For donors hoping to improve the quality of life in American cities, community development corporations (or CDCs) are a favorite category of grantees. Corporate foundations, community foundations, and major national foundations all support local CDCs and a group of related “intermediary organizations” like the Local Initiatives Support Corporation (LISC) and the National Congress for Community Economic Development, the Washington-based trade group for the “industry.”
CDC-related grants range in size from $15,000 and $25,000 grants made to local organizations by regional donors, to a number of large gifts. The latter include the $1.7 million given by the Ford Foundation to the National Congress for Community Economic Development, the $1 million given by the Lilly Endowment to the same group, and the $3.5 million given by the MacArthur Foundation to LISC, which also received $1 million-plus gifts from the McKnight Foundation and the Pew Charitable Trusts. Other major supporters include the Annie E. Casey and Fannie Mae Foundations. Conservative-leaning foundations have also been significant local CDC supporters.
Such grants are not hard to understand, given the superficial attractiveness of these 3,600-plus ostensibly community-based “corporations.” They have cast themselves in terms that make them sound attractive to the left, right, and center. In Comeback Cities, a leading defense of CDCs co-written by Paul Grogan, former head of the LISC, they are appealingly described as “citizen-formed self-help groups trying to revitalize their own neighborhoods.” They have enjoyed bipartisan support in Washington, with Republicans in Congress sharply raising the Low Income Housing Tax Credit that subsidizes them and the Clinton administration helping them to grow in number by 64 percent from 1995 to 1999.
To be fair, in addition to nice-sounding phrases, CDCs can put some concrete things on the plus side of the ledger. They do, for example, have local residents on their boards of directors, and they have been involved in the building or renovating of apartment buildings and in encouraging supermarkets to open stores in the inner-city. For two decades they have used direct and indirect federal subsidies to build over 500,000 units of low-rent (but often high-cost) housing, a number equal to almost half the nation’s stock of public housing.
The Down Side
But a closer look at the wave of CDCs that has developed over the past two decades makes clear these organizations are not exactly what they claim to be. They are not helping to create neighborhoods that are truly (to use their term) sustainable—meaning they have been built through the effort and accumulated wealth of their residents. Instead, CDCs are conducting a new version of the 1960s War on Poverty with their main product being a new version of public housing, albeit creatively financed. Rather than helping urban residents in their own task of self-improvement, CDCs threaten to produce neighborhoods designated, in perpetuity, as homes for the poor, sustained only by a continuing stream of transfer payments from governmental and private sources. Worse, CDCs impede the potential for the sort of new, spontaneous development that is the hallmark of real urban vitality. Donors concerned about the plight of the urban poor should look elsewhere—toward initiatives that will help individual residents improve their life prospects and, over time, lead to rebuilt cities as well.
The rhetoric surrounding CDCs soars. But in reality, community development corporations are neither corporations nor truly based in their communities. They are nonprofit organizations staffed by full-time professional employees, not volunteers, whose most common activity is the construction of subsidized housing—the vast majority of it subsidized rental housing. Far from being, for instance, a group of neighborhood friends who pool their funds to build, they operate as a sort of decentralized Department of Housing and Urban Development, using a complex combination of federal tax credits, state-subsidized mortgages, and rent subsidies to build apartments, for which they realize fees for managing. As with all subsidized housing, there is already evidence that CDC-built housing may not remain in good condition over the long haul (public housing looked great, too, when the ribbons were cut by Franklin Roosevelt). One private firm that assesses the condition of numerous CDC-owned housing projects for state housing finance agencies that support them has concluded, for instance, that seven out of ten face “unmet capital needs” and that they should be setting aside thousands of dollars more per unit for proper upkeep. A New York Times series in June 2000, exposed the maintenance practices of a Bronx CDC called Banana Kelly, once held up as a paragon. Wrote the Times: “Its buildings have deteriorated; tenants have complained of no heat, of rats, of repairs not done.” In the words of Francie Ferguson of the Neighborhood Reinvestment Corporation, a federal entity that assists nonprofit housing developers, “The assumption is that the hard thing to do is to get housing built. In fact, the hard thing is to run it well.” Still, as bad as such problems are, they _are not the greatest difficulties these organizations pose.
