Community Development Financial Institutions (CDFIs): A Primer for Donors

By Janell Turner and Nancy Reid

The passing of the bipartisan Infrastructure Investment and Jobs Act (IIJA) last November signaled a commitment to repairing and reconstructing infrastructure consequential to the economic vitality of our nation after decades of neglect. The $1.2 trillion bill aims to improve public transit, reinforce bridges and tunnels, expand access to clean drinking water, and advance environmental justice. Importantly, a portion of the budget is allocated to help remedy decades-old infrastructure design and transportation policies that hindered economic growth in underserved communities.  

In a recent public statement, Transportation Secretary Pete Buttigieg reported on the bill’s transportation budget that directs resources to special programs designed to address the racial inequalities in our nation’s transportation system and infrastructure. But with a budget of only $1 billion, these efforts are unlikely to go very far. What additional investments are needed to establish and strengthen the economic infrastructure required to bring communities of color fully up to par?  And, as Taj James of Full Spectrum Capital Partners asked recently in a conversation about community investing, what forms of capital are our communities of color best able to absorb? And what forms of support can help maximize capital absorption?

While the infrastructure bill aims to amend the bricks and mortar needs of communities, Community Development Financial Institutions (CDFIs) offer an array of complementary investments into our communities’ social infrastructure. Certified by the U.S. Treasury, CDFIs are banks, credit unions, loan funds, and equity capital providers that use a combination of government and private sector capital to invest in low-income communities. Recipients of government CDFI funds have successfully leveraged billions in private sector investments to create jobs, build affordable housing, build essential community facilities, provide financial counseling, and invest in neighborhood revitalization initiatives.  

The Community Reinvestment Act of 1977 initially gave rise to CDFIs by requiring banks to reinvest in communities that were stripped of access to capital through redlining. Almost half a century later, there are hundreds of CDFIs in the United States, ranging widely in size and operations. They include loan funds, venture funds, regulated depositories, and community development credit unions. In the summer of 2020 in response to Black Lives Matter protests, the treasurers of a handful of large U.S. corporations began to take notice of CDFIs as both an investment vehicle and as a way to invest in communities.

Donors who direct philanthropic capital into communities of color have begun to ask themselves what other tools may be available to support economic development. Increasingly, access to capital – affordable loans to consumers and business owners of color – has come into focus as a critical pathway to wealth creation. CDFIs can offer underwriting, diversification, and support for borrowers alongside tailored resources and innovative programs to foster economic opportunity and revitalize neighborhoods. 

While the opportunity to directly support community wealth building is attractive, donors should consider the following:

  • CDFIs can deploy both philanthropic and investment capital.  An increasing number of CDFIs offer investment notes, which aim to return 100% of the funders’ capital with a modest, below-market rate of financial return. Placing loans in underestimated communities requires care and support, which must be funded through grant support. Funders can back either of these activities, or use blended capital approaches to do both. For more information on this investment approach, Capital Impact Partners is the largest minority-led CDFI in the country; their investment note is rated by Standard & Poor’s and investments can be supported with philanthropic capital as well.

  • CDFIs vary broadly in their size and risk.  While many CDFIs fared better than banks in the great recession, funders should understand that any loan, or pool of loans, bears risk. While Standard & Poor’s began issuing ratings to some of the larger CDFIs in 2015, a nonprofit ratings agency called Aeris has gathered data on CDFIs since 2004 and issues ratings on over 150 CDFIs around the country to help investors and donors understand their financial exposure and impact.  

  • CDFIs can offer targeted impact.  Changemakers focused on a particular geography, issue area, risk profile, or population can direct loans through existing organizations that have, in some cases, been building relationships in communities for many years. Aeris has built a helpful tool called the CDFI Locator. Investors focused on a particular U.N. Sustainable Development Goal can sort by the SDGs also.

  • The financial services sector is innovating fast.  Several financial technology (fintech) and investment advisory firms are working to provide their clients with vehicles to access CDFIs. If your advisor hasn’t yet introduced CDFIs as an option for capital that doesn’t require the highest financial return possible, ask them! This type of investing sits at the intersection of return-seeking investment approaches and impact-seeking philanthropy. It may only be a matter of time before it becomes a mainstream option for donors.

  • Donors may direct assets from a Donor Advised fund to a CDFI.  Some DAF platforms will allow grantors to direct DAF assets into pooled loan vehicles like CDFIs. Ask your DAF provider what options may be available to you. 

