Project Community
Center for Urban Policy Research
Rebuilding distressed communities and empowering its residents requires economic development activities to accompany affordable housing production. An oft-heard plea from low-income communities is for housing and jobs. Although the New Jersey economy has been on the rebound since 1992, the state's urban centers and rural communities continue to be hard pressed. While job growth has occurred in suburban regions, urban areas, especially, have gone through a cycle of disinvestment which has seriously undermined local economies. Residents suffer from under-employment, unemployment, and limited goods and services. The net effect has been the economic isolation of the poor and minority groups.
Urban and Other Low-Income Areas
Small business development programs and entrepreneurial training are among the methods communities are using to retain jobs, spur new employment, and bring goods and services to underserved areas. Small businesses are already an important component of New Jersey's economic landscape. Between 1982 and 1992, New Jersey saw its total number of small businesses rise by 19.3 percent.34 Research has shown that, nationally, small business development has contributed to job creation.35 Small business support and entrepreneurial development will not only preserve and create jobs, it will also expand consumer choices in these underserved areas. Becoming entrepreneurs has been a viable alternative for minorities who often face discrimination in the job market.36 Maintaining a longer circulation of capital within a distressed area can also be furthered by supporting business start-ups among the indigenous population. The lower initial overhead costs for the start-up of small businesses seem to make them a uniquely appropriate tool for economically boosting New Jersey's distressed communities.
Access to credit is especially difficult for small businesses and microenterprises, especially for start-ups. The value of collateral, such as land or building stock, is likely to have declined in low-income areas, making banks more hesitant to give loans. Banks avoid the smaller loans required by small businesses and microenterprises because of the comparatively higher cost of servicing a smaller loan than a larger one.37 Small business start-ups face the most difficulty in accessing credit because of the risk involved in lending to them. Even accredited nonprofit minority small business investment corporations, say they steer clear of start-ups.38
Small business loan pools are being implemented around the state as a way of financing business start-up and expansion. In a survey by Project Community of five small business loan pools in New Jersey, these programs reported dispersing 221 loans worth over $9 million. These loans created 568 jobs and retained 962 positions.39
Entrepreneurial training programs can tap into entrepreneurial potential and result in the development of small businesses as a method to improve job skills and in some cases as a way out of welfare. An example is the Latin American Economic Development Association (LAEDA) in Camden, the state’s longest-running and most successful entrepreneurial training program. LAEDA’s Entrepreneurial Development Training Project is an intensive nine-week course consisting of the financial and marketing aspects of running a business; developing a business plan; and offers motivational and other counseling services. Assistance includes: obtaining financing for business start-ups; finding a suitable location for the business; and follow-up technical assistance for one year after business start-up.
Since the program’s inception in 1987, LAEDA graduates have created fifty businesses and ninety jobs, and only three failed. Between 1994 and 1999, LAEDA expects to create ninety new businesses and 180 new jobs through this program. Every year, thirty students complete the full program, at a cost of only $4,500 per student. Businesses that have been created by LAEDA graduates include day-care centers, cleaning services, hair salons, computer sales and service shops, clothing manufacturing, building contractors, specialty retailers, and office support services. These new businesses have provided full and part-time jobs for local low-income residents, have expanded the city’s tax base, and have given low-income persons more control over their lives through ownership.
The Entrepreneurial Training Institute (ETI) started running a program similar to LAEDA’s last year. Administered through the New Jersey Development Authority in conjunction with the New Jersey Association of Women Business Owners, ETI has conducted classes in several urban areas throughout the state. ETI currently operates in Newark, Camden, Trenton, and Elizabeth. At the conclusion of the training, participants are eligible for financing from a revolving loan fund. The need for these kinds of programs far exceeds the availability in New Jersey.
A demonstration project found entrepreneurship to be a route out of welfare. The Corporation for Enterprise Development, a research firm based in Washington D.C. which advises nonprofits and governments on potential economic growth opportunities, tested the applicability of self-employment among AFDC recipients in eight states through its Self-Employment Investment Demonstration (SEID) to see whether it was a feasible route out of welfare. Of the 732 participants who completed training, 249 started businesses.40 Of the 212 businesses started as of April 1990, thirty-five belonged to former welfare recipients and 154 others had a projected level of income that would allow them to discontinue welfare within one year.41 Even participants who did not start their own businesses used the training sessions as a springboard for further self-improvement. Of the half who chose not to continue with the program, many went on to further training, education, or employment. According to SEID, "approximately 53 percent of enrollees have achieved positive outcomes in the form of economic or educational advancement."42
Economic Development Fund
The Economic Development Fund will provide $41 million to subsidize small business and job creation ventures and support and expand technical assistance and entrepreneurial training programs in distressed areas. The fund will employ these tactics to bring urgently needed jobs to the distressed communities and empower residents to start their own businesses. It will also help neighborhood regeneration through new services to residents and make possible the expansion of existing economic development programs operated by the state to low-income areas not yet targeted.
