Civic Lesson: How CDFIs Can Apply Market

Jeremy Nowak
Jeremy Nowak Former Brookings Expert, Distinguished Visiting Fellow - Drexel University’s Lindy Institute for Urban Innovation

March 1, 2001


This paper has four parts. The first section discusses three social and economic trends that influence poverty alleviation policies and strategies. The second section argues that as a result of these trends, we need new kinds of civic institutions that can maximize the connections between regional economic growth and low-income households. Part three argues that community development financial institutions (CDFIs) have the potential to be one source from which regional civic intermediaries can be created, due to their market positioning and organizational qualities. In the final part of the paper, examples of CDFI regional intermediary roles are provided, drawing from The Reinvestment Fund in Philadelphia.

Markets, Public Capacity, and Spatial Form

The social context in which many community development and social service initiatives were developed in the 1960s and 1970s has been radically altered. The relatively fixed nature of many public and private institutional functions and identities has been cast aside, and the boundaries between business, government, and civil society have become increasingly blurred. Businesses and consumers have an increasing number of market and locational choices. Income and opportunity have become spatially dispersed. The economic capacity and political influence of many of the jurisdictions that contain large numbers of low-income residents has been diminished. And the public sector, particularly at the local level, can no longer provide the re-distributive benefits-from social welfare payments to public employment and public contracts-that it could a generation ago. Yet, to a great extent, the organizational forms and strategic directions of many public and civic-led initiatives concerned with poverty have not come to terms with these new realities.

Community developers’ demand for capital was, similarly, fairly modest. Before 1980, when community developers needed financing, they turned to private financial institutions which, in turn, depended on long term federal contracts for their security. Specialized community development capital sources barely existed; just a few philanthropic programs had created “portfolios” of loans for housing projects or small businesses for economic development in distressed neighborhoods or regions. And while the Local Initiatives Support Corporation (LISC) had emerged as a capital and technical assistance provider for community development corporations, its lending activities were limited.

Three kinds of changes, or trends, particularly stand out: 1) the increased private sector capacity to penetrate distant markets through new technologies and new organizational structures; 2) the shifting capacities and emphasis within local public sector management as government attempts to assert local advantages that are no longer natural or historically bound; and 3) the increased isolation of low-income people from places with strong job growth, social opportunities, and taxing capacity.

Private Sector Liquidity: New market capacities and imperatives have re-shaped corporations, created more immediate links between customers and businesses, and altered the significance of the connection between corporations and places. The development of new communications and information processing technologies has made it possible to manage and transmit capital and information quickly and cheaply across institutional and national borders. This has allowed businesses to pursue new labor, investment, and consumer markets and create transnational market strategies and organizational identities.

To capture new markets and take advantage of cost efficiencies of labor and production, global corporations have become both more flexible in their approach to production and more horizontal in their connection to other firms. New production strategies include inter-firm alliances, the outsourcing of certain core functions, the employment of just in time inventory controls, and the use of business-to-business and business-to-customer channels through internet and intranet capacity. This has transformed the once rigid boundaries between corporations, nations, and economic sectors. Increased competition and market reach have created a kind of liquidity where industrial-era borders and categories have become increasingly irrelevant. Market and organizational liquidity is defined by the connectivity of information, assets, and technique in contrast to the repetitive use of fixed assets in situ.

New production and distribution methods have also provided consumers – particularly middle and upper income consumers – with more market power and more choices. The same technology that eliminates geographical friction from production and distribution allows individual consumers to invest in companies, make travel arrangements, do government business, and buy commodities across the globe, without leaving home. The acceleration of choice has created a new competitive dynamic within both private and public markets.

Public Sector Enterprise: Rapid changes in market capacity have created pressure on local governments to position themselves as business-friendly promoters and guardians of a high quality of life. Business investment and residential location are not especially dependent on political boundaries, natural resource location, and the historical connections of particular corporations. However, as Joel Kotkin and others have suggested, the very forces that appear to eliminate the particularity of place for business location make place-based qualities increasingly important. If a firm and labor market talent can locate anywhere, then the amenities and value of place to the business become paramount.

