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Speaking of the Economy
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Speaking of the Economy
Nov. 8, 2023

Financing Rural Development

Audiences: Community Advocates, Community Investors, Economists, Business Leaders, General Public

Jarrod Elwell and Jason Smith share what the Federal Reserve Bank of Richmond has learned about the financing needs of rural parts of the Fifth District and how the Bank's Rural Investment Collaborative and other programs help community leaders address those needs. Elwell is a community development manager and Smith is a senior community development advisor at the Richmond Fed.


Tim Sablik: Hello, I'm Tim Sablik, a senior economics writer at the Richmond Fed. My guests today are Jason Smith, senior community development advisor at the Richmond Fed, and Jarrod Elwell, community development manager for the Richmond Fed. Jason and Jarrod, thanks for joining me,

Jason Smith: Thank you for the chance to raise awareness about the importance of the topic of access to capital for rural communities.

Jarrod Elwell: I'm happy to be here, Tim. Thanks for the opportunity.

Sablik: Today, we're going to be talking about the work that your team has been doing to better understand the difficulties communities in our district face when it comes to accessing capital to finance development projects.

These are issues that are often particularly acute in rural and small-town communities. To start, could you give us an overview of what some of these challenges are?

Smith: Sure. For several years, we've been hearing about the availability of large amounts of capital. Much of this money has been flowing from federal sources related to stimulus or infrastructure or pandemic relief. The problem is that availability of funding does not equal access to funding. Communities need to be able to access the capital investments needed to reach their full potential.

Rural communities have particular challenges getting investments that are needed to build on their unique strengths and assets. Capital access is needed for all kinds of community needs: workforce housing, small business creation, tourism, cultural amenities, access to healthy food, childcare, health care. The list could keep going on and on.

When people hear about access to capital, they may think it's only about getting the funds that are needed for buildings or infrastructure. It is that, but the economic impact of access to capital is also related to having a thriving workforce and a community that is reaching its full potential.

Employment trends tend to be lower in rural communities. Within the Richmond Fed's service area, we can see that the average employment for working-age adults decreases as the counties become more rural and when they're not close to a more urban community.

Rural communities also have a high concentration of people living at a low- and moderate-income level. With a smaller population and a high concentration of low- and moderate-income households, there can be less local government resources and philanthropy that are needed to leverage state and federal resources. Matching funding and flexible funding to fill the gaps of other forms of investment is a real challenge in smaller communities.

Elwell: Capital access is an issue that affects urban communities, small towns, and rural communities. While the challenge tends to be the same, it's the contributing factors that are nuanced.

On the demand side, accessing capital in any community is time intensive and relationships are incredibly important to the process. There are often fewer leaders in our small towns and rural communities that are experienced in moving a capital project from an idea into a proposal. Projects often require business plans and the assembly of a set of complex sources of financing. I think you can see the challenge for folks that wear many hats in a community setting aside the time that's needed and the energy to focus on a single project over a series of several years.

On the supply side, for small towns and rural communities that lack a presence of funders, it can be more challenging. The sources of capital needed to make a project work seem either unattainable or not well aligned. As we travel throughout the [Fifth] District, it's common for us to hear about these projects that have been completed and have anywhere from five to 25 different funding sources in a project's capital stack to make it work. That means an equal number of contracts, regulations, and reporting requirements with which to comply.

There's also this perception that if the capacity in smaller communities increases to make them more "investment ready," then the problem will be solved. We've heard from communities and community development finance experts that more effort and attention need to be placed on helping capital providers be more "investor ready" to work with rural communities.

There are also fewer local philanthropic organizations to help fund community engagement planning and pre-development support so that communities are ready when the funding becomes available. There are more national philanthropic entities that are focused on urban and rural communities. [But] we've heard that national players aren't always sure how to serve or engage with these smaller communities.

In recent years, there has been an increase in rural hubs or rural-serving intermediaries. These organizations can help communities access training, technical assistance, and flexible capital for community engagement planning and pre-development. Some rural hubs act as regional intermediaries by connecting national capital with local projects. This could include matching funds, recoverable grants, forgivable loans, loan loss reserves, or loan funds to mitigate default risks.

