The Dynamics of a Regional Center

 In late 2008 the status became official: that the Mankato-North Mankato region was changed by the federal Office of Management and Budget from a Micropolitan Area to become Minnesota’s newest Metropolitan Statistical Area.  Of course, most local officials knew this change of status was coming as all of the population estimates since the 2000 Census suggested that the 50,000 threshold was near and most expected that this would be confirmed as soon as the 2010 Census was completed.  But getting the official status declared in late 2008 was to some an early Christmas present.  It opened the door for new levels and categories of federal funding and more importantly, it put south central Minnesota on the screen of many corporations and their site-selection firms seeking to expand to new, emerging and dynamic metropolitan areas.

But is the population size of the region the only factor that makes a region dynamic?  What about MSAs like Detroit and Cleveland whose size far surpasses south central Minnesota’s, but whose economy has stalled and population decreasing?  No, the true measure of a dynamic region is its ability to both serve as a hub and magnet for new job creation and sales; as well as its capacity to reciprocate growth in its smaller outlying region.

So it was with great interest that I read a recent report focusing on the “Trade Center Hierarchy in Greater Minnesota” by U of M researchers William Craig and Bruce Schwartau

( http://www.cura.umn.edu/sites/cura.advantagelabs.com/files/publications/Reporter-41-3&4-Craig-rev2.pdf).  Like many demographic and economic researchers before them, Craig and Schwartau rank greater Minnesota communities by their 2009 taxable retail and service sales.  But in addition to this simple ranking of sales, they also examine changes in the population size, retail sales, and sales per capita.  For you see, it is in these statistics that one can get sense of how dynamic the economy of a trade center really is; i.e. is the community truly serving a broader region, or is it primarily serving its own population? 

A simple example of this is to look at the communities of Willmar and Alexandria.  Willmar is by far the larger of the two communities with a 2010 population of 19,610; while Alexandria’s population is significantly smaller at 11,070.  Yet the smaller Alexandria had retail and service sales in 2009 totaling $287 million, while the much larger Willmar’s sales were only at $282 million.  In fact retail and service sales grew in Alexandria (1990-2009) at a rate of 68 percent, while sales growth in Willmar was less than half at 31 percent.  Translated into sales per capita, the smaller Alexandria reported sales of $25,958 per person in 2009, while the larger Willmar reported similar sales of $14,382 per person. Clearly it suggests that Alexandria is serving as a trade center that is drawing upon a much larger area and possibly a more affluent population than Willmar. And as one who visits both of these communities on a periodic basis, I can attest to the significant growth in retail shops, strip malls and hotels in Alexandria over the past decade, while such growth was not as apparent in Willmar.

So how did the Mankato-North Mankato MSA fair in these rankings?  Well the short answer is extremely well.  Of all greater Minnesota Cities it is clear that Mankato deserves its spot at number 4 in the rankings, behind Rochester, Duluth and St. Cloud.  While Mankato’s 2009 sales were just shy of $1 billion ($904 million to be exact), the remaining three all surpassed the billion dollar mark with Rochester leading the pack and nearly $1.2 billion.  However, what really secured Mankato’s ranking at number 4 was the sales figure for number 5 Brainerd, MN, whose sales were $421 million -- less than half of Mankato’s. Clearly, the Mankato-North Mankato MSA deserves its place and status with greater Minnesota’s other metro areas.

But what was truly most impressive was the sales growth of the Mankato-North Mankato region.  While sales from 1990-2009 grew at a rate of 39 percent in Rochester; 27 percent in Duluth; and 42 percent in St. Cloud; sales grew in Mankato over the same time period at a rate of 123 percent (from $406 million in 1990 to $904 million in 2009)!  Translated into sales per capita, the Mankato area actually generated $17,153 in retail and service sales per resident, while the similar number are $10,976, $10,986 and 10,041 for Rochester, Duluth and St. Cloud respectively.

