Business Diversity

 

The City of Philadelphia has made remarkable progress with diversity in its government contracting over the last fifteen years, but the participation of local disadvantaged firms is still lacking. According to a recent disparity study, utilization of local disadvantaged firms is hampered by the low rate of entrepreneurship among people of color in Philadelphia.

 

According to the State of the City research published by Pew Charitable Trusts on the ownership of businesses in the Philadelphia region, 76.6 of businesses with employees were White owned in 2016, and Whites comprised less than 40% of the population. By contrast, in a city with a majority of people of color, African-Americans own only 1 in 40 businesses with employees (2.5%) but comprise over 40% of the population and Hispanics own only 2.2% of businesses with employees but comprise over 10% of the population. The low rate of business ownership with actual employees among people of color can naturally be linked to other economic disparities – including the rate of poverty among people of color, the unemployment rate among people of color, and the wealth gap between Whites and people of color.

 

Increasing the rate of business ownership and growth among people of color can positively address those economic disparities and would help to grow the overall economy in a more equitable way – bringing more economic value to people of color and the city as a whole.

 

Almost all public policy action on this issue has come from City Council. Council has enacted legislation that has amended both the Philadelphia Home Rule Charter and/or the Philadelphia Code to enact ordinances related to fair contracting and fair lending to aid diverse business growth. With more diversity in local government contracting already achieved, there should be a new legislative focus on more diversity in business ownership.

 In 2006, I sponsored a legislative change to the Philadelphia Home Rule Charter to require both an annual disparity study and annual participation goals for disadvantaged business enterprises (DBEs) in City contracts. As of Fiscal Year (FY) 2018, DBEs in the Philadelphia metro area represented about 25% of available metro firms and utilization of those DBEs was also about 25% of City contract dollars, (as compared to only 14.8% in FY08). We finally reached “statistical parity” in FY 2018, if you measure by “metro area” data. If you look at the numbers just within the City of Philadelphia -  DBE utilization falls to about 16%. There is a problem with disadvantaged business development in Philadelphia.

How far have we come since I began this work? From single-digit participation between 1998 and 2003 to a double-digit percentage in every year since 2006, when annual disparity studies and participation goals became the law. In each fiscal year, that now means hundreds of millions of dollars to DBEs from City contracts - and in FY 2018, it meant over $400 million to DBEs as compared to less than $100 million between 1998 and 2003.

Based on this data, we’ve made effective public policy interventions on this issue– but also in FY18, businesses owned by people of color within the City of Philadelphia accounted for only 19.3% of available firms - in a city that is majority people of color. Business ownership matters – and we can’t have real economic equity or parity without it.

 

Business development by people of color has many hurdles including racial disparities in business lending. While business lending data based on the race of the loan applicant is not publicly available for the most part, the National Community Reinvestment Coalition has conducted “matched-paired mystery shopping” that demonstrates the disparate treatment faced by people of color seeking access to business capital and credit. The city is at an economic disadvantage if the financial industry is, in fact, “red-lining” business ownership opportunities for most of the population in the disparate treatment of people of color seeking access to business capital and credit.

 

The idea of a Diverse Business Loan Guarantee Program that is publicly funded should be considered. The loans would still come from the private sector with some level of public sector guarantee.