In adapting to the changing power of markets and choice, many local governments have come to view public services and costs, local institutional amenities, the labor market skills of their residents, and existing business and civic infrastructure as a package of competitive assets. These assets contribute to economic growth by attracting firms, entrepreneurs, residents, and investors. Like a business product, the assets of place require the right kind of valuation, continual investment and upgrading, and aggressive positioning. In a world of private sector liquidity, places are one more product in competition for market share.

To be sure, most public sector and civic leaders have not been able to (nor have necessarily been interested in) recognizing or adapting to the new competitive realities. The constraints are many: old-style political cultures and habits, aging infrastructure, and large constituencies wedded to the locational monopolies of the past. In jurisdictions with very high levels of poverty and low tax capacity, the difficulty of attracting management talent, the inability to define outcomes beyond the re-distributive agendas of local politics, the lack of private sector demand, and weak civic leadership make real change difficult.

But the future economic viability of municipalities and regions is clearly linked to their ability to compete and to re-organize the public sector and local civic champions into a competitive service enterprise. The idea of the public sector managed as a competitive corporate entity, while implicit in political discourse for generations, is now an explicit part of public management lexicon. The increased range of choices for firms and residents is gradually transforming public management into public business.

Jurisdictions that have adapted to change have pursued a market-oriented approach to service provision. A shift toward market-oriented policies was carried out most notably by several dozen mayors and governors during the 1980s and 1990s through the imposition of more fiscally disciplined and business-friendly administrations. They pursued market-oriented approaches in everything from policing to public school reform. Market-oriented service delivery uses quality benchmarking, management accountability measures, the application of new technology, and selective outsourcing to private sector and civic groups. Big city mayors, in particular, during the past two decades have had to come to terms with their lack of cost and service competitiveness and face down political cultures formed by decades of locational monopoly.

There are, of course, limits to efficiency and cost as the operating principle for delivering public goods. Governments do not have shareholders in the same way as businesses, and they cannot shed functions or regard selective publics in pursuit of profits and market share in the same manner. Government also represents or partially underwrites a public realm where democratic participation and voice are expected and demanded. But within the constraints of the broader definition of public participation and obligation, government has had to come to terms with the marketplace in a new way.

The market-orientation of public administration has also been adopted as an increasingly important aspect of social policy for the poor. A shift in language and consciousness crossed party lines, as Republican enterprise zone legislation in the 1980s and Democratic empowerment zones in the 1990s demonstrate. Both promised to reduce poverty and physical blight by affecting market behavior. Both assumed that business investment would catalyze wider social change. No matter what your opinion of either initiative, it is their seemingly private sector world-view that is important.

At the turn of the century, the newest package of anti-poverty programs is the “New Markets” program, a package of tax credits, subsidies, and regulatory changes that seems more in tune with graduate business school seminar than a course at a school of social work. Other, people-based interventions were similarly oriented towards the marketplace in that they reduced non-work incentives and increased work incentives through welfare reform, the earned income tax credit, savings incentives, and targeted childcare and job-training subsidies designed to facilitate labor market attachment.

The shift by many jurisdictions to a more business-oriented government has been led by a shift in what people expect from government and government’s own view of its core competencies. The most entrepreneurial governments have learned to distinguish between products that they must deliver and products they must directly provide, as they have increasingly been willing to carry out some of their functions through private sector and civil society relationships or contracts. As in the private sector, many government agencies have learned to manage horizontally, thus building a different institutional architecture. It is not uncommon today to find everything from social service delivery to parking ticket payment processing to school management being carried out by for profit companies or non-profit civic groups. In fact, it would be impossible to imagine government service delivery today apart from contracted services. The budgets of the non-profit independent sector (including many religious institutions) are often dominated by public sector contracts.

The Increased Isolation of the Poor: Changes in markets and government regulation have created enormous opportunities for new wealth creation and economic expansion. But they have also increased the gap between many low-income residents and the institutional, economic, and normative processes that facilitate entry into the middle-class. Increased social isolation is concretized in contemporary metropolitan spatial forms. Demographic and economic dispersion have created a social geography where middle and upper income suburbs are increasingly the dominant residential and business location markets for the economy. Political power has migrated along with people and jobs. Cities retain vital economic functions (tied to product innovation, corporate administration, dense consumer and labor markets, cultural and educational institutions, etc.), and some cities continue to exercise economic dominance in their region. But the dominant growth pattern is the de-concentration of economic and demographic power from the central core. The urban core is the historical and symbolic center of a regional system, yet the most dynamic markets are sometimes located outside the city proper.

