In the absence of key financing from federal grants and loans, Marla Bilonick worries that the community development nonprofits and small businesses she serves will soon see their credit frozen.
Bilonick is president of the National Association for Latino Community Asset Builders, a membership organization of more than 200 Community Development Financial Institutions that invest in businesses and housing development in areas long overlooked by commercial finance. These institutions, known as CDFIs, are lenders — including nonprofits, credit unions, venture funds, and banking organizations — that receive federal certification if they provide below-market rate loans to businesses, housing developers, and nonprofits for projects that serve a social benefit in low-income areas.
NALCAB is among many CDFIs concerned about the blitz of federal policy actions coming out of the White House during President Donald Trump’s first four months in office. The Trump administration’s executive orders targeting diversity, equity, and inclusion and environmental protections are a sharp U-turn from the Biden administration, which supported CDFIs , especially those that invest in projects led by and serving people of color historically locked out of traditional financing. The Biden administration set aside billions for community development, notably $8.3 billion for CDFIs in the 2022 Emergency Capital Investment Program.
Since the creation of the federal CDFI Fund in 1994, the federal government has awarded more than $8 billion to community lenders and has helped finance more than 3 million new or rehabilitated housing units, according to the Opportunity Finance Network, which is composed of CDFI organizations.
Bilonick had been waiting on news of two government grants that were green-lit last year, as the White House temporarily froze the flow of all federal funds immediately after the inauguration. In the following two months, the Trump administration also threatened to chop federal community development budgets across several agencies, and forced an exodus of federal staffers at the handful of agencies that invest in local housing and businesses.
For weeks there was radio silence from the federal agencies the association works with, and it wasn’t clear who the “go-to” person was, Bilonick said. One of the expected grants, $2 million for consulting work with rural housing agencies and nonprofits, was delivered in early April. Bilonick is still waiting on the other grant, totaling $16 million, which she declined to identify.
In such an environment, “I don’t think anyone wants to really stick their neck out to say, ‘Hey, what’s going on with my grant?’” Bilonick said.
NALCAB, which has received support from grant makers, including the Ford, MacArthur, Robert Wood Johnson, and Walton Family foundations, says philanthropy is still eager to invest. Private foundations that make program-related investments, which are designed to generate both financial and social returns, often put their money behind groups like NALCAB. The investments count toward the foundation’s required grant payout, and help lure commercial investors.
But commercial lenders, she said, seem spooked by the federal pullback.
Bilonick worries that smaller organizations without a long history of credit — which rely on community development grants from the federal government and risk capital from philanthropy — will be left in the cold if commercial lenders that usually piggyback on those financing deals now consider them too great a risk.
“Organizations that are in a tight cash crunch need to buy time,” she said. “My fear is that there won’t be a lot of leniency.”
The Rise and Fall of Federal Funding
Through programs at the Environmental Protection Agency, the Department of Housing and Urban Development, and the U.S. Treasury Department’s CDFI Fund, among other federal agencies, philanthropy and the U.S. government have put up cash that helped lure billions of dollars in additional commercial investments.
The money has gone into community development projects in the poorest city wards, new housing projects in some of the most remote rural districts, start-up loans to Native American entrepreneurs, and lines of credit to fledgling nonprofits — the kind of investments commercial lenders have historically shunned. Those mission-based investments have tested the waters for larger commercial banks and provided a security blanket for other investors by guaranteeing loans or absorbing the first losses of a deal gone sour.
But over the first four months of the Trump presidency, the federal community development funds housed across various agencies have been cut, and then reinstated, only to be slated for significant reductions in Trump’s budget proposal, which the White House produced last week.
Take, for example, the CDFI Fund, which was allocated $354 million in the current fiscal year. President Trump’s executive orders on diversity, equity, and inclusion programs targeted the fund, which makes grants to the more than 1,400 Community Development Financial Institutions across the country.
The proposed budget reduces the CDFI fund by nearly $300 million. It makes those cuts by eliminating portions of the fund that allegedly trafficked in “critical race theory,” promoted “racial justice,” and claimed a “white monopoly on capital,” according to material distributed by the White House.
“Terminating this fund would also prevent taxpayer dollars from forwarding gender extremism, including an LQBTQ+ clinic in Detroit, transgender housing initiatives, and a fashion show promoting transgender awareness,” the White House document reads. “In addition, CDFIs have also been irresponsibly dedicating funds to climate radicalism and Green New Deal causes.... The function of the CDFI is much better served by local government and the private sector than inefficient partisans.”
As a result of the Trump blitz, the flow of new deals has slowed to a trickle, according to Aaron Seybert, managing director of the Kresge Foundation’s social investment practice.
“We’ve got a lot of paralysis at the federal level that’s creating a great deal of uncertainty in the space about how capital can move,” he said. “Capital likes certainty.”
Collaborative Philanthropic Investment
Regional grant makers may soften the blow of a reduced federal commitment to community development. That’s the hope of the Robert Wood Johnson Foundation, which teamed with three community foundations to disburse a total of $15 million in the form of 10-year loans.
