No Recession for Community Development Corporations

This is a paper I wrote back in December 2008 about CDCs in DC and the recession.  Unfortunately I never sent it around to be published.

------------
No Recession for Community Development Corporations
by Michael Clarke
December 18, 2008

WASHINGTON DC - On Dec. 1, the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) announced that a recession in the U.S. began in December 2007. But in DC and other cities around the nation, there are some corporations bracing for a tsunami of business. With optimism like that, why is the outlook so bleak?
It is hard to open the morning paper without seeing dozens of articles reporting on one aspect or another of the US financial crises. Inevitably talk turns to “recession proof” companies. What is surprising is that not only are there companies that are recession proof, there are an estimated 4,600 community development corporations (CDCs) across the nation designed specifically to support those impacted most by a recession. CDCs are non-profit, community-based organizations that anchor capital locally through the development of both residential and commercial property, ranging from affordable housing to developing shopping centers and even owning businesses. Organizing Neighborhood Equity DC (ONE DC) is such a company.

Operating on a shoe string budget of $700,000, Executive Director Dominic Moulden boasts he and other companies like him “are ahead of the curve.” ONE DC’s work centers on popular education, community organizing and alternative economic development projects. In times like these Dominic feels the pressure for ONE DC to “ramp up” their operations

The statistics are hard to ignore, when the economy contracts, workers loose their jobs. The Bureau of Labor Statistics reports over a half million jobs were lost in November alone. When employees loose their jobs, some will default on their mortgages. According to RealtyTrac, an online marketer of foreclosure properties, “foreclosure filings — default notices, auction sale notices and bank repossessions — were reported on 259,085 U.S. properties during November, up 28 percent from November 2007.” As you might expect these folks turn to local, state, and federal governments for assistance, but when that isn’t enough, it is corporations like ONE DC who step in to fill the void.

CDCs are big business. $42.9 billion in grants and other support was provided by private and community foundations in 2007. This investment produced $367.9 billion in direct, social and economic benefits. While these indirect benefits vary substantially across grant areas, the Philanthropic Collaborative (TPC) found that the $42.9 billion in foundation support helped to generate nearly $512 billion in additional household income and some $145 billion in additional government revenues .

One conversation with DC Central Kitchen’s (DCCK) Chief Executive Officer Michael F. Curtin, Jr. and you get the picture very quickly. Mike, as he prefers to be called, makes it clear he is not running a soup kitchen. “Charity doesn’t work. [Nonprofits] have tried for 40 years and we haven’t moved the ball very far. Charity by definition is leftovers; charity [to me] is the definition of un-sustainability.” Instead Mike wants people to think in terms of “investments.” When an individual donates to DC Central Kitchen they don’t just get a thank you note, the get a thank you for investing note. “It is just a word,” Mike explains, “but it accurately describes what we are doing here.” While the benefits vary in size, each dollar that private and community foundations provided in grants and support in 2007 produced an estimated average return of $8.58 in direct, economic welfare benefits. Mike is happy to point out that for every dollar DCCK receives it creates $11 dollars in revenue for the local economy.

According to Community-Wealth.org, CDCs like ONE DC and DCCK create more 75,000 jobs a year throughout the nation. Mike thinks that figure is “extremely low.” “In 2008, DCCK alone hired 8 graduates from the training program to staff our ongoing programs and new initiatives that we created. The beautiful part of running a culinary training program is that there are always jobs available in that field – hospitality is the largest private sector employer in the country, 2nd only to the federal government. In DC alone, it is predicted that there will be 5,000 new hospitality jobs created in the next few years. The trick is making sure they are “good” jobs with a decent hourly wage and benefits. Our relationship with the hotel and restaurant community as well as with institutional food service providers such as Compass, Aramark and Restaurant Associates, positions our graduates well for what we consider to be these “good” jobs.” Dominic would agree. In 1998 ONE DC (then Manna CDC) created Enterprising Staffing Solutions (ESS), a worker-owned temporary employment agency, since that time, more than 3,000 people have found work through ESS.

Three decades ago state pension funds didn't target any funds to local investment. Today, they invest over $12 billion in venture capital (much of which is invested locally) and tens of billions more in other forms of economically targeted investment. Community approaches, such as social enterprises, CDCs, community development financial institutions (CDFIs), and employee stock ownership plans (ESOPs), have also grown. Case in point, the number of CDCs has risen from a handful 40 years ago to over 4,000 today, while, at the same time, the number of employee owners in ESOPs has increased from 200,000 to over 8 million.

Manuel “Manny” Hidalgo, the Executive Director of the Latino Economic Development Corporation (LEDC) in Washington, DC agrees. “Each dollar you spend at a local business two-thirds of that dollar stays within the local economy.” LEDC isn’t a CDC, but rather a community development financial institution (CDFI) based in Washington, DC that works for the entire underserved community— not just Latinos—by helping them navigate the formal US financial systems and manage the conditions that impact their financial stability. Enthusiastically he explains, “What we are doing is [local] economic stimulus.”

According to the Coalition of Community Development Financial Institutions (CDFI Coalition) Data Project he and others like him are correct. “In 2006 the 505 CDFIs studied by the CDFI Coalition’s Data Project invested $4.75 billion to create economic opportunity, the impact of which financed and assisted 8,185 businesses, which in turn created or maintained 35,609 jobs.” But despite an overwhelming increase in demand for their services, even these recession ready corporations are feeling the pinch.

