Conventional wisdom about cities has it that community development corporations (CDCs) are one of the great successes of urban policy, responsible for sparking a revival of inner-city neighborhoods across the nation. The CDC movement, now three decades old, gets credit for physically upgrading shabby neighborhoods and also for uplifting the poor who live in them by organizing them to help themselves. CDCs, write Paul Grogan and Tony Proscio in Comeback Cities—a new Bible of the CDC movement and a book that ranks CDCs ahead even of improved public safety in helping to bring back cities—are "citizen-formed self-help groups trying to revitalize their own neighborhoods." These bootstrap operations, write Grogan and Proscio, are the answer to the question: "If government on its own has repeatedly failed to save inner cities, who can save them?" Such rhetoric has helped make CDCs popular left, right, and center.

Without doubt, CDCs can point to apartment buildings they’ve had a hand in building or renovating and supermarkets they’ve helped recruit to inner-city locations. And, true, local residents serve on their boards of directors. But, fundamentally, the methods of the movement are not what its organizers claim them to be, and the movement’s impact is not a healthy one. Rather than being true grassroots groups, CDCs add up to a cleverly decentralized HUD, almost entirely financed through federal funding and provisions of the federal tax code, not through the assets and initiative of neighborhood residents. CDCs are in fact a sub-rosa version of the 1960s War on Poverty, built on that era’s false assumptions that, since "the system" necessarily conspires to keep the poor in poverty, only political action can ameliorate their condition. Or, as the National Congress for Community Economic Development (NCCED), the trade group for the CDC "industry," revealingly puts it: "CDCs are helping to empower millions of people left out of the economic mainstream" [emphasis added].

These organizations threaten to maintain the poor in a dependency that runs counter to the new spirit of welfare reform. Rather than encouraging upward mobility and genuine self-reliance, the implicit message of the CDC movement to the poor is: Stay put and organize for government benefits. As a result, CDCs are bad for cities; like the public housing they claim to supersede and improve upon, they threaten to keep the poor frozen in poverty and cities forever frozen as warehouses for the eternally poor. Rather than representing a true urban revival, CDC neighborhoods are Potemkin villages, sustained by government resources and outside organizers, and potentially impeding the new, spontaneous development that is the hallmark of urban vitality.

Today’s CDC "industry," as insiders insist on calling it, is huge, consisting of some 3,600 such organizations heavily concentrated in the Northeast and Midwest and on the West Coast. More than 50 are in New York; more than 20 in Boston. They proliferated during the Clinton years, increasing by 64 percent between 1995 and 1999 alone. They are not corporations in the normal sense, of course, but nonprofit organizations, run by paid employees, not by a volunteer corps of engaged citizens, though they claim to speak for the neighborhood around them and are generally housed in small storefronts or converted apartments in the midst of their modest neighborhood domains. Over the past 20 years, they have, through direct and indirect federal subsidies, built more than 500,000 units of low-rent (though often high-cost) housing—nearly half as many apartments as the entire existing stock of U.S. public housing.

Though they struggle to sound politically centrist, CDCs cling unambiguously to the left end of the spectrum. The theme of this February’s annual NCCED convention, for example, was "Community Economic Development Equals Economic Justice," and one speaker, evidently reflecting the views of his large, enthusiastic audience, referred to newly "selected" President Bush. Walk into local CDC offices and you feel like you’ve entered a 1960s time warp. A bulletin board at the Urban Edge CDC office in Boston’s Roxbury section, for instance, advertises a job opening at the local chapter of "Bikes not Bombs." A placard at the Fifth Avenue Committee, a CDC in Brooklyn’s Park Slope, proclaims, "Our mission is to advance social and economic justice in South Brooklyn." The Fifth Avenue Committee sponsors a campaign opposing Giuliani administration policies that require some welfare recipients to work in public jobs, and it supports a "campaign of conscience" to generate "community solidarity" in favor of a "displacement-free zone" in South Brooklyn.

