Economic Assets: An In-Depth Look
Building a healthy and skilled workforce is essential not only to the nation’s economic growth, but also to building secure futures for families. A $3,000 difference in parents’ income when their child is young is associated with a 20 percent increase in the child’s future earnings. Historically, impact investment activity related to economic assets has focused on affordable housing and access to finance. We are beginning to see investors exploring other areas for potential investment. Seventeen survey respondents indicated investing in ventures that address economic security, spanning the following areas.
Today, one of the country’s greatest challenges is the significant increase in people being incarcerated and the lack of real solutions for re-entry for these women and men. Recidivism remains a persistent social issue with significant implications for black and Latino communities. Recidivism also results in hefty taxpayer costs. Impact investors are exploring strategies to scale effective models and reduce public costs. Following the first pay for success model in the United Kingdom that was focused on addressing recidivism, three models in the U.S. have emerged to reduce recidivism rates.
What We Know
A national five-year study shows that in 30 states – with a study population of more than 400,000 prisoners – 68 percent were re-arrested in three years, and 77 percent were re-arrested in five years. In this study, recidivism was highest among males, black adults, and young adults. By the end of the fifth year after release, more than three-quarters (78 percent) of males and more than two-thirds (68 percent) of females were arrested, a 10 percentage point difference that remained relatively stable during the entire five-year follow-up period.
Five years after release from prison, black offenders had the highest recidivism rate (81 percent), compared to Latino (75 percent) and white (73 percent) offenders.
The current rate of recidivism in the U.S. within a year is 69 percent. For juveniles, it hovers around 50 percent for one year and 70 percent for within three years of release. Here, also, the majority – around 95 percent – are black and Latino juveniles.
These numbers are high and translate into significant spending on incarceration and relatively low spending on helping people find productive employment post-incarceration. In 2012, the Vera Institute of Justice released a study that found the aggregate cost of prisons in the 40 participating states was $39 billion in 2010. The annual average taxpayer cost in these states was $31,286 per inmate. New York state was the most expensive, with an average cost of $60,000 per prison inmate.
New York City’s jails have even higher incarceration costs, at nearly three times the state incarceration costs. New York City paid $167,731 to feed, house, and guard each inmate in 2012, according to the Independent Budget Office.
- Rikers Island: In 2012, the first social impact bond/pay for success model was announced. The public-private partnership between Goldman Sachs Bank’s Urban Investment Group (UIG), Bloomberg Philanthropies, the City of New York, MDRC, and the Osborne Association leveraged private capital and philanthropic support to provide therapeutic services to 16- to 18-year-olds incarcerated on Rikers Island. Goldman Sachs provided a $9.6 million loan to the Osborne Association via MDRC. Bloomberg Philanthropies provided a $7.2 million guarantee, and the Vera Institute is the evaluator. The rate of recidivism is expected to decrease, and the loan will be repaid based on the actual and projected cost savings realized by the New York City Department of Correction.
- Roca and the Commonwealth of Massachusetts: Roca, a Boston Area organization serving high-risk youth, recently partnered with the Commonwealth of Massachusetts to launch the Massachusetts Juvenile Justice Pay for Success Project. The project’s goal is to help almost 1,000 young men at risk of incarceration. Through the project, the state expects to avoid 248 incarcerations (224,205 days of incarceration), which would be a 45 percent reduction in incarcerations among the targeted population, measured through a randomized controlled trial evaluation.
- Center for Employment Opportunities: In New York City, another pay for success model involves helping adults leaving prison find employment. The social impact bond will provide $13.5 million over a 5.5-year investment life to expand the work of Center for Employment Opportunities (CEO), a provider of evidence-based training and employment programs to recently incarcerated individuals in New York state. This flexible, multiyear funding will cover the full cost of CEO’s programmatic work and core costs to assist 2,000 individuals over a four-year period.
What We Know
In 2011, the majority of low-income working families (61 percent) spent more than one-third of their income on housing, exceeding an accepted guideline for what constitutes affordable housing.
Approximately 12 million households have housing expenses that take up over half of their annual incomes. Nowhere in the United States can a family with one full-time worker earning minimum wage afford to rent a two-bedroom apartment at fair-market prices.
In a recent study of how housing affects child development, researchers assessed stability, housing quality, renting versus owning, and subsidized housing. Of the four, poor-quality housing was the most consistently and strongly predictive of children’s well-being across the span of childhood.
