Securing Capital for Rural Prosperity

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This third in the Thrive Rural Field Perspectives series offers a call to action to restructure and reorient public, private and philanthropic capital in ways that increase their impact across rural America. The challenge? Put in place the infrastructure and systems that will ensure ready and adequate flows of financial capital that is reliably available, easily accessible and affordable, and consistently, strategically and equitably invested to address needs and create opportunities in rural communities and economies.

Context

The Field Perspectives in this brief offer a call to action to restructure and reorient public, private and philanthropic capital in ways that increase their impact across rural America. The challenge? Put in place the infrastructure and systems that will ensure ready and adequate flows of financial capital that is reliably available, easily accessible and affordable, and consistently, strategically and equitably invested to address needs and create opportunities in rural communities and economies.

Broken systems coupled with misguided and discriminatory policies and practices have led to massive disinvestment and decline in many rural regions and Native nations in the United States. Despite that, there is a wealth of talent, innovation and determination in our small towns, rural regions and government and private systems upon which we can build a more fair and prosperous future. Together, seven seasoned rural development practitioners and experts provide insights in this brief about what it will take to structure and direct capital to where it is most needed in rural America – and offer examples where transformation is already in progress.

The topic of capital formation and investment in rural America is complex and multifaceted. This brief makes no claims of being comprehensive or in any way definitive. It is intended to provide starting points for productive discussion and lead to informed decision-making and action that meets the challenge. For those not steeped in the concepts and language of development finance, a glossary is included to help better appreciate some of the ideas and perspectives presented; when a term is highlighted in text, you will find it in the Glossary on page 20.

Modernizing Federal Investments for Rural Prosperity

Federal Funds For Rural Development: The Current Landscape

Federal resources have historically played an important role in helping rural places thrive. Yet the legacy of that federal responsiveness is today’s wide-ranging landscape of more than 400 programs currently available for rural community and economic development – a complex system that is especially challenging for distressed communities to navigate (See Federal Development Assistance graphic).

About one-quarter of these programs focus specifically on supporting rural places or efforts. To access the other programs, rural areas must compete with metropolitan regions. Rural areas are often at a disadvantage in this competition because programs have spending formulas or eligibility requirements that exhibit a “structural urbanism” – for example, because they prioritize absolute numbers of people served over percentages of area population, require local matching funds scarce in rural places, or fail to adjust for the higher fixed costs of delivering services in remote places.

Federal funds mostly reach rural areas in one of two forms: debt financing (loans and loan guarantees backed by agencies) or grants. Most of the federal funding targeted specifically to rural development comes via debt financing. Out of the 93 programs across the federal government that exclusively focused on rural development in FY2019, the overall ratio of loan to grant dollars was 15:1. By itself, if the U.S. Department of Agriculture (USDA) were a bank, it would be the 11th largest in the U.S. based on total assets. USDA-Rural Development (USDA-RD), which provides just over half of the federal funds exclusive to rural community and economic development, boasts roughly a $235 billion loan portfolio – but provides only a bit more than $1 billion in grants.

Yet it would also be a bank without a coherent vision or strategy. Its loans are tied to specific Congressional authorities that each narrowly aim at producing a specific output. Often, these outputs are tangible “built” items such as water infrastructure, broadband, housing or community facilities. These loans are organized without a policy approach that incentivizes or enables rural communities to use the different elements of available assistance to implement an integrated community vision. This is reflected in the measures of success these programs use, which are often transaction-based, focusing on factors like dollars out the door, miles of road paved, or number of jobs retained rather than the long-term community prosperity or improved livelihoods or health.

The disadvantages facing rural communities in the competition for federal funding show up in the dollars themselves. Just 10 percent of the loan dollars delivered between FY2010 and FY2021 through the Small Business Administration’s 7(a) loan program, that agency’s largest and most popular program, went to businesses in nonmetropolitan areas – an alarming reality given that small businesses make up more than 90 percent of businesses in nonmetro areas. The U.S. Department of Housing and Urban Development’s community development block grant (CDBG) program, a cornerstone economic development program launched in the 1970s, reserves 70 percent of the funding for metropolitan “entitlement” areas that receive funding by formula, leaving state governments about 30 percent to allocate to smaller “non-entitlement,” largely non-metro, communities that typically must compete for the dollars. Thus, unlike their urban counterparts, not every rural area receives CDBG funding, and they must do more work to secure it.

