Evaluating Your Economic Role in the Community
Economic impact analyses are an increasingly popular tool for arts advocacy in all regions of the country. Some methodologies in this section have been in practice in the cultural sector for years, while others are relatively new or experimental approaches to quantifying different dimensions of economic impact.
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Direct spending and employment figures
Reporting direct spending and employment figures is really just a descriptive accounting of the annual expenditures of your organization (or collection of organizations within a geographic region) and the number of employees directly employed by your organization or a group of organizations.
Collecting these figures each year is good practice for two reasons. First, it gives you a starting place for thinking about your organization’s economic impact. It is only a starting point, however, because the money spent by your organization circulates through the local economy and creates additional economic impact, as do monies spent by visitors from outside of the area.
Second, these figures are more and more commonly being collected by regional and state arts advocacy groups to make the case for the growing significance of the cultural economy within a region or state. Having these figures readily available will make you a better partner in these larger arts advocacy efforts.
The New England Foundation for the Arts (NEFA) www.nefa.org has been refining definitions of the creative economy and gathering and analyzing primary data related to the six New England states for over a decade. NEFA’s periodic reports provide a snapshot of trends within the creative economy and are often used by cultural leaders to advocate for the importance of the creative economy to New England’s communities.
Until recently, the reports relied mainly on primary data from the U.S. Census Bureau’s Economic Census, the decennial U.S. Census Bureau Population Census, the annual U.S. Census Bureau County Business Patterns, the U.S. Bureau of Labor Statistics Current Population Survey, and the New England state Departments of Education, using statistical methods to interpolate total direct spending and employment based on the combination of available data. These reports, available at www.nefa.org/pubs/index.html, have attempted to characterize the scope of the creative economy in its for-profit, formal non-profit, informal/unregistered, and institutionally embedded forms.
In August 2006, NEFA released its first report using a new methodology that incorporated large amounts of data from the digitized IRS Form 990 filings of cultural nonprofits provided by the National Center for Charitable Statistics. This latest report does not attempt to characterize the entire creative economy in New England, but it does provide enhanced direct spending and employment estimates for the registered nonprofit component of the creative economy. This report, along with previous ones, have been useful advocacy tools at the state and regional level, and for making generalized cases at the local level. www.nefa.org/pubs/documents/NPrpt05_web_000.pdf
There are several high-profile examples of regions that have invested considerable sums of money to create a “data warehouse” in which to collect and analyze data on the cultural sector and then use that data warehouse as a launching pad for more in-depth analyses such as those covered in other pages of this toolkit.
The New England Cultural Database (NECD), a project of the New England Foundation for the Arts (NEFA), was initiated in 2001 and has grown to contain more than 10,000 records on nonprofit, for-profit and embedded cultural organizations in the six New England states. NEFA’s strategy has been to grow the database in phases as relevant data become available, and to use it as a platform for designing tools that can serve evaluation and advocacy purposes.
The New England Cultural Database is available at www.newenglandarts.org. It includes direct spending information for the nonprofit cultural organizations that file a Form 990 with the IRS, consisting of nonprofits with budgets of $25,000 and up. The database also provides tools developed with the Center for Creative Community Development to estimate employment and indirect and induced spending generated by nonprofit cultural organizations in the towns and cities of Massachusetts (the pilot state for the NECD’s tool development). Other tools provide the ability to: map the locations of cultural organizations; analyze funding by the National Endowment for the Arts (NEA), state arts agencies and NEFA by geography; download lists of press contacts in various parts of the New England region; and view US Census data at the community level.
that can eventually be integrated into the NECD.The Pennsylvania Cultural Data Project (PACDP) is another interesting case. The PACDP does not collect Form 990 information as “primary data,” but relies instead on the cultural organizations themselves to submit extensive financial and non-financial data through an annual electronic survey process. Participation is expected to be high among established cultural organizations because completing the survey has been made a requirement for funding by many of the leading arts funders in Pennsylvania.
