The Biggest Challenges Facing Business in RI
Stephen Beale, GoLocalProv News Contributor
The Biggest Challenges Facing Business in RI
While government-related factors dominate the list, the chief challenge is health insurance. The next most common issues confronting businesses are both state and federal regulations, followed by labor costs—an issue which reflects both pressures in the economy, the world of lower and higher education, and government regulation.
Click here to view all top ten challenges to doing business in Rhode Island.
Local business owners and advocates said the survey was an accurate reflection of what they see in their day-to-day work and conversations with other business owners.
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLAST“That survey is spot on,” said Jody Sullivan, the executive director of the Newport County Chamber of Commerce, the second largest chamber in the state.
A number of the factors represent both economic realities and government regulations, such as the challenge of labor costs, or the burdens of personnel management. “They’re all intertwined,” Sullivan said. “Basically when you cut through it all, it’s the cost of doing business in Rhode Island.”
“I’ve owned a small business in Rhode Island for the last eighteen years. During that time, and over the course of the past two campaigns, I have spoken with thousands of other small business owners in our state. This report echoes the concerns I have been hearing for many years,” said Ken Block, a prominent local business advocate who is running for Governor. “As Governor, my top priority will be improving Rhode Island’s economic competitiveness.”
The cost of health insurance was named the top obstacle by more than a fifth of the 709 businesses that responded to the survey, which was conducted by the state Office of Regulatory Reform. The cost of health insurance premiums for a family of four can be somewhere in the neighborhood of $16,000 a year, according to Ed Mazze, a business professor at the University of Rhode Island.
“When you’re a small business $16,000 a year is a lot of money,” Mazze said.
While employer-provided insurance is a private market, the uncertainty swirling over the impact and cost of Obamacare, once it has been fully implemented, has only added to the worry of local businesses owners, according to Mazze.
“As a small business owner, I have witnessed the unsustainable increase in the price of health insurance. If we don’t start to control costs, small businesses will be forced to close or relocate to other states,” Block said.
If elected, Block said he would “always consider the impact on small business” in any decisions on health policy. One major policy change has already been set in motion: Rhode Island has elected to become one of the states that offers its own online health insurance marketplace rather than let residents fall back on the federal version that is part of the health care reform law.
Block said the online marketplaces, known as exchanges, could “be used to harness and control future increases in health care costs.”
Regulations from City Hall to Congress
After health insurance, however, government-related factors dominate. Businesses cited regulations at the local, state, and federal level each as major obstacles. Two additional factors cited by businesses are closely related to government regulation: labor costs and personnel management.
“I am not at all surprised by the results of this survey, which confirms what our Center has been saying all along. The business sector gets it. Our state’s problems emanate from excessive government intervention—at all levels—in the form of poor public policy,” said Mike Stenhouse, the CEO of the Rhode Island Center for Freedom and Prosperity.
“Most of the top 10 deal with direct government regulation or areas of business that are highly regulated or influenced by tax and regulatory policy,” Stenhouse added. “If we want to keep and attract residents, businesses, and shoppers in Rhode Island we need to roll-back the level of government interference in the market.”
The second biggest impediment to business is state regulation, according to the survey. “The big issue with the state regulations is the cost of compliance,” Mazze said.
Just over half of survey respondents said that cost was more than $2,000 annually. One third said they have to hire outside consultants to help them sort through all the state rules. And almost half of all said regulations are a “critical factor” in decisions about whether to expand or invest in their business. (Read the previous GoLocalProv report on the most burdensome state regulations.)
Local businesses must also contend with reams of federal regulations: according to a Forbes estimate, there more 854 federal regulations that had a specific impact on small businesses, as of the end of 2012. State and federal regulations that address similar issues only compound the problem, business owners said in the survey.
One business owner urged state officials to streamline state and federal rules.
“Clear up overlapping state regulations as well as better integrate with federal FLSA [Fair Labor Standards Act] and related acts. Great RI wants to put its own stamp on things but how about making it clearer (esp. in legislation) how it relates to federal law/regulations,” the owner wrote, according to the report.
Regulations also affect some of the other eight obstacles listed, such as personnel management, which entails seven separate federal laws meant to guard against discriminatory hiring practices and ensure equal opportunity employment. Then there is another, sometimes overlapping, set of state rules and regulations on fair hiring. “The personnel manager of the future might need a law degree,” Mazze said.