- MacArthur Foundation
- Habitat for Humanity International - FlexCAP: FlexCAP is a Habitat for Humanity International (HFHI) administered program that enables participating affiliates to borrow against selected mortgages in their portfolios, thereby generating funding to provide decent, affordable housing to deserving families. Through FlexCAP, HFHI has developed a consistent secondary market for Habitat mortgages on a national basis. Since 1997, FlexCAP and its predecessor program have generated $131.7 million in loans for 263 U.S. affiliates, providing funding for approximately 3,900 new Habitat homes. During this 15-year history, there has never been a delinquency on the investor notes. HFHI estimates that its U.S. affiliates currently hold $1.4 billion in mortgages. Although Habitat mortgages have no interest, they are otherwise much like conventional mortgages and typically have 20- to 30-year terms. By using FlexCAP to accelerate the receipt of income from mortgages, affiliates recover the cost of Habitat homes in a much shorter period of time and receive ready cash to build more affordable homes.
- The San Francisco Foundation Bay Area Transit-Oriented Affordable Housing Fund: The San Francisco Foundation’s Program-Related Investment Fund invested $500,000 in the Bay Area Transit-Oriented Affordable Housing (TOAH) Fund to bring to life transit-oriented plans across the Bay Area. Over seven years of collaboration, coordination, and trust-building among partners, The San Francisco Foundation’s $500,000 seed loan was leveraged into a $50 million loan fund to develop affordable housing around transit. In December 2012, the TOAH Fund was awarded the Environmental Protection Agency’s prestigious Smart Growth Achievement Award.
We know that place matters. Research and experience show that families do better when they live in strong and supportive communities. However, too many communities face challenges of high poverty, unemployment, failing schools, and housing instability. These outcomes are influenced by unequal access to opportunity and decades of disinvestment in marginalized communities. An equitable approach to ensuring that all neighborhoods become the kinds of places that enable all children and families to succeed and thrive requires intentional efforts to build, sustain, and operationalize certain types of community capacity. To this end, funders and federal officials are focusing their investments on place-based efforts to improve outcomes for families.
For a city with less than 1 million people and less than 200 square miles, Detroit faces significant hardship. With unemployment rates hovering around 17 percent, the city needs major development efforts to increase employment. This is critical as the city faces a historically low housing market and crime rates that often lead the nation. Over more than 10 years, the city has launched numerous place-based initiatives to extricate itself from bankruptcy and its residents from poverty. Philanthropic efforts emerged to support programs aimed at those most in need. However, without a strong connection to public and private sector initiatives, those efforts did not bring the desired return on investment. Now, with the help of many national and local foundations, coupled with private investors and investment funds, there is a cohesive strategy to support the development of infrastructure, people, profit, and the environment. (See snapshot on Living Cities.)
Effective place-based policies can influence how rural and metropolitan areas develop and how well they function as places to live, work, operate a business, preserve heritage, and more. These policies are particularly significant in the Mississippi Delta. The complexity and interconnectedness of needs in urban and rural Delta regions, coupled with the often untenable opportunity costs of working in both regions and their sometimes competing interests, make investments in this area challenging at best. For the past eight years, the Kellogg Foundation has addressed these hurdles with a holistic approach to community investment. First, the foundation has become part of the “place.” The foundation has an office in the Delta so it can be a part of the community — its decision making, asset mapping, and community and capacity building. Second, the foundation has invested in institutions that cross the varied communities. For example, the Healthy Living Initiative focuses on providing nutrition, healthy living, and related workforce development to communities through schools. So far, research shows the program is working.
The focus on place — and the respect for its diversity — is significant, as Mississippi is regularly reported last in major research standings, such as Kids Count. For example, the region has an estimated 61 percent high school graduation rate that falls slightly below the national figure, and school districts in the Mississippi Delta fare particularly poorly. More specifically, five of the 10 districts with the highest recorded four-year dropout rates are in Delta region counties: Leflore, Tallahatchie, Sunflower, Tunica, and Panola Counties.
Southern Bancorp: A Mission-Driven Bank Small banks are closing throughout the southeast region, hamstrung by lending limits and capital requirements, or run by aging bankers without succession plans or exit options. But rather than pulling out, Southern is doubling down. As other Delta banks sell, or close, Southern Bancorp is a buyer, often the only one. Southern sees an opportunity for both financial growth and social impact in acquiring small banks and local branches that might otherwise simply shut down, leaving whole towns reliant on storefront check cashers or credit cards. Its social mission sometimes helps Southern strike a good deal.
