Orgegonian
2/26/02

MODEL OF DIVERSIFICATION

Summary: Hermiston has dodged recession because it has built a mixed economy

Oregon and the nation may be reeling from the devastating brick-through-a-store-window economic downturn, but this blue-collar Columbia River town has barely noticed the recession.

An unusual economic mix concocted during the prosperous late 1990s has enabled Hermiston, population 13,154, to make the transition from a farming and food-processing hub to a highly diversified base with nearly $3 billion in recent investments, hundreds of new jobs and millions of dollars in annual payrolls

As a result, Umatilla and Morrow were two of only seven counties in Oregon to add jobs last year. The counties still have unemployment rates above the statewide level, but that partially reflects the economy in areas further from Hermiston as well as the historical trend toward high unemployment in Eastern Oregon.

Hermiston, in western Umatilla County, has become the hub of a regional economy built to withstand cyclical hiccups. A new state prison and a federal project to incinerate obsolete chemical nerve agents at the Umatilla Chemical Depot provide a base of government jobs. The largest private employer is retail giant Wal-Mart Stores, which operates a distribution center near Hermiston. New power plants and a Union-Pacific maintenance shop provide additional jobs.

Not bad for a town with a watermelon slice as its symbol and a 3,717-ton stockpile of Cold War-era chemical weapons awaiting incineration just west of the city limits.

"It is unique in the state for the forces that are driving growth," said Art Ayre, the state employment economist in Salem.

Unlike the Portland area, Hermiston boasts few high-tech jobs. Instead, it has a fairly large public sector -- notably the prison and the activities at the chemical depot -- that is "fairly well inoculated from recession," said Scott Currey, a state work force analyst in Hermiston.

That has been a winning mix in this recession, marked by an implosion in high-tech and a sharp decline in manufacturing.

"It certainly has no counterpart this side of the Cascades, at least this side of Bend and Redmond," Hermiston City Manager Ed Brookshier said of the economy of Hermiston and western Umatilla County.

Transition from agriculture
Before the economic transformation began, the bulwarks of the job base in the Hermiston area were food-processing plants and onions, and roughly 230,000 irrigated acres in adjoining Umatilla and Morrow counties.

The most dramatic changes began happening during a slowdown in the agricultural economy in April 1997, said banker Tom Gilleese of Hermiston. Within a 10-day period, ground was broken for the 1.2 million-square-foot Wal-Mart wholesale distribution center with 1,100 jobs, the Two Rivers Correctional Institution state prison with 418 jobs and the Union Pacific locomotive maintenance facility with 210 jobs.

The most expensive and controversial addition to Hermiston's economy has been the construction of incinerators to destroy the Umatilla Chemical Depot's vast weapons stockpiles.

The project pumps $300,000 a day into the economy, has cost $400 million to date and is likely to trigger the outlay of another $1.6 billion by the decade's end, said Rick Kelley. He is a spokesman for Washington Demilitarization Co. of Boise, which has a contract with the U.S. Army to destroy the chemicals.

Completed in August, the incinerators have not yet begun destroying the depot's arsenal of deadly mustard and nerve agents. The operation employs about 500 workers, a number likely to swell to 650 by year's end, said Chris Early of Washington Demilitarization. Actual destruction of the substances is set to start in February 2003 and end in 2009, after which the burners will be dismantled, he said.

A power center
The chemical depot jobs eventually will disappear, but other economic additions should continue to pay dividends for years.

The Western energy crisis of 2000 and 2001 sparked a power-plant building boom as companies sought to supplement the region's hydropower with gas-turbine generators. Hermiston was in an ideal position to attract plants because of its proximity to two large natural gas pipelines and a Bonneville Power Administration electrical transmission grid.

Kim Puzey, general manager of the Port of Umatilla, said public and private operators have proposed more than 40 power-generating plants "ranging from a single megawatt windmill to these 1,000-plus gas turbines."

Calpine Corp. recently completed a 630-megawatt, gas-fired generating plant. The plant, which cost $300 million, is expected to begin operating in June, said Kent Robertson, a company spokesman in Dublin, Calif. It will employ 25 to 30 workers and have a $1 million annual payroll, he said.

PacifiCorp and PG&E National Energy Group operate a 474-megawatt, gas-generating plant west of Hermiston that went into service in July 1996 at a cost of about $300 million, said Sandra McDonough, vice president for PG&E National Energy Group. The companies are making plans to build a 586-megawatt facility, she said.

In addition, the city of Hermiston proposes to build a 1,000-megawatt generating plant in partnership with the Port of Umatilla and the Confederated Tribes of the Umatilla Reservation near Pendleton, said Jill Miles of the Oregon Economic and Community Development Department.

"Hermiston is ahead of the game just because they are very aggressive and have access to this infrastructure," she said. "They are sitting on the power grid for BPA."

Economic ripple effects
Diversifying the local economy has been a goal of community leaders for years. Now that it is happening, the value of new housing starts in Hermiston jumped from $9.5 million in 2000 to $15.8 million last year, said Brookshier, the city manager.

At the same time, steadily climbing school enrollments -- up 82 students in the past year to 4,146 this year --have prompted the construction of a $7 million elementary school that opened in August, said Jim Thompson, district business manager. The community also is rebuilding its high school at a cost of $25 million, he said.

Hermiston's population increased 31 percent between 1990 and 2000, according to the U.S. Census Bureau.

Even agribusiness once again is in an up-cycle here, and revenues of $274 million from farming and food processing flooded into Hermiston and Umatilla County in 2001, reported the Oregon Department of Agriculture. That was a dramatic one-year increase of 16 percent. Adjoining Morrow County posted $146 million in agricultural sales.

The Agriculture Department said two commodities, hay and wheat, were largely responsible for Umatilla County's increase in sales. Drought conditions that dried up pastures around the Northwest bumped up hay prices in Umatilla County, where much of the alfalfa crop is irrigated. And wheat yields were high because many growers alternate wheat and potato crops on irrigated fields.

The state-line effect
On the downside, some potential benefits from a growing economy are being lost. Of the hundreds of workers at the chemical depot, 52 percent live across the Columbia River in Washington, Kelley said. And many depot workers who live and work in and around Hermiston shop in Washington's Tri-Cities, where there's a larger selection of stores.

That's one explanation for Umatilla County's 12.4 percent unemployment rate in January. The rate, which is not adjusted for seasonal factors, also could be artificially high because January is a down month for agriculture-related jobs.

Gilleese says the county still benefits from workers who live elsewhere because many do at least some of their shopping in Hermiston, taking advantage of the absence of a sales tax in Oregon.

"Count the Washington license plates" at the local Wal-Mart retail outlet and the furniture stores on weekends, Gilleese said. "It's kind of interesting."

You can reach Richard Cockle at 541-963-8890 or by e-mail at rcockle@ucinet.com.