Essays on People, Place & Purpose

Investing in What Works for America's Communities

The Past, Present, and Future of Community Development in the United States

by Alexander Von Hoffman

TOWARD BUSINESS REMEDIES

Urban Crisis

Despite the civil rights movement victories, Johnson’s massive government antipoverty project, and the other community efforts, from 1964 to 1968 violence rocked big-city ghettos. Each summer an incident, usually involving the police, sparked riots in which angry blacks fought police, started fires, and looted stores. In 1964, sporadic violence broke out in several cities, most notably in New York. The following summer the Watts section of Los Angeles erupted for an entire week, with rioters crying out, “Burn, baby, burn!” When it was over, 34 were dead, hundreds injured, and almost 4,000 people arrested. In 1966, violence struck the West Side of Chicago and the Hough section of Cleveland, and the next year numerous cities exploded. The worst was Detroit, in which four days of upheavals left 43 dead and more than 7,200 arrested. After the assassination of Martin Luther King Jr. in April 1968, rioting hit numerous cities, to deadly effect in Chicago, Baltimore, and Washington, DC.
As the upheavals sent shockwaves through the country, the nation’s increasingly anxious leaders cast about for explanations and solutions. While the fires were still smoldering in Detroit, President Johnson named the National Advisory Commission on Civil Disorders—known as the Kerner Commission after its chairman, Illinois governor Otto Kerner—to determine what was causing the violence and how it could be stopped. Some observers called for a crackdown on lawlessness, but many believed that deep-rooted problems were to blame for the violence. Reformers had long condemned the slums as a source of disorder, so it was unsurprising that numerous leaders, including the members of the Kerner Commission, concluded that conditions in the ghettos had helped spur a violent revolt.5

Bringing Big Business to Save the Ghetto

Hence, in the late 1960s, Americans redoubled their efforts to cure the slums and ghettos of their cities. Somewhat surprisingly given the leftward political tilt of the 1960s, lawmakers and government leaders seized on the idea that the private sector should play a central role in solving what many called the “urban crisis.” New York Senator Robert F. Kennedy became a leading proponent of the idea of tapping the power and wealth of corporate America for social betterment. Deeply unhappy with Johnson’s efforts to rescue America’s ghettos—there was no love lost between LBJ and the martyred president’s younger brother— Bobby Kennedy sought an alternative to the big government programs of the Great Society.

Kennedy turned to big business. In 1966, he and his aides conceived the idea of a “community development corporation,” a prototype of which they worked to set up in Brooklyn’s Bedford-Stuyvesant neighborhood. As Daniel Patrick Moynihan put it, the Bedford-Stuyvesant project would “get the market to do what the bureaucracy cannot.”6 With the support of New York Republican leaders Senator Jacob Javits and Mayor John Lindsay, Kennedy persuaded Congress and the administration in November 1966 to amend the Economic Opportunity Act by adding the “Special Impact Program” to fund community development ventures in urban poverty areas, beginning with Kennedy’s Bedford-Stuyvesant Restoration Corporation.7 In December Kennedy announced that two new nonprofit organizations—one made up of local leaders and another of top business executives—would lead the effort to revive Bedford-Stuyvesant. Kennedy had convinced several corporate heavyweights—including Thomas Watson, chairman of IBM, and George S. Moore, chairman of First National City Bank (later renamed Citibank)—to serve on the businessmen’s advisory committee.

Not long after, the project directors dropped the awkward idea of a white corporate over-board. A locally based organization under Franklin Thomas, a rising African American star in New York City political circles, took over the direction of the effort, and the Manhattan executives were relegated to fundraising. The group would face other hurdles in the years to come, but something called a community development corporation (CDC) had been established in the federal law and on the mean streets of an American city.8

Private Sector Enlists

In the 1960s the social mission of business took many forms. Corporations such as General Electric and IBM operated urban centers for the federal government’s Job Corps program, a key part of the War on Poverty. Employees of private firms helped to run hundreds of government, nonprofit organizations, and corporate charitable programs. Some aimed to employ the “disadvantaged,” whereas others provided housing, education, safety measures, and social services. In September 1967, 348 life insurance companies pledged to commit a billion dollars to mortgage financing of low-income housing and other investments to help the impoverished sections of America’s cities.