Overall, federal dollars for community and regional development have been declining steadily since the 1970s. Despite a boost from COVID-19 stimulus funding, federal resources are projected to begin to wane again after 2022. Funding for 14 of 17 major federal block grant programs also declined between their inception and 2020. New funding from the CARES Act and American Rescue Plan in the wake of COVID-19 for state and local governments ($500 billion) and the Department of Commerce’s Economic Development Administration (EDA) (a combined $4.5 billion, which is more than a tenfold increase in EDA’s typical annual budget for the period 2010-2019) represents an immediate expansion of support. However, deploying these funds without changing the underlying structures that disadvantage rural applicants risks adding further complexity and leaving those communities behind.

A Federal Capital Way Forward

To improve the scale and effectiveness of federal capital for rural prosperity requires three structural changes:

1. Increase Flexibility, Scale, and Consistency
Federal investments must move away from siloed, loan-heavy programs that narrowly target outputs like infrastructure or housing. Flexible, multi-year grants offered at larger scales would allow rural communities—especially communities of color and Native nations overcoming legacies of exclusion—to respond creatively to demographic, economic, and social challenges.

2. Invest in Intermediaries and Local Capacity
A national and regional network of intermediaries is needed to provide technical assistance, strengthen leadership, and support organizational “software” that communities rely on. Rural places need resources for staff capacity, training, nonprofits, associations, and trusted networks that allow diverse groups to collaborate effectively.

3. Center Equity
Equity must be a core principle of federal rural development policy. With 86% of persistent poverty counties located in rural areas—and nearly half of Black and Native rural residents living in distressed counties compared to 18% of rural whites—federal programs must center the priorities and voices of communities of color. Agencies should be held accountable through independent evaluation to ensure they reach the lowest-capacity communities and deliver real improvements in well-being.

UNDERSTANDING KEY GOVERNMENT DRIVERS:

FISCAL POLICY – AND THE PUBLIC INVESTMENT MANDATE

Fiscal policy is one of those things that many people talk about but not everyone understands. So, first a definition: Fiscal policy includes all the ways that governments design to raise revenue from economic activity – whether using taxes, fees for services, or royalties on resource extraction, for example – and then how governments use these revenues to pay for services and priorities such as roads, schools, police, workforce and business development, and hospitals. There is fiscal policy at the local level, state level and national level.

In addition to fiscal policy, government plays an essential public investment role in local places and economies. It does this in several ways: by providing early-stage financing that leverages other private and philanthropic investment into significant community projects and business development, by funding basic and applied research to drive innovation, and by using government procurement policy and partnerships to accelerate commercialization and economic growth. This “public investment mandate” is critical because government investing can be more flexible, risk-tolerant and accessible as compared to private capital investment; the latter often demands higher rewards and shorter timelines which do not work for rural economies. Private capital is averse to funding early stages of research and innovation that cannot be easily or quickly monetized.

Unfortunately, the existing U.S. fiscal policy landscape is unable to deliver on this public investment mandate, particularly in the case of rural areas that are dominated by primary natural resource industries like timber and forestry, farming and mining. Three reasons explain why:

1. Unreliable resource revenue.

Some corporations must pay fees or royalties to the government to extract natural resources (like timber or oil) from rural places for the industry’s use elsewhere. This revenue, required by varying state and federal statutes, generally goes to state or federal government, which typically shares some of it back with rural jurisdictions. State and local governments tend to treat this like reliable recurring revenue. Local governments use it to fund annual operating budgets and to maintain low local tax rates. For example, Oregon counties that received the highest federal timber revenue-sharing payments maintained the lowest property tax rates. But this is not reliable recurring revenue if the natural resource is non-renewable and thus being used up, or if the demand for it enters a bust cycle due, for example, to the ups and downs of the economy, changing policy environments or unanticipated crises like the pandemic. Over time, periodic busts result in underinvestment in savings, infrastructure and local institutions as government responds to recurring fiscal crises. And once resource extraction ends, communities are left with too little to show for decades of wealth extracted and exported to outside markets.

2. Preempting diversification.

Communities are often blocked from diversifying their revenue streams by state and local limits placed on tax rates, tax assessments and spending authority. (This is an example of “preemption” – when a higher government authority restricts lower governments from a certain action.) For example, local governments in Utah receive no net revenue benefit from any new renewable energy generation (wind and solar) that is developed in rural counties because of state rules that limit local property tax. Such taxation and expenditure limits (TELS) undermine the ability of rural communities to benefit from new economic growth, which locks-in dependence on revenue from resource extraction.

3. Business relocation tax incentives.

Conventional tax incentive programs provided by state and local governments for private businesses to build, expand or relocate tend to undermine the long-term development goals of rural and underserved communities. For example, Louisiana’s Industrial Tax Exemption Program (ITEP) offered local tax incentives to industry without the approval of local governments and lacking any assessment of their likely efficacy. Rural and historically marginalized communities often have been left to shoulder the resulting burdens of hosting heavy industry with few accompanying public resources to mitigate impacts or to diversify their economies.