Sablik: Thank you both for that overview.

On the same topic, we did a previous episode with Surekha Carpenter where she talked about community development financial institutions, or CDFIs, and the work that they're doing to address some of these financial services gaps in underserved communities. We'll include a link to that episode in the show notes. At that time when we recorded back in April, Surekha mentioned that the Fed was launching a survey to gather more information about the work that CDFIs are doing. Now that the results of that survey are in, can you talk a bit about what you learned?

Smith: Jarrod can share more about what we're finding through the survey and some examples. Before he does, I wanted to mention that CDFIs can help address some of the complicated capital access challenges we were just talking about. CDFIs are one of the partners that could be helpful when looking at regional capital aggregation.

There are two things that come to mind that would be needed for them to help play in this role of helping to pull capital together for communities. One of them is to be able to engage with innovative financial products. CDFIs don't have to fit their work into a traditional bank product. Impact investing from philanthropic sources can allow CDFIs to use innovative products like forgivable loans, recoverable grants and other flexible financial products to plug the holes in the stack of investments that are really needed to make a whole deal work.

Having local presence is also important to serving as a regional capital hub. Serving as an intermediary between regional and national funding with these local communities comes down to relationships. The financial products aren't enough to get those tools into use by real people. Having those long-lasting relationships in communities is part of how those tools get used.

Elwell: The Regional and Community Analysis team recently released our key findings report from that 2023 survey that was fielded this spring. For some perspective, there are around 1,400 CDFIs in the country. We're incredibly pleased that approximately 35 percent of the CDFIs in the country shared valuable information about demand, products, innovation, and access and barriers in this economic environment.

I'll quickly touch on five key themes that came out of the survey. The first is that the demand for CDFI products remains very strong. The second is that CDFIs have mostly been able to meet demand.

Three, the challenges varied across CDFI types. There are six different types of CDFIs and the top two respondent types in the survey were community development credit unions and community development loan funds. The challenges for both of them included lending capital, operational funding, staffing, technology, and borrower qualifications. The difference is that lending capital is the number one challenge for loan funds while it was ranked fifth for credit unions. Staffing was the number one challenge for credit unions [and] came in at number three for loan funds.

The fourth key finding is that CDFIs continued to innovate to meet the emerging challenges. Building and leveraging relationships with banks and government agencies, which helped CDFIs rapidly deploy COVID-19 relief funding into neighborhoods, is a great example. The second is new products and/or approaches to support underserved populations through things like alternatives to credit scores that can include rental payment histories and things like that.

The last key finding is that CDFIs want to expand their ability to measure impact beyond outputs like number of jobs created. CDFIs are hoping to understand how those new jobs that they helped finance have impacted housing stability, wealth and asset building, and school performance of the children of those new jobholders.

Sablik: What are some other things that your team is doing to understand the financing needs of communities in our district?

Elwell: CDFIs are one part of the equation to support capital access. We also work in partnership with our Research colleagues to focus on different aspects of CD finance, whether it's things like tax credits, aligning economic development with housing strategies, and understanding local workforce challenges.

Earlier this week, interagency regulations overhauling the implementation of the Community Reinvestment Act were released for the first time in almost three decades. For context, the last revision happened while the Internet was very nascent. Banking models consequently have changed a lot in the last three decades.

CRA is one of the most powerful and important tools the government has to ensure that banks meet the credit needs of all Americans in all communities. The effects of historical financial discrimination, including inequities in mortgage and small business lending, still afflict many of our marginalized communities.

Because of our Bank's strategic focus on rural communities and small towns, we're doubling down to learn more about capital investment and absorption in these communities and creating a strategy to help improve capital access in partnership with rural and small-town leaders through our Rural Investment Collaborative. Jason is leading that work.

Sablik: Jason, can you tell us about the Rural Investment Collaborative and its goals?

Smith: The initiative is based on many of the challenges and opportunities we've discussed today. The Rural Investment Collaborative is a community of practice that is working together to help small towns and rural communities thrive by improving their access to capital. The goal is to improve workforce and economic outcomes by promoting better availability and access to capital for communities that are trying to do work in community and economic development, particularly in low- and moderate-income communities.