One of the first banks to be designated a community development finance institution, or CDFI, Southern now has 38 branches in Arkansas and Mississippi, more than $1.1 billion in assets and made more than $3 billion in loans. More than half of Southern’s personal loans are under $10,000. More than half its small business loans are under $55,000. Few commercial banks would even consider making such small loans.
In the face of the economic crisis, Southern successfully secured substantial impact investments, but for all its achievements, Southern still has not cracked the thing that almost all investors really want – a viable exit strategy. That leaves Southern facing a steep hike in the interest rates it pays on the capital it raised in 2009 and 2010. The ultimate resolution will represent a compelling example of the risks and rewards of impact investing. Risks are undeniably higher when a bank is working in a distressed region with low-income customers. They are higher again in the context of a global financial crisis that reordered market and regulatory conditions. Responding to such changes requires a flexible strategy and flexible investors. Such flexibility may be the ultimate differentiator – and competitive advantage – for impact investors.
After the devastating natural and man-made disasters (Hurricane Katrina, Gulf oil spill), this city and region has been hard hit in terms of employment, crime, and education. However, blight remains one of the most pressing issues for New Orleans Mayor Mitch Landrieu. Nearly 25 percent of residential homes and addresses in New Orleans have been blighted or left vacant over the past several years, representing one of the highest rates of abandonment in the country and surpassing other struggling cities like Baltimore, Cleveland, and Detroit. In 2010, the mayor made a commitment to reduce the city’s blight by 10,000 units by 2014. Using a five-pillar strategy — including data-driven decision making and place-based revitalization, coupled with public-private partners, including city agencies and local foundations — the mayor exceeded his goal of 10,000 by April 2013.
Place-based work can be initiated or led by the local government, its residents, local organizations, and/or be part of an external funders’ (or other national organization’s) larger strategy. In the case of Colorado, Kaiser Permanente selected the state as a partner for its community health initiatives. Colorado has a high prevalence of binge drinking, high rate of drug deaths, and large disparities in health status by educational attainment. As part of this portfolio, the Kaiser Foundation will support strategies to address the obesity epidemic and other health issues that can result from poor nutrition and lack of exercise.
Kaiser hopes to strengthen and accelerate collaborative efforts among practitioners, policy makers, funders, and advocates from different fields. The foundation provides financial assistance, thought leadership, and coordination to support community partners in creating environments that encourage healthy eating and active living. Many local organizations will benefit from grants to make healthy food and physical activity available in underserved communities. Grantees include public health departments, community-based organizations, and coalitions; advocacy organizations that drive state and local policy agendas; and school districts implementing school wellness plans.
What We Know
Investing in microenterprise programs is a cost-effective economic development strategy to create jobs that help build family economic security.
- The Aspen Institute’s FIELD program estimates that the U.S. microenterprise industry served over 329,000 individuals and deployed nearly 37,000 microloans, valued at more than $292 million in 2012.xliii
- Thirty-one million people are collectively employed by 25.5 million microbusinesses (businesses with five or fewer employees) in the U.S.
A FIELD survey of 1,198 microenterprises found that each enterprise created on average 1.9 jobs in addition to the owner.
- The median hourly wage paid per worker was 38 percent higher than the federal minimum wage, putting the families of those employees further down the path to economic security.xlv
- Individuals with a self-employed parent are two to three times more likely to engage in self-employment.
Barriers and Investment Examples
Microbusinesses have the potential to create jobs, stimulate the local economy, and provide much needed services and products in low-income communities across the U.S. However, micro-entrepreneurs face significant barriers, including access to affordable capital, ongoing business training and mentorship, and access to supportive networks.
- Calvert – WIN-WIN: Leading up to 2012, Calvert Foundation noted a lack of opportunities for investors to invest in organizations and enterprises that create economic opportunities for women. In response, the foundation developed and launched WIN-WIN in March 2012, creating a targeted Community Investment Note option to enable individual and institutional investors to support women in areas such as affordable housing, financial inclusion, and health care. The foundation selected potential borrowers based on those organizations’ governance structures and products, targeting those that not only foster “equitable gender representation” at all levels of the value-chain, but also those that support low-income women through their service offerings. In December 2013, WIN-WIN surpassed its goal of lending $20 million to its WIN-WIN portfolio organizations.