To take advantage of the blossoming sense of social responsibility among business people, the Johnson administration set up the Job Opportunities in Business Sector (JOBS) program, in which the federal government would train the “hard-core unemployed” and a volunteer organization, National Alliance of Businessmen, would find the trainees gainful employment. In 1968, after consulting with a presidential commission led by industrialist Edgar Kaiser, Congress passed a sweeping new housing bill that created two powerful new low-income programs, one for rental apartments and the other for single-family home purchases. Both were to be carried out not by public housing authorities but rather by private sector builders and real estate agents.

Black Business and the Rise of Local Economic Development

The private business approach also took hold locally in African American communities. The Reverend Leon H. Sullivan pioneered black economic development in Philadelphia. In 1964 he founded the Opportunities Industrialization Center, an employment training program. He then persuaded the members of his congregation to tithe themselves in what he called the 10-36 plan (they were to contribute $10 for 36 months) to establish the Zion Non-Profit Charitable Trust (ZNPCT). With this endowment the ZNPCT started a number of programs, including a for-profit subsidiary, Progress Investment Associates, which built moderate-income housing.

As businesses and government departments applied business techniques to solve America’s pressing social problems, philanthropic institutions took up the idea of making interest-bearing investments in socially motivated enterprises. In 1967 John Simon of the Taconic Foundation organized the Cooperative Assistance Fund, a nonstock corporation made up of nine philanthropic foundations capitalized with $3.8 million, to invest in minority business enterprises. Simon had worked out the legal grounds for philanthropic investments based on social goals rather than maximum profit. He was joined by Louis Winnick, who was interested in making loans on projects, such as buildings, that would create an asset for low-income people. As a program officer at the Ford Foundation, Winnick helped persuade his board to become one of the members of the Cooperative Assistance Fund and then in 1968 to launch a “program-related investments” program that would channel Ford’s capital funds as loans into projects with social purposes.9

As both the community development and civil rights movement progressed, policy intellectuals began an argument that continues today. Some believed that the poor and racial minorities should move to upper-middle-class neighborhoods where they could benefit from nearby jobs and better schools. Others questioned the practicality and political wisdom of moving the populations to integrate entire metropolitan areas and suggested the energy would be better spent improving the places where the poor currently lived. In fact, racial integration of housing and community development are not mutually exclusive goals, and reformers have pursued both successfully.10

THE EMERGENCE OF A NATIONAL COMMUNITY DEVELOPMENT SYSTEM

The Inner City Spirals Downward

The ghetto riots of the 1960s, it turned out, were only a harbinger of bad times to come in the inner city. Apparently many inner-city residents agreed with the outside society that their neighborhoods were wanting and began to depart. From the late 1960s, the number of crimes rose, while street gangs and drug traffickers took over large areas of turf. A national building boom, chiefly in the suburbs, sank inner-city real estate values into the negative numbers, with the result that landlords abandoned and sometimes burned their properties. Local stores shut down and local government services dried up. As the stream of people departing inner-city neighborhoods turned into a flood, the local populations shriveled, such that by 1990 some were as little as one-third their size of only 10 or 20 years earlier. The exodus, sociologist William Julius Wilson has pointed out, deprived the neighborhoods of stable African American middle- and working-class families who could serve as models of how to get ahead in society. Left behind were the poor and elderly.11 Yet even as the inner city spiraled downwards, the embryonic community development movement began to grow into a national force.

From Small Acorns Grow Large Oaks

Out of many small local efforts—and the increasing support for them of government and philanthropies—grew a complex national community development system. A key to the system was the creation of national institutions, called financial intermediaries, that provided loans and grants to local organizations. Although the people who worked at the local nonprofit groups and the well-endowed national intermediaries had different perspectives and roles, they shared a commitment to the idea that the combination of social mission and business practices would produce practical and effective ways to boost downtrodden communities and the people who lived in them.

In 1968, Dorothy Mae Richardson and her friends in a block club in Pittsburgh’s Central Northside neighborhood were fighting slum rats and landlords. The club’s efforts to get housing loans for their low-income neighbors attracted the attention of local bankers and foundation officers. After thinking it through together, the block club, a local bank, and the foundation set up a novel program to give home improvement loans and advice to residents whose incomes made them look too risky for fearful conventional bankers. They called the new lending agency Neighborhood Housing Services (NHS).