As I noted earlier, having a large enough population to create a critical mass is certainly an important factor in creating a dynamic regional center, but population alone is not enough.  Rather the ability of a community to evolve into a truly dynamic regional center for sales, service, health care, education, the arts and entertainment is the true test.  And based upon this analysis, it certainly seems like the Mankato-North Mankato MSA is passing this test quite successfully.  With a 2010 population of 52,703, the Mankato-North Mankato MSA is half the size of the St. Cloud MSA at 101,206.  Yet in 2009 it reported 89 percent of the retail and service sales of the St. Cloud MSA.  If this trajectory continues will Mankato jump to the number 2 spot by 2020?  

Is Minnesota Nice to Small Business

The news that new job creation continues to slow is creating concerns among economists and politicians alike.  More and more of the evidence is suggesting that if you are truly concerned about job creation, you really need to focus on the needs of small businesses.  Why? According to the Small Business Administration, small businesses employ nearly half of all private sector employment and accounted for approximately two-thirds of the net new jobs created between 1993 and 2009.  More importantly, in our effort to speed our economic recovery along, it is helpful to remember that between the “dot-com” recession at the beginning of the decade and 2007, small businesses added almost 7 million jobs, while larger businesses with 500 employees or more actually shed close to 1 million jobs.  Lesson … if job creation is the goal, focus on creating an environment that supports small business development.

So it was with this in mind that I reviewed the results of a new research report on the friendliness of the states toward small business development.  The research, which surveyed more than 6,000 small businesses all across the U.S., was conducted by Thumbtack.com in partnership with the Ewing Marion Kauffman Foundation.  The study actually examined 12 separate dimensions of “business friendliness” for small businesses; from ranking the friendliness of a state’s licensing regulations to the friendliness of its tax code.  Not surprisingly, the findings that made the headlines in the press release was that Texas, Idaho, Utah and Oklahoma were the most friendly states for small businesses, while California, Hawaii, Vermont and Rhode Island were the least friendly.  In fact, California was home to the three least friendly cities to small businesses; Los Angeles, San Diego and Sacramento.

But aside from the rankings, what I found most interesting was the finding that small businesses in the study reported that licensing and regulatory requirements were nearly twice as important as tax-related regulations in determining overall business friendliness.  This finding reminded me of a study conducted last year by U.S. Bank Corp. where they also found that among the concerns of small businesses, only 8 percent reported that taxes were a primary concern.  So why are small businesses more concerned about the regulatory environment than they are about taxes?  Well I would suggest two reasons:  first, most small businesses are just that – small.  Most have few employees and modest sales revenues; therefore in most states taxes are not such a burden.  On the other hand according to the Small Business Administration, these same small firms with 20 or fewer employees actually spend 36 percent more per employee than larger firms trying to comply with federal regulations.  Simply put, complying with environmental, health and licensing regulations are disproportionately more expensive for smaller firms.  Therefore, when examining the friendliness of the business climate for small business, entrepreneurs focus more on the regulatory environment than taxes.

So how “friendly” is Minnesota to small businesses?  Well overall, the report gave Minnesota a solid grade of “B” ranking 18^th out of all the states.  Minnesota seemed to rank higher on the cost of hiring new employees; ease of starting a small business; zoning regulations; and the availability of training programs.  Conversely, Minnesota didn’t rank as well in licensing regulations and the friendliness of the tax code. The city of Minneapolis itself ranked 15^th out of the 40 major cities examined in the study, ranking high in the cost of hiring new employees and the ease of starting a new business.  Clearly, while the state ranked reasonably well in this study, we certainly can strive to do better.

Political and civic leaders should be encouraged to take a moment to consider the implications of this and similar studies.  While political leaders from both sides of the aisle may have difficulty agreeing on a variety of issues, both Republicans and Democrats alike want to improve the environment for small businesses.  In fact, the study’s authors examined these rankings by the political orientation of the entrepreneurs and found that there was very little difference across the political spectrum (i.e., conservative, moderate or liberal) in terms of how respondents ranked the friendliness of their states.