- Opportunity Fund – San Francisco Foundation: The Opportunity Fund is a leading microlender to small businesses in the San Francisco Bay Area – creating jobs and economic activity by providing small loans to Bay Area entrepreneurs and small businesses. The San Francisco Foundation’s Program-Related Investment Fund provided a $500,000 loan to The Opportunity Fund that will be leveraged to make upward of $1.5 million available to small businesses that are unable to access bank financing due to their size, credit history, or lack of collateral. The low- and moderate-income borrowers selected by The Opportunity Fund are all women or ethnic minorities.
- Opportunity for Impact Investing to Advance Microenterprise
- Capital + Training + Social Capital for Micro-entrepreneurs
Lessons Learned from Investments
To help individuals achieve economic opportunity, we need to invest not only in jobs but also in employers. Investors in microenterprise know this better than anyone. Small businesses and entrepreneurs are the greatest job creators. Investing in individual enterprises through Calvert, intermediaries like Opportunity Fund, and related research activity via FIELD will continue to bring evidence, interest, and investment to real job creation engines.
Investment in housing is key to support economic opportunity. Research has shown that the stability of an affordable mortgage or rent can have profound effects on childhood development and school performance and can improve health outcomes for families and individuals. But the benefits of affordable housing extend beyond its occupants to the community at large. Research by the MacArthur Foundation demonstrates that the development of affordable housing increases spending and employment in the surrounding economy, acts as an important source of revenue for local governments, and reduces the likelihood of foreclosure and its associated costs. Without a sufficient supply of affordable housing, employers — and entire regional economies — can be at a competitive disadvantage because of the subsequent difficulty in attracting and retaining workers.
According to a 2014 poll by the American Planning Association, while many remain skeptical of the national economic outlook, there is greater optimism about the prospects for local and personal progress over the next five years. Therefore the local policy and financial framework has a tremendous influence over the economic trajectory of residents. The place-based investments in Detroit, Mississippi, and New Orleans have shown great promise in geographically focused investments by diverse but collaborative investors in quality of life indicators like housing, jobs, health, and transportation.
Opportunities for Impact Investing in Economic Assets
Over the years, placed-based impact investing has been a staple in many communities. Initiated with lending to CDFIs to support housing, job creation, and education, these investments have been instrumental to communities in New York, Philadelphia, Los Angeles, and across the South. Recently, impact investing has increasingly focused on place. Cities with large minority populations are sitting on the verge of bankruptcy due to lack of historical investment, decreasing federal support, and the quagmire of local politics. Investments in places like Detroit and Minneapolis bring hope. Through targeted investments in housing, transportation, and business, individuals and families are being transformed through new and sustained economic opportunity.
Key opportunities in the area of economic assets are:
- Using diverse capital forms to initiate and sustain economic opportunity. As noted earlier, the MacArthur Foundation uses impact investing to support local infrastructure and mitigate risk in the area of housing. The foundation has invested more than $9 billion since 1999 in a diverse set of investment vehicles to help minimize loss of housing stock, increase value of the housing stock, and make it affordable to residents and owners to maintain.
- Collaborating to invest in local ecosystems. Typical investors like to stay local and invest with their expertise. Shifting poverty rates and increasing economic opportunity require an array of investors with different areas of expertise. In Detroit, for example, by leveraging national and local financial institutions, Living Cities has invested in infrastructure projects — like transportation — to create sustainable systems to provide access to economic opportunity. High-net-worth investor Dan Gilbert has leveraged his own lending and equity investments, alongside those of foundations, to create opportunities for entrepreneurs and accelerators to invest in their companies or to provide places to safely move from proof of concept to the growth stage. Local and regional foundations, like the Kresge Foundation and the Skillman Foundation, are providing grants and loans to mitigate crime and blight and increase the soft and hard skills of the newly working and employed to get them on track. The diversity of skills, expertise, and investment are helping to transform Detroit and its residents.
- Leverage data to scale what works and eliminate barriers. The pay for success models underway by CEO and Roca build upon the core concept of pay for success and scaling what works. More important, it is investing in areas that often have long-term negative consequences for individuals. For example, formerly incarcerated individuals are barred from certain types of employment and civic participation. In some states, they are not eligible to vote if incarcerated. By supporting proven interventions in systems that actually cause long-term harm and dramatically decrease access to economic opportunity, these investments create economic efficiency and incentives to support asset development and economic well-being for those most at risk.