The Richmond Federal Reserve convenes rural leaders and local community champions from South Carolina, North Carolina, Virginia, West Virginia, Maryland, and Washington, D.C. to participate in shared learning and some programming that facilitates improvements in their work together. The rural centers, councils, and hubs from each of our regions have co-created the collaborative's goals and strategies, and they continue to provide leadership for the collaborative as core members of the steering group.

The Rural Investment Collaborative has three core strategies that we're working on through workgroups. The first strategy is to strengthen the capacity of state rural centers, councils, and hubs within each region. The second strategy is to increase the number of communities with the ability to develop viable project proposals.

The third strategy is to inform decision makers about the challenges and best practices in improving access to capital for small towns and rural communities. This is particularly a place where the Richmond Fed has a key role to play because of our neutral work, our key skill sets in research and analysis. We can look at what's happening through these other workgroups and be able to tell the story of what the real impact can be for communities.

Sablik: Could you talk a little bit more about the second strategy? Jarrod was talking about how rural communities might have a great idea but face challenges turning that into an investable proposal. How is the Rural Investment Collaborative hoping to address that?

Smith: The Rural Investment Collaborative is partnering with Invest Appalachia to provide community investment training starting in January of 2024. Between this recording and the airing of the podcast, the steering group will select a diverse group of people — maybe 15 to 18 leaders — representing different communities and organizations from the states I mentioned a minute ago.

The leaders that they select will go through a 12-week experiential curriculum focused on developing real community projects. The virtual sessions are going to be taught by leaders of regional organizations that have a track record of success and some of the prior participants in the training itself.

During the training, participants will work in between the sessions in helping to develop their own project proposals. By the end of the training in April, they will have an opportunity to practice pitching their proposals to each other so that they have the experience [of what it] would be like when they go before investors. Each participant who completes the training is also going to receive a mini grant of $2,000 to help them move their project forward.

The Rural Investment Collaborative steering group is working on securing some additional resources, because we know that just completing the training isn't going to be the last step. They're also going to need to continue to move forward with technical assistance and other supports and might have gaps in funding that require additional investments to help accelerate their projects.

The Richmond Fed is honored to convene the steering group, which doesn't include any Richmond Fed staff. The Richmond Fed doesn't work in the area of the raising of funds [or] giving out the funds. We don't even select the communities that are going to receive the training, technical assistance, or other investments. The dedication of these rural leaders who really know their local communities and so much about this work and then help to make those resources available is really what makes this work possible. So, we're really grateful to them.

Sablik: In addition to this community investment training, are there other trainings and learning opportunities that the Richmond Fed provides to help communities?

Elwell: Yeah. We also provide CRA training for community-based organizations and community leaders as well as bankers.

We also seek out other opportunities to share our knowledge and best practices through research and engagement. There are several teams within the Research department that are outward facing in addition to Community Development that include our Econ Ed team, our regional economists, and regional executives. We work closely together and compare notes on what we're hearing on a regular basis.

In addition to our own engagement, we align our calendars with our Bank's president, Tom Barkin, to visit communities to do deeper dives. We also collaborate closely with our Regional and Community Analysis team that I mentioned earlier to conduct and share research and findings through articles and presentations.

I'm also working on the basics of a CD finance curriculum to strengthen our team's understanding of CD finance. It will also be shared with the Rural Investment Collaborative's investment training participants.

The full Research department, including Community Development, also puts on an annual conference called Investing in Rural America. The IRA conference will be addressing this topic in 2024, so anybody listening to this that would like to join us, please do so. It's on May 21 and 22, 2024 in Roanoke, Va.

Sablik: Jason and Jarrod, thanks so much for joining me today to talk about this important work.

Elwell: Thanks, Tim.

Smith: Thanks, Tim.

Sablik: Listeners can find links to the research and projects we discussed today on the show page. And if you enjoyed this episode, please consider leaving us a rating and review on your favorite podcast app.