The first step when considering any new philanthropic strategy is to clarify your intentions. What outcomes are most important to you? Do you envision building affordable housing? Creating jobs? Helping small businesses get started? Think about what you’d like to achieve in your philanthropy and then seek out a CDFI that aligns with your giving strategy. If you’re just getting started and would like support in developing a giving strategy, Phīla Engaged Giving is here to help. 

Lastly, while supporting CDFIs can be a compelling complement to your philanthropic framework through grants and program-related investments, talk to your financial advisor before incorporating CDFIs into your personal investment strategy. To learn more about CDFIs check out  CDFI Investing for the Impact Investor published by Community Capital Management and A Foundation Guide to Investing in CDFIs published by Philanthropy Northwest. 

*The statements and ideas presented in this blog post do not constitute financial advice or an endorsement of a particular financial instrument. 



Addressing the Emotional Aspects of Wealth: Five Tips for Families

6b0cc421-61e3-456b-807d-ce09a33f1772.jpg

Talking about wealth is almost always emotional exercise. It can bring on a whole range of feelings, many in conflict with one another: guilt and pride, anger and happiness, connectedness and isolation. Yet one of the most common emotions that wealth (or the lack of it) elicits is fear—fear of being taken advantage of, fear of not being liked, fear of not having enough. The list goes on. And further, the devastating effects of the COVID-19 pandemic has blown the cover off of the United States’ stark inequalities. Over 3 million people are out of work, and many more are without reliable access to healthcare. The 2020 COVID metaphor is apt: we are all navigating the same stormy sea, but we’re in different boats. When your boat is large, sturdy and comfortable, it can feel doubly isolating to have so much security when others are struggling for basic needs.

For people with children, these conversations are especially challenging. Just as you are trying to sort out your own feelings, you also must tend to young people who are acutely aware of social inequities and often have excellent questions wondering why they exist. And it’s not just about those who have less. Even for those who have objectively "made it”, all it takes is one look up the social ladder to see that you are still far from the top. In fact, in our climb up the wealth ladder, our gaze is nearly always upward, toward those who have still more, and it fuels desire to join their ranks. But in reality, it’s a losing battle. I once read a Wall Street Journal article that said the difference in assets held by the top .01% versus the top 1% is greater than that between the 1% and the rest. It’s an incredible perspective, yet we rarely turn around and look at those behind us. We tend to focus on what we lack. Children notice these differences too. While we can’t dispatch with these emotions entirely, we can mitigate their influence in our lives by shifting our focus. Here are five ways that might help you navigate these feelings:

  1. Struggle is OK. All parents want to see their children succeed and not experience hardships in life. That is normal. However, when a family is the steward of significant wealth, that natural desire takes on much more weight. How do we allow for the natural instincts of parenting while also not becoming “snow plow parents”, i.e., parents who plow every obstacle out of the child’s way to create a clear, unobstructed path to success? Allow your children to try, fail, and learn from failure. 

  2. Share family stories that do not involve money. Create a family narrative around who your family is that does not involve what you own. Perhaps it’s your family genesis story, or how it came to be rooted in the city you’re in. We inherit more than money. We inherit a set of mores and values that define our family and ourselves as its members for generations. Share the sayings and anecdotes that make your family unique and bind you to higher ideals.

  3. Re-evaluate the purpose of work. If you had the chance to do what you love and not have to worry about being paid for it, would you do it? Most would automatically say ‘yes”, but looking deeper, it may not be so easy to do. We live in a society that says “you are what you do”, and being paid lots of money for your work says what you do is valuable. With wealth, you have the opportunity to rethink the nature of work. While for most, work is a means to an end, but it can also be about purpose, pride, and satisfaction. There’s a prestige to certain professions, but the real challenge is to move beyond social status and focus on what’s right for your child. Be open to their exploration of pursuits that aren’t highly paid. Allow your children to explore work (paid or unpaid) that brings them satisfaction, a sense of purpose, and joy.

  4. Acknowledge your privilege. Regardless of how it came to you, there is an undeniable privilege that comes with having money. While money can’t buy happiness, it does buy convenience. Maybe your kids don't need to work during high school. Or they won’t have student loans while their friend is on work-study or is graduating with debt. Recognizing the ease that having wealth affords won’t make your situation similar to your peers, but being more aware of your advantages also recognizes others who have a different experience. No, not everyone will appreciate it, but there is integrity in honesty.

