EntreWorks Insights (December 2023): The Coming Fiscal Cliff: Are We Ready?

Welcome to the latest edition of EntreWorks Insights, a quarterly newsletter that reports on business trends, policy developments, and other issues affecting the business of economic and workforce development.   You’re receiving this note because you’ve asked to subscribe or because you have some previous interest in the work of EntreWorks Consulting. If you wish to subscribe or be removed from this list, please send an email to info (at) entreworks.net. If you’re interested in the newsletter, please read on.  Please feel free to share with friends, family, colleagues, and other loved ones.  Comments and constructive criticism (and praise) are also welcome.  You are also encouraged to visit the EntreWorks blog at http://entreworks.net/blog.  Thanks for your interest.

Erik R. Pages

President

EntreWorks Consulting

www.entreworks.net

EntreWorks Insights

Volume 20, Number 3

December 2023

HIGHLIGHTS:     The Coming Fiscal Cliff:  Are We Ready?

                             What’s New at EntreWorks Consulting?

The Coming Fiscal Cliff:  Are We Ready?

In some ways, the past few years have been something like the opening lines from Charles Dickens’ Tale of Two Cities:  “It was the worst of times; it was the best of times.”  We’ve been through some horrible events, like a global pandemic, the January 6^th insurrection, and ongoing wars in Ukraine and the Middle East.  While “best of times” is perhaps too strong as a description, these tough times have generated a few positives, such as improved economic conditions for many of our neediest residents and families.  For those working in economic development, these tough times have also produced many new policy innovations, and for the first time in my career, robust, and long overdue, investments in new community economic development programs and program capacity.

It appears likely that these small glimmers of good news may be coming to an end, as public budgets are tightened in the face of challenging economic circumstances.  As many organizations and programs are starting to gain traction, they may face something of a fiscal cliff as sources of funding start to dry up.  Are economic developers ready for these new challenges?  What can we do to sustain the good work that has occurred in response to the pandemic and its aftermath?  This issue of EntreWorks Insights offers some perspectives on where we may be going and where we should be going.

OUR RECENT HISTORY

Think back to the Spring of 2020, when our economic prospects were incredibly grim.  Hundreds of people were dying every day from COVID 19, unemployment reached 14.8 percent, and thousands of businesses were forced to shut their doors.  This crisis demanded a big response, and we got one.  The Federal government undertook a massive recovery effort, investing billions of dollars and embracing many new policy tools and ideas. According to the Pew Trusts, the value of Federal grants to states jumped 96% between 2008 and 2021. For the first time, Washington provided no-string attached direct payment to individuals, expanded unemployment insurance to support gig workers, and supported a host of other new social safety net programs. 

Economic development-related programs also saw major boosts in funding—thanks to the American Rescue Plan Act (ARPA), the Bipartisan Infrastructure Law (BIL), and the CARES Act. ARPA and CARES directly provided more than $500 billion for state and local governments, and other Federal efforts, such as increased Medicaid support, also provided indirect, yet still important, fiscal support at the state and local levels.  According to the Brookings Local Government ARPA Investment Tracker, anywhere from 7-10% of these funds directly supported economic and workforce development efforts, and large funding shares were also devoted to related activities in housing, infrastructure, and community aid.  Budgets for the US Economic Development Administration (EDA) reflect these patterns.  For most of the 2010s, EDA’s annual budget averaged around $288 billion. In FY2023, EDA’s total appropriations reached $1.6 billion. 

Thanks to these Federal investments, state and local economic development programs have hired staff, bolstered capacity, and helped provide an important lifeline for local businesses and workers. For the first time in years, many local economic development organizations (EDOs) could tap into sufficient resources and staff capacity needed to achieve their missions. Important progress has been made, especially in focused areas such as small business support where targeted local programs helped to keep firms in business and coach new and aspiring entrepreneurs starting new ventures.  Along the way, we have also made important progress in supporting underserved entrepreneurs who long lacked equitable access to capital, mentoring, and other resources.