I am reminded that early in the 2012 legislative session our Republican-led legislature and our Democratic Governor found common ground in passing a bill to expedite environmental permitting.  With that in mind I might suggest that if our legislators are interested in finding bipartisan issues to work on in 2013, they may wish to start by focusing on improving the environment for small businesses throughout Minnesota. 

Rural Minnesota and the Broadband Economy

There is little doubt that as a state Minnesota has embraced the broadband economy. A new report released last month by Connect Minnesota™ reports that online sales in Minnesota now account for approximately $6.2 billion annually, including more than $1 billion in sales for micro businesses with fewer than 5 employees. The report also notes that approximately 83,000 Minnesota businesses report having a company website and 45,000 Minnesota businesses report allowing some of their employees to engage in tele-work. Not surprisingly, they estimate that of those 45,000 businesses that engage in tele-work, 13,000 are located in rural Minnesota.

The incorporation of all these digital tools by Minnesota businesses over the past decade is truly remarkable when you consider that only 10 short years ago a Blackberry was still a fruit (i.e., the Blackberry™ was first introduced into the marketplace in 2002). Today approximately 1 in 5 Minnesota businesses report that they procure work by actively bidding on contracts online; almost 50,000 Minnesota employers use the Internet to advertise job openings and/or accept employment applications; and most importantly, median annual sales of those Minnesota companies that utilize broadband are approximately $200,000 higher than those that do not use broadband (Connect MN, 2012). As noted above, it is remarkable how far our business community has come in the span of 10 years.

While the economic benefits of broadband utilization are well documented, clearly not all Minnesota businesses have embraced this technology. For example, while 72 percent of all Minnesota businesses now report having a website, only 58 percent of rural businesses report having one. Further, as a new report disseminated by the University of Minnesota Extension Center for Community Vitality points out that it’s not just about the existence of a website, but rather it’s about the overall “digital presence” of your business that really counts. What do I mean by a digital presence? Digital Presence is how a business presents itself and is visible via electronic media channels. This often includes the integration of a web site, social media channels, email marketing campaigns, a blog, digital signage or any other connected electronic touch point. And according to this new report, rural Minnesota has a ways to go.

Extension researchers Tara Daun and Hans Muessig assessed the digital presence of almost 14,000 rural Minnesota businesses through the examination of their websites; their use of social media such as Facebook; and their identification through GoogleMaps and GooglePlace. For those not familiar with a digital presence through Google, the idea is quite simple. When you search for a location in GoogleMaps, the map automatically identifies landmarks and businesses that have a GooglePlace page. So for example, if you zoom in on South Riverfront Street in Mankato, businesses such as “Neighbors Italian Bistro” are automatically identified on the map and if you place your cursor over that location and “click,” information will be provided about Neighbor’s, including its phone number, website and even restaurant reviews. Many Internet marketers will tell you that travelers and tourists are much more likely to patronize your business if you have a quality digital presence.

If it is true that more than 60 percent of purchase decisions today start with research on the Internet, then rural businesses that have no digital presence are at a great disadvantage. And according to this new study, just slightly over 40 percent of the businesses in the small rural communities they examined maintained a website. Only 13 percent of businesses were engaged in social media; and an equally small 13 percent of businesses were identified on GoogleMaps.

While there are many advantages of living in a rural community, trying to operate a business in rural Minnesota has two inherent disadvantages. The first is that the size of your market is small and the second is the distance one often needs to travel to reach markets that have critical mass is significant. Of course the good news is that these digital tools allow you to expand your market reach and closes the distance to reach regional, national or global markets.

A decade or more ago before the “dot.com” bubble burst, there was a belief that the Internet would change everything. While we know now with hindsight that wasn’t exactly true, it is fascinating to observe how it has truly changed so much and how the Internet continues to integrate itself into our daily lives. But some things don’t change; and as I think about how rural businesses without a digital presence may not realize the business opportunities they are missing, I am reminded of an old adage that while appropriate, far preceded the Internet: and that is "out of sight – out of mind."

