculiar rules about retirement eligibility (e.g., “rule of 75”, “25 and out”), that produce what economists call “back-loading” of benefits. 

This back-loading makes it so most of the value of a typical teacher pension plan accrues to the teacher in the final few years of a career, in spite of the fact that teachers make contributions over an entire work life. The back-loading (illustrated in the graph) shows the cash value of retirement benefits over the work life for a typical twenty-four-year-old entrant in the Kansas City Public School Retirement System. 

Pension wealth accrues slowly early in a career but then starts rising rapidly as the teacher reaches her mid-forties. It then peaks and starts declining by the teacher’s mid-fifties. The decline in pension wealth occurs because the pension plans have a “use it or lose it” feature. While the value of the annual pension grows with another year of work, this is offset by the fact that the teacher collects it for one fewer years.

The pension wealth chart, above, illustrates the powerful “push” and “pull” incentives built into educator pension plans. Mid-career educators with, say, fifteen years of experience, are just entering the steep upward trajectory in wealth accrual. They are “pulled” to the peak, whereas educators who are past the peak experience a “push” out.

Research shows that the timing of teacher retirements is highly responsive to these pull/push incentives. One consequence of the “peak” hitting at a relatively young age is that the average retirement age for Missouri educators (i.e., both teachers and administrators) is around fifty-seven years old. While districts scramble to recruit young qualified STEM teachers, the pension system encourages experienced STEM teachers to leave the classroom, many before the age of sixty.

What about new teachers in charter or district-run schools? Is this type of retirement plan a good deal for them? The graph below, based on administrative teacher attrition data, shows the estimated probability that new cohorts of teachers in Kansas City district and charter schools will actually remain in the plan long enough to qualify for a regular pension. The chart shows that this probability is very small—less than five percent—for new teachers. One reason this is important is that the pension system is absorbing resources that could otherwise be used to improve starting teacher salaries, which could improve the recruitment and retention of effective teachers.

These balkanized pension plans deter movement of educator talent to its best use, provide virtually no benefits for the typical new teacher recruited into a Kansas City public school, and are absorbing a larger and larger share of educational resources. It’s time to ask whether there are better ways to spend these dollars to educate students.