While regions form single economic markets, they are divided to different degrees by political jurisdictions, the dynamics of racial and income segregation, and the ability to pay for public goods from sub-region to sub-region. One result of the uneven distribution of income and race is the increasingly high level of concentrated poverty in the urban core, particularly for African Americans. High poverty-rate census tracts are both the historical product and contemporary agent of regional spatial form. If sprawl-like growth isolates the poor, high levels of concentrated poverty create market and civic ?tipping> (in urban public schools, for example) that drive away the middle-class. The long term result is the self-reinforcing logic of suburban growth and concentrated poverty so richly documented by authors like David Rusk and Myron Orfield. The logic of growth isolates the poor from middle-class role models, higher tax capacity districts, and the fastest growing job clusters in the region.

The economic segmentation of regional economies, particularly as this relates to new business start-ups, exacerbates the decline in urban-related business leadership. When the highest growth companies of a region, many of which employ new technologies and have global connections, are suburban, new business enterprise never develops a civic connection to cities. In some cities, the major private sector employers are in place-based industries: universities, hospitals, and cultural institutions, utilities, real estate and construction firms. While these institutions are important, they often lack the civic clout and financial independence to create change.

Poverty Alleviation and The Role of Civic Intermediaries

Lost within the whirlwind of late-twentieth century capitalism is the enduring relevance of public sector capacities and services, as well as the democratic impulse to extend opportunity as broadly as possible. And yet, the changing nature of the marketplace not only creates a sense of abstraction from local government and civic life, it also creates the necessity for all three realms to connect in new ways in order to address certain public and civic problems-particularly the problem of poverty.

It is helpful to think about poverty reduction from the perspective of four processes and pre-conditions: the private economy, public services, public and private opportunity investments, and the role and potential of civic intermediation.

  • 1. Strong private-sector job growth in a region is the absolute prerequisite for poverty alleviation. Poverty reduction cannot occur as a social or public program outside of quality private-sector job growth. Poverty alleviation efforts must focus on how low-income individuals are most advantaged by macro gains in employment growth and productivity, particularly on how competitive their skills are within the context of the regional labor market.

2. Long term economic growth cannot occur in the absence of competitive public sector services and investments. Private sector dominance changes the bargaining position with the public sector; it does not eliminate its relevance. A key variable of residential and business location is the cost, quality, predictability, and relevance of public goods. Concrete services and investments create more or less competitive environments. The inability of a public sector to create a competitive environment limits the capacity for private sector opportunity.

3. The public sector can maximize private sector opportunity for low-income people and places by pursuing opportunity-oriented interventions as long as those investments do not create significant local market disadvantages. In most cases it is best for some transfers to originate in political jurisdictions (usually State or Federal government) that can make re-distributive social payments without losing competitive advantage. Opportunity-oriented public policy is usually designed to maximize labor market connections and reinforce wealth accumulation. This includes policies that: directly build or create incentives for income and savings (i.e. earned income tax credits, individual savings accounts); expand the geography of work opportunities (housing vouchers, childcare subsidies, transportation investment); and facilitate investment in low-income places to build their value as residential and business sites. In some cases the private sector has also participated in these kinds of investments, from individual development accounts to training stipends to employee assisted housing, childcare, and special transportation incentives. While these private benefits are most often designed to attract and retain labor in a tight job market, they nonetheless have real income and labor market significance.

4. Civic institutions, in the new social context, have the opportunity to function as value-added institutional channels between the public and private sectors because of their combined attributes of public purpose and non-governmental flexibility. To alleviate poverty, these civic channels organize and link resources and relationships across regions, thereby constructing a broad array of connections (through credit, public goods, labor market connections, etc.) between opportunity and low- income people and places.

The need to have non-government civic institutions play an aggressive role in the extension of private sector opportunity and public sector investment is necessitated by:

  • The fragmented administrative logic of regions or the lack of correspondence between regions as economies and regions as political systems;
  • The accelerating decline in the influence of regional business leadership due to the rapidly shifting dynamics of the marketplace;
  • The spatial isolation of poor residents and their primary civic institutions, and the relatively weak market position of many of the jurisdictions within which they reside;
  • The need to bridge organizational cultures and identities between a private sector with increased options and geography and a public sector that protects local sovereignty;
  • Increased capacities on the part of both public and private sectors regarding alliances with organizations that they do not control, but that provide them with market or public value.