In 1970, Federal Home Loan Bank (FHLB) board members, who were visiting Pittsburgh to conduct special training for savings and loan officers, discovered and were impressed by the NHS experiment. Three years later, FHLB joined the Department of Housing and Urban Development (HUD) under Richard Nixon to create a task force that would expand the NHS concept across the country. The taskforce helped organize the Neighborhood Housing Services of America to operate a secondary market for the NHS high-risk loan funds and to provide technical assistance to the individual Neighborhood Housing Services. In 1978, with
60 Neighborhood Housing Services now operating around the country, Congress turned the task force into an independent entity, Neighborhood Reinvestment Corporation, now called NeighborWorks America, to support and strengthen the NHS system. After an initial period of struggle, NeighborWorks America began to grow by strengthening its affiliates—beginning with a rural NHS group in West Rutland, VT—and attracting investments from national financial partners. The program also launched successful home ownership campaigns. The little experiment in Pittsburgh would produce a national housing network.

During the late 1960s and 1970s, various nonprofit organizations began to appear in many inner-city and rural areas where poor people lived. In Los Angeles, with the help of the community action program, Mexican-American activists organized the East Los Angeles Community Union (TELACU), and African Americans, led by local United Auto Workers official Ted Watkins, set up Watts Labor Community Action Committee for that distressed district. In many riot-torn areas, residents set up community action agencies or development corporations such as the Hough Area Development Corporation in Cleveland. In 1968 in the Hunts Point section of the Bronx in New York City, a Roman Catholic priest, Father Louis Gigante, founded the South East Bronx Community Organization Development Corporation (SEBCO) as a Model Cities agency to serve impoverished Puerto Ricans. In the countryside, activists set out to improve the depressed conditions with organizations such as the Kentucky Highlands Investment Corporation.

Watering the Grass Roots

At the Ford Foundation, Mitchell Sviridoff had replaced Ylvisaker as head of urban operations and shifted the philanthropy’s emphasis from strictly social services to economic development and housing. Sviridoff, the former director of the Gray Areas organization in New Haven, thought the nonprofit development organizations held great potential for social uplift. On the train returning from a trip to Baltimore to visit local CDCs in 1979, a Ford Foundation trustee challenged Sviridoff by asking him what he would do if he had $25 million to help the fledgling groups. It would take Sviridoff a year to answer that question. But with the help and support of Franklin Thomas, the former head of the Bedford-Stuyvesant Restoration Corporation who had recently become president of the Ford Foundation, Sviridoff worked out the idea for a large independent organization to assist CDCs. Using a grant of $9.3 million from the Ford Foundation and six major corporations, Sviridoff in 1980 established the Local Initiatives Support Corporation (LISC) to give loans, grants, and technical assistance to CDCs. Four years later LISC had obtained more than $70 million from 250 corporations and foundations and three federal agencies and set up 31 branch offices, which raised funds from local sources.12

Idealistic real estate developer James Rouse set up the third national financial intermediary. As in the other cases, his idea germinated from a small beginning. Terry Flood and Barbara Moore, two women who were part of a social mission group of the ecumenical Church of the Saviour in Washington, DC, wanted to save two decrepit apartment buildings in the Adams Morgan neighborhood. They turned to their fellow church member Rouse for help. Although he counseled against the idea, he supported the church members when they formed a nonprofit community development organization, Jubilee Housing, to renovate rundown properties for poor people in Adams Morgan. Impressed, Rouse and his wife Patricia decided to create a national institution, and in 1982 founded the Enterprise Foundation to assist entities of all types interested in developing low-income housing. Like LISC, the Enterprise Foundation (now called Enterprise Community Partners) grew quickly. In 1982 it supported six groups in six locations; six years later, Enterprise had made $5.8 million in loans and grants and had expanded its network to 54 organizations in 27 locations. In the years that followed, both LISC and Enterprise would continue to expand their operations and finances by leaps and bounds.13

The Emergence of Social Loan Funds

As the financial intermediaries and philanthropies demonstrated new ways to support nonprofits, activists in different parts of the country began creating social banks that would make loans to nonprofits for projects that regular banks shunned. One of the first of these social lenders was ShoreBank, which began in 1973 when four idealistic friends purchased a bank in the South Shore neighborhood of Chicago to counteract the departure of other banks from an area undergoing a racial and economic transition. After a few years of losing money on its loans to struggling local stores, the bank’s owners found customers who both brought in profits and fulfilled a social purpose. By making loans to mom-and-pop landlords who wanted to rehabilitate their apartment buildings, ShoreBank helped stabilize working-class neighborhoods. Soon others founded new banks devoted to working in lower-income neighborhoods. From the broader credit union movement, for example, came community development credit unions, such as that started by the Center for Community Self-Help to help low-income African Americans, women, and rural residents in North Carolina.14