The regional grant makers — the Community Foundation of Greater Chattanooga, the Greater Cincinnati Community Foundation, and the St. Paul and Minnesota Community Foundation — each received a loan of $5 million to invest in their communities over 10 years at an interest rate of 2 percent, or less than half of the 10-year U.S. Treasury rate. Unlike funding from a grant, which runs out once it is spent, any proceeds from the loan repayments can be recirculated into new investments .
Although the investments were finalized in the months before the inauguration, they could test whether local grant makers and donors have an appetite for community development investment in the reduced capacity, or absence, of the federal government.
“We see the community foundation space as an opportunity to step into the gap that is going to be created by the administration,” said Zoila Jennings, impact investing lead at Robert Wood Johnson.
Robert Wood Johnson had made grants to community foundations plenty of times, Jennings said, but the recent deals are the first the grant maker has made as investments with the expectation of a return.
The three regional funders were chosen, Jennings said, because they had some history with making social investments, were comfortable taking on debt, and had a pipeline of potential investments ready to go.
In addition to the loan, Robert Wood Johnson provided each grant maker with $200,000 to help with costs associated with the transaction, so future deals might come easier. The idea, Jennings said, is that community foundations usually rely on their donor-advised fund holders to steer their agenda.
The additional funds could “help the community foundation stand on its own as an enterprise doing their own initiatives rather than be donor-controlled,” she said. “They really can’t be as innovative as they want to be as an institution because they’re often pulled in so many different ways because of their donors.”
The Community Foundation of Greater Chattanooga will use the money to invest in new housing. The city has become a magnet for remote workers, attracted to its relatively low cost of living. The newcomers have driven up the cost of housing, making it difficult for the city’s essential workers, like emergency responders and teachers, to find affordable housing, said Quentin Lawrence, the grant maker’s vice president of community development.
Local donors have expressed a lot of interest in the investment approach. Late last year, about 250 of the foundation’s donor-advised fund holders attended an event to learn about how the process works. The foundation is also working with those donors to design gift-making strategies that complement the investments from Robert Wood Johnson.
“It’s an issue that a lot of our donors care about, but it has felt overwhelming,” said Maeghan Jones, president of the Community Foundation of Greater Chattanooga. “It’s hard to figure out what the entry point is for a donor.”
Congressional Action Wild Card
Robert Wood Johnson hopes its place-based investment strategy is adopted by grant makers in other cities. But in the meantime, community development agencies are under pressure, unsure if the federal government will be part of their financing mix.
With federal community development financing in jeopardy, many nonprofit borrowers adopted austerity measures on their operations, dialed back their services, and in many cases laid off staff.
There hasn’t been a collapse among lenders to those nonprofits, Seybert, Kresge’s impact investing specialist, said, but the pace of investment has slowed down. That slowdown, he warned, could ultimately hurt smaller nonprofit borrowers, the organizations that are most likely to be shut out of traditional financing options.
The community finance system is built on volume, rather than the expectation of huge market returns. If there’s lower volume, lenders see their cash flow dwindle, giving them less money to make new investments.
Meanwhile, nonprofit lenders that are having trouble staying afloat will go to their lenders for help with day-to-day expenses. If that happens enough across the nonprofit sector, organizations that rely on credit for about 10 to 15 percent of their liquidity could see that portion rise to more than half in the absence of federal support, Seybert said, adding: “That’s going to raise massive alarm bells inside credit shops.”
“Banks are going to load up on the super-strong nonprofits,” Seybert said. “They are going to trim the medium-strong ones to reduce their exposure, and then they are just going to not renew the smaller ones.”
If such a credit crunch occurs, foundations have a limited number of options to help nonprofits they’ve invested in, Seybert said. They could offer a straight-up grant, but grant budgets are tight, and those opportunities are limited. A foundation could offer a bridge loan from its program-related investment budget, he said, but if a main source of investment, the federal government, disappears, it would be a “bridge to nothing.”
Already, some planned developments have been put on hold based on the fear of a lasting federal retreat. For instance, a project in rural Alabama that was going to be financed partially through the New Markets Tax Credit, a program run by the CDFI Fund that provides a tax incentive to build in distressed communities, was postponed, according to Donald Hinkle-Brown, president of the Reinvestment Fund, a lender that was set to participate in the project. Hinkle-Brown declined to identify the borrower.
The project may yet get off the ground. While the White House put CDFI funding and support for other community development programs on the chopping block, Congress has yet to weigh in.
It’s not clear how much support the wide range of community development efforts throughout the federal government have in Congress, but lawmakers seem eager to protect CDFI funding. The Community Development Finance Caucus, led by Democratic Sen. Mark Warner of Virginia and Republican Sen. Mike Crapo of Idaho, claims 28 members split evenly between the two parties.
While the community development finance sector has been put “on guard” by the administration’s actions, “the real question,” Hinkle-Brown said, “is whether we will find daylight between Congress and the White House.”
Note: The Ford Foundation and Walton Family Foundation are financial supporters of the Chronicle of Philanthropy.