Such campaigns, and the core activities of CDCs generally, reflect beliefs about cities and the poor that have not really changed since the 1960s—even as prosperity has vastly lowered unemployment and brought millions of the poor into the workforce. CDCs operate on the implicit Marxist belief that "the system" will exclude a significant number of people from adequate reward for their labor, or from the chance for meaningful employment in the first place; these people—in effect, the army of surplus labor that Marx believed would always exist in order to keep a steady downward pressure on wages—need permanent protection. Their neighborhoods should, as a matter of "economic justice," be made more pleasant through subsidized renovated housing, and they must be protected against displacement by gentrification for the same reason. To suggest that this army of surplus labor might adapt and prosper on its own is a cruel mockery.

CDC theorists inherited these deeply pessimistic views from the 1960s social planners who created HUD, on the belief that private market forces would never be drawn to restore poor urban neighborhoods or to create jobs in them, and that therefore government must provide both income support and housing for the poor trapped in cities. As early as 1969, the economists John Kain and Joseph Persky recognized the perniciousness of this view: they cautioned that the earliest CDCs (and federal efforts to rebuild the inner city generally) didn’t encourage upward mobility but instead were merely attempts to "gild the ghetto"—while keeping it a ghetto. In this spirit, fundamental to the CDC project, Comeback Cities author Grogan has asserted that, in improving the lives of the poor, it makes sense for housing to "come first."

Far from representing the break with big-government anti-poverty programs that its advocates represent it to be, the CDC movement came into existence—quite self-consciously—to be a better-managed, clandestine continuation of the War on Poverty, designed by one of the original architects of the Johnson administration’s war. The late Mitchell Sviridoff, a onetime Detroit union organizer and Lindsay administration welfare chief, had, as an aide to the mayor of New Haven in the early 1960s, made that city the leading advertisement for the Ford Foundation’s Gray Areas Program—the first effort to invest massive outside funds in the rebuilding of ghettos by giving grants to community groups. The Gray Areas Program became the template for the Johnson administration’s Model Cities Program. As a student in Sviridoff’s "Workshop on Urban Blight" in 1982 at Princeton’s Woodrow Wilson School, I watched him flesh out the CDC blueprint he had created shortly before, while he was at the end of his long stint as a Ford Foundation program officer.

A hard-boiled but realistic man of the left, Sviridoff had accepted two key critiques of the War on Poverty—those of Daniel Patrick Moynihan, who dismissed Model Cities as fractious, politically confrontational, and corrupt in his book Maximum Feasible Misunderstanding, and of Edward Banfield, who identified the underclass as the real threat to life in poor neighborhoods in his classic The Unheavenly City. In Sviridoff’s new CDC model, rigorous screening of tenants was going to avoid the problems Banfield had identified. Strict financial accountability—by an outside overseer—would prevent the waste and corruption of Model Cities. To perform this function, just before he left the Ford Foundation, Sviridoff had funded something called the Local Initiatives Support Corporation (LISC), designed to funnel foundation money directly to newly forming CDCs—often in the form of loans, so as to encourage business-like operations among the recipients. Sviridoff himself became LISC’s president. While the methods were a new wrinkle, the overall goal of Sviridoff’s movement was the same as the War on Poverty’s: stable poor neighborhoods—that is, poor neighborhoods made stable for their present populations through physical improvement financed by outside funds.

The financing system for the CDC movement’s hundreds of thousands of units of subsidized housing is a marvel of what federal officials like to call "off-budget" financing. The linchpin of the system is the Low Income Housing Tax Credit, legislated by Congress in 1986 and made permanent in 1993. This device offers a dollar-for-dollar tax reduction to those who "invest" in subsidized low-income housing. Corporations looking to limit their tax liability while publicizing apparent good works flock to the Low Income Housing Tax Credit. How do a myriad of small, local CDCs get matched up with big corporations looking to make such investments? Here’s where the Local Initiatives Support Corporation comes in. LISC—where Paul Grogan succeeded Mike Sviridoff as president in 1987—makes the match between those looking for tax relief and individual CDCs.