Meanwhile, religious groups had begun to build a movement to provide capital to social mission projects. Inspired by the Second Vatican Ecumenical Council (declared by Pope John XXIII in 1962), the civil rights, antiwar, and women’s liberation movements, Catholic women’s religious orders led the way to faith-based community investing as it is known today. In 1978, the Adrian Dominican Sisters, who had joined other denominations in the Interfaith Center on Corporate Responsibility, established its own Community Investment Program, as a way to provide for the growing number of their order’s retired nuns and at the same time work toward social justice. At first, the Adrian Sisters had difficulty finding financially viable nonprofits, but eventually they discovered nonprofit food banks, housing organizations, and community land trusts to invest in.15

In the early 1980s, social investment in the United States gathered momentum. Along with their grants and technical assistance, the large financial intermediaries, LISC and the Enterprise Foundation, began making social purpose loans. In 1982 the Enterprise Foundation, for example, formalized its lending by starting the Enterprise Community Loan Fund. In 1983, local activists organized the New Hampshire Loan Fund with the support of the Adrian Sisters and other religious investors. On the West Coast, San Francisco reformers grew frustrated with the biases of mortgage lenders and in 1984 founded the Low Income Housing Investment Fund to set a good example. Over the next 15 years it grew exponentially and, renamed the Low Income Investment Fund (LIIF), made loans for building child care and education facilities as well. On the opposite coast, socially conscious financiers in 1985 pooled resources to found Boston Community Capital, which invested in housing, child care, youth programs, and commercial real estate in poor neighborhoods.16

In 1994 Congress responded to the increase in community development lending by establishing the Community Development Financial Institutions Fund in the Treasury Department. Since that time, the Fund has made equity-like investments in hundreds of community development financial institutions (CDFIs). This has allowed the CDFIs, which include banks, credit unions, and a wide variety of loan funds directed at social progress, to vastly increase their lending to organizations working to help low-income communities.17

Government Tools for Community Development

Although philanthropic and nonprofit support helped the movement to grow, government funding, especially federal funding, was essential if community development was to thrive on any significant scale. Under both Republican and Democratic presidents, the federal government gradually became an indispensable source of funds for the community development system.

Congress took a major step when, after years of haggling with the Nixon administration over its proposed bill, it passed the landmark Housing and Community Development Act of 1974. The law replaced the unpopular urban renewal program and the idealistic but poorly conceived Model Cities and other categorical programs with community development block grants (CDBGs) to local governments. Although the act allowed governments to use block grants for a range of activities, it required that at least some of the funds help low-income families. Three years later, the Carter administration reinforced this goal through the Urban Development Action Grant program to target additional funds to inner-city areas in extreme economic distress. With these prods, many local government agencies began to contract redevelopment work to neighborhood nonprofit organizations, including community action agencies and CDCs.

Besides the numerous antipoverty aids such as child care, meals for the elderly, and loans to small and minority businesses, government programs specifically targeted low-income housing. The 1974 act created the federal Section 8 housing program, which subsidized rents for tenants in newly constructed, rehabilitated, and existing apartment buildings. In combination with federal tax benefits for real estate investors, the Section 8 subsidies provided a set of financial incentives that produced a surge of privately owned, low-income housing developments.

Although in 1986 Congress eliminated key tax incentives for real estate development, it replaced them with the Low Income Housing Tax Credit, which proved to be one of the most powerful housing programs ever devised. Unlike the earlier system, which relied on small-scale investors, the Low Income Housing Tax Credit opened the door to large banks and corporations to pour hundreds of millions of dollars into housing projects. To date, the program has helped finance more than 2.5 million homes. And in 1990 the government specifically recognized the work of nonprofits by setting aside funds for them in the HOME program.18

State governments too supported the community development system. By 1980, 42 states had established housing finance agencies, which issued state bonds to finance the construction of low-income housing. In the face of Ronald Reagan’s cuts in housing spending, the remaining eight states soon followed. Some states went further. Massachusetts led the way by creating one corporation to finance community and economic development projects; another entity to give technical assistance and consulting services to nonprofit organizations carrying out housing, job training, local economic development, and improvements to child care facilities; and another program to provide crucial operating support to CDCs.19

Local activists gained another tool when federal regulators began to implement the Community Reinvestment Act (CRA), which was aimed at overcoming banks’ refusal to lend in inner-city neighborhoods. The act had been passed in 1977, but only became effective in the mid-1990s. There were two main reasons. The first was that regulators, under pressure from political agitation and legislation that changed their reporting requirements, began to reveal publicly banks’ lending behavior. The second reason was that after a steep increase in the number of banks seeking to merge with other banks, the regulators indicated that they would not grant approval for the mergers unless the requesting bank fulfilled its local lending obligations under CRA. To comply with the regulations, many banks seeking approval for mergers began providing capital to CDFIs and making loans to developers of the Low Income Housing Tax Credit deals.