When a zoning tweak derailed development in Providence
After the state and federal level, a third world of regulation for local businesses are local ordinances. For developers and others in the construction industry, the problem can be magnified 39 times over, considering local variances in zoning and other local codes from town to town.
The Spot recently had plans to move out of the Jewelry District into a new building closer to downtown. Cardi had everything lined up: the new space, the builder, and a landlord ready to make it all happen within the limited three month window of time he had. But his carefully laid plans were thrown askew when Cardi applied for a building permit and found out that “much to our chagrin” the city zoning ordinance had “suddenly changed.”
One week earlier, and Cardi would have been in the clear. But the new changes meant he would need a special use permit from the zoning board. It would take two months to even get on the board agenda, followed by a six-month waiting period for any objections, according to Cardi.
There was one more unpleasant surprise in store for Cardi: after abandoning plans for a new building, he moved The Spot to 100 Richmond Street, where an entertainment use had been grandfathered in. The catch: according to city rules on tangible taxes, Cardi had to pony up the back taxes owed by the prior tenant before local officials would allow him to reopen.
“The big issue is that oftentimes, when politicians create laws to address one concern, unintended consequences result—hindering, hamstringing, or (at the very least) slowing potential growth,” Cardi said.
“Lawmakers also rarely take into account the burdens placed upon city staffers; new laws, however well-intentioned, first require those affected to develop a new interpretation; then, the agencies responsible are tasked with enforcement of these new laws—and, simply put, that takes time,” Cardi added. “In a city whose workers are already strapped for time to do what they were already doing, adding a whole new set of responsibilities represents a virtually insurmountable burden. The result: slow growth.”
The economy: recession, competition, and innovation
“The most frequently cited concern I hear from business is the weak demand for goods and services locally and a diminished customer base,” said Laurie White, the president of the Greater Providence Chamber of Commerce.
“Decreased consumer demand is the most troubling problem because it demonstrates the overall poor health of Rhode Island’s economy,” Block said. “We need to take quick actions to improve the business climate, increase employment, and attract new businesses. We must also address the other factors that are driving some citizens to leave our state. Whether it’s a new college graduate or a retiree, our economy cannot afford to lose consumers.”
As the demand for consumer goods has declined, global competition has increased. And it’s not just the manufacturing sector that faces job loss to do outsourcing. Local banks face international competition: for example, Citizens is owned by the Royal Bank of Scotland and the Spanish Santander Group owns Sovereign Bank. The same goes for the insurance industry: thanks to the Internet an insurer might have to battle West Coast companies for local business, Mazze said.
Competition is also stiff in the construction industry, according to Gilbane spokesman Wes Cotter. For the work that is available, companies have to work harder to get it, Cotter said.
Unlike other factors, increasing competition and decreasing consumer demand can’t necessarily be blamed on the government, Mazze said. “That has nothing to do with regulations,” Mazze said. “That’s the economy in action.”
Two other economic factors are the limited availability of credit and the challenges of keeping up with rapid technological changes.
The fast pace of technological change takes its toll. “It’s just challenging to live in a world where nothing stays the same,” Sullivan said. “Everything changes month to month.”
On average, 6.4 percent of small business revenues are eaten up by tech-related expenses, according to AMR Research. Businesses also spend an estimated total of $700 each month per user, according to Gartner, Inc. It’s not just purchasing new equipment—it’s also maintaining it. An estimated 80 percent of small business IT costs are incurred after the initial purchase, according to Gartner.
And the costs do not stop with buying and maintaining new technology, Mazze said, new technology drives businesses to hire new people—and finding new employees who have the necessary skills itself can be an added burden.
Tip of the iceberg
Mazze and Sullivan have widely differing outlooks on where the Ocean State business climate is headed.
“I think we’re at a good point,” Sullivan said. “The state is stepping up.” She said she was pleased state policymakers have moved economic development to the top of their agendas. “We see some momentum in making our state more business friendly and more regionally competitive,” Sullivan added.
Mazze remains skeptical. Were the the state to do the same survey next year, he said the same ten items would show up again. “I have seen the same list of items since 1998,” he said, when he first moved to the state.
Mazze said state officials who attempt to address the business climate only are touching the tip of the iceberg. “In other words, they never look below the tip to start reducing some of these concerns,” Mazze said.
Stephen Beale can be reached at [email protected]. Follow him on Twitter @bealenews