  5. Philanthropy benefits the giver as well as the receiver. Philanthropy can be a great tool to help raise children with values and position them to have a healthy relationship to wealth. Giving to others reminds them (and us) of how a strategic yet moral deployment of philanthropic dollars can benefit a family for generations. As Charles Collier stated, “wealth itself is morally neutral, but how it is used is what matters.”

While these tips were written with raising children in mind, they apply to anyone struggling with how to make sense of wealth. And there are certainly more. One of my roles as a philanthropic advisor is to help my clients come to terms with what they have so that they can make good decisions in giving it away. If you find yourself wanting to become more engaged in the public sector in general and philanthropy in particular, but are struggling with how and where to plug in, let’s talk.

Additional recommended reading on this topic:

We Need to Talk, by Jennifer Risher

Uneasy Street: Anxieties of Affluence, by Rachel Sherman

Classified: How to Stop Hiding Your Privilege and Use it for Social Change, Karen Pittelman



Summer Reading for the Times

by Lauren Janus

I think we can all agree it’s been a long spring. 

With summer’s sultry nights and icy drinks just around the corner, in normal times, we’d be searching for the best escapist reads. But these days are far from normal. If picking up a copy of the latest crime fiction doesn’t feel quite right given the current state of affairs, I hear you.

More than any other major event of the past 50 years, the COVID crisis has illuminated our nation’s shocking disparities in health, education, and opportunity. And the brutal, on camera murder of George Floyd only added fuel to the fire that has always simmered due the injustices faced by African-Americans at the hands of police. 

If you’re ready to educate yourself about race, poverty, and injustice this summer, you’re in luck. A number of nonfiction books have come out in recent years that drives these issues home in a really engaging way. 

Below are a few of my favorite books that get top scores for research quality, humanizing stories, and readability:

1. So You Want to Talk About Race, Ijeoma Oluo

This book has been on The New York Times Bestseller list for months, and for good reason. If you care about the issues facing the Black community, you must talk about race and Oluo gives you the background and vocabulary to do it. It is not written just for White people who deny that racism exists or who “don’t see color”, but also for people who think they “get it” but haven’t learned all the quiet ways it shows up. 

Oluo seems to write so effortlessly and clearly, this book just a pleasure to read, despite the intense emotional and political topics. Oluo explains difficult and timely issues like police brutality, the myth the “model minority”, and the “hurting your own cause” storyline, by sharing personal stories, detailed examples, and statistics. And best of all, it ends with ideas for actions you can take to battle systemic racism using the knowledge you've gained from this book. 

2.  Stamped: Racism, Antiracism, and You, Jason Reynolds and Ibrahm X. Kendi

 In 2016, American University history professor Ibrahm X. Kendi won the National Book Award for his pioneering book on the history of racist ideas in America.  If Kendi’s seminal—yet highly recommended—book feels a bit daunting as a poolside read, never fear. Just this year, Kendi teamed up with children’s book writer Jason Reynolds to write a version of Stamped for the middle school crowd, called Stamped: Racism, Antiracism and You. 

 The book covers material similar to its grown-up version, including a comprehensive and disturbing description of how racist and assimilationist viewpoints, rooted in our country’s very foundation, have fermented and embedded themselves into American culture. But because it’s for a young adult audience, the book is also fast-pasted, often irreverent, and focused on ways the reader can seek and stamp out racist ideas in every day life.

3. Janesville: An American Story, Amy Goldstein

To understand the struggles of many living in today’s Middle America, crack open a copy of Janesville. One of President Obama’s best books picks for 2017, this is the story of what happens when a large factory leaves a town where it’s been a fixture of stable employment for generations.

Amy Goldstein is a Washington Post journalist who follows a cluster of residents of Janesville, Wisconsin, over several years. Some recover from the blow of middle age unemployment, some don’t. What she reveals is the heartbreak and very real struggle of people who are left “out in the cold.”

4. Evicted: Poverty and Profit in the American City, Matthew Desmond

Harvard sociologist Matthew Desmond wrote Evicted in 2016 after spending years interviewing residents of the poorest neighborhoods of Milwaukee. What he describes in this highly engaging, often infuriating book, is a broken system in which the poor are forced to pay well over half of their income on substandard housing from which they will very likely be evicted for the most minor of offenses. 

 This book is especially useful for anyone hoping to understand the role of affordable, safe and stable housing in breaking the circle of poverty.  