OUR CURRENT DILEMMAS

Whether we like it or not, this era of federal largesse is coming to an end. No matter which party prevails in 2024, public spending at all levels is likely to decline. EDOs will face tough budget decisions, as these funding sources begin to dry up.  Can they keep the added capacity developed in recent years, or must they return to “doing more with less.”  While the pandemic’s impacts are lessened, major challenges still loom.  Climate emergencies are not going away, and long-standing problems, such as limited housing availability, also persist.  Meanwhile, many cities face eroding revenues as commercial vacancies skyrocket due to changing work patterns.   Some analysts, such as Drexel’s Bruce Katz, warn of a “coming fiscal storm” for American cities.

This looming fiscal reckoning will be especially challenging for EDOs operating in smaller rural communities. Due to limited capacity, these organizations have traditionally been less able to access Federal funding streams and other resources.  They enjoyed more success in recent years, but have still been shut out from many federal opportunities. Headwaters Economics, a Montana-based think tank, has developed a Rural Capacity Index which seeks to quantify local capacity levels.  The Index notes that in many regions of the US, more than half of communities can be defined as “low capacity,” i.e., they lack government capacity to effectively pursue outside funding opportunities.  Low capacity has real consequences as other Headwaters research has found that only 3% of recent Federal Emergency Management Agency (FEMA) funds went to low-capacity counties. Similar patterns regularly occur in other Federal grant programs.

A recent Center for Rural Pennsylvania offers similar findings. It finds that 62% of rural Pennsylvania communities (compared to 49% of urban locations) did not apply for recent federal/state transportation grants.  When asked why this occurred, rural community leaders pointed to an inability to find matching funds (62%) and limited staff capacity/expertise (60%) as key factors.

AVOIDING THE FISCAL CLIFF

Given the magnitude of recent Federal investments, state and local economic developers must be ready for some level of retrenchment and “right-sizing.”  However, it would be a shame if we simply abandoned or shut down the many new initiatives, and new ways of working, that have emerged over the past few years.  We must find new ways to retain these assets, so that we not only continue to support essential community building efforts, but we are also ready to respond in the event of future crises and economic shocks. 

Some observers are pushing large-scale responses.  For example, Bruce Katz and his colleagues are recommending some type of national commission, akin to the Advisory Commission on Intergovernmental Relations (1956-1996), to re-examine how federal, state, and local governments work together. At the local level, many cities are also undertaking in-depth reviews of their fiscal architecture, assessing how they can continue to generate the revenue needed to support basic services.

This focus on long-term fiscal restructuring makes sense, but is unlikely to have much near-term impact.  And, unfortunately, we’ll need to act before then.  While I can’t promise any universal solutions, let me offer a few ideas on how we might reduce the impacts of the coming fiscal reckoning facing EDOs across the US. 

Diversify Funding Sources

When creating economic development plans, we often focus on helping communities diversify their local economies.  The same is true for EDOs—reliance on a single source of funding can be a recipe for disaster.  As Federal funding streams slow down, EDOs must identify new sources of funding and support. 

Within ethical guidelines, there should be no limit to the range and type of new funding sources that EDOs can access.  We should embrace an “all of the above” strategy that seeks funding from member dues, fees for service, event revenues, and so on. 

Community philanthropy should be at the top of the target list here.  Over the past decade, community foundations have assumed a larger role in supporting community building and economic development.  This is a promising trend, but too few EDOs are pursuing this option.  Potentials steps might include creating special funds at a community foundation or creating a new community foundation from scratch.  In either case, these new funding sources can help provide needed funding while also helping to keep local dollars at home.

A large and growing network of organizations is available to support such work.  In addition to philanthropy networks, groups like LOCUS Impact are available to help communities create new funds or repurpose existing tools, including philanthropy, Community Development Financial Institutions (CDFIs) and others.  Invest Appalachia, a reginal network of CDFIs, offers an excellent case study of how these new impact investment models can bring new capital and resources to the community building field.

