An Overview of Community Development

The Federal Reserve Bank of St. Louis is one of 12 Reserve banks that, along with the Federal Reserve Board of Governors, comprise the nation’s central banking system. As the central bank, the Federal Reserve has three primary responsibilities—conducting monetary policy, providing financial services to banks and the U.S. government, and regulating and supervising financial institutions. These three activities all work toward a common goal—fostering a strong and healthy economy.

Community Development departments within the Federal Reserve help promote economic growth and financial stability in communities across the country, especially those in low- and moderate-income (LMI) areas. We do this by bringing together financial institutions, the private sector, nonprofits, public officials, government agencies, researchers and practitioners to identify and address challenges that confront LMI communities and collaborate on community and economic development initiatives.

Through our roles as conveners, researchers and information brokers, community development staff ultimately seek to promote community and economic development in LMI communities, ensure fair and impartial access to credit in underserved markets and assist financial institutions in understanding their responsibilities under the federal Community Reinvestment Act (CRA). This convening power of the Fed is also leveraged to help community development organizations access the technical and financial resources needed to explore new and emerging sources of capital to finance community development initiatives.

Numerous resources, like this guide, are available from local Reserve banks and from the Federal Reserve Community Development web portal, FedCommunities.org.

Understanding “Community Development”

The definition of “community development” can vary. Some equate the term to neighborhood beautification projects or affordable housing efforts. Others consider broader definitions, such as initiatives that promote job creation, small-business development and supporting small farms; and any project that revitalizes or stabilizes LMI neighborhoods, such as supermarkets or day care centers.

Community development can be all of these things and more, but typically requires four elements:

1. Attention to the needs and desires of the people involved and to the areas where they live and work
2. Control by community members, who become active participants
3. The concept of self-help, which is vitally important to the community development process
4. A holistic view of the community, in which groups take into account one another’s goals and actions as opposed to operating as if each were in a vacuum

As we’ll unpack throughout this guide, these elements are important because they undergird an “inside-out” community-based approach in which community members not only have a stake, but become engaged and invested in the process of making changes that will ultimately benefit their community and its future.

The Evolution of Community Development Finance: Some History and Trends

Essentially, community development finance involves economic growth in which people come together and make decisions to organize and pool assets and resources for the purpose of addressing unmet needs and opportunities.

It wasn’t always the case that financing community development projects involved a true people-centered approach. In its earliest days, dating back to the Progressive Era and the New Deal, civil progress and community improvement projects were typically classified as top-down, government-led administrative efforts that did not include community members in early funding decisions. It wasn’t until the antipoverty movement of the 1960s and the subsequent proliferation of community development organizations—such as community development corporations (CDCs) and community action agencies—along with philanthropic organizations and financial intermediaries such as community development financial institutions (CDFIs), that the era of community-centered initiatives and community development funding options we see layered today were ushered in.

Other shifts were happening over recent decades as well. As business sophistication and technologies emerged, innovation has paved the way for new lending platforms and increased opportunities for data collection and measurement. Finally, traditional place-based community development strategies are being supplemented by people-based strategies as a way to build healthier communities beyond bricks and mortar.

Current trends in community development include:

Shifts in the role of government funding

Traditionally, money for community development has come primarily from government sources, which has accounted for up to half of all nonprofits’ revenue. Today, not only has the proportion of funding from government dwindled, but government aid has also shifted to reflect changing priorities. What’s more, government agencies, like other funders, are raising their expectations for those who receive assistance. What are some of the implications of these changes? Most levels of government are allowing community developers to tap into more than one government program for money for the same project; such layering was not usually allowed in the past. Meanwhile, private contributions are increasing, but not at a rate that can replace ever-diminishing government funding.

Shifts in the number of funding sources

Money rarely comes from a single funding source for today’s projects; instead, funding typically involves multiple sources and entities, both public and private. This may have begun in its simplest form, with the requirement for matched funding. It is quite common for seven or more sources to fund just one community development project.

Shifts to more holistic approaches for meeting community needs

The early piecemeal approach of addressing community needs is moving toward coordinated and collective action as community developers and funding sources are becoming more concerned about how a project fits in with and benefits from other projects at work in the same community. As similar mission-minded organizations work together to address common goals, coordinate activities and collect data, these “collective impact” approaches are beginning to translate into measurable and sustaining results in various communities.

Shifts to data-driven, outcome-based expectations

If ever there were funding handouts with no strings attached or simply given because the community need was deemed a good one overall, such handouts have gone the way of the dinosaur. As subsidies have declined, community development projects have increasingly relied on debt financing (loans) and equity financing (the sale of stakes in the project). As a result, investors have raised their expectations for a return, whether in the form of dollars or social benefits. And the return must be measurable—not just a promise, hope or expectation. For example, funders will expect data on the outcome of your project, such as: What is the specific benefit of your project to the community? Who exactly will be impacted by your project? How will this impact be measured? When and how will the return on investment be captured?

Given these trends, some might say that community development finance has become more complex than in years past but has also presented new opportunities for collaboration and creativity. As such, our approach in this guide is to prepare community development professionals with the basics of community development finance and core principles that are essential to getting projects off the ground. Among those whom we expect to benefit from this guide are members of community-based organizations, development groups, state and local governments, and financial institutions.

Components of a Community Development Project

If you have a community development project in mind, would you know where to start to pull the project together? Do you engage with partners and then write a plan, or write the plan first and then seek partners? What’s the road map to secure financing for the initiative? Explore your options as we probe deeper into the components of a community development project. 

In Unit 1, we’ll discuss the PEOPLE component—how connecting the right partners makes a difference in the ability to bring together your community’s best assets.

In Unit 2, we’ll talk about the role and importance of the PLAN—why business plans are so important and what funders are looking for.

In Unit 3, we’ll provide an overview of the PROCESS for securing funds, including resources for innovative tools that can be layered to make your project work.

Finally, in Unit 4, we’ll introduce you to two case studies that reveal how these components have come together to produce successful PROJECTS. Scattered throughout these units, you’ll find insights, resources and examples of how others have successfully brought together these three elements to finance community development projects in their communities.

The overall takeaway from this guide is simple: People + Plan + Process = Successful Project

Five Core Principles That Help a Community Development Project Succeed

As you read through the units that discuss the PEOPLE, PLAN and PROCESS that lead to community development PROJECTS, you’ll notice five core principles that are key to successful initiatives:

1. Community Engagement. For any community development project to succeed, a project must have the support of its community, right from the start. How do you gauge this? How do you put this into action?
2. Leadership. Not only must each initiative have community buy-in, it must also have one or more leaders—those who champion the effort from day to day and whose job it is to make sure it succeeds. Who makes ideal leaders for your project? How can you become a leader yourself?
3. Collaboration. A successful community development project isn’t the work of a single individual or even a handful of people; it takes a village to bring a project to fruition. Knowing how to collaborate and with whom to network to build a successful team is a critical part of any community development project. Which organizations are the best collaborative partners for your initiative?
4. Evaluation. How do you build a strong project plan that clearly articulates your intended goals and outcomes? What are funders looking for before choosing to invest? Find out more about today’s data-driven decision-making environment and tools, and its impact on your business planning.
5. Adaptability. What tools are available to get your project financed? What happens when funding gaps exist? As any veteran of this work knows, projects rarely go as planned. People move, missions change and funding sources dry up. But that doesn’t mean good initiatives need to be cancelled or put on hold. Find out how flexibility and resilience are often the answer to the question, “How did this community development project finally get off the ground?”