San Francisco spends just 10 percent of public money with local businesses -- and that's bad for everyone
On Dec. 3, 2008, just before noon, Mayor Gavin Newsom arrived at a press conference in Noe Valley to remind city residents why it's important to shop locally. The mayor climbed out of his shiny new hybrid SUV, walked into the Ark Toy Company, showed charts and graphs, and talked about how money spent in town helps the local economy. Joined by Steve Falk, president of the San Francisco Chamber of Commerce, Newsom urged holiday shoppers to look first in San Francisco before buying something on the Internet or in some suburban mall.
The mayor's shop-local press conference was a clear sign that the debate over the role of small business in the San Francisco economy is over. Everyone from the mayor's business advisors to the Chamber of Commerce to small business advocates and progressive economists now agrees that small local businesses provide the vast majority of the jobs, keep their money in town, and generate more tax dollars, more wealth, and more prosperity for this city than the big out-of-town chains.
It was a picture-perfect scene, until KPIX-TV reporter Hank Plante asked the mayor an embarrassing question: Why, he wanted to know, did the Mayor's Office buy Newsom's new car in Colma?
Newsom said he didn't have a clue.
Actually, the reason was pretty simple: the dealership in Colma submitted the lowest bid. But San Francisco lost out on the sales tax, a local Chevy dealer that was going out of business lost a local sale, San Francisco workers lost a commission and in the end, the city almost certainly lost more on the deal than it saved with the Colma discount.
That's the untold story behind the mayor's promotion. San Francisco, as a buyer of goods and services worth hundreds of millions of dollars a year, does a terrible job at shopping local. Indeed, for years small business advocates have been trying to get city officials to make it easier for local merchants to get city contracts and they've made very little progress.
"I've worked so hard on this, year after year, and nothing ever happens," Scott Hauge, a small business activist and organizer, told us. "After a while, I just threw in the towel."
Hauge is devoting his energy these days to statewide issues. But on the local level, there's a growing sense that the city needs to do more to help small local businesses get their share of the massive public spending pie.
"The Small Business Commission has made it clear that this will be a priority over the next year," Regina Dick-Endrizzi, the commission's acting director, told us.
Nobody knows exactly what percentage of city contracts for goods and services go to local businesses. Hauge said the Mayor's Office did a limited survey about a year ago, but the data wasn't very good. And while Newsom signed an executive order in 2005 directing departments to look for ways to patronize local businesses, there's not much to show for it.
"I think probably less than 10 percent [of city spending] goes to local businesses," Hauge said.
Board of Supervisors President David Chiu, a former small business commissioner, agrees. "I think it's accurate to say that at least 70 to 90 percent of all city contracts go to out-of-town businesses," he told us.
As Dick-Endrizzi pointed out, city purchasing has strict rules and for good reason. "In most cases, you have to put out a request for proposals and take the lowest bid," she said. "If you didn't have that, you'd have a big problem with favoritism."
But when the lowest bid is the only criterion, San Francisco businesses are at a distinct disadvantage.
"Say a city agency wants to buy five hammers," said Steven Cornell, owner of Brownie's Hardware. "I have the hammers for $6, but somebody in Nowhere, Miss., can sell them for $5.99.
"Well, the shop in Mississippi doesn't have to pay San Francisco's minimum wage, doesn't have to pay for sick days, doesn't have to pay for health care ... We've asked businesses to contribute to all these good social policies, then those businesses get penalized because someone else can sell something cheaper."
Cornell who says he agrees that local businesses should pay well and give their workers benefits is frustrated that when it comes to purchasing, the city doesn't give anything back. "We lost S&C Ford, we lost Ellis Brooks Chevrolet," he said. "Those were all union jobs, with good benefits. And how many cars did the city buy from them?"
When Cornell was on the Small Business Commission, he remembered some small locally owned cabinet-making shops came to complain about a $4 million city contract for woodwork. "They told us that they lost the contract to a Canadian firm," he said. "The costs of operating in San Francisco were higher than in Canada, so they couldn't compete."
"We do not as a city reflect the fact that we ask employers to do good things for their workers," Chiu added. "When we spend perhaps $1 billion a year in city contracts, those employers don't have a level playing field."
Sure, on the surface and in the short term, the city gets a better deal when it awards contracts based entirely on price. But San Francisco has, as a matter of public policy, already decided there are good reasons to give minority-owned contractors some advantage in bidding, and that public contractors should pay prevailing union wages and offer benefits to domestic partners. Local enterprises get a modest advantage in some bids, but nowhere near enough to make up for the cost difference of operating in San Francisco.
And as Newsom himself has made clear, spending money locally has a long-term economic benefit that almost certainly outweighs the price differential in most bids. "When Newsom bought his car in Colma, the city lost the sales taxes, and lost the multiplier effect of the money being spent in town," Cornell noted.
In fact, a 2007 study by Civic Economics, sponsored by the San Francisco Locally Owned Merchants Alliance, showed that if city residents shifted just 10 percent of their purchasing from national chains to locally-owned businesses, the city would gain 1,300 new jobs and $200 million in economic activity every year.
Imagine the activity the positive benefits to the local economy that would come with the city shifting, say, 25 percent of its spending to local businesses.
Obviously the city can't buy everything in town. "Nobody in San Francisco makes Muni trains," Cornell noted. But a lot of what city departments buy, from hammers and paper to cars and trucks, is available from local suppliers or could be. "If the city made it known it was looking to buy something locally, some entrepreneur would come along and figure out a way to supply it," Cornell said.
So how could this work on a policy level? It's not that complicated. The city controller, or the Human Rights Commission, which oversees contracting policy, could devise a formula showing how much the cost of complying with city laws like the minimum wage, health care, and sick days (laws that most of us, and many small businesses, fully support) drives up the cost of doing business in San Francisco. Then give local merchants an equivalent advantage in the bidding process.
In other words, if the hammers at Brownie's Hardware cost 25 cents more than the hammers in Nowhere, Miss., because Cornell pays for his workers' health insurance, he should only have to come within 25 cents of the cut-rate suppliers' price to get the city's business. And if the taxpayers have to fork over a few cents more to buy local hammers, the money will come back, and more, from the demonstrated benefits of shopping locally.
Chiu thinks that's a good idea, and he's already taken the first steps to forcing the city to shop local. Chiu introduced legislation in April requiring the city to set aside a portion of all contracts for locally-wned businesses and to increase the financial advantage local firms get in bidding.
And at Chiu's request, the HRC will appear before the supervisors Land Use Committee May 11 to present the latest data on how much city spending goes to local businesses. "I've been asking for this for two years," Chiu said.
"It is unwise for our city not to take $1 of public money and give it to a local business that will pass that dollar onto its local employee, who will then spend it at another local business," he added. "The multiplier effect of this is that money spent locally is better for the economy, and for the taxpayers."