Civic institutions that fill this institutional void must possess a number of organizational qualities. First they must have institutional credibility with public and private sector firms and agencies. This, in turn, requires that they have concrete products that are valuable to the public and private sectors, while at the same time relevant to low-income households and places. They also must have sufficient relationships and power across a region to facilitate systems building or innovation. And finally, they must be rooted in one or more of the core factors that facilitate economic development: labor market access; the utilization of particular places as business or residential sites; the provision of financial investment and services; or the nurturing of entrepreneurial talent.

During the past several decades we have seen good examples of regional institutions and civic transactions that foster the intermediary relationships and qualities that I described above. These qualities can be found in some of the best labor market intermediaries such as Project Quest in San Antonio or Focus: HOPE in Detroit. A few of the oldest, rural community development corporations such as Coastal Enterprises in Maine or Kentucky Highlands, which are regional in geography and pursue business investment strategies, have also demonstrated these qualities. Many of the best regional business groups have been able to organize relationships and underwrite projects that connect a region’s overall competitiveness with low-income benefit (Cleveland Tomorrow, for example). And there are aspects of this kind of cross-sector thinking and relationship building in a variety of recent business development initiatives (Institute for a Competitive Inner City, Social Compact) as well as among the best regional housing partnerships throughout the country. While some might view these projects as ad hoc market corrections or as evidence of the declining capacity of government, they can also be viewed as the historical outline of a more substantial process of institution building that the early 21st century requires if we are to create a more inclusive economy.

The intermediation between the supply and demand for labor-particularly low-skilled labor-cannot always be resolved through existing market or public systems. The tremendous job growth and changing skill requirements of the past decade expose some of the labor market inefficiencies between the demand and supply of labor. The situation of low-skill workers, including former welfare recipients, living without transportation to areas with labor shortages, demonstrates the spatial isolation discussed above. The jurisdictions that contain high levels of low-skilled labor often do not have the organizational capacity to build training and recruitment channels to businesses, particularly those in other jurisdictions. Community groups associated with low-income neighborhoods are often cut off from relationships and information that lead to job placements. And private sector firms (especially smaller companies) may not have the capacity to recruit an inner-city work force in a cost-effective manner. These disconnections have occurred in the midst of significant public-sector investments (often delivered in ineffective ways) in job training and related support mechanisms.

Inner-city labor placements have been facilitated in many regions by numerous institutions-business trade groups, specialized training institutions, community development agencies, community colleges-often in alliances that play to the respective strengths of partners. Institutions and institutional alliances that bridge the gap between supply and demand must establish credibility with employers, potential employees, and the public sector. They have to understand the industry and skill demands for which they are training and recruiting. They must organize public-sector job training resources or generate other streams of revenue to cover costs. They have to become reliable supply links for particular industries by demonstrating consistent market outcomes. And they have to become skilled at understanding and overcoming the barriers between supply and demand: social and technical skills, childcare, discrimination, and transportation.

Intermediation between the demand and supply of labor is a civic organizing process. Successful labor intermediaries act as hubs of relationships between public and private, employer and employee, urban and suburban, particular jobs and labor market connectors such as housing, transportation, and childcare resources. The best intermediary systems distinguish themselves by organizing industry groups and low-income workers. While the job opportunities they mediate are produced by the private sector and the financial tools for training are often provided by the public sector, civic intermediaries provide the organization necessary for market success.

The institutional challenge of increasing labor market entry for low-income workers is a good example of how industrial-era public sector and civic institutions can be re-equipped to support low-income mobility. Civic institutions must develop products and relationships that make them part of the value chain of both private enterprise and public investment, organizing and linking the market place, government, and low-income households.

CDFIs as Regional Civic Intermediaries

Community development financial institutions have emerged in recent years as an increasingly important part of the community development infrastructure in the United States. There are more than 500 CDFIs in the United States-an assortment of credit unions, development banks, micro-enterprise funds, loan funds, and community development venture capital funds. They received public policy credibility with the development of the CDFI Fund within the U.S. Treasury Department in the mid-1990s. CDFIs provide financial products to low-income people and places in order to reduce poverty and create opportunity. Depending on their organizational and legal structure, CDFIs use either deposits or investments by individuals and institutions to invest in projects and businesses that affect their mission. CDFIs function as bridge institutions between products and places that do not always have conventional financial options and the capital markets.