The NBER predicts “the 2007-09 recession is expected to approach 8 percent unemployed or about 2 million jobs lost from peak to bottom.” If the NBER is correct, it would place this recession tied for third place in terms of the unemployment rate and the number of jobs lost since 1945. Already this year according to the Bureau of Labor Statistics (BLS) the unemployment rate rose from 6.5 to 6.7 percent, while November's drop in payroll employment followed declines of 403,000 in September and 320,000 in October.

“I’m not saying we predicted the housing crises,” Manny explains, “but my housing director came to me in 2005 saying that there would be a ‘housing crisis tsunami’ just based on the number of clients showing up at LEDC trainings.” As such Manny had to learn on the job how to provide new services to new clients. To him it was clear that LEDC needed to respond to constituent needs. Later that year, under Manny’s leadership, LEDC re-organized its lending activities. This change allowed LEDC to be more agile and responsive to its market.

All three directors agree that funding for the social sector are the most at risk. “Whenever budgets get tight, social services are the first to go. The foundation and grant sectors then get stressed. [You] have to be smart with your money. What we don’t want to hear is “we usually give $20,000, but this year we have so many groups in need so we are only going to give you $10,000.”” Mike cautions foundations and governments that spreading funding to vulnerable organizations that might not be able to make it through the lean times is not a wise approach. “You wouldn’t take this approach with your savings,” he says. “It is inevitable some non-profits are going to go under. Foundations and government should not try and prop up failing nonprofits.”

This fall two ONE DC employees decided to go back to school and Dominic had to make the tough decision not fill those positions right away. Attrition he says was “a cost-saving measure.” Now Dominic has only four full-time staff and three consultants to support all of ONE DC’s activities. He claims his board and members do 90% of the work, but admits it won’t be easy. Manny at LEDC has had to make similar choices, “This fall we got rid of one position entirely.” He is afraid he may be overstaffed and may have to resort to transferring some staff to their Maryland office.

“Times are tough for everyone,” Mike at DCCK explains. “Our clients are the most vulnerable, but if we as a community don’t serve them we are only digging ourselves a deeper hole.” He likens the situation to credit card debit, “We are borrowing against our future. This is not a zero sum game. If we cut funding to those most in need, we are only taking one step forward, and two steps back.” That being said, Mike wants to be clear that DCCK is not looking for entitlements.

When Mike talks about entitlements he draws the analogy to prison. “We want people to understand that it costs the taxpayer $24,000 a year to keep someone in prison.” He argues that once these people are released, the chances are high that they will reoffend because they won’t be able to find work in this economy. “For $8,000 a year DCCK will give that person a good job, not an entitlement. The second we add that person to our payroll we are putting money into the economy rather than that person being a drain on our economy.” He concludes simply, “Building more prisons is not the way out of a recession.”

It is clear funds are drying up. “When [LEDC] developed a budget for the year we reduced our operating budget by twenty-five percent. Now that things have gotten worse, we are now looking at another twenty-five percent cut.” Everyone including the CEOs are affected. For 2009 DCCK had to make the difficult decision of instituting a salary freeze. “There are three principles we are working hard to avoid. The first is cutting any of DCCK’s programs or services. The second is laying-off staff, and the third is reducing benefits for current staff members. Everything we are doing is geared at avoiding those three avenues.”

Manny tells a story about one of his board members who felt the impact of a slowing economy first hand. “We have a board member who was a successful real estate executive and recently lost her job. Now she is working for the Department of Agriculture on rural housing issues.” When asked whether ONE DC has had to scale back their future plans, Dominic explains he had to make the difficult decision to change the business model from a grantee dependent on funding from other organizations to “a membership based organization with 170 members.” Dominic feels ONE DC must raise its own resources rather than relying on handouts, “We needed to create a model that was sustainable.” When asked about individual giving Dominic is proud to say “[ONE DC] puts our own limits on donations and in the past we have given money back.” He warns, “Don’t give us money if you think you can control us or our mission.” By switching to a membership based organization Dominic feels ONE DC now has the independence to drive their agenda and be more successful. “Our goal is to have 200 members by the end of the year!”

So what can be done? “We know individual giving is going to be difficult.” Manny suggests several alternative ways for individuals or organizations to give more than money. “Anyone can volunteer. We are always looking for bankers, business professionals, and housing professionals to council, train and lend a hand our clients.” He would like to see the banking sector step up with better programs for the first time home buyers and those currently undergoing foreclosure. In 2008 LEDC business training and technical support efforts benefited 300 businesses. He explains right now LEDC is helping banks sell foreclosed homes in DC, by matching foreclosed properties with his clients who have undergone LEDC’s homeownership counseling. “We accommodate clients’ individual needs to make sure they understand how to make a wise investment in a home.”

An industry survey published in 2006 found that 4,600 CDCs promote community economic stability by developing over 86,000 units of affordable housing and 8.75 million square feet of commercial and industrial space a year indicates he may be on to something. That is a lot of housing for those loosing their homes. Dominic at DC ONE sums it up best, “If you organize with the local community, nurture and cultivate local people, those same people will invest in themselves and us. As the community grows they will continue to give back because it is now THEIR community.” Let’s hope for his sake and ours he is right.