Build Capacity

Capacity building has always been a priority in development, whether it’s here in the US or around the globe.  As such, calling for more investment and more focus on capacity building is hardly a revolutionary suggestion.  But, we still need to continue these important investments. 

Capacity building investments can take many forms.  Direct investment in local EDOs or in technical assistance programs helps to build capacity, but other ideas can also help.  Examples include support for leadership or professional development programs, on-line training, and community partnering programs.   

Over the past few years, federal agencies have also been testing other new approaches.  For example, the US EDA has funded several Communities of Practice focused on specific issues such as the energy transition, manufacturing support, indigenous communities, and revolving loan fund operators. In addition, EDA has also invested in an innovative Economic Recovery Corps program to bring new talent to EDOs operating in distressed regions.  These promising pilot projects were funded with pandemic response-related funds.  Thus, their future sustainability may be at risk, even as they provide a real lifeline for many EDOs.

Import Capacity

Lower capacity regions may still lack sufficient resources to keep talented staff in-house.  In these cases, they might consider strategies that “import” capacity by bringing in outside organizations that provide technical assistance or staff support.  Consulting firms do serve this purpose, and we at EntreWorks Consulting certainly support that option!  Yet we also recognize that some regions may not be able to afford outside consulting support. 

Fortunately, we are also beginning to see the emergence of non-profit organizations with an explicit mission of providing additional capacity to at-risk regions.  These entities, typically funded via philanthropy or corporate partnerships, can provide staffing, technical assistance, community coaching, and other services.  Many of them operate like traditional consultants with a focus on technical assistance, but a growing share seeks to become more embedded in their host communities. Examples of this model include the West Virginia Community Hub, the Northern Forest Center, and the Center on Rural Innovation.   

Change Business Practices

Finally, we must recognize that much of this capacity problem results from our current business and funding practices.  Low-capacity regions have faced decades of neglect and disinvestment, and it is challenging for them to turn the tide.  They become caught in a vicious cycle:  they lack capacity which prevents them from accessing federal grant programs.  As a result, they must operate with limited staff and limited dollars to support their missions.

Some of these challenges result from our current business practices.  It’s simply too difficult for many low-capacity regions to identify and compete for various grant competitions sponsored by both public and private organizations. We can and should make these processes easier.  US Digital Response, a non-profit focused on improving how government agencies use technology, has developed a menu of proposals to help small communities better access these opportunities.  This program includes a host of sensible ideas, such as a single Federal application portal, streamlined reporting and evaluation processes, and revised grant competitions targeted to communities of varying sizes.

Lots of other good ideas can be added to this list.  For example, further reductions in grant match requirements can help attract more applicants, as would a wider embrace of non-competitive grants for distressed communities.  Finally, specific steps to engage regional organizations, like Councils of Government and Economic Development Districts, in supporting at-risk regions should also be considered.

We’re near the end of an unprecedented period of public largesse for state and local economic development.  These investments are having positive impacts, but they are still not providing sufficient support to small or at-risk regions who lack the capacity to compete for these funds.  In these cases, the rising tide has not lifted all boats.Simply throwing money at the problem is insufficient.  We’ll need to rethink how we do business as well.  If we support this work now, perhaps we can lessen the impact of future “fiscal storms.”

What’s New at EntreWorks Consulting?

We are grateful for a rewarding and productive year in 2023, and look forward to connecting with friends and partners in the coming year.  We wish you a very happy holiday season and a happy New Year!

You can find reports and other great resources at our website; we encourage you to check it out. The website also includes access to all past issues of the EntreWorks Insights newsletter and the EntreWorks blog at http://entreworks.net/blog.  Recent topics include the impacts of AI, rural migration patterns, and strategies to support underserved entrepreneurs. In addition, you can still access blog updates at our Facebook and LinkedIn pages.  We look forward to connecting in person in 2024.