Faces of a Community: Collaborative Approaches to Neighborhood Economic Revitalization
Good afternoon, ladies and gentlemen. Thank you for joining us here in Baltimore to discuss community economic development. We are here today because we know that we must confront the economic and social challenges of our most distressed urban and rural communities. For families who live where there is a critical shortage of decent housing and jobs, the 'American dream' is elusive -- and in a country and an economy like ours, this shouldn't be the case. We can change this. Working together, we can revitalize neighborhoods and create opportunities for residents to overcome economic and social obstacles.
In my hometown of Richmond, I've seen community developers transform some of the city's toughest neighborhoods. I've witnessed a renewal of these neighborhoods and -- more importantly -- a renewal among the residents. My volunteer work with our local United Way has taught me a great deal about the nonprofit organizations that work to revitalize neighborhoods and help residents in need, and it has shown me just how highly dedicated and creative the people who work in community development are -- people like you. Much has been accomplished as a result of your efforts. But more needs to be done and that is why we are here today -- to talk about how we can coordinate our efforts and talents to get the job done and get it done well.
The traditional approach to community development has been for the federal government to assign a specific agency to design a specific program to handle a specific problem. Unfortunately, the results of this approach have been less than satisfactory. In recent years, however, we've learned a great deal about successful community development. We've learned that it takes all members of a community, collaborating and contributing specialized skills, to revitalize neighborhoods. When community entities work together -- when banks lend money, businesses provide services and jobs, governments support physical and social infrastructure, and neighborhood organizations contribute hands-on work and valuable information about local markets, neighborhoods can be redeveloped effectively and efficiently. It takes strong collaboration among all of these entities to revitalize the economies of distressed communities.
Perhaps you are wondering why a Federal Reserve Bank president like me is trying to foster local collaborations to achieve community development. Doing so is quite natural when you think about it. The 12 regional Federal Reserve Banks are well positioned to be facilitators of such partnerships. Reserve Banks collect, generate, and analyze data on economic trends in their respective Districts as part of our contribution to the formulation of national monetary policy. And we have the perspective of the banking industry from our work as a bank supervisor and regulator. So, it is as a facilitator that I want to discuss collaborative community development.
Collaborative community development rests on two core principles. The first is a recognition that the problems facing distressed communities -- poor housing, a lack of jobs, and complex social issues -- are all interrelated. The negative ramifications of one spill over and exacerbate the others. It follows that, when tackling one problem, the chance of success is much greater if other issues are tackled as well -- in other words, strong synergies are available in community development efforts. The second core principal is that each public, private, and nonprofit institution in a community typically has specialized abilities to play a particular role in community development. At the same time, each institution also has inherent limitations, so it is unreasonable to expect any one organization to handle the entire range of community development issues.
These two guiding principles for collaborative community development -- recognizing the close interrelationship among major problems and the value of specialized roles played out in coordination -- can help local programs take advantage of the many resources and meet the needs of all sectors of the community. These principles help to explain the record of some of the most successful community development efforts to date.
As recently as 15 years ago, about the time that the HMDA (Home Mortgage Disclosure Act) data were first made public, most of the rhetoric heard nationally was concerned with affordable housing, ways to make decent housing available and to ensure fair access to financing. More recently, we've learned to appreciate the obvious -- that in order to maintain housing, we need to have economic revitalization and job creation to pay for the houses. And more recently still, we've begun to realize the value of comprehensive neighborhood development. This approach emphasizes the value of investment in human capital by creating programs aimed at job readiness, job training, child and elder care, drug rehab, credit and home ownership counseling, and even continuing education. This component of community development is absolutely necessary if we expect housing and jobs programs to work.
I've always believed that an illustration is worth a thousand abstractions. So let me tell you about three organizations that have addressed these challenges and how the 'industry' has evolved to embrace the collaborative approach to sustainable neighborhood revitalization.
I think we all agree that one of the most critical issues in distressed neighborhoods is safe, decent, and affordable housing. Adequate housing is a basic need, and home ownership is the cornerstone of neighborhood revitalization. Over the last 25 years, community developers have worked tirelessly to reclaim their communities by rebuilding housing stock and supporting infrastructure and by creating financial mechanisms that make home ownership a reality for low-income residents. These efforts have been successful because public, private, and nonprofit institutions have brought their expertise to the table. Nationwide, such collaborations have repaired thousands of streets and sidewalks, built and reconstructed tens of thousands of homes, and generated millions of dollars in loans and tax revenues.
One local example that illustrates the impact successful collaboration can have is the Neighborhood Housing Services of Baltimore, Inc. Baltimore NHS has coordinated activities among local institutions and capitalized on synergies to redevelop communities and make the housing market work for low-income people. To fulfill its mission of revitalizing neighborhoods through home ownership, this nonprofit community organization makes home mortgages accessible to low-income residents by offering two services -- counseling and gap financing.
