Increasing the supply of capital to low and moderate income communities has been a central goal of the community development movement since its inception. From the passage of the Community Reinvestment Act in 1977, to the Low Income Housing Tax Credit in 1986, to the establishment of the CDFI fund in 1995, to the New Market Tax Credit in 2000, advocates have won significant changes in public policy that have dramatically expanded the capital available to our communities. While there can be no doubt that this has been of huge benefit to our communities, I have often wondered whether we are so focused on the "supply side" that we have neglected to support the "demand side."  You see, for every community development loan or investment, there must be a qualified borrower in which to invest. CDFIs can't succeed without good borrowers.

The reality that lenders and borrowers are the two sides of the same coin became readily apparent in 2008 and 2009 when the tax credit market froze and both CDCs and CDFIs alike found themselves in a bind together, as the financial challenges of each sector negatively impacted the other. (Of course, many groups function as both a CDC and a CDFI - truly the same coin!)

So I was very pleased to read a recent article on the Living Cities Blog by  John Moon called In The Works: Understanding How Investments Get Made in Low-Income Communities... Or Don't.  According to Moon, Living Cities is finding "that communities need not merely dollars, but also an effective capital absorption ecosystem."

Moon continues: "What do we mean by capital absorption? Capital absorption describes the process by which capital flows to support the needs of low-income communities, either through direct investment or through financial intermediaries. Effective capital absorption requires a sufficient supply of capital moving from market, government or philanthropic sources to a set of capable borrowers. The borrowers then use the capital to strengthen a community’s vitality through the development, preservation or expansion of assets such as affordable housing, small businesses, health clinics and grocery stores. When looking at how to improve the level and quality of investments in low-income communities, the unit of analysis needs to be the capital absorption ecosystem. Traditionally, the field has focused on simply increasing capital sources, improving the capacity of particular financial intermediaries, or concentrating efforts at the project level."

Among the borrowers that are needed, of course, are high-functioning, resident led community development corporations.  Yet, while CDFIs have grown tremendously since the launch of the CDFI fund, the federal government does not have any comparable system of support for CDCs - nor do most states.  Many, although not all, CDCs are undercapitalized, which limits their ability to pursue a community led agenda and their ability to leverage capital investments. The result, I fear, is a  capital absorption ecosystem (a.k.a. a community development ecosystem) that is growing out of balance. This imbalance - if it continues to grow - threatens to undermine both the CDFI and the CDC sectors and more importantly the communities we all seek to serve.

I believe that the Community Development Partnership Act, now under consideration by the Massachusetts Legislature, would provide CDCs with a system of support similar to the CDFI fund, thereby creating a better supply/demand balance in our "capital absortion ecosystem."  MACDC is working hard to win passage of this legislation as soon as possible. We are also advocating for other changes in policy and practice that will help CDCs become stronger financially and thereby better able to leverage private and public investment. As policy makers, investors, foundations and practitioners look to increase the flow of capital to our communities, they need to strengthen both the lenders and the borrowers in order to create a healthy ecosystem that can significantly move the needle on economic opportunity and equity.

In many ways, the Roxbury neighborhood of Boston and the suburban town of Arlington, Massachusetts are very different. Roxbury is a low income urban neighborhood with per capita income of about $16,000 and 86 percent of the population comprised of people of color. By contrast, Arlington has a per capita income of $44,000 and 86 percent of the population is white. And, of course, they sit on opposite sides of the Charles River.

Yet, earlier this month, I was able to attend celebrations in both communities where the similarities resonated as much, if not more, than the differences. In Arlington, more than 300 people crowded into the Town Hall to celebrate the 25th anniversary of the Housing Corporation of Arlington.  HCA has helped over 400 families avoid homelessness, built 58 affordable apartments, and now has 32 more apartments under construction at Capitol Square Apartments. Most importantly, HCA has engaged local residents who are determined to make Arlington a welcoming home for everyone – long time residents and newcomers, rich and poor, white and people of color. It is a challenging task given the realities of our housing markets, but the people in Town Hall that night seemed undeterred. Governor Patrick sent a wonderful video message to the mark the occasion, calling HCA a “model CDC” and noting that “Community Development Corporations play a vital role in our communities. By being the bridge between state and local government and between public and private entities, CDCs take ownership of their community and work to lift up everyone.”

In Roxbury, I attended the 45th anniversary of Madison Park Development Corporation,  the oldest CDC in Massachusetts. A full house crowded into the newly redeveloped Hibernian Hall to recall the many achievements of the CDC since 1966 and to highlight the group’s current work to build housing, spur economic development, and promote culture and the arts. Madison Park’s history, recounted in a wonderful video,  inspired the growth of the community development movement across the Commonwealth and the Country. Over the years, Madison Park became a vehicle for enabling local residents to define the future of their own community, building over 1,000 affordable homes, renovating important commercial buildings in Dudley Square and supporting programs that celebrated the history and the vibrant cultural community in Roxbury.

Roxbury and Arlington are certainly different communities with different challenges and different assets. But they also have much in common. Both communities have long and proud histories dating back to before the American Revolution; both communities are blessed with residents and leaders who are dedicated to making their neighborhoods better for everyone; and both communities have organized, and sustained, resident-led CDCs that, in the words of Governor Patrick “understand that economic and social diversity requires the support of everybody in the community. And that in a community each of us has a stake in our neighbor’s dreams and struggles as well as our own.”

I greatly enjoyed Russ Douthat’s column in last week’s Sunday New York Times called “Our Reckless Meritocracy."  Reflecting on former New Jersey Governor Jon Corzine’s fall from grace, Douthat notes that many super smart and super successful leaders in business and politics have “led us off a cliff — mostly by being too smart for [their] own good.” Douthat continues,
“In hereditary aristocracies, debacles tend to flow from stupidity and pigheadedness: think of the Charge of the Light Brigade or the Battle of the Somme. In one-party states, they tend to flow from ideological mania: think of China’s Great Leap Forward, or Stalin’s experiment with “Lysenkoist” agriculture. In meritocracies, though, it’s the very intelligence of our leaders that creates the worst disasters. Convinced that their own skills are equal to any task or challenge, meritocrats take risks that lower-wattage elites would never even contemplate, embark on more hubristic projects, and become infatuated with statistical models that hold out the promise of a perfectly rational and frictionless world.”
While Douthat’s article focuses on the impact of this pattern in business and politics, I wonder if the nonprofit sector might face similar risks. I'm skeptical that simply being smarter by using "evidence based models," and "data driven programs" and "business metrics" and "triple bottom line investments" will suddenly transform persistent social challenges that have plaqued human society for hundreds, if not thousands of years.  Proposals like Social Impact Bonds, which presume an ability to measure social impact with such precision that we can create meaningful investment vehicles based on that data, strike me as an example of becoming “infatuated with statistical models that hold out the promise of a perfectly rational and frictionless world.” In the community development world, financial innovation has generated more and more complicated financial tools that may add more complexity than value, and also make it harder for local residents and non-professionals to fully enage in the community development process. 

I am certainly not saying that innovation, evaluation, evidence and data are not important. I am not a climate change denier or someone who rejects science, expertise and knowledge.  The nonprofit sector absolutely needs to make better use of emerging tools. We should absolutely strive to learn more about the cause and cure of social ills and apply that knowledge diligently.  I have no doubt that we can do a better job than we have in the past at fighting social challenges and problems. But I also agree with Douthat’s conclusion:
“In place of reckless meritocrats, we don’t need feckless know-nothings. We need intelligent leaders with a sense of their own limits, experienced people whose lives have taught them caution. We still need the best and brightest, but we need them to have somehow learned humility along the way.”