The PACDP, discussed in more detail at www.pacdp.org, will be used by Pennsylvania’s cultural community to develop benchmarks, impact analyses, and trend analyses based on aggregated data. One such report has already been published relying on PACDP data: the Greater Philadelphia Cultural Alliance has utilized PACDP data to develop a report on the “breadth, diversity and well-being of Southeastern Pennsylvania’s nonprofit cultural resources,” available at www.philaculture.org/portfolio. Among other findings, this initial report documents some $562 million in direct spending and over 14,000 full- and part-time jobs at the 218 participating cultural organizations, figures which many of those organizations are now using to advocate for their importance to the regional economy.
It can be very useful to contextualize the impacts you have observed in the local economy by collecting data on general changes in the local economy over time. These data can be easily obtained at the 5-digit zip code level for the years 1998-2004 currently.
Go to http://censtats.census.gov/cbpnaic/cbpnaic.shtml and enter your zip code in the “Zip Code Business Patterns” field and click “Go.” The data for the most recently available year will be shown automatically. You can then search for other years going back to 1998 to look for changes over that time period and manually calculate percentage changes. We recommend searching for results in one or more nearby zip codes that are demographically similar, and for the county overall; if you calculate percentage changes for those other geographic areas you can compare the trends observed in your community with trends in the surrounding area to help articulate the changes in your local economy and the role you see your organization as having played.
An examination of employment patterns in North Adams, Massachusetts, where MASS MoCA is located, and neighboring Adams can provide an example. Zip code business pattern data show a jump in employment in North Adams from 1998 to 2001, from 5,101 jobs in zip code 01247 in 1998 to 5,611 jobs in 2001, followed by a recessionary drop-off back to 5,125 jobs in 2004.
The corresponding figures for nearby Adams, which also has a blue-collar history and also has suffered manufacturing job losses for decades, are revealing. In Adams (zip code 01220), employment went from 1,882 in 1998 to 1,909 in 2001, then down to 1,614 by 2004, reflecting both the recession and the ongoing loss of manufacturing jobs in small New England towns. The town of Adams, then, lost more than 14% of its overall employment between 1998 and 2004, while North Adams experienced a slight increase in employment over this same period.
As an alternative to government collected data, surveys of local businesses can be conducted to help determine the extent to which a cultural organization, cluster or event plays a key role in driving customers and sales to particular businesses. There are numerous methodological difficulties in collecting meaningful data from small businesses, however, which must be taken into consideration when planning such an analysis:
- It can be extremely challenging to get small business owners to fill out surveys, especially if they are asked to do so regularly over some period of time. Lack of time and concerns about confidentiality are both significant deterrents.
- Business surveys, by themselves, can’t easily distinguish between “new” spending and spending which would have occurred in the community regardless of whatever cultural event or venue may induce visitors to frequent local stores and restaurants.
- Business surveying is very time-consuming.
In spite of these challenges, well-designed business survey efforts can be useful, especially if combined with good data on local cultural visitors such as their zip codes and their other reasons (if any) for visiting a particular community.
Business surveys are most effective when used with “control groups” that can show the marginal impact of a particular cultural event. For example, you might survey a group of restaurants about their Saturday night sales on evenings when there is an event at a nearby cultural organization and on evenings when there is no such event or other unusual factor that would drive business above or below the norm for a Saturday night. If you could garner consistent participation over a period of time (and assure the restaurant managers that their results will be kept confidential), you could learn some interesting information about the impact of a particular cultural organization in driving restaurant sales.
Because of privacy concerns, business surveying is usually best done by an independent evaluator such as a university faculty member or paid consultant who pledges not to disclose individual results; many business owners are hesitant to release sales information to staff of a nearby cultural organization, even with a pledge of confidentiality.
Economists working in the 1950s developed a methodology for understanding and calculating the pattern of business trade among firms in a region, and the economic effects of these trades as the monies involved circulated through the local economy. This economic model has gone by different names over the years, including inter-industry model and input/output model.
