Maximizing Economic Impact of Colorado Rescue Funds

Submitted by Mickki Langston on Thu, 03/05/2009 - 8:26am

Considering Colorado’s $600 million budget shortfall and other economic challenges (recession, unemployment, reduced business revenue and tax revenue), we must maximize the economic impact of federal stimulus funds coming into the State. One critical way of doing this is to ensure that funds are not spent just once in Colorado, but instead ensuring they re-circulate in our local economies to create a healthy multiplier effect.

The easiest way to do this is to include a brief economic impact analysis as part of the cost assessment for bids for works and projects. Quite simply, hiring a big out-of-state engineering or construction firm to do something IS NOT EQUAL to hiring a local firm. The impact on the economy and state tax revenue are quite different as the local firm buys from local suppliers, hires local lawyers and CPAs, retains its profits in local ownership who in turn spend them into our local economy. We should not be sending rescue funds straight out of the state again by ignoring this fact.

Here’s a simple metaphor. Think of the money that we have circulating in our economy like water in a bathtub. We're currently $600M short of being able to take a comfortable bath; however, we're receiving a number of big bucketfulls of new hot water. If we don’t keep that water from splashing right out over the sides or running down the drain, then we have not improved our bath situation much, have we?

There is certainly precedent and easy method for doing this kind of factoring in rating bids. For example, Sun Microsystems has a factor for every vendor (based on past costs and overruns working with that vendor). It multiplies every bid they receive by that factor to determine the true dollar cost of the bid.

It is quite feasible to add just a few questions to the RFP/RFQ bid process for these funds and accomplish a similar result for the multiplier effect / economic impact. A simple rating as described below, can be used as an impact multiplier in assessing project bids.

Local Multiplier Effect

Economic activity is maximized when money circulates quickly and frequently within a community. Based on studies, money spent with local businesses recirculates 3 to 8 more times in our local economy than money spent at non-local firms or chains.

Locally owned businesses retain business profits here – where their owners live.
Local companies buy more often from other local businesses – especially through suppliers, marketing & advertising firms and other business services such as accounting and lawyers.
Local business owners are more connected to the needs of our community and contribute more to non-profit organizations, schools and other institutions.

Measuring Local Economic Impact

MHBA has implemented a 5 mountain “localness” rating as an indicator of local economic impact. This localness rating is the sum of each of the ratings described below. It shows how much of every dollar you spend with a company is likely to re-circulate within the community and how strong that company is tied to the community. (See http://www.coloradolocalfirst.com/localness-details for details)

Headquartered in Colorado Businesses that are based here employ higher level staff, make decisions with knowledge about our community, and more often use local firms for business services such as marketing, advertising, and legal and accounting assistance. Domestically based companies also pay State taxes for doing business here.
Percent Ownership in Colorado This mountain shows how much of the ownership of a company is based in Colorado. This affects how connected they are to the local community as well as their ability to respond and make decisions relative to the community's needs. It also indicates whether profits will re-circulate here, or in a different region.
Percent Employment in Colorado This mountain indicates how much of a businesses payroll re-circulates in our community vs. how much goes to outside employees. This figure is calculated from either dollars of payroll or number of employees in the state.
Percent Purchasing in Colorado Businesses making the effort to buy locally will have higher numbers here. This mountain shows what portion of the purchasing and expenses of a company are spent within the state. If a company does significant outsourcing, off-shoring, importing or other spending out of state, it will register here, lowering their score.
Sales Base in Colorado Having an established local customer base is one of the indicators that a company is more likely to stay here. It also increases their responsiveness to local needs and feedback. This mountain shows what portion of sales are actually done in state.

Getting Started Now

Implementing this would not take much effort, but would accomplish a lot in understanding where our money is going and ensuring that money is creating more jobs here than simply leaving the community. This new policy could go into effect immediately, with simple rules that require:

Require bidding contractors (or projects) of Federal rescue funds to submit accurate, complete figures for the five areas listed above, to determine their “localness rating”
Require that the localness rating be considered when approving bids for projects funded by federal rescue funds.
When we choose firms with higher localness ratings, we know that more of that money is being circulated in our economy, creating more jobs, providing more revenue for local businesses, and healthier tax revenue for municipalities.

MHBA already has an online questionnaire that we’ve developed to measure the localness rating of Colorado businesses. This can easily be used by businesses and State officials now to make smarter decisions about how money is being spent, and to ensure greater economic vitality.

Resources

Learn more about the Mile High Business Alliance, a non-profit network of local businesses based in Denver.

Read studies about the economic impact of local businesses here: http://www.livingeconomies.org/netview/resources-and-studies/LFstudies

For example, the Local Works! Examining the Impact of Local Businesses on the W. Michigan Economy study by Civic Economics in 2008 found that:

A modest change in consumer behavior – a mere 10% shift in market share to independent businesses from chain stores – would result in 1,600 new jobs, $53 million in wages, and a $137 million economic impact to the area

More information and resources about policies to create healthier local economies can be found here: http://www.newrules.org/finance/index.html