In this way, CRA encouraged investment in inner-city and rural neighborhoods. From 1977 to 1991, according to the National Community Reinvestment Coalition, financial lenders and community organizations negotiated $8.8 billion in CRA credit agreements. Spurred undoubtedly by a strong economy and a variety of new banking and securitization practices, from 1992 through 2007 lenders committed an astonishing $4.5 trillion in CRA loans.20

Community Development, the Leading Edge of Revival

By the 1980s, forces that would encourage the revitalization of the inner city began to gather momentum. During the 1980s, immigrants, attracted by economic opportunity greater than that in their homelands, began to arrive in increasing numbers. Often low-wage workers, they sought and found inexpensive shelter in low-income neighborhoods of large “gateway” cities, such as New York, Washington, Chicago, Los Angeles, and Miami. At the same time, a small but noticeable number of artists and white-collar professionals began to take up residence in central cities. For them the city held attractions: historic homes, which some of the arrivals took great care to renovate, lively cultural life, and proximity to downtown jobs.

But during the 1980s and 1990s, the community development movement provided the most visible signs of new life in the inner city. Across the United States, but especially along the East and West Coasts and in the Midwest, the number of local CDCs in storefronts and church basements began to multiply. In the shambles of a neighborhood that was West Garfield Park in Chicago, the Lutheran Church in 1979 started a community development organization called Bethel New Life. The name expressed the hope that these organizations brought to the depressed and abandoned inner-city neighborhoods.

Learning by Trial and Error

Yet the road to community development was rough. The original notion, dating from Kennedy’s experiment in Brooklyn, was that ghettos were backward places of low employment. Hence, in the 1970s and 1980s, community development advocates endeavored to lure large corporations to set up factories in the inner city, with only mixed success. The Bedford-Stuyvesant Restoration Corporation was able to persuade IBM to open a small manufacturing plant in the neighborhood. Yet old buildings were not necessarily efficient for modern production, locations were not always near highways, and sometimes labor costs were too high. No other large corporations followed IBM, which closed its plant but stayed in Brooklyn until the early 1990s. Similarly, the Stride Rite shoe corporation and the Digital Equipment Corporation agreed in the late 1970s to operate factories in Boston’s Roxbury neighborhood. But in December 1992, both companies announced that they would shut the doors of the facilities.21

Because of their economic development goals, leaders of CDCs also tried to stimulate small-scale enterprises, a treacherous undertaking under any circumstances. Community development groups that invested directly in local supermarkets and restaurants often lived to rue the day, if they survived the ordeal. In 1981, for example, the Codman Square Community Development Corporation in Boston’s Dorchester district tried to replace the neighborhood’s recently closed supermarket with its own, but the store quickly went bankrupt and took the CDC down with it. Bedford-Stuyvesant Restoration was more successful than some, but was forced to liquidate its ice cream shop and fashion design firms. And Restoration’s efforts at starting new businesses, according to its historian, “proved almost impossibly difficult.” Even with lavish backing from the federal government and corporations, Restoration undercapitalized its business startups and lacked the management skills to help the fledgling companies.22

These kinds of early business failures were valuable, if painful, learning experiences for the new grassroots practitioners of community development. Gradually they gained professional skills in real estate development, finance, and management. Just as importantly, local community development directors and project managers began to appreciate that business methods and discipline were necessary tools for the pursuit of their social and economic goals.

Through trial and error, the community developers learned that housing, for which there was both subsidies and demand, provided a viable business model. With a commitment for federal government’s Section 8 rental assistance or the allocation of a Low Income Housing Tax Credit, a nonprofit could make a reasonably accurate financial plan of revenue for a low-income housing project. That plan, in turn, could convince lenders to back the deal. Nonprofit community development groups usually had to find multiple lenders to back their deals, but despite this serious burden, they developed hundreds of thousands of homes, either by constructing new attractive buildings or by renovating old apartment buildings inside and out.

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