Methodology in Determining Economic Multiplier Effects
A quantitative analysis of the potential economic impacts of the Economic Development Fund was calculated using the PC I-O model.43Three assumptions were made in the calculations. First, due to the flexibility of the fund and uncertainty over the percentage of funds that will be used for small business loans versus entrepreneurial training, it was assumed that all funds would be spent for small business loans and business start-ups related to entrepreneurial training. Second, it was assumed that each dollar of expenditure by the fund would leverage approximately $2.50 from other sources. (The leveraging ratio was based on a slightly reduced rate of leveraging experienced by the five loan pools contacted for this study.44) Third, it was assumed that the implementation of the initial $41 million expenditure will be distributed through grants and loans over a five-year period in increments of approximately $8 million per year. About $20 million or one-half of the fund is expected to function as revolving loans, with the money paid back by the entrepreneurs and loaned out again to help start other new businesses.
Input on the types of businesses the Economic Development Fund would support was modeled upon businesses started-up by LAEDA graduates in combination with the kinds of small firms receiving loans from two of the loan pools: the New Brunswick Small Business Loan Program and the Cooperative Business Assistance Corporation in Camden. By examining jobs created per public dollar through these two small-business loan pools and then estimating what sectors these jobs would fall into by using the history of businesses started by LAEDA’s graduates, a projection of the economic impact of the total $41 million (if it was all spent upon small business loan pools) can be made. The businesses of LAEDA graduates were chosen because they are the most representative of the kinds of small businesses this initiative seeks to promote.
Impacts
The impacts, as Table 5 illustrates, of the $41 million Economic Development Fund, with leveraging, will create a significant number of new jobs, revenues to state and local government, and value-added effects on the economy.
The impacts would be the following:
These impacts are based on the initial $41 million (plus leveraging) and potentially will increase as money is reloaned. Since one half of the Economic Development Fund will be revolving loans, the number of jobs and tax revenues are estimated to rise in proportion to the amount of loans made beyond the original fund allocation. For example, if in the sixth year of the fund $5 million is paid back and reloaned to new individuals, the amount of employment and revenues could rise by one/eighth.
Table 5: Economic Impacts of the Economic Development Fund
| Impacts | Leveraging 1:2.5 | Public Expenditure
| Employment (jobs) | 2,560 | 1,024
| Personal Income | $75,010,975 | $30,004,390
| State Taxes (annual) | $6,159,000 | $2,463,600
| Local Taxes (annual) | $6,437,250 | $2,574,900
| Value-added to State Economy | $99,869,250 | $39,947,700
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Employment
The Economic Development Fund’s impact on employment will create 2,560 jobs (assuming leveraging). Since the Economic Development Fund will primarily support new businesses, the jobs created are expected to be permanent, subject to the success of the enterprises developed. Over 90 percent of the employment created through the Economic Development Fund will primarily benefit four industries. About two-thirds of the jobs will be in services (916 jobs) and retail trade (821 jobs). Manufacturing will have an employment impact of 470 jobs, followed by construction with 162. Other industries will account for 191 positions.46 The phase-in of the jobs expected will be in proportion to the value of the loans and grants awarded. For example, if by the end of the first year, 20 percent of the Economic Development Fund with leveraging is awarded, then 20 percent of the overall jobs should be created.
State and Local Revenues
A total of almost $12.6 million in annual revenues to the state and selected municipalities will be generated by the jobs created through the Economic Development Fund. The state will receive nearly $6.2 million each year in personal and corporate income and sales taxes. Revenue to localities mainly from increased property taxes generated by the effects of higher worker incomes and use of commercial space by some of the new businesses is expected to be $6.4 million each year. The annual revenues to the state and municipalities will accumulate each year toward the above levels in proportion to the total jobs created to date. As an example, if 512 jobs (20 percent) are created by the end of the first year of the Economic Development Fund, then 20 percent of the expected revenue will be generated annually.
The effects of the Economic Development Fund per million dollars of public expenditure, with leveraging, are substantial (Table 6). Almost sixty-three new jobs will be gained, over $150,000 will accrue in annual state tax revenue, and approximately $157,000 in annual local tax revenues.
Table 6: Economic Development Fund Effects Per Million Dollars of Expenditure
| Impacts | Leveraging 1:2.5 | Public Expenditure
| Employment (jobs) | 62.75 | 25.1
| Personal Income | $1,829,536 | $731,814
| State Taxes (annual) | $150,683 | $60,273
| Local Taxes (annual) | $157,492 | $62,996
| Value-added to State Economy | $2,443,344 | $977,338
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