It’s Time to Update our Definition of Community Development
Aligning CRA requirements with our country’s infrastructure needs can unlock significant capital for much-needed projects.
By Michael Gaughan (ED, Vermont Municipal Bond Bank) and Eric Letsinger (CEO, Quantified Ventures)
At the National Interagency Reinvestment Conference last month in Miami (where it was NOT snowing), we enjoyed a welcome chance to engage with community leaders, and to share ideas for how the Community Reinvestment Act (CRA) can continue to be a force for community wellbeing — as it has been for over 40 years. (Did we mention they have palm trees in Miami?)
Passed in 1977 in response to redlining practices that left a legacy of disinvestment in many low and moderate-income communities, the CRA requires that large banks meet service, lending, and investment tests throughout their service areas. CRA-related community development lending accounts for around $87 billion annually, so its future and application could not be more important.
We came to this event because we believe that traditional finance can learn a lot from the innovation in this community development field (and, as a couple of northeasterners, we both really needed some sun). Current discussions about infrastructure seem incomplete absent efforts to convey both the direct and indirect results of related investments. Take Michael’s work in Vermont, for example; the Bond Bank’s yearly assistance helps many non-metro areas finance a range of impacts that are critical to community vitality, such as renewable energy, Main Street revitalization, and clean water.
This is also what drives Eric’s work on Environmental Impact Bonds (EIBs), and why Quantified Ventures aims to both solve specific community problems, while also building a vibrant market that can scale across the country and even beyond.
So what are EIBs? They’re pretty simple (but not always easy) financing mechanisms that leverage private capital to bet on whether innovations like green infrastructure can work at least as effectively as traditional strategies. EIBs effectively shift the up-front capital and performance risks away from government. In practical terms, this means that instead of floating a plain-vanilla municipal bond and repaying bondholders regardless of whether the project is successful, EIBs allow governments to pay back bondholders based on project performance (i.e., outcomes). The government, in essence, pays only for success. Everyone wins — or loses. Interests and incentives are aligned, and government entities find the freedom and breathing room needed to try out new ideas.
As a result, more innovative solutions are finding their way on to the field, and getting road tested in applied settings, and in ways that can inform their replicability in other places. We’re seeing efforts that support farmers while also reducing the need for expensive water treatment systems, and that reduce blight while providing viable opportunities for hard-to-employ populations. This isn’t privatization. This isn’t outsourcing. It’s a financing option in the middle of what has become a polarized set of options: either the public sector does it all alone or it privatizes.
So you might think the types of high-impact projects characteristic in EIBs makes them obvious candidates for banks seeking CRA, right? Not exactly. What counts as an eligible investment is laid out in an interagency Q&A, which notes that municipal bonds (i.e. the form of financing responsible for roughly 75% of U.S. infrastructure) can count towards CRA requirements only if their primary purpose is community development.
Unfortunately (only in this context), infrastructure benefits accrue to both immediate and intended parties, as well as indirectly to those further removed (e.g., a water source upstream can benefit a water user downstream). This means that a municipal bond sponsored project may not qualify for CRA “credit” because the funds can be used to support work that is miles away from the low and moderate-income community that will benefit alongside others along the system.
Tools like EIBs, and better issuer reporting on social and environmental impacts, both can help to clarify the argument for what types of infrastructure fit the bill for CRA. If we could bring the best of each together, and zip up the two sides of this zipper, we’d unlock the flow of significant capital that could be directed toward innovative solutions that are ready for scale.
All of that sun and warm weather got us thinking of baseball and the first pitch of the season, which is where we are in this important conversation.