Tax Credits gone Awry?

There no question that the life blood of any business is capital and cash flow; and this is especially true for emerging small businesses. When starting up a new venture there are myriad expenses with little or no revenue coming in, making access to adequate capital essential to getting a venture off the ground. In fact many good ideas never get off the launch pad due to a lack of access to capital. And once the business is launched, cash flow becomes “king”, as expenses inevitably outpace revenues throughout the initial survival stage of the business. It is during this survival stage in the business development cycle where managing the rate in which funds are being expended vs. sales revenue coming in is key to the business’s viability.

When it comes to capitalizing a business there are two types of capital that entrepreneurs rely on: debt capital and equity capital. We are all familiar with debt capital as it is the strategy that most of us use to finance our homes and cars. Banks and other lenders are more than willing to provide us with loans as long as we have sufficient collateral or other demonstrated means to pay back the loan with interest. But obtaining sufficient debt capital is often difficult when a small business is starting out with little equipment, real estate or other forms of tangible collateral that a lender can count on. On the other hand, equity capital is a form of investment where a financier provides outside funding in exchange for a partial stake in the emerging business. Many call this type of investment “patient capital,” as the business owner does not have to begin paying back the funds, but rather as the business grows and prospers, so does that equity stake in the business. Unfortunately, most of the financiers that make such equity investments are not typically interested in very small start-up firms as the risks are often disproportionately high in relation to the reward. Accordingly, those individuals and equity firms that choose to make investments in such start-up or early-stage companies are often called “angel investors.”

In an effort to encourage more angel investments in Minnesota the state legislature passed a bill in 2010 establishing an Angel Investment Tax Credit program. The program, which began in the latter half of 2010, requires qualified investors seeking to make such investments, as well as qualified businesses wishing to receive these investments to register with the Minnesota Department of Employment and Economic Development (DEED). The reward for such compliance with the program is a refundable tax credit to the investor equal to 25 percent of the investment.

According to a recent legislative report it seems that the program is performing as intended. In 2011 there were 623 individual angel investors certified by DEED, of which 563 made an investment in a certified business, along with 21 certified investment funds, all of which made an investment as well. As a result in 2011, 113 qualified businesses received investments totaling $63.1 million through the program and $15.8 million in refundable tax credits were issued.

While most would consider the program a success, others have concerns. As expected, the overwhelming majority of investments were made to businesses located in the 7-county Twin Cities region. In fact of the 113 firms receiving investments in 2011, only 11 were located outside the Twin Cities; 10 in southern Minnesota and 1 in Duluth. As a result of this apparent geographic inequity, a bill was drafted this session increasing the size of the refundable tax credit to 40 percent for investments made to businesses located in greater Minnesota. But is this really a good idea?

While few are more sympathetic to the concerns of rural Minnesota communities and businesses than I, at the same time I have always believed that smart equity investors make their investments in good companies regardless of their location. And while the opportunity to learn about such good companies is certainly easier if they are located in the Twin Cities area, maybe the appropriate response is for DEED to simply work harder at showcasing these investment opportunities in greater Minnesota. But is increasing the tax credit to 40 percent the answer?

Personally, I can’t help but think of a 40 percent refundable tax credit as the taxpayers of Minnesota subsidizing almost half of a private investor’s total investment without receiving any direct return on our investment. Can we even call this private investment anymore? Further, the program does not limit qualified investors to be Minnesotans. So hypothetically, an out-of-state investor who has no tax liability in Minnesota, and who makes a $100,000 equity investment in a rural Minnesota company will simply get a refund check for $40,000. Really?

Recently I was reading the remarks of Mankato’s city manager Pat Hentges in the Mankato Free Press, as he was reflecting on the strong employment growth and business development his city has experienced. Hentges noted, “The days of wielding all these financial incentives for getting companies (to locate here) is past.”