5. Nickle and Dimed: On Not Getting by in America, Barbara Ehrenreich

If you’re looking for a book that will take you for an engrossing, enlightening walk in someone else’s shoes, pick up a copy of Nickle and Dimed. To research this book, Barbara Ehrenreich takes a job as a low-wage worker for one month in three different states—Florida, Maine and Minnesota. Her goal is to live only off of the salary she receives, and gain a greater understanding of the lives of people often referred to as America’s “hidden poor.”

Ehrenreich ends up working a string of jobs in each state in order to make enough to pay her rent and bills. She works as a waitress, a dietary aid in a nursing home, a house cleaner and a Wal-Mart worker—”essential workers” in today’s parlance. The injustices and humanity she describes are heartbreaking and energizing at the same time. A highly recommended read.

How to Help 

All of the books above will make you want to take action on of poverty, hunger, racial justice, and inequality in general. If you’re moved to give after finishing that last page, have a look at our vetted list of organizations around the country, or these organizations below:

 Happy reading and I wish you a safe, sane, and optimistic summer. 

Community Colleges: The Unsung Heroes of Higher Ed

element5-digital-jCIMcOpFHig-unsplash.jpg

When donors think of giving to education, they most often one thinks of K-12 education (including early learning initiatives) and higher ed—the latter being the granddaddy of all philanthropic giving. In 2018, over $45 billion were earmarked to higher-education alone, and much of it went to the investment pools (a.k.a. endowments) of elite universities.

Yet, with the constantly rising cost of education, greater numbers of students are saddled with ever-larger student loans (see Robert Smith’s big bet on relieving student debt), while others are going so far as to question the basic utility of a university education. So, it’s hard to find a place where a savvy donor can “move the needle” in higher ed.

But we are forgetting the corner of the education universe that serves more people and offers the greatest chance for economic stability and social mobility: the two-year technical and community colleges. For many high school and returning students, going to a community college can serve as a buffer before launching into the hyper-competitive world of university admissions, but making that transition is not easy. According to a 2013 report, 81% of first year students want to transfer to a four-year college or university, but after six years, only 12% were successful. Today, the percentage has risen only slightly to 15%. 

This post will give you a brief overview of what these schools are doing today to meet the needs of rapidly changing demographics and job markets. Understanding their focus may offer some insight into how directing funding to two-year colleges offers a unique opportunity to bolster resources in an underfunded area of education.

Community colleges are evolving just as quickly as the needs of their students. For starters, they have altered their traditional business model of offering stand-alone associates degrees to offering baccalaureate degrees. Schools in locations that are not served by a nearby four-year college are the ones most likely to do so and the BAs typically serve students who want to become teachers and either cannot afford or cannot travel (or both) to a major college or university. Though such a big change is not without its critics, adapting to address teacher shortages in rural or otherwise underserved areas has become a crucial service of many community colleges. 

They have also formalized their relationships with four-year colleges and universities by become official “feeder” schools to partnering institutions. Students who may not have had the initial qualifications to attend or who could not initially afford tuition, can start at the partnering community college and easily transfer credits after two-years while saving on fees. 

While the concept of a transfer student is one we’re all familiar with, another trend at community colleges is the reverse transfer students. Some of these “transfers-in” are students who are returning to community college to improve specific job skills after attending four-year colleges. Others either could not sustain tuition payments or did not perform well academically at the four-year college and end up returning to community college to build up enough credits to re-enroll at the four-year school or even get the associates degree they missed out on by transferring out. 

 Community colleges also make important contributions to higher-education’s mandate to serve the national interest. They have the most diverse student body not just in terms of race (they collectively serve more black and Latino students than their four-year counterparts), but in other demographic segments such as Baby Boomers and Iraq War veterans. Whether students come to retool for a new career or to reintegrate into society as a civilian, community colleges are developing comprehensive programs designed to help an increasingly diverse student body acquire the education and skills it needs to return to the workforce.

 For a donor interested in higher education access and creating a wider path to the middle class, these trends are relevant and worthy of consideration. Community colleges tend to serve students with the greatest needs yet receive the least amount of support. Philanthropy is not the only sector to realize the disparity. So far, 19 states have free or debt-free tuition to community colleges and see their success as critical to building a workforce and citizenry ready for a new economy. Your local community college is an important piece of the higher education puzzle that deserves attention. 

 

For more information on the role of community colleges in the higher-education landscape, read The Chronicle of Higher Education’s “Why Community Colleges are Good for You” and The Century Foundation’s importantresearchon how community colleges help create pathways to an aspiring middle class.