Flawed Founding Vision
The essential problem with CDCs lies in their conception. Reflecting their origins in the 1960s, they resist the historical truth that cities are way stations for waves of the immigrant poor, who make their way up and out. Instead, CDCs embody the misguided view that the poor will inevitably remain poor because of the harmful workings of the market, especially where racial minorities are concerned. Thus, the argument continues, it is only just for wealth to be redistributed in order to rebuild and maintain poor neighborhoods. As early as 1969, the economists John Kain and Joseph Persky recognized the pernicious pessimism of this view: They cautioned that the earliest CDCs were not vehicles for upward mobility but efforts to “gild the ghetto”—which mainly succeeded in perpetuating the ghetto.
The architect of the CDC movement was the late Mitchell Sviridoff, whom I studied under at Princeton. As a mayor’s aide in New Haven, Connecticut, in the early 1960s, he connected that city to the Ford Foundation’s Gray Areas Program, which in turn inspired the Johnson administration’s Model Cities Program. He then completed his CDC ideas as he concluded his years of work as a Ford Foundation program officer. To his credit, Sviridoff accepted some critiques of LBJ’s War on Poverty made by Daniel Patrick Moynihan and Edward Banfield. He wanted strict financial accountability in CDCs so they could avoid the waste and corruption of the Model Cities Program, and that is why he ended his Ford years by funding the establishment of the LISC, which directs foundation money to CDCs, often as loans. Sviridoff then became the LISC’s president and hoped that by having CDCs receive loans rather than grants, they would operate in a more business-like fashion. Unfortunately, he still aimed at stable poor neighborhoods, where the poor already living there would have physical improvements in their surroundings paid for by outsiders.
In this way, CDCs have perfected methods that mimic private sector activity. They rely, first and foremost, on the federal Low Income Housing Tax Credit, which reduces the tax liability of private investors who put money in CDC projects. This use of the tax code to lure capital should not be confused with the spontaneous workings of truly vital neighborhoods, which attract capital because they are genuinely developing and the win-win logic of the market is operating within them. Nor should we take at face value the investments in CDC efforts made by banks—who are under regulatory pressure to make such loans—or Fannie Mae, which is under regulatory pressure from HUD. Money directed to CDCs is simply not going there because of the return on investment offered.
Just as ’60s-era groups called for increased welfare payments as the way out of poverty, the CDCs tell the poor: Stay put and organize for benefits. It’s telling that, in an era of widespread upward mobility among immigrant and minority groups, CDC tenants tend to be those who are most susceptible to dependency: single mothers and their children. CDCs don’t put time limits on their tenants’ enjoyment of subsidized rent and confess that their housing units have, in one group’s words, “almost no turnover.” I have met tenants—including CDC board members—who admit they could buy their own homes but prefer to live in improved apartments with subsidized low rents. The CDCs and their tenants, in sum, have no incentives to make progress from dependency to independence.
More Than Housing
CDC advocates will tell you that this industry does much more than build subsidized housing, and indeed it does. Some of these other projects, however, are equally suspect—such as the nonprofit commercial activities which many CDCs undertake in the apparent belief that, because the larger economy inevitably fails those of modest means, an alternative, sheltered economy must be created. Some, such as the Ecomat Cleaners run by a CDC in Brooklyn, simply go along at a modest level (10 employees), losing money but subsidized through foundation support. Think about the implicit message sent to workers by any “firm” that stays in business despite its losses. Occasionally such ventures have proven disastrous. In Indianapolis, Eastside Investments, a CDC once held up as a national exemplar, effectively went bankrupt (shrinking from 80 employees to four) largely as a result of a failed venture to manufacture building materials for its subsidized housing complexes.