Banks are especially eager to play this game—not because CDCs are good investments but because of pressure from federal regulators through the Community Reinvestment Act (see "The Trillion-Dollar Bank Shakedown That Bodes Ill for Cities," Winter 2000). The act (which the Clinton administration vigorously enforced) calls on banks to direct funds to so-called underserved areas—in other words, areas where it doesn’t pay, in real financial terms, for them to invest. The threat of regulatory sanction—particularly, delays in merger approvals—leads banks eagerly to seek good Community Reinvestment Act "ratings" and thus to enter into much-ballyhooed "public-private partnerships" with CDCs, which are said (in a recent, complimentary David Broder column in the Washington Post, for instance) to "leverage" private funds. It may be no coincidence that, in addition to his executive duties at the banking and financial services giant Citigroup, former Clinton administration treasury secretary Robert Rubin has, as his community service, become the chairman of LISC. Nor is it any coincidence that, according to the NCCED, 28 percent of CDCs engage in pro-Community Reinvestment Act "advocacy."

So it is that CDCs raise capital. But they can’t typically raise enough this way—low-income housing tax credits assigned to the states by the IRS based on state population are limited. CDCs typically raise additional development capital through low-interest mortgages made available to them by state housing finance agencies. These public authorities borrow at below-market interest rates and funnel the proceeds to CDCs.

Even such low-interest mortgages must be paid back, however. That means collecting the rent every month. Here, old-fashioned federal spending comes into play: HUD’s Section 8 housing voucher program typically pays the monthly rent on CDC apartments. HUD normally sets rent levels incredibly high—which allows CDCs to pay their staffs and meet expenses. One Boston CDC director recently crowed to me about his success in persuading HUD to set the "fair market" rent for the CDC-owned apartments in his low-income neighborhood at no less than $2,300 a month.

The government-created combination of tax credits, bank regulation, and rent subsidies has proved to be a financing juggernaut, a stealth housing production program ideal for the era in which big government was supposedly over. Between 1995 and 1998, CDCs used the system to build 300,000 units of new, subsidized housing. Although the NCCED likes to trumpet the number of jobs and apartments CDCs have "created" this way, they do so only by using the power of government to divert funds from other, probably more productive, investments. Beneath the illusion of market-based investment is the reality of the coercion of private capital.

The CDC financing juggernaut can be as lucrative as it is effective. Subsidized, no-risk development generates large developers’ fees for CDCs during the construction process and high management fees thereafter. Take, for example, the proposed renovation of a 28-unit apartment building recently approved for tax credits by the Massachusetts Housing Finance Agency. Actual construction costs will be $133,000 per unit. But the total costs will be much higher: $248,000 per unit, with much of the excess—$33,000 per unit for acting as general contractor, $27,000 per unit in "fees and overhead"—going into the CDC’s coffers.

What’s wrong with this? Just because CDC’s misrepresent themselves as far more bootstrap-based than they really are, is their activity—the Sorcerer’s Apprentice-like production of nonprofit-run subsidized housing—problematic? The answer is yes.

As with public housing and other philanthropic housing projects in the past, there’s always the danger of insufficient maintenance. Warning signs of bad maintenance, along with full-blown maintenance problems, have already turned up in CDC buildings. Most CDCs apparently are not putting enough aside for looming repairs. On-Site Insight, a private firm specializing in such assessments, recently examined 102 properties in the "affordable housing" stock and found that "seven out of 10 developments face unmet capital needs." It judged that CDCs should set aside at least $2,200 more per unit per year for maintenance and repairs and that CDCs owning older buildings, where maintenance needs loom larger, should set aside even more. CDC advocates acknowledge this problem. Francie Ferguson of the Neighborhood Reinvestment Corporation, a federal entity established to assist nonprofit housing developers, observes: "The assumption is that the hard thing to do is to get housing built. In fact, the hard thing is to run it well."