CDFIs have an opportunity to become an important part of the civic networks that mediate between low-income people and economic growth. They are, of course, only one source for these networks. Other candidates include business groups, philanthropies, universities, religious institutions, and cultural groups. A range of intermediaries will increasingly appear in the most vibrant regions, facilitating civic transactions that have a variety of historical sources and that create a myriad of formal and informal connections across political and institutional boundaries.

The capacity of CDFIs to assume regional intermediary roles similar to those that I described above is rooted in the ambiguous organizational cultures and functions of CDFI institutions, as organizations with one foot in community development and one foot in the financial services industry. This results in institutional qualities that give them broad market reach and complex product orientations.

Social Geography: Many CDFIs have a market reach that extends or easily could extend throughout a regional economy. CDFIs are not as local or community based as much of the rest of community development. In contrast to many social service institutions and most community development organizations, they cover a broader social and economic geography. While some small credit unions and micro-enterprise funds are embedded within narrow geographical boundaries, most CDFIs are organized at a municipal or regional level. Some cover entire states, or are multi-state or national in scope. This distinguishes them from the majority of CDCs, which are bounded by neighborhood borders. Neighborhoods are defined by many things-ethnicity, race, spatial boundaries, public service administration, political wards-but not the logic of economic markets.

CDFIs are not committed to locality in the same way as neighborhood-based institutions. They are, in part because of their financial products orientation, more people and project oriented than place oriented. CDFI investments may predominate in particular places, but they are structured as transactions to households, projects, and firms as the ultimate end users more than to neighborhoods as abstract aid recipients. A good deal of community development investment-particularly as defined by philanthropic initiatives-makes neighborhoods and neighborhood institutions the starting point for interventions. This can result in a reification of place and an under-appreciation of the connections between places, households and regional economic and social processes.

The wider geographical focus of CDFIs positions them in local economies and civil society in important ways. Their geographies cover labor and business markets that neighborhood-based institutions cannot, and they can therefore build relationships with broader economic and civic sectors, regional or statewide associations, business groups, and others. The expanded portfolio of institutional relationships creates opportunities for civic leadership on a different order than is usually possible for institutions that represent narrower segments of a city or region.

The opportunities and relationships of most CDFIs encompass multiple political jurisdictions. While CDFIs do not have the depth of local political relationships as a more narrowly rooted civic group might, they are able to escape being overly defined by a particular political culture or regime. Political diversification allows CDFIs to manage opportunities and barriers in ways that local institutions with fewer options cannot; they are neither valued nor defined by local politics in the same way as neighborhood institutions. Like consumers with options, they can, as the economic development theoretician Albert O. Hirschman observed 30 years ago, exercise exit, voice, and loyalty in complex and strategic ways.

Financial Products and Services: Along with social geographical distinctions, CDFIs are distinguished within the community development world by their financial functions, in contrast to the real estate development and service functions of much of community development. While they have civic missions that may be supported by philanthropies or government, CDFIs are also privately organized, niche financial institutions. Financial institution status implies at least four attributes that are distinct from other low-income services.

    1. First, CDFIs receive a different kind of organizational credibility in a market-oriented culture due to the fact that they manage financial risk. CDFIs are accountable to investors in ways that differ significantly from most public-sector and philanthropic funding relationships. The portfolio management function necessitates that CDFIs develop organizational cultures that balance their public purpose with business discipline, which results in an added degree of private sector affinity.

    2. Secondly, as financial intermediaries, CDFIs are natural hubs of relationships and information on market activity, both in low-income areas and within the broader region. Relationships with investors and borrowers, as well as public and private regulatory systems make CDFI institutions into a rich source of networks and potential systems building frameworks.

    3. Thirdly, financial institution status often means that CDFIs are less dependent on public and private subsidies than are most other community development or social service institutions. Many CDFI financial products, properly managed, pay for themselves and generate profits, again depending on context and product. Self-generated revenue allows for distance from political cultures and agendas. It also projects permanent institution status, establishing CDFIs as places where assets grow despite the vagaries of political regimes or policy trends.