Well … maybe not everywhere.

Spring is a Time for Optimism

It sure felt like spring was in the air when the February jobs report was released showing an increase of 227,000 jobs. While that was a bit higher than most analysts expected, what actually was most impressive was that February was the third consecutive month in which the economy created over 200,000 jobs. As any statistician will tell you, one occurrence is often perceived as an episode; two back-to-back occurrences give you a reason to pause and observe; however three consecutive occurrences is defined as a trend. And while this continuing upward trend in jobs is not that steep, it appears to be spreading a great deal of optimism.

What was equally exciting to see was that in addition to the higher than expected job growth in February, the economy simultaneously witnessed an increase in the employment participation rate. In other words, people who had previously been sitting on the sidelines unable to find a job in the past are now encouraged to once again join the workforce and start looking. The fact that several hundred thousand Americans re-joined the workforce and the overall unemployment rate still remained steady at 8.3 percent is a good sign. And lastly, amid all this optimistic news it was also reported that average weekly wages increased as well. Having all of these indicators trending upward at the same time gives one reasons to hope.

Here in Minnesota the trends and the optimism are equally on display. The January jobs report indicated that our state economy added 15,500 jobs and the state unemployment rate dropped to 5.6 percent; more than 2.5 percentage points lower than the national average. Over the past year the state economy has now added a “net” 29,000 jobs. The strength of the state’s private sector was substantial when you take into account the continuing loss in government jobs during the same period of time. For example, in January the private sector actually created 17,200 new jobs, while government shed 1,700 for an overall net gain of 15,500. These contradictory trends have been quite consistent throughout the year with the private sector actually creating close to 37,000 new jobs in the past year, while government agencies shed a total of 7,900 jobs. And while one could argue that the loss of government jobs seems to be slowing down the overall jobs recovery, one cannot deny the fact that in the fourth quarter of 2011 Minnesota’s private employers reported close to 50,000 job openings; an increase of 47 percent from the same quarter the year before. Without question Minnesota’s private sector is both growing and gaining traction.

The housing market in Minnesota has been weak for years and has created a significant drag on the economy. But now even the housing market seems to be trending in a more positive direction bringing a bit more optimism for 2012. Realtors report that the number of homes receiving offers continues to rise, while the number of new listings entering the market declines. And while the average price of homes has not significantly risen, it is fair to say that the continuing decline in the average price of homes seems to have bottomed out and may be in a position to increase from this point forward.

Locally here in south central Minnesota, the economy actually has been quite robust. While the Mankato/North Mankato metropolitan area typically doesn’t receive much statewide attention, some might be surprised to learn that over the past year the Mankato/N. Mankato area has outpaced the all other metro areas in terms of job growth. In fact in the past year jobs grew at a rate of 3.6 percent in the Mankato area. Not that impressed? Well over the same period of time jobs in the Twin Cities metro grew at 1.1 percent; in Rochester the rate was 0.2 percent; and in Duluth net jobs declined by a rate of -0.9 percent. With that as a reference, how does 3.6 percent seem now?

Let’s remember that spring is the time of year that always brings out the optimist in all of us; but this spring the economic optimism may well be warranted. At the same time one must be careful not to be unrealistically optimistic. The recent February forecast of a $323 million budget surplus is a good example. While a multimillion dollar surplus is always a good thing, let’s remember that this surplus was created as a result of reduced government spending, not because of a fast-growing economy. In fact since the November forecast the combined revenue increase as a result of income, sales and corporate income taxes was a very modest $45 million, or an increase of 0.2 percent.

So while the economic recovery continues in Minnesota and across the nation, let’s remember that the recovery can’t afford any sudden jolts. And while some may imagine jolts such as a natural disaster or unexpected geo-political events, it also includes unwise tax and economic policies designed to speed up the recovery. While it’s hard to admit, sometimes the smartest thing a policymaker can do is to sit back and just let the economy continue its course.