Let me tell you the story of Spencer and Edith Lewis, an elderly couple who have owned their home in the Baltimore neighborhood of Irvington for many years. Because they used finance companies to refinance their mortgage in order to make critical home repairs, Mr. and Mrs. Lewis ended up with a mortgage at an interest rate of 11.5 percent. Moreover, they were still $17,000 shy of the total amount needed to complete the repairs. What to do? Fortunately, the president of their neighborhood association suggested that they contact housing counselor Ann Peele at Baltimore NHS. Ann helped them improve their financial situation substantially. After determining the Lewises' credit needs and financial position, Ann arranged a loan package that reduced their interest rate and provided them with the additional $17,000. A local bank provided a market-rate first mortgage at 6 3/4 percent that covered 73 percent of the total amount needed; the remaining 27 percent was funded through a below-market-rate second mortgage with Baltimore NHS. Even with two mortgages, the Lewises' total monthly payment has been reduced by more than $100, and they can now make the home improvements they need.
This little story has a happy ending, and it demonstrates how very effectively complementary institutions and programs can collaborate and contribute diverse strengths to support community development. Banks use their capacity and skill to underwrite first mortgages. Baltimore NHS couples its counseling services with its public/private funding mechanism to create financially-ready borrowers who can qualify for and afford bank loans. And neighborhood organizations provide residents with information to help them get the financial assistance they need. This collaboration bridges a market gap that neither traditional financial institutions nor community groups could easily manage alone.
Similarly, community developers look to local collaborations to help address the lack of employment opportunities in distressed neighborhoods. Partnerships that promote local economic development can offer residents the jobs they need to maintain their homes, support their families, and be self-sufficient. Job creation through entrepreneurial and small business development is one of the objectives of HUD's Empowerment Zone/Enterprise Community program. This program offers communities the opportunity to design and direct local activities that promote revitalization through job growth and human development.
The city of Baltimore was one of six cities nationwide to be awarded an Empowerment Zone designation. Responding to this designation, the city's private and public sectors have joined forces to provide training, technical assistance and access to capital to support business development in the zone. As a result, more than 1,900 jobs have been created in the zone since 1995 -- and half of these have been filled by residents living in the area.
An example of one of the many collaborations within the Empowerment Zone is the Business Empowerment Center. Here, entrepreneurs and small business owners have access to the technical and financing resources they need to start and grow their companies.
Let me tell you how the Center empowered Roland Jeffries, who owns and operates a small custom cabinetry shop in the zone. Two years ago, Mr. Jeffries couldn't obtain the working capital he needed to expand his growing shop, Waterford Caseworks. For 18 months he had to turn away customers because he didn't have the capacity to fill their orders. Then -- fortuitously -- a business development consultant from the Center contacted Mr. Jeffries and initiated a process that turned his business around. The Center was able to help him not only overcome his financial frustrations but also obtain the skilled staff he would need as the business grew. First, the Center packaged a deal that attracted a $175,000 investment by a large banking company's small business investment corporation. Less than two years later Mr. Jeffries' annual sales have more than doubled. Second, with the help of a city-sponsored job training program, he created an apprentice shop to train area residents in the art of making custom cabinets. These students become Mr. Jeffries' full-time employees upon completion of the program. Today, Waterford Caseworks has 45 employees on its payroll, more than half of whom live in the Empowerment Zone. This example shows how local, specialized, community institutions can work collectively to meet local needs, grow small businesses, create jobs and generate tax revenues.
While the Baltimore NHS and the Baltimore Empowerment Zone demonstrate the success that productive collaborations can have facilitating home ownership and jump-starting a neighborhood's businesses and economy, it is important to recognize that community development activities are interdependent and that their long-term survival hinges on financially viable residents. It is through comprehensive community development, where there is investment in human development as well as in physical capital, that we can achieve sustainable neighborhood revitalization. One community group that has used this approach is the Marshall Heights Community Development Organization in northeast Washington, D.C. Through innovative collaborations, Marshall Heights has motivated redevelopment, revitalized its economy and empowered its residents. Let me briefly describe how its complementary programs address the interrelated financial and social barriers to neighborhood and resident economic viability.
First, Marshall Heights knew that its residents needed jobs and basic consumer services, so it put several programs in place to attract businesses to the neighborhood. Through its community economic development company, funded through public and private partnerships, Marshall Heights renovated a shopping center -- a step that has brought nearly 400 much-needed jobs, shopping facilities and services to the neighborhood. The shopping center now anchors the neighborhood, and its profits fund other community development initiatives. Since the 1986 renovation, total annual sales at the center have quadrupled. Let me tell you also that the shopping center enjoys a 100 percent occupancy rate, and the development company has never actively recruited tenants. As a matter of fact, it has a waiting list of firms that want to locate there. With its intimate knowledge of the local market, the development company and its financial partner regularly evaluate the mix of tenants to determine if it supports the demands of the community.
Beyond this, to provide its residents with safe, decent, and affordable housing opportunities, Marshall Heights created a for-profit housing development corporation that constructs and refurbishes homes by leveraging funding from banks, government agencies and foundations. To date, more than 200 affordable housing units have been created. Further, Marshall Heights is using its knowledge of the local housing market in partnership with government agencies to renovate and redesign public housing developments so they can better meet residents' needs.