    4. Finally, CDFIs promote capital-led strategies that resonate with the world-view of many entrepreneurs and business leaders. This loosely articulated ideology regarding the role of capital in facilitating economic opportunity conveys mainstream messages about investment, savings, work, and business growth.

    In order to become regional civic intermediaries in the way that I am describing, CDFIs must grow in capacity, productivity, market knowledge, and institutional stature. There are three focal points for this kind of growth:

    1. Increasing their financial services role by developing more product depth.
    2. Developing data and information intermediary functions appropriate to their portfolios, markets, and regions.
    3. Creating more substantial and more mainstream relationships that allow them to exercise stronger leadership roles.

    Increased product depth: The impact of CDFIs has been constrained by the fact that they largely operate outside of the two great innovations of conventional financial services-liquidity and information technology. This has occurred, in part, because CDFIs specialize in making loans and investments to people and projects that require boutique relationships, have high transaction costs, utilize complex layers of public and private support, and do not easily fit existing secondary markets.

    Increased financial product depth requires better wholesaling systems to attract and rationalize CDFI investments, product diversification in terms of profitability and volume-based delivery channels, and increased secondary market options. All three are necessary in order to widen institutional capacity, build long term sustainability, and create a more pronounced regional presence.

    A deeper financial product infrastructure can be built upon the financial intermediary success of the CDFI industry. On the lending side, portfolios and market knowledge for many CDFIs have been tested by 15-20 years of operations. While they are not as profitable as most conventional portfolios, they have relatively low levels of default. And the investor portfolios of the most dynamic CDFIs contain investments from hundreds of individuals, religious institutions, financial institutions, businesses, civic groups, and philanthropies. These relationships represent under-utilized sources of civic support for CDFI missions. They are the investment fund analogues to United Way or community foundation assets and they can be converted into more significant investment capital mechanisms.

    Presently, there are a number of innovations underway, piloted by some of the most experienced CDFIs-Accion, Shorebank, Self-Help Credit Union, Neighborhood Reinvestment Corporation, The Community Development Trust, Low Income Housing Fund, National Community Capital Association-that can transform the way CDFIs do business. The innovations include:

      Securitizations of rental housing, small business, childcare, and charter school loans
      Organizational credit ratings by conventional rating agencies, allowing CDFIs to seek capital in the bond market
      New liquidity products through negotiated GSE (i.e. Fannie Mae, Freddie Mac) relationships and special purpose secondary markets
      Increased capital access to the Federal Home Loan Bank system
      Capitalization channels through existing or new mutual funds
      Industry rating systems that can be used to wholesale investments to major institutional investors
      Technology-based credit scoring systems for CDFI loan customers in an effort to create volume-based, low-transaction-cost relationships
      New electronic bank delivery access for low income customers through partnerships with conventional banks
      Venture capital oriented CDFIs that are experimenting with equity or near equity business investments

      During the next 5-10 years a critical mass of these innovations will change the CDFI industry, providing it with more capital, more liquidity, and more product diversity. It will result in an industry where the top 20-30 institutions have permanent institution status and branding within their region. They will have stronger links to conventional capital and the relationships, resources, and skills that this implies.

      Data and Information Intermediary Functions: Along with building deeper capital investment infrastructure, CDFI growth requires more substantial information and data collection capacities. The management of information is every bit as critical as investor credibility-indeed, the two are becoming inseparable. The availability of data sets of every imaginable sort from public and private sources and the capacity to more readily and cheaply geo-code and integrate data have made it possible for CDFIs to become data warehouses, using vast quantities of information in support of their mission and business.

      The data capacities of a CDFI play at least five roles:

        1. Risk management refers to the underwriting and evaluation of businesses and projects and the longer-term management of a portfolio. The understanding and evaluation of risk creates market value that can be leveraged with other investors.

        2. Technical services refers to the use of information as a resource to CDFI borrowers and their allied institutions in order to build their business capacity and assist in the broader flow of public and private investment. This technical support is a market making function that aggregates information, capital, and relationships.

        3. Evaluation and planning refers to the use of data to understand the social impact of CDFI transactions. CDFI impact analysis also functions as an on-going business and strategic planning tool for business lines within the CDFI and allied institutions.

        4. Product development involves integrating the analysis of trends and opportunities within CDFI markets with impact analysis, in order to create new products.