The earliest text on the economic model was written by Walter Isard. It is titled Methods of Regional Analysis and was first published in 1960 by the MIT Press. A more accessible summary of the economic theory behind input-output modeling is available at en.wikipedia.org/wiki/Input-output_analysis.
The model relies on data collected by the federal government that describe the flow of goods and services between different industrial sectors and households within a geographic area. In the most basic terms, a firm buys inputs to produce whatever it produces, whether that is electronics equipment or a theatre production. The firm’s suppliers must then increase their purchase of inputs in order to fulfill the firm’s order.
Thus, when a restaurant opens in town and orders new towels, there is increased economic activity not only at the local restaurant supply store, but also at the local mill (if there is one) where the towels are made, and at the local energy supply firm since all three firms (the restaurant, the restaurant supply store, and the mill) may increase their energy consumption as a result of new business.
New jobs are created as a result of the new restaurant and increased activity at the restaurant supply store and the mill, and that results in increased household income. Households may spend their increased income in quite different sectors, such as buying a new car or increasing their expenditures on healthcare and education.
Of course at every stage some of the money spent stops circulating through the local economy and “leaks out” to other counties, states, or even countries. At some point the cycle stops and it is possible to sum the total economic impact of the new restaurant. Typically, the economic impact model focuses on the local county economy, although it is possible to broaden it to a state or national level.
Arts administrators and policymakers will want to be familiar with two free tools that are available online to provide you with estimates of an arts organization’s local economic impact. For a small organization, these tools may essentially be all you can afford to utilize as empirical back-up in building a case for your economic role in the community. For larger organizations, these estimates can be a useful starting point for more in-depth analyses.
Arts and Economic Prosperity Calculator
Nonprofit arts organizations nationwide can make use of the “Arts and Economic Prosperity Calculator” designed by the national arts service organization Americans for the Arts.
Released online in 2003, the Arts and Economic Prosperity Calculator has been a valuable tool for generating simple, free estimates of economic impact by nonprofit cultural organizations around the country. The calculator requires only basic annual operating expense and visitation figures, using economic models to translate those figures into estimated impacts on full-time-equivalent employment, household income, local government revenue and state government revenue presented in a clean, straightforward format.
Americans for the Arts stresses that when using the calculator, it is important to keep in mind that the results are estimates; that they are based on averages of similarly populated communities throughout the U.S., not on your specific community; and that they are based on surveys of 3,000 nonprofit arts organizations and more than 40,000 attendees at arts events in 91 cities in 33 states and the District of Columbia.
Counting on Culture Tools
For arts organizations located in Massachusetts, we also recommend exploring the “Counting on Culture” tools developed by the Center for Creative Community Development, New England Foundation for the Arts, and Cultural Logic, Inc., as a feature of the New England Cultural Database.
The Counting on Culture tools provide income and employment estimates for the impact of budget spending by nonprofit cultural organizations in Massachusetts, as well as estimates of their impact on quality of life as measured by detailed regression models of residential property values (see Quality of life through residential property analysis, the next section of this toolkit).
The income and employment estimates are derived from economic inter-industry models for each of the counties in Massachusetts, grouping cultural organizations into three broad categories: museums; performing arts organizations; and other cultural organizations.
The Counting on Culture site is simple to use and includes useful explanatory material to put the estimates into context. Users can search by name for many of the state’s nonprofit cultural organizations whose Form 990 financial information is contained in the New England Cultural Database. Users can also create a link to the “print summary” results page for their organization in order to easily share the estimates with members of the public.
Comparison of Arts and Economic Prosperity Calculator and Counting on Culture
After exploring both the Arts and Economic Prosperity Calculator and Counting on Culture, you will notice a number of differences:
The Arts and Economic Prosperity Calculator does not provide estimates of the total indirect and induced “income” (combined business income and household income) generated by a particular organization’s budget and visitation, but it does break out the estimated impact on total household income and state and local tax revenues, a level of detail which is not presented in the Counting on Culture tool.