Elsewhere, in the critically important area of human development, Marshall Heights and its partners have invested heavily in a variety of programs that teach residents the skills they need to secure and sustain jobs, homes and credit. This investment in human capital yields dividends that not only strengthen the neighborhood's social and economic fabric but enrich individual lives. Educated, employed, and financially stable residents are wage earners and consumers who pay the taxes and buy the goods and services that support the community's economy.
Finally, Marshall Heights has established a crisis unit to assist families in dealing with unanticipated financial shocks resulting from job, health or housing-related emergencies. Intervention by this unit provides a financial 'shock absorber' which helps residents manage financial crises before they become full-scale catastrophes.
Let me reemphasize that this comprehensive approach to neighborhood revitalization is coordinated through a local, community-based organization in partnership with private businesses, public agencies, and philanthropic organizations where each participant contributes its specific skills toward the solution. This represents the best of public/private collaborations, and it is these partnerships that can serve as models for rebuilding distressed neighborhoods and markets.
Let me close with a few remarks about why the Federal Reserve is involved in community development. Federal Reserve Banks have three distinct and interrelated missions that make our participation in such discussions relevant.
The Fed's primary goal is to promote price level stability and consequently economic growth through its conduct of monetary policy. To achieve this objective, each of the 12 Reserve Banks monitors local economies and credit markets in its respective region. Extensive research is conducted to evaluate regional economic conditions, and the conclusions produced by this research play an important role in monetary policy decisions. Also, as a research institution, we serve as a clearinghouse -- an information node, if you will -- for collecting and generating extensive data on regional trends in employment, housing, business and banking. By providing access to these and other data, and by conducting interpretive studies based on the data, the Fed helps provide markets with the information essential to their efficient operation.
Secondly, as many in the audience are aware, the Fed participates in the supervision and regulation of bank holding companies and Federal Reserve member banks. In this capacity Reserve Banks assess banks' performance under the Community Reinvestment Act (CRA) and their compliance with fair lending laws. These statutes require that banks provide fair and equal access to credit in their communities, including low- and moderate-income areas, in a way that is consistent with their basic safety and soundness. Through the CRA we, as regulators, encourage lenders to do everything they can to facilitate community development, while still meeting their responsibilities as government-insured, for-profit depository institutions. Our enforcement of the CRA particularly encourages banks to participate in partnerships that fund community development. These collaborations take advantage of banks' natural strengths in credit evaluation while allowing them to continue to meet their broader banking service responsibilities to all their customers.
Further, through our Community Affairs Office (CAO), the Fed facilitates community development by providing information on the various resources available to promote local development -- through publications and programs such as today's conference. By providing practical research data, technical assistance and regulatory guidance to the wide variety of public and private sector organizations engaged in community economic development, our CAO fosters collaborations between public, private and nonprofit institutions. Through this information exchange, the CAO helps partners in community development make maximum use of their specialized skills while recognizing their individual limitations and respecting those of other participants.
One more thing: if you put a podium in front of me, I can't resist making a few comments about monetary policy. Over the last several months I've been meeting with a coalition of community groups to discuss community development, CRA and monetary policy. So it seems appropriate, at this point, to share with you some thoughts on the relationship of monetary policy to community economic development.
The fundamental goal of monetary policy is to promote sound economic growth, and the best way for the Fed to do that is to concentrate on price stability. Today we have a combination of low inflation and low unemployment rates that we have not seen in decades. Lots of things have contributed to this happy result, and I believe that one of these things is the Fed's persistent pursuit of price stability in recent years and our increased credibility as an inflation fighter.
Protecting our hard-won gains on the inflation front is vital to the distressed communities we all seek to develop. Experience has shown all too clearly that rising inflation is inevitably accompanied by rising interest rates and a contraction in overall economic activity. The hardships that follow bursts of inflation fall disproportionately on lower income families, because they are the families most likely to suffer from job cutbacks and least equipped with a buffer of savings to deal with such cutbacks. They don't have financial 'shock absorbers.'
The Federal Reserve, like the community development institutions I have spoken of today, has both unique competencies and inherent limitations. Obviously the Fed cannot, by itself, ensure real growth in the overall economy -- for that we depend on the creative energies and innovative, productive activity of individual people. What the Fed can do -- and is uniquely qualified to do -- is to stabilize the purchasing power of our money and in that way provide a solid monetary foundation for the growth of jobs and income, and the development of our communities and neighborhoods.
To sum up, my personal view -- not so much as a Fed official, but as a professional economist and a concerned citizen -- is that we need to shift our neighborhood and community development focus away from programs that seek to deal narrowly with particular problems and focus instead on programs that work to foster development collaboratively and holistically.
As a society, we should not confuse simply spending with investment. By writing checks, we can slap some paint on a building or provide an unemployed worker with a job that lasts a month or two — but that's just spending. We need to do more than this. We need to invest in ways that will make development self-sustaining and in that way provide citizens with good places to live and work, and a lifetime of opportunity to earn their own keep and realize their dreams.