        5. Regional market analysis refers to the broader analysis of economic and social trends within a regional economy in order to improve the structural connections between low-income populations and economic opportunity.

        The development of data capacity in these areas creates market intelligence appropriate to a CDFI’s mission and customers. And it increases the value of the institution to public and private sector institutions. Market intelligence drives the quality of CDFI business lines, and creates a platform from which CDFIs can build regional relationships and capital connections. It helps to make CDFIs into focal points for participating investors within those markets and data centers for neighborhood institutions and public policy initiatives. By conceptualizing data functions as regional infrastructure, rather than merely a by-product of portfolio management and loan underwriting, the leadership potential of a CDFI-as a network institution between low-income households and the economy-is reinforced.

        Regional Relationships and Leadership: As the financial scale and product diversity of CDFIs grows there is increased opportunity to leverage public and private sector relationships into civic leadership. CDFI relationships with various parts of a region and with a variety of income groups and institutions (from urban congregations to major financial institutions) give them a distinct credibility on policies and issues that affect their customers. The exercise of this multi-constituency credibility around issues that matter to their portfolios and at the same time are critical to low income mobility-childcare centers, housing policy, business competitiveness, work force quality, regional growth patterns-becomes increasingly important to CDFI sustainability.

        To create a significant multi-constituency, regional leadership voice, a CDFI must maintain policy and organizational linkages with its natural customer and community development constituency, while at the same time connecting to new private sector institutions and alliances. This includes such things as participation in chambers of commerce, business trade groups, regional planning institutions, regional growth and environmental groups, and public policy institutes.

        Regional civic leadership means positioning CDFIs as idea and action leaders in policies and in projects that link poverty reduction and regional growth. This is a terrain that few institutions are positioned to assume. To the extent to which CDFIs can be market experts and leaders they can bring a fresh perspective to the bunker mentality of a great deal of political discourse. The debates and politics that swirl around smart growth, for example, create an important context for CDFI leadership. Their special contribution reflects their organizational qualities, i.e. the fact that they bring both a business and public purpose standard to the debate.

        Regional Civic Transactions at The Reinvestment Fund

        In 15 years The Reinvestment Fund (TRF) in Philadelphia has grown from a small non-profit lender that concentrated on inner-city housing projects to a more substantial, regional intermediary. Examples of recent civic and portfolio innovations at TRF illustrate the capacity of CDFIs to assume greater leadership roles within their region.

        During the past several years TRF has grown into a $100 million asset corporation, with three subsidiaries, two for-profit and one non-profit. TRF’s assets derive largely from more than 700 individual and institutional investors, an investor base that TRF regards and deploys as a source of civic power. TRF makes housing, small business, and community facilities loans throughout metropolitan Philadelphia. In addition to financial services, TRF operates work force investment programs and provides data and information in support of a wide range of regional planning and policy initiatives. TRF has an increasingly strong lending presence: it is one of the largest lenders in the region for childcare centers that serve low income clients, one of the largest construction lenders of affordable housing projects, among the top SBA lenders in the region, and the largest charter school lender.

        Five examples of recent civic transactions illustrate the potential for CDFIs to use capital, data, and relationships to play intermediary and leadership roles:

        Transaction One – Venture Capital and Work Force Investments: TRF’s jobs strategy for low-income workers functions through connections both to the demand for and supply of labor. Its venture capital fund, which is supported by the some of the region’s top venture capitalists, makes investments in regional businesses whose growth will create a supply of family-wage jobs. TRF invests in companies that are largely outside the investment screen of other venture investors because of the size of the investment, the nature of the industry, projected returns, or the likely source of the investment’s exit. TRF uses its substantial contacts throughout the region to bring in additional capital and support. In some cases, it functions as a broker and relationship manager for conventional venture investments into the same businesses.

        At the same time, TRF’s work force services department assists the entrepreneurs with human resource assistance, helping them access a supply of workers, using the best training sources in the region. The training sources are often programs that TRF has supported financially and has evaluated independently. The simultaneous provision of work force assistance and capital provision reinforce each other, strengthen company growth potential and therefore strengthen the potential for portfolio success. During the past three years, TRF venture work force activities have created more than 1,000 family-wage jobs for entry-level workers. Just as importantly, TRF has become a recognized source of venture investment capacity and advice in several key sectors that hold promise of new job opportunities, including precision manufacturing and customer fulfillment centers.