The Arts and Economic Prosperity Calculator allows users to indicate the number of cultural event-related visits received by a particular organization or community to calculate the estimated impact due to visitors. The calculation does not distinguish between visitors from inside the county and those from outside the county, which many economists would consider problematic because of the likelihood that spending by visitors from within the county would be easily replaced by other local spending in the event that a particular cultural organization moved or ceased operations. The Counting on Culture tool does not currently address visitor impact for several reasons – the primary one being that most cultural organizations do not carefully track the zip codes of their visitors and thus cannot distinguish local from non-local visitors.
Counting on Culture’s income and employment models are customized for each county in Massachusetts, providing localized estimates that can be considered more accurate than estimates derived from average results in similarly-sized communities across the country. A town or small city in culturally-rich Berkshire County of western Massachusetts or in a suburb of Boston may have quite different trade patterns from those observed in the average “small community;” the economic peculiarities of the Berkshires will be much better represented by a model based on Berkshire County data (as provided by Counting on Culture) than by a model based on a national average (as provided by the Arts and Economic Prosperity Calculator).
The Counting on Culture models of organizational spending impact are also more reflective of Massachusetts organizations because of the ability to categorize organizations as museum, performing arts, or “other.” The wage levels and employment characteristics of museums are generally quite different from performing arts organizations. In Massachusetts, museums typically employ fewer staff than performing arts organizations with the same budget size. That difference is blurred by the Arts and Economic Prosperity Calculator, which averages together the impacts of museums, performing arts organizations, and other cultural organizations.
Counting on Culture also provides empirical estimates of cultural organizations’ impact on quality of life in their local communities as measured by detailed regression models of residential property markets in Massachusetts, showing the approximate share of house values that can be attributed to homeowners’ willingness to invest larger amounts in a home to live in a community with more culture.
Quality of life through residential property analysis
Cultural organizations can be agents of community change because they improve the quality of life and make the neighborhood a more desirable place to live. Evaluating the extent to which a particular organization serves this function is complex, however, because of the intrinsic difficulty in defining what being “more desirable” means. One approach developed by economists is to conceptually “empower” current and potential residents of the community to define attractiveness based on their own willingness to seek out and pay for accommodation in the community. This view leads naturally to an economic evaluation, in which we measure the increased desirability of the local neighborhood and community by calculating the appreciation in property values and identifying that portion of the change that is attributable to the arrival of the cultural institution or other source of amenity.
The approach has important strengths and weaknesses. On the one hand, it can be undertaken in a consistent fashion over a wide variety of communities and for a wide variety of cultural organizations, environmental amenities, and other factors. This permits comparison and evaluation of the features of communities and institutions that combine to influence the community development impact. A further advantage is that it produces numerical estimates of changes in community wealth and property values that are often of interest to local policy makers and funding sources quite apart from the artistic merit of an organization’s programming.
The main drawback of this approach is that it is highly technical and requires specialized skills.
Careful accounting of the many factors that have influenced the values of residential property in a particular community over a period of time (in order to isolate the impact of a cultural organization or cluster) requires sophisticated regression analysis. For a detailed discussion of this technique, refer to “Hedonic Analysis of Housing Markets” by Dr. Stephen Sheppard.
Utilized with care, the approach can serve to help identify cultural organizations that are having a significant impact on the desirability of their communities, as well as the threshold situations in which displacement of existing residents might arise. It can be a central input in the design of policies and programs that are meant to enhance neighborhood quality of life and mitigate any tendency towards such displacement.
Dr. Sheppard has applied these techniques to analyze the housing market impacts related to a number of cultural organizations around the country. An overview of the results in the case of MASS MoCA in North Adams, Massachusetts can be found in our report on the Economic Effects of MASS MoCA on North Adams.
If you are located in the state of Massachusetts, you can take advantage of an automated quality of life/housing market impact calculator developed by C3D based on a model of diverse housing markets across the state. This calculator is available through the “Counting on Culture” tool of the New England Cultural Database. For a description of the analytical methodology used to develop the Counting on Culture tool, read our report on Measuring the Impact of Cultural Amenities.