The details of deferred maintenance can be chilling. An extreme case is the South Bronx group called Banana Kelly Community Improvement Association, one of the original CDCs Mike Sviridoff funded through LISC. This year, LISC had to foreclose on 14 Banana Kelly buildings and seek other management, because, as the New York Times put it, "Its buildings have deteriorated; tenants have complained of no heat, of rats, of repairs not done. . . . 866 Beck Street is a building so badly deteriorated that it had to be vacated." The Times’s excellent June 2000 series about the organization—which Comeback Cities featured as a "block club turned builder"—quoted a Bronx community board member and Banana Kelly tenant who said, "Our savior has become a slumlord."

Or consider the example of a Boston development called Tent City, born out of a protest group’s occupation of vacant land by tents to dramatize what it saw as the need for subsidized housing. The Massachusetts Housing Finance Agency’s 1999 assessment of Tent City’s condition found the following, according to an internal agency memo: "Eight roofs had active leaks. Carbon monoxide was at unacceptable levels because of poor maintenance of the ventilation system." Despite all the CDC rhetoric about grassroots oversight, the project had hired a private security firm, but it was "not performing up to standards," and lacked a working relationship with the Boston police, "the latter critical given the past history of youth gangs and drugs" [emphasis added]. Again, despite all the rhetoric of community control, Tent City had also contracted out its overall maintenance—like 41 percent of all CDCs.

Yet the maintenance issue isn’t what’s most worrisome about CDCs (and so far, many appear well-maintained). The real worry focuses on the people who actually live in CDC housing. Just like old-fashioned public housing projects, the new subsidized accommodation mostly houses single mothers, who are the main recipients of the Section 8 rent subsidies on which CDC financing relies. (Only 8 percent of households receiving rent vouchers are families with children with both spouses present.) In other words, rather than being an authentic breakthrough in building healthy communities for working families, CDCs are just part of the vast financial support system for illegitimacy, with all its bad effects for both mothers and their children.

Because CDC staffers misunderstand the reason their tenants are poor—blaming supposed injustices in the economic system rather than the bad life decisions of welfare mothers—they’re involved in preserving the old welfare culture that the 1996 welfare reforms have begun to supersede. CDCs, doggedly faithful to their rhetoric about "stable" neighborhoods, don’t urge their tenants to move up and out. Urban Edge estimates that at least half its tenants have already stayed ten years or longer. Brooklyn’s Fifth Avenue Committee reports "almost no turnover." As with all public and subsidized housing, CDCs place no time limit on how long one can retain one’s subsidy after initially qualifying. Indeed, subsidized rent can seduce even ambitious tenants to limit their impulse toward self-improvement. At one Urban Edge property, I met two women, board members of the organization, who both said that, had their building not been renovated—allowing them to live in an upgraded apartment at low rent—they would have gone out and bought their own homes.

Even apart from their stable-neighborhood ideology, CDCs have a financial incentive not to urge their tenants to move up and out. They need the poor, and the generous subsidized rents they bring with them, to pay their own bills. When Urban Edge recently completed a new building, for instance, it couldn’t find enough qualified or interested potential tenants in its immediate neighborhood. So the organization—officially dedicated to neighborhood comeback—imported poor tenants, primarily single mothers, from other, poorer parts of the city. Here is a dismal underside to the CDC story: the finances of their projects depend on there always being a stream of poor, subsidized households.

Incredibly, CDC financing arrangements explicitly assume a steady supply of such households. Massachusetts, for instance, continues to build subsidized housing in Boston based on the following logic: because 32 percent of the city’s households are low-income, the state should continue to support subsidized housing construction until 32 percent of all Boston units are "affordable." (The current figure is over 20 percent.) Thus the state officially does not foresee the possibility of upward mobility. It assumes a static economy, in which cities are not starting points for ambitious strivers of modest means but long-term poorhouses.