MORE PERMANENT, RELIABLE AND RESILIENT PUBLIC CAPITAL OPTIONS

The promising news? Exemplary efforts are emerging that prove the viability of structuring and using fiscal policy related to natural resource revenues in ways that create more permanent and reliable capital available for local public investment. These efforts not only can drive more equitable rural development; they can also increase local ownership and authority.

• State-based solutions using fiscal policy include New Mexico’s Land Grant Permanent Fund, which has been built from royalties paid by private industries when they lease state trust lands for oil and gas extraction. The permanent fund is structured to provide stabilized revenue insulated from the uncertainty and volatility of oil and natural gas markets and policy. The fund, which has amassed to $24.5 billion in FY 2021, will provide more than $1.2 billion annually to public schools – in perpetuity, even if no new deposits are made. Moreover, the State Investment Council is using the public capital in the land grant permanent fund to finance renewable energy development in the state consistent with calls for integrated and mission-oriented rural development policy.
• Montana’s Hard Rock Mining Act enables communities, local government and other local institutions to save money from extraction today for long-term economic diversification – including a rainy-day fund with resources to use when a mine closes. A state law forged and passed in the 1980s requires that, in order to receive a permit to operate in Montana, any mine enterprise must contribute to these special fund structures as part of their “social license to operate.” Private mine developers must pay into a fund set up by local governments and/or other local organizations upfront – before they start mining. The fund can be used to mitigate impacts associated with the development of the mine and to invest in community improvements – which the local fund leaders can spend when needed. Once the mine is operating, mining companies contribute to a second fund held by local government. These longer-term savings grow from fees on a mine’s production; the fund revenue becomes available when the mine closes to deal with mine-closure impacts.
• The Southern Ute Indian Tribe in Colorado offers another example of re-centering wealth locally. Historically, tribal resources have been leased to private companies for unfavorable terms, resulting in wealth being exported from tribal communities, and perpetuating poverty and dependence in reservation economies. Rather than lease energy resources to private companies that make the profit, the Southern Ute Indian Tribe created their own corporation and developed their own natural gas resources. Profits are dedicated to improving the Tribe and are invested in two funds. The Ute Indian Tribe Permanent Fund supports tribal infrastructure and services, using an endowment fund model that spends only interest. A companion Growth Fund makes per capita payments that support the income of tribal members. Local ownership, permanent savings, and public capital reinvested into tribal assets have led to greater wealth and autonomy for the Tribe.

Enterprising Rural Capital: Alive And Growing

Even as reports of the demise of rural America have persisted, numerous high-performing rural investment platforms have been established in recent decades. These enterprising hubs of domestic investment seek to advance inclusive, place-promoting, and environmentally sustainable approaches needed in urban and rural communities alike. Examples include Coastal Enterprises, Inc. (CEI) in Maine, the Regional Economic Development Finance Institutions (REDIFIs) that participate in the CDFI Financial Assistance Capital, the Lakota Funds on the Pine Ridge Reservation, to Craft3 in the Pacific Northwest, and to Southern Bancorp and Hope Enterprise Corporation in the Delta. Along with many others, such organizations are essential to keeping capital for rural communities in their own hands and maintaining investment as an ongoing driver of local and regional economic resilience.

In addition to these anchor efforts, the pandemic has again revealed that the health and economic fragility of rural communities and businesses also provides a platform for innovation. Innovative investment approaches in both the public and private sectors have been deployed across rural America as COVID-19 exposed the lack of financial resiliency. New funding strategies and vehicles, such as those highlighted below, show how capital can be used for both public investments in rural health systems and private investments in rural businesses and communities that reinforce good health and economic outcomes.

Fortunately, funds and collaborative investment platforms are emerging to aggregate impact investment capital and shift underserved rural regions into local control. These efforts are designed to keep capital invested in ways that align with rural priorities and reduce extraction of wealth from rural places. While some of these are designed to attract outside investors, others seek to reorient capital that already exists in rural regions to support and scale CDFIs, independent loan funds, and nonprofit investment organizations. To succeed, these organizations must focus on building the capacity of the local business ecosystem, cooperative and nonprofit partners, as well as reorient public and philanthropic capital to align with community needs.

But Still Scarce: The Essential First-In Capital

Despite these strong efforts, it remains difficult to secure the type of risk capital that can fill the gap in a capital stack to help jump-start regional funds. “First-in capital” is that allocation of public and private capital that can catalyze alignment across regional players and investors to support projects with significant regional impact. Without such catalytic first-in capital, promising efforts can stall or remain too small to be transformational.