        Transaction Two – Innovations in Work Force Policy and Practice: Experience in venture financing and work force have uncovered gaps in the region’s work force system, specifically, the absence of a regional private-sector body that advocates for industry-driven work force policies, and limited capacity in particular skill training areas. During the past two years TRF has developed a 40 company Regional Work Force Partnership that issues an annual state of the region’s work force report and works on specific training challenges. Through the leadership of several of those companies, TRF and a local training provider have recently incubated a new customer service academy that will eventually graduate 1,000 new workers per year. The firms that make up the Regional Partnership developed the curriculum in partnership with the National Retail Initiative and a local training contractor.

        Transaction Three – Homeownership Investment Partnership: In order to increase the supply of new homeownership units in Philadelphia and to diminish the red tape that is often associated with providing public housing subsidies, TRF worked with the City of Philadelphia to privatize some of its resources. TRF leveraged the city resources by committing to an annual allotment of its own construction debt. In the system that was created, developers of affordable housing come directly to TRF and receive in one seamless transaction an allocation of subsidy and a construction loan. The TRF debt is derived from a consortium of banks that TRF has organized and for which TRF provides lending management services.

        Transaction Four – Predatory Lending Analysis and Products: During the past two years TRF has monitored the flow of what are termed predatory loans (high priced sub prime loans packed with significant fees, prepayment penalties, single premium life insurance policies, etc.). The loans often result in property losses and bankruptcy by unsuspecting inner-city customers. TRF is in the final stages of a large study of Philadelphia’s inner-city real estate market that includes a multi-census tract analysis of the flow of real estate financing on every property. This analysis has not only uncovered the prevalence of certain abusive lending patterns in tracts with particular real estate and demographic characteristics, but it has led TRF real estate lenders to develop a new product in response to market conditions. Working with a team of lawyers that counsel victims of predatory loans and a group of financial institutions, TRF has developed a loan product that will buy selected loans from the predatory lenders after lawyers re-negotiate the fees and certain terms from the original lender. TRF will hold the loans for a period of seasoning and then sell them to a secondary market, thus allowing the predatory loan victims access to the conventional real estate market.

        Transaction Five – A Regional Policy Institute: Working with a business based policy center (Pennsylvania Economy League) and a smart growth environment group (10,000 Friends of Pennsylvania), TRF has created a regional policy center (Metropolitan Philadelphia Policy Center) that is quickly becoming the focal point for ideas and debate around regional growth. The policy center issues a quarterly review and an annual state of the region report. TRF is using its extensive data capacity and housing portfolio background to create regional housing indicators that will eventually be used to build support for a stronger State commitment to affordable housing.

        These transactions illustrate the direction of TRF’s growth, not away from core financial intermediary functions, but toward the transformation and use of financial intermediation into a broader civic agenda. TRF’s capital relationships provide it with institutional leverage and sustainability that allow for systems innovation. Venture investments provide an entrée to work force access and human resource issues within growth companies. TRF’s market credibility gives it the capacity to organize other businesses around work force policy, and its public sector and philanthropic relationships help it to launch new work force initiatives. TRF’s banking and political relationships help it construct a more efficient flow of funds to developers. TRF’s data capacity and real estate knowledge help it understand the flow of transactions in the city’s poorest neighborhoods. Its balance sheet and capital allow it to create products in response. Finally, its regional reputation makes it a natural partner for other institutions trying to build a policy platform around how the region handles growth, competitiveness, and equity.

        If you reflect on these transactions, you get a sense of the complexity of relationships that define these civic deals – the most prolific venture investors in the region, companies with work force concerns, entry level workers, entrepreneurs, inner city consumers with credit problems, developers, business groups, and environmentalists. These transactions are the defining framework of what might be called a regional financial network; a focal point for capital, political, and technical linkages and relationships.

        The uneven growth of many metropolitan regions, the powerful yet abstract relationship to place on the part of the private sector, and the limited capacity of local government to deploy regional functions, makes civic transactions of this sort increasingly important. These transactions are also a way for us to re-conceptualize community development as a process that is local in presence, regional in capacity and relationships, and capable of the scale and product focus that gives it both market and civic credibility.