As communities come to realize how the changing financial landscape is affecting community development, they will find that it is possible to build more resilient economies by becoming more knowledgeable about capital. Becoming a "capital literate" community means using capital assets wisely to survive and prosper. The story of Shelbina, Mo., (pop. 2,000) illustrates creative approaches being used by many communities.
In 1999, the Community Affairs Department of the Federal Reserve Bank of St. Louis began conducting community development finance training sessions throughout the District. Participants were asked to share their experiences in dealing with changes in the industry. Many mentioned the dwindling federal funds and the shift in responsibility to state and local governments; the growth of community development corporations; more sources of private money; and a shift from three or four funding sources and partners to as many as 10 in a single project. The discussions pointed toward a need for deeper understanding about how capital and credit markets behave.
Some approaches to community development finance have mistakenly created dependencies on public subsidies that may not be sustainable into the future. Many communities rely on federal and state grants as the sole source for community development. But good community finance requires building the skills to recognize and use capital assets wisely—for example, developing partnerships among a growing number of funding sources and addressing all partners' expectations for a return on their investment.
Shelbina residents refused to accept that they couldn't afford to build an addition to their library that would match the original building. The addition is on the left.
In the past three years, residents and officials in this northeastern Missouri town have generated $11.4 million in private and public contributions and grants by pooling their knowledge about using capital to leverage more capital. A common vision of community progress—usually difficult to achieve—is cited by community leaders as one of the town's greatest assets. Shelbina's philosophy is seen in the completed addition to the Carnegie Library. When library board members proposed to use architectural design elements and materials to match the original structure, they were told that the project would be far too costly. "Never tell us that something can't be done," said John Bode, economic development director for Shelbina.
Capital can be created, grown, purchased or attracted. It exists in all communities and may take the form of money, raw materials, buildings, technology, human labor, information or skills. Leveraging capital expands the production of the community beyond the levels that could be attained without it and plays a large part in improving productivity, the standard of living and the quality of community life.
Capital goods and services make up a community's assets—that is, any advantages, resources, goods or services available for use by the community. An advantage may be location, access to information, proximity to excellent transportation routes and the existence of community organizations.
Examples: Community-owned properties are capital that play an important role in a town's growth.
A local financial institution is important because money begins to circulate through communities as a result of savings and investments. This means that there must be not only sufficient capital but an excess of it to allow for savings and investing. As more money is generated, it can be used in combination with funds from individual developers and tax credit programs to finance local developments.
Examples: Farmers, corporation, theater group understand value of local money, programs.
|Movies are shown and plays are performed at the new Hawkins Theatre. A state tax credit was used to attract $800,000 in private donations.|
Capital flows to the path of least resistance and greatest return. Capital follows well-laid business plans that communicate the expectations, time frames, risks and other essential information that help investors and partners make sound financing decisions. The community must have supportive rules, standards and operating policies, such as a special tax district and local ordinances that create confidence and attract investments.
For an investor in community development projects, decisions about where to put capital include more criteria than that used in traditional investment decisions. Multiple bottom lines and alternative measures of return on an investment are always present. For example, community development tax credit programs and social venture investment funds are designed to fulfill political, social or economic goals in addition to providing financial incentives to the taxpayer or a financial return to the investor.
Choices remain difficult for investors because the same capital may have a better use or a greater rate of financial return if invested elsewhere. For example, an investor could place $1,000 in a 12-month certificate of deposit at a community development financial institution (CDFI) paying 3 percent interest or invest the same $1,000 in a 12-month certificate of deposit at a traditional bank paying 4 percent interest. Because proceeds from the deposit earnings to the CDFI are used for loans with a community development purpose, the investor may receive a lower rate of financial return but be willing to accept a moral, social or economic return on the investment.
Community development project officials seeking capital should consider why an investor would give up an alternative investment in favor of the project with a lower rate of financial return and be prepared to answer the question, preferably in a written business plan.
Capital may be unused, underused or otherwise not flow toward community development investments because of inadequate information about how to match it up with a development.
Examples: Trust funds and endowments lay dormant for years until persistent officials found a way to use them.
If you want to be capital literate, you should know these basic terms.
the ability to use a small amount of money to attract other money, including loans, grants and equity investments. Leverage also refers to providing the organization with the tools it needs to raise other kinds of funds.
the teamwork that is essential to structure and to implement savings and investing vehicles at the community level, especially to share market knowledge and mitigate risks.
Flexibility and customization:
the ability to tailor savings and investment programs, services and products to the unusual circumstances of markets or consumers. For example, microlending is right-sizing capital for businesses that have a need for small loans, usually less than $10,000.
the patterns that usually recur in business, investment and development. These cycles must be recognized and used to maximize savings and investments.
Keep up with what’s new and noteworthy at the St. Louis Fed. Sign up now to have this free monthly e-newsletter emailed to you.