To get this first-in capital to regions that need it, public and philanthropic investments are essential. These early investments in flexible, risk-tolerant capital can stabilize regional financial intermediaries and attract private capital. Without them, the regional funds and institutions that are critical to building a more inclusive capital system, cooperative business ownership, and equitable development remain fragile or incomplete, especially in economically distressed rural regions.

What difference can such shifts in capital make in rural places? The San Joaquin Valley Impact Investment Fund (SJV IIF) provides an example. This impact-oriented, place-based regional investment platform was launched to counter limited locally available philanthropy and community investment capital. Designed to keep investment in the Valley region and to steer grant-funded, flexible first-in capital toward pressing community health equity agendas, it offers a model that can be replicated elsewhere.

The SJV IIF’s investment strategy reflects the Health Fund’s resident-driven policy of grassroots grantmaking strategies that advance important integration, health, housing, education, environmental justice, and land use planning. The Center at Sierra Health Foundation, Communities Health Action, and an anonymous family philanthropy are lead investors in the SJV IIF’s current and pipeline investments. Those investors include both CDFIs and mission-driven nonprofit local organizations that advance solutions to eliminate disparity while improving rural economic, environmental and health systems, advancing conditions for small businesses, and growing affordable housing, other services and retail amenities.

The SJV IIF’s returns are applied leverage the power of strong CDFIs and community-based organizations to combine public and private investments in ways that increase access to opportunity, including new ways to increase the wealth-building local ownership of both business and residential assets. They also fuel innovation by increasing the supply of services available to low-income rural residents. Consider these SJV IIF investments:

• AccessPlus Capital. Launched in 2008 by this California region’s community action agency – the Fresno Economic Opportunities Commission – AccessPlus Capital (APC) is a nonprofit CDFI loan fund. It focuses on diverse entrepreneurial clients across the San Joaquin Valley, including as a microlender for Small Business Administration (SBA) loans. APC has deployed over $27 million in almost 800 small business loans. 70 percent of that amount has gone to entrepreneurs of color, 67 percent to low- or moderate-income entrepreneurs and communities, and 32 percent has reached rural counties throughout the San Joaquin Valley. While APC was not itself a Paycheck Protection Program (PPP) lender, it partnered with other CDFIs in the region to ensure its access for loans to rural firms.
• RCAC. Sacramento-based RCAC is a nonprofit organization that provides training, technical assistance and financial resources to rural communities and tribes across the western United States. It was one of the CDFIs that delivered SBA’s Paycheck Protection loans to rural communities in the San Joaquin Valley. Though headquartered in partnership with Self-Help, a private “family office” company that manages core family wealth and investments, RCAC was able to rapidly raise capital to originate $15.5 million in 2020 PPP loans and distribute more than 6,100 forgivable SBA loans across RCAC’s 70-county rural service area. 37 percent of its loans were to minority-owned firms, 36.5 percent to women-owned firms, and 20.8 percent to firms located in persistent poverty counties. In the San Joaquin Valley, where 20 percent of people live in a persistent-poverty county, fully 80 percent of these loans went to nonprofit organizations, 44 percent to women-owned businesses, and 36 percent to minority-owned businesses.
• Self-Help Enterprises. Rural organizations are also spearheading innovative and impactful approaches to addressing broader development needs. Incorporated in 1965 to serve the San Joaquin Valley, Self-Help Enterprises (SHE) has grown to be recognized as a national leader in the field of housing development for rural low-income working families. SHE operates in an eight-county area, building affordable housing, wastewater systems, and community infrastructure. Recently, it piloted an innovative community land trust process that helps families and public schools pool sites together in a community formed through shared land ownership. SHE has constructed over 6,200 homes for low-income families over the course of 55 years, completed 1,300 units of affordable rental housing, and provides other essential services in water, wastewater, and energy efficiency.
• Consolidated Medical Services, Inc. (CMSI). A new CDFI and regional loan fund created by Connecticut’s largest Federally Qualified Health Center and the California Primary Care Association, CMSI is emerging as a unique mission-oriented investment vehicle. It blends philanthropic, federal, and private sources to fund healthcare infrastructure in underserved rural areas. In the San Joaquin Valley, CMSI is being developed to expand primary care access, behavioral health, and workforce training facilities.

Innovations In Regional Rural Capital:

Making Vinegar Pie: The Case for Agile Capital

The region of rural Appalachia stretches over 13 states and 205,000 square miles, with a population of nearly 25 million people. This heartland of rural America has been an enduring mythological icon and the bed from which generations of American poverty mythology have been created. From a strictly capital point of view, much of the highly concentrated, largely extractive, commodity-dependent regional economy has been perpetually starved for effective, community-directed capital formation. This “sub-region” of the broader U.S. capital ecosystem demonstrates one of the nation’s most persistent and profound investment deserts. Appalachia has long been the “canary in the coal mine” for the rest of the country’s resource-dependent regions.

