Essays on People, Place & Purpose

Investing in What Works for America's Communities

Crossing Over to an Improved Era of Community Development

by Eric Belsky and Jennifer Fauth

As of 2011, PBC has acted as advisors to eight different development groups across the country and continues to grow. Working in New Orleans after Hurricane Katrina, for example, PBC helped the Bayou District Foundation transform the dilapidated St. Bernard’s public housing site into a mixed-use and mixed-income community. Using many of the lessons learned from the Villages at East Lake, the newly opened development has a new charter school, an early learning program and supportive services.34

PBC stresses open communication between the various groups in its network and hosts annual collaborative meetings so each organization can learn from one another’s successes and challenges. Whereas each location is unique and needs a tailored solution, the collaborative model PBC has embraced has led to best practices and a basic framework. As Warren Buffett, one of PBC’s cofounders, states, “I like to back success. I like things that change people’s lives…. [PBC has] got the right mission. It’s got a record of success. It’s got the right leader and it’s hard to find terrific leadership. And now it’s been proven to be replicable.”35 Although still in its early stages, with sustained success only being able to be evaluated by future generations, PBC has provided a replicable model for communities to dramatically alter the achievement of low-income residents.

Meeting the Challenges Ahead

Although the community development field has progressed, it still faces several challenges as it moves forward. Unless it successfully meets these challenges, the field will have a difficult time fulfilling the promise of an outcome-oriented, integrated approach to creating systemic change in low-income communities across the country.

First, integrated community development demands significant flows of capital into a community for diverse programs and activities. Finding ways to attract private capital to make such concentrated investments will remain an important challenge. Fortunately, the field can look to strong national intermediaries and CDFIs that have managed to aggregate private capital and leverage scarce government tax incentives and subsidies to fund integrative initiatives. It can also look to the growing number of strong community-based organizations and regional and national firms capable of launching and operating community development initiatives and activities at scale. Concentrated investment can spark additional investment and reduce risk to both community and investors because its benefits usually get capitalized into the value of real estate in the areas around it.

More specifically, to take integrated community development to scale it will be necessary to create a financial return on investment sufficient to attract private capital and sustain community developers and CDFIs. Moving beyond real estate investments to investments that promote human capital development will take special efforts to craft strategies that show people-based investments can enhance social return while generating financial returns.

Second, integrated community development places a premium on coordination and cooperation among community development organizations with different functions as well as among multiple other stakeholders, including business and civic leaders, philanthropic organizations, and government agencies. The field should support education that builds the skills of community development leaders to forge such partnerships and operate them effectively. In addition, innovative financial structures in which philanthropic and government capital work together to leverage private capital must be studied and efforts made to replicate successful ones. New government programs should learn from and build on these efforts.

Third, the structure of government programs and funding streams poses another set of challenges. Despite fledgling efforts at the federal level to coordinate sectors at the regional level (through the HUD-DOT-EPA Sustainable Communities Program) and to promote integrated solutions at the community level (through the Choice Neighborhood Program), funding and program innovations continue to take place at the federal level almost exclusively within silos that resist efforts to coordinate and meld them together in more flexible ways. Nevertheless, there are ample examples of the federal government giving states authority to experiment that have produced replicable approaches. Welfare reform, for example, was based on innovative programs piloted at the state level. Moving-to-Work public housing authorities, able to petition HUD to waive rules, have also become laboratories of invention.

Fourth, the Great Recession and its aftermath pose another set of challenges. Although some weaker community development organizations have failed, others are still teetering. Weak organizations often resist merging with or being acquired by stronger organizations until it is too late. Helping organizations know how and when to reach out to other organizations when they are in trouble—whether as an after-effect of the recession or for other future reasons—is important to sparing communities and the broader field from the ravages of failed organizations. The Great Recession has also resulted in massive disinvestment, foreclosures, and abandonment in communities across the country. Integrated investment in these communities will require dealing in new ways with housing distress, abandoned properties and the loss of jobs and civic services.

Fifth, the social impact investing movement brings its own set of trials to the field because it puts new responsibilities on community-based organizations to demonstrate social impacts to investors in measurable ways. Measuring social impact is not easy or cheap. The field would be well served by pooling its resources to generate efficient and transparent ways of evaluating community impact and facilitating the cross-organizational sharing of best practices for outcome measurement. Those leading this movement understand the importance of doing so and are already trying to sort out better ways to measure social impact and support quality local efforts to address poverty.36

Sixth, impact investment can place a greater burden on organizations that wrestle with causes of concentrated poverty with smaller or difficult-to-measure impacts but which are nevertheless important elements of a broader strategy. Socially motivated investors may have to accept that measurement of social impact of some activities, which have a logical place in improving the well-being and achievement of the poor, may be elusive or small and invest in them anyway.

Seventh, although the success of strong CDFIs and community developers with regional or national reach has helped bring about better human and community outcomes, it has also made it a challenge for smaller organizations to grow even if they are financially strong and doing good and important work. Rural CDFIs and community developers and those in small cities also face special challenges finding capital because they fall outside of areas where large banks are assessed for Community Reinvestment Act (CRA) performance. It is therefore important for government agencies, national intermediaries, and large foundations to make extra efforts to identify and strengthen small but effective organizations, especially in rural areas. It could also be advantageous to give large banks CRA credit for certain forms of community investing even if outside of their traditional assessment areas.

Eighth, CDC capacity is constrained by a financing system (including most government incentives and subsidies, as well as equity and debt finance from the private market) that funds transactions (e.g., real estate development) rather than entities (such as capital provided to a CDC to strengthen its financial capacity). Efforts to apply lessons from European countries where investments are more often made to entities based on their balance sheet capacity—as well as to craft tailored approaches that work in the United States—could play an important part in strengthening CDC capacity.37

Ninth, and more broadly, the important work of building the capacity of community-based organizations and expanding their geographic coverage is far from done. Many communities are lacking in strong organizations or organizations that are able to work with nonprofits, for-profits, and governments in ways that are mutually beneficial and reinforcing. The CEI example discussed above, and IFF’s efforts to branch to new markets, are attempts to close these gaps.

Finally, fiscal austerity has added to the ever-present urgency of protecting but also expanding funding for critical but chronically underfunded government programs. The NMTC program could sunset at the end of 2012 if legislative action is not taken. The Sustainable Communities Program was not funded in fiscal year 2012 but managed to receive funding of $50 million in fiscal year 2013. All other programs are under pressure, and funding for several, such as the CDFI Fund, have been trimmed. Lastly, the potential for a broad overhaul of the tax code places at risk some of the cornerstones of community investing like the LIHTC and NMTC programs. The late Cushing Dolbeare, founder of the National Low Income Housing Coalition, would regularly remind groups that if they give up the battle to increase government funding for the poor, the War on Poverty would surely be lost.

The Way Forward

As active agents of social and economic change, CDFIs and community development organizations have successfully attracted large-scale support from private financial institutions, from banks to insurance companies to hedge funds. The opportunities that open for low-income communities and their residents because of these efforts include small business development, job training and creation, retail and commercial services, safe and affordable homes, improved education, new community health clinics, transit-oriented developments, green financing, and many successes in venture capital investing, the arts, recreational space, and an array of community facilities.

The community development field is ready to step into a period that will achieve scale, impact, and accountability for outcomes. The hints of the future lay in some of the innovative examples described above. Meeting the challenges ahead will help the community development field continue to mature and advance toward an integrated approach to community development informed by evaluation and proven tactics.

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