Some CDCs have helped recruit new businesses, such as supermarkets, to older urban neighborhoods. But there is no reason to think that a real need exists for such economic midwifery, although doubtless some private firms, as they seek the many permits they need, like to receive protection from compensated community groups. The simple truth is that where a demand for products and services arises, investment will follow—assuming that cities don’t get in the way with high taxes and a regulatory maze.
It is also true that some CDCs build and sell privately owned single-family homes. These, too, are subsidized through tax credits and other public monies, and bring with them requirements that they remain “affordable.” This condition means that, unlike most homeowners, the poor owners of these homes must content themselves with only the most modest appreciation of value if they should sell, which they are discouraged from doing in the first place. Again, such odd arrangements are the opposite of upward mobility and flourishing neighborhoods.
Sadly, a complex system of rewards has developed which keeps donors’ money flowing toward CDCs. Bank foundations in particular have powerful regulatory reasons for making such grants. The Community Reinvestment Act, based on the dubious premise that banks will conspire to keep capital away from cities, pushes banks to demonstrate their good citizenship by making non-market loans in urban areas—thereby securing regulator’s approval of banks’ mergers and expansion. CDCs are highly convenient vehicles for meeting the Reinvestment Act’s requirements. Secondary mortgage lenders such as Fannie Mae are under similar pressure. Major regional foundations and employers are also under public relations pressure to show that they are doing their part for inner-city renewal—despite the fact that CDCs are predicated on the permanent poverty of the areas they serve. (Without a population of the poor, for instance, they would not have a pipeline filled with holders of housing vouchers who bring lucrative rent payments.)
None of this means we should be complacent about the plight of the poor in our cities. But donors who care about assisting the urban poor should consider quite different approaches. I think the settlement house model is the best one. At the turn of the twentieth century, urban settlement houses like Chicago’s famous Hull House offered waves of poor immigrants recreation, education, and Americanization. These houses were key engines of immigrant assimilation and upward mobility. Unfortunately, many settlement leaders, such as pioneer Jane Addams, ultimately moved to the far left—and so helped lay the groundwork for an approach to poverty at odds with the one they themselves had successfully implemented. But this should not prevent us from rediscovering what can be called their human capital approach: helping individuals acquire the social and intellectual skills needed to enjoy a better life and to build better neighborhoods.
This past year, I have directed the new social entrepreneurship program inaugurated by the Manhattan Institute. It has included awards for several new urban-based initiatives that follow in the settlement house tradition.
For example, the Junior Uniformed Mentoring Program in Buffalo provides military-style drilling and discipline combined with tutoring for inner-city children. It is poignant to see its impressive father figures effectively serve in loco parentis for the many children of single mothers who bring their offspring in for help. The SEED Foundation in Washington, D.C. operates a charter school in the city’s impoverished Anacostia section; its founders have raised $15 million to construct and renovate buildings in which 300-plus children will enjoy an educationally ambitious, socially conservative school where they will both attend class and board. In New York’s Washington Heights area, the Credit Where It’s Due Program has drawn thousands of Dominican immigrants into the formal banking system for the first time, providing them the chance to qualify for mortgages and small business loans through its own credit union. And in Boston, the Steppingstone Scholars program identifies promising public school children in the fourth grade and prepares them—in after-school, weekend, and summer programs—to pass entrance examinations for private schools, as well as the city’s prestigious public Latin School.
These are efforts rooted in the optimistic belief that the urban poor, if equipped for the struggle, can indeed advance to self-reliance, and that as they do, city neighborhoods will also revive. Funders who want to help the poor avoid dependency and no longer be poor should focus on programs that believe such progress is possible, and avoid ones whose pessimistic assumptions make progress unlikely.
Howard Husock is director of Harvard’s Kennedy School Case Program and a contributing editor to City Journal.