Today, in an age of accelerating change and new approaches designed for 19th- and 20th-century industrial economy realities, Appalachia, like much of rural America, must now find agile financial and investment solutions that are flexible, localized, and targeted. To move beyond traditional fruit and nut pie ingredients of extractive capital, brittle investment structures, and misaligned decision points mostly made outside the region, Appalachian communities need innovative blended capital solutions that fuel attainable and “next economy” opportunities. Agile capital, like vinegar pie, must be cheap, present, demand-driven and adaptive. The examples of agile capital in action contrast with supply-driven and more generic financing products that are usually offered by banks and conventional private equity funds.

Next Economy Rural Industries: Capital Opportunity Knocking

Emerging “post-extraction” industries like regenerative agriculture, sustainable forestry, nature-based enterprises, tourism, wind, water and solar energy generation, and even cutting-edge carbon capture and reuse technologies are all aligned to the historic and natural resource capacities of Appalachia, and indeed more broadly to rural America. This is “built to be rural” capital investment that recognizes the region’s natural strengths and fertile valleys—as well as rural communities’ often deep and multi-generational knowledge of place that has preserved them. Assets like soils, forests, and water can be stewarded to create a diversified mix of investments that communities committed to long ties to the land, along with their vinegar-pie ingenuity and resilience, can seize if capital is aligned.

Without suitable capital access, however, these opportunities’ potential will wither on the vine. America’s community development financial institutions (CDFIs) have done much good in recent decades, building their essential role in the health and survival of America’s small business economy during the COVID crisis. But term lending is a blunt instrument, best suited to established business models that align with a relatively low-risk, cookie-cutter, non-agile lending approach. Their emphasis on verifiable cash flow, credit history, conventional and SBA-compliant credit history, and formal business experience creates hurdles for historically underinvested entrepreneurs and small communities. For many, from backgrounds of deep rural poverty, informal but resilient entrepreneurial experience, and often with no business collateral or financial statements, the essential tools and lending benefits for rural communities are effectively locked out from realising their potential. Unfortunately, although there are over 1,100 certified CDFIs in America today, only 17—or less than one percent—are focused on deploying capital in the rural Appalachian region. Despite the visionary leadership of big regional CDFIs like Fahe in Kentucky and local innovators like the Bronze Valley CDFI in Appalachian northern Alabama, the financial landscape is not yet fully equipped to the needs of the rural next economy.

Getting Agile With The Capital Pie

There is an imperative to move free of risk-averse and heavily regulated banking models in favor of more demand-driven and agile finance delivery models. These include risk-tolerant social venture capital, crowd-funding and patient equity and equity-like capital, agile impact investing networks, and innovative crowd-funding approaches enabled by more open capital formation regimes. These forms of capital represent adaptive investment that must be deployed in a fashion that reflects and deepens access to emergent entrepreneurs and capital formation at the edges of conventional business and nonprofit economic capital.

America’s current regulated capital ecosystem must better accommodate agile capital. This does not mean wholesale abandonment of regulation. But it does mean thoughtful adaptation. Agile capital is exemplified by financial models and instruments that mirror rural America’s entrepreneurial ingenuity. For example, PieLab in Greensboro, Alabama, a small town business incubator, provides risk-tolerant community investment support while leveraging its social enterprise for regional economic and community benefit. Likewise, Invest Appalachia’s creative pipeline strategy combines philanthropic and public investments with regionalized efficiencies in community health and energy sectors to expand agile investment opportunities across the region.

This is historically embedded knowledge and business experience from generations that have long succeeded at piecing together livelihoods with an ad hoc ingenuity based on the vagaries of rural economies and historically excluded communities and businesses. These models show that agile capital, appropriately aligned, can foster emerging entrepreneurial ecosystems and provide “capital deserts” with essential access to needed resources. With federal recovery and resilience packages such as ARPA and the anticipated federal infrastructure bills, as well as innovative regional approaches such as Invest Appalachia and new hybrid models like SPARK being developed with public and private business tools such as those supported by Jobs for the Future and Accion, there is an opportunity for transformative capital action.

The need before COVID pandemic and now in awareness of future disruptions is real and growing. Local capital ecosystems require transformative and diversified capital injection from more risk-tolerant and blended sources. Rural investment strategies must be designed to flow more inclusively into more diverse impact and opportunity investments. The evidence shows these can be mobilized effectively when agile capital strategies are deployed, as Invest Appalachia, Bronze Valley CDFI, and other pioneers have shown.

A new wave of agile financial structures and instruments focused on building entrepreneurial ecosystems and expanding capital access is possible. From blended finance to hybrid local-global partnerships, agile capital investors must seize the unique opportunity to deploy more capital in rural communities for emerging post-extraction futures. As America embarks on a new phase of rural economic transition, agile capital will be the essential vinegar pie ingredient that helps stitch together resilient rural ecosystems across Appalachia and the nation.

This kind of purposeful capital must be coupled with the important legacy of rural America’s ingenuity, resilience, and stewardship, but also aligned to the realities of sustaining local jobs, diversifying capital access, and developing new community wealth. Agile capital is not only a means to expand local opportunity; it is also a powerful mechanism to shape public-private capital regimes for the 21st century, directing resources into the framework of building durable place-based capital formation. These investments, wide as the horizon but out of reach of the glass ceiling of status quo finance and traditional capital formation, must be within reach of the agility and creativity so famous to rural Appalachia—and rural America—for generations to come.

Local Foundations and Rural Capital

Transformation in Progress: Rural-Rooted Philanthropy in the Community Capital System

Achieving a vision of equitable, prosperous and sustainable rural communities will require philanthropic partners that place a priority on investing directly in community change over (or at least equal to) their charitable grantmaking. Community foundations and other place-rooted philanthropy (like family and health legacy foundations) must shift from a primary focus on accumulating assets to one that, through an inclusive process, leverages assets they already control to address the most critical community opportunities and challenges – for example, accessible and affordable broadband, housing, entrepreneurship, childcare and health care, among others. Few other rooted institutions have the mission-imperative and asset base to become a true force for local change. And that change is needed now more than ever.

Why Do We Need to Transform the Community Foundation Model to Do More, and Be More Creative, With Its Capital?

1. The need for blended capital stacks.

There is a demonstrated need for “blended capital” in rural places. Rural business investment opportunities often require a capital stack that includes traditional capital – like loans or equity – combined with more catalytic capital. Catalytic capital might take the form of a capacity-building grant for technical assistance that helps a prospective borrower fully articulate their business model. Or catalytic capital could be a loan guarantee that helps a financial intermediary make a loan that has high community impact but also carries increased uncertainty and, therefore, risk. As one example, early research to make the case for Invest Appalachia (a social investment fund serving a six-state region) identified unmet capital demand of over $330 billion in the region – including the need for a mix of loans, grants and credit enhancements. Community philanthropy is in a unique position both to provide grants to build an ecosystem of help for enterprise development and to make concessionary, catalytic lending and equity investments in for-profit and non-profit local enterprises themselves.

2. The need for flexible capital.

Even in rural regions served by a diverse set of community development financial intermediaries, what is often in most limited supply is flexible capital. A community foundation (or other local foundation) can use grantmaking dollars, specially raised funds, or part of its own endowment investment portfolio to make local “impact investments” structured with flexible terms – for example, lower interest rates, longer payback periods, payment forgiveness in the early years, or interest-only loans with balloon payments at the end. For example, the Hutchinson Community Foundation, serving rural Reno County, Kansas, recently provided a lower interest loan in partnership with a community bank to enable a downtown workforce housing townhome development to become a reality.

3. The need to leverage now for a better future.

For many communities, especially rural ones, a community foundation may be the primary or only local philanthropic asset that can be leveraged. There is, of course, great variation in the field of rural-rooted foundations. Some local foundations struggle to identify donors, and raise funds to stay viable and remain relevant; others garner wealth from their communities but invest it elsewhere. Since many community foundations remain largely donor-driven and less focused on strategic community impact, there is an urgent need to transform the culture of community philanthropy in order to maximize its potential to leverage local capital for local benefit. The goal must be to aggregate and invest assets for community impact now, in place. As evidence of the change that can happen, community foundations in rural places across the country are moving from sitting on the responsive sidelines of community and economic development to leading from the center with a focus on building more equitable and sustainable prosperity. They are investing their assets in line with these values, and forming partnerships with mission-aligned financial intermediaries, community development organizations, diverse advisory groups, and even local government so that these investments are made with community engagement and input.

4. The need to leave no rural community assets untapped.

Community foundations nationally control assets approaching $100 billion. Imagine if more community foundations could step confidently into the role of community investor, guided by principles of equitable local impact investing: It would mean that a portion of this $100 billion in endowed community capital – which is currently typically invested in stocks, bonds and other traditional vehicles that benefit businesses and shareholders located elsewhere – could become investments in rural places. In essence, it would unleash a new source of already locally owned, community-controlled resources to help rebuild and reimagine rural communities that work for all.

What Will It Take to Achieve This Transformative Vision for Community Philanthropy?

In many ways, the field of community philanthropy has been moving in this direction. In response to a visionary and pivotal 2005 study about the future of community foundations, many in the field have slowly but surely begun to refocus and revamp to take on a “community leadership” role that emphasizes partnering to pursue a community’s greatest opportunities and address its most critical challenges.

To be truly transformative, however, this community leadership role must be extended to embrace a community investor role. Moving in this direction requires a shift both in mindset (for staff and board) and in practice (deploying all the philanthropic tools, and partnerships needed to invest foundation assets in place). While this shift is underway, community foundations large and small are making this change. With examples underway in Arkansas, Indiana, Kansas, Michigan, Ohio, Vermont and Wisconsin, it is apparent that place-rooted foundations are beginning to align their capital with their mission.

What Difference Can This Transformation Make?

Three examples of rural community investments made when a community foundation stepped into this community investor role demonstrate the power of this new vision for community philanthropy.

• The Community Foundation of Grant County in rural Indiana partnered with a local credit union to provide an alternative to payday lending. The foundation provided a guarantee that enabled the credit union to provide lower-interest consumer micro loans for unbanked and underbanked individuals, helping them pay off the high interest predatory loans, and thus retain more of their hard-earned dollars, improve their credit scores, and establish savings.
• The Arkansas Community Foundation, which works statewide, provided a low-interest loan in 2017 to the state’s oldest community loan fund to enable them to lend to rural small businesses that were not being served by traditional financial institutions. A recent grant also equipped the loan fund to provide technical assistance to these same small businesses as they navigated through the disruption caused by the pandemic, keeping rural businesses open and serving their communities.
• The Whatcom Foundation, serving a relatively rural county anchored by the city of Bellingham in Washington State, established a revolving loan guarantee fund – in partnership with the local Habitat for Humanity chapter and a local land trust – to help address the county’s affordable housing crisis. The foundation has engaged donors to build the fund, which reduces borrowing costs for affordable housing developers and recycles dollars to help ensure that more permanently affordable homes are built for the region’s childcare workers, nurses, teachers, farmers and others.

When rural philanthropy steps into this new role, several things become possible:

• Truly catalytic local philanthropic capital can unlock other private and public capital to invest in rural housing, Main Street businesses, childcare centers and other assets that make rural communities places of opportunity.
• Community-rooted philanthropy can become a value-added partner with national and regional philanthropy. Catalytic local foundations can make visible the investment opportunities in rural communities and can leverage their commitment to authentic community engagement to create bridges between BIPOC communities and national and regional partners.
• In return, national and regional philanthropy can support the capacity building – staff and board learning, and policy and systems development – needed to implement this transformative vision and role for community philanthropy across the country. And both can be co-investors with community foundations, demonstrating what is possible with the embrace of this new vision.
• Community philanthropy can prioritize equity in the way that investments are sourced, assessed and packaged, signaling a new way of doing to financial intermediary partners and demonstrating how capital can be a tool to advance equity and better serve BIPOC, immigrant and low-wealth communities.
• Community philanthropy can dispel the myth that rural communities are not “investable” and instead demonstrate that what rural investments require is creativity in aggregating and stacking capital.

Native CDFIs and Rural Capital

A Moment or a Movement? The Rise of the Native CDFI Model

At the 2021 Annual Capital Access Convening organized by the Oweesta Corporation, participants asked a pivotal question several times: Is this a moment or a movement? The question arose as the COVID-19 pandemic and ensuing outcry in response to the twin racial, environmental and economic injustices brought sharp focus to the disparities bearing down on racial justice. In the weeks of this flurry, governments, corporations and philanthropy discovered Community Development Financial Institutions (CDFIs) to be effective vehicles for channeling financial resources into communities of color, persistent poverty, and long-overlooked disinvested areas. As a result, Native CDFIs are now more widely recognized as appropriate and authentic conduits for directing capital into Native communities.

Native CDFIs: Transformative and Under-Resourced

Although other types of Native financial institutions have been operating far longer, since 1987, the Lakota Funds, was established as the first Native CDFI certified in 1994. These include loan funds, credit unions, banks, venture capital funds, and support organizations. The Native CDFI Network, a national member organization housed at the Native CDFI Fund at the Treasury’s Community Development Financial Institutions Fund and the Opportunity Finance Network Institute, described Native CDFIs as transformative institutions: They not only provide financial services and loan products tailored to the needs of Native communities but also contribute to the profound transformation of increased Native community self-determination.

Despite that assessment, a 2018 survey conducted by Oweesta showed that even with significant recent increases in their capital, and the growing sustainability of individual Native CDFIs, the field remains undercapitalized. The survey highlighted two key reasons: limited Native CDFI engagement with traditional lending sources or capital markets and the challenges and risks of placing loans in Native communities with limited collateral, borrowers with thin or no credit histories, and high transaction costs due to the specific conditions of Indian Country. One key problem is lenders’ and investors’ perceived risk of lending in Indian Country, due to their unfamiliarity with Native CDFI models. Native CDFIs offer not only financial products, but also wraparound development services that help advance financial literacy and help entrepreneurs and families manage their financial lives. Their lending practices and services, in combination with development services that help advance business community interests, like technical assistance for business start-ups and development, have produced long-term local jobs. Their need for long-term, flexible, and responsive capital remains acute, as Native CDFIs serving low-wealth and remote Native communities are being squeezed out in more traditional lending because they tend to be time-consuming and expensive.

Transitory or Trend?

The “moment or movement” question arises out of concern over whether the COVID- and racial justice-induced attention centered on Black, Indigenous, and people of color communities is something ephemeral or something that will endure and lead to transformation. This has generated conversations about the future of capital access and wealth building in Native communities in general, and specifically questions about the future of CDFIs. Speakers at the 2021 Oweesta Convening noted that Native communities are hungry for structural transformation that funnels capital in a form that matches the development realities and needs in Native communities – “redefining lending and investment” – and that recognizes the broader need for more and better capital.

Indeed, another 2018 study – this one by the First Nations Development Institute – called out the dearth and restrictiveness of philanthropic funding available to Native-led nonprofit organizations, which amounted to just 0.23 percent of all foundation grants. With Native-focused nonprofits receiving this very low share, the Institute signed a Council on Foundations-led pledge to change the way they provide grants and communication and partner with grantees. This study shows both the significant need for and the opportunity to expand access to capital for Native CDFIs and Native communities.

However, Native communities do not want to create an unfairly targeted financial approach; funders and governments must assure an equity-centric distribution of capital that also sustainably benefits wealth creation. For organizations working with Native communities, several steps are clear:

• Native and rural communities must be regarded as important and investable partners with them in a long-standing partnership. Too often, the relationships that drive investment have excluded Native opportunities as “special interest” funding, rather than as essential long-term investment in America’s prosperity.
• Philanthropy and private sector need to incorporate initiatives, programs or projects to focus on long-term, equity-centered progress. This means that capital investment must be directed not just at Native communities’ immediate needs, but at building wealth and resilience for the future.
• Public investment programs and policies must develop a deeper understanding of the existing, underutilized resources in Native communities into which they can direct capital. In these places, Native CDFIs and Native-led organizations are untapped resources for getting money into communities that need it the most.

The Generation of Change

Changes are already happening, in part springing from new generations of Native Americans who are willing to craft both innovative funding partnerships and better ways of pursuing economic and community development. They are seeking to address historic barriers, while at the same insisting on authenticity and transparency from investors and greater representation in decision-making.

• The Oweesta Corporation exemplifies the capacity and promise of realizing economic sovereignty in its role serving as an intermediary institution, providing capital, technical assistance and training, and financial education to established and emerging Native CDFIs across the country. Having revolved over $67 million in investment capital to Native CDFIs and their respective tribal communities over its more than 20 years of lending history, it has been pivotal in building assets and creating avenues of wealth that align with cultural values and community needs. In 2018, 13 Native CDFIs leveraged their balance sheets and existing relationships, developing a cooperative financing vehicle housed at the Oweesta Corporation.

• Another example of Indigenous-led financing for Native nations is the NDN Collective. This Indigenous-led organization is focused on building Indigenous power through organizing, activism, philanthropy, grantmaking, capacity building, and narrative change. It has established the NDN Fund, an emerging Native CDFI, to deliver what it calls integrated capital solutions and capacity for Native nations, by redesigning from the ground up how capital is assembled and deployed in line with principles of regenerative and just economies. NDN is committed to investing in large-scale renewable energy development projects and businesses, community development and housing, resilient and sustainable infrastructure, social enterprise and regenerative agriculture.

These, and many other examples of explosive creativity seen over the years from Native CDFIs and Native-led organizations, demonstrate that there are high-capacity institutions in place in Native and rural communities, if only governmental and philanthropic institutions have a desire to work in partnership with these organizations.

A Moment or a Movement?

It may be that the challenges 2020 brought us may indeed unleash a new determination to change the trajectory for Native nations and unlock capital to achieve their aspirations. If we were to witness such a capital flow to tribal communities, we could tell our children and younger generations that they do not have to leave their homes to have a better life or pursue opportunity. We would have collectively created that platform of a healthy economy together for Native (and rural) generations to come.