This construction of stealth public housing is not only bad for the poor but is also a sure way to inhibit a real comeback in older city neighborhoods. Cities bounce back when decline makes their land so cheap that it becomes economic for businesses to buy. CDCs claim, on the contrary, that it is their housing activities that set the stage for growth, attracting subsequent private investment. But Harvard University social scientist Sara Stoutland has found that "there is no hard evidence of such a widespread ’spillover effect.’" In fact, the "spillover effects" of CDCs are much more likely to be negative than positive, hindering urban economic revival. To take one example out of thousands upon thousands, a fledgling Internet-related firm called Virtual Access Networks recently decided to build its new corporate headquarters in the depressed mill town of Lawrence, Massachusetts—a place in the mold of Bridgeport, Camden, or Buffalo. Why Lawrence? The firm says it looked for the least expensive space that was most convenient for the largest number of its employees. Lawrence should count itself fortunate that some CDC had not beaten Virtual Access Networks to the site and turned it into more housing for the poor—housing that the struggling city already has in superabundance.

The non-housing activities of CDCs also have a way of backfiring economically. Some 700 CDCs nationwide own and operate nonprofit businesses, on the assumption that, since the larger economic system keeps the poor permanently poor, they must be cared for in a separate, "compassionate," non-capitalist economy. In this spirit, Brooklyn’s Fifth Avenue Committee operates Ecomat Cleaners, "an environmentally friendly solution to toxic dry cleaning," with ten employees—and an annual loss, subsidized by foundations and by housing-related income. Occasionally, such subsidized ventures have proven disastrous. In Indianapolis, Eastside Investments, a CDC once held up as a national exemplar, effectively went bankrupt—shrinking from 80 employees to four—largely as the result of costs associated with a business it started. Here was the separate economy with a vengeance: Eastside was going to manufacture building materials for use in its own subsidized housing projects. The factory would provide employment for the people living in its units. Instead, the CDC lost $800,000 on "Shelter Systems." But the fundamental problem with all such enterprises lies in their conception, not their performance. During a period in which unemployment hit historical lows, CDCs continued to operate on the assumption that it was necessary to develop an alternative, nonprofit economy to shelter the poor, much like sheltered workshops for the blind or retarded.

CDCs often manage their other non-housing economic-development activities poorly, too, including their business of renting commercial space to for-profit firms. The director of a Central Harlem credit union, for instance, complains that a nearby CDC has left a block of storefronts empty and boarded up. He suspects that their housing development provides such a reliable level of income with relatively little effort that, he says, they "don’t want the hassle" of finding commercial tenants.

But without a doubt, CDCs have also been able to recruit some successful for-profit businesses to their neighborhoods. It’s great to see a new Key Foods across from the Fifth Avenue Committee office and a new McDonald’s in the mini-mall built and leased by Urban Edge in Boston. But one must ask the question: why are such intermediaries necessary for inner-city development when they are unneeded in the broader, commercial economy? If land is available, zoning flexible, and permits easy to get, if there is unmet demand for a new supermarket or restaurant, and if police are doing their job of allowing business owners to operate safely, business will take root as it does anywhere else. Indeed, right nearby the McDonald’s that Urban Edge recruited to Roxbury, two major national drugstore chains, Walgreen’s and CVS, opened new stores without any help from a CDC.

It is only in the context of the protest politics so often found in inner-city neighborhoods—the knee-jerk response against chain stores or outsiders—that CDCs make sense. They provide the means for investors to buy entrée and community support. Urban Edge, for instance, only agreed to rent a storefront to McDonald’s if the fast-food giant signed a lease agreeing to share profits with the CDC—even though the store was on land leased by the state to Urban Edge at minimal cost. Says Urban Edge executive director Mossik Hacobian: "Why should we let profits generated by our community make someone in Chicago rich? We think at least some of that money should go to the community itself." The arbiter of how that money should be used is, of course, Urban Edge—although, concedes Hacobian, there is nothing in the agreement with McDonald’s that specifies exactly how the money will improve the community. (Urban Edge says it has used the funds to build premises it rents to a Boys and Girls Club.) Moreover, this vision overlooks a great many things—not only the fact that McDonald’s is a public corporation in which Roxbury residents (through pension funds, for instance) might actually have a stake, but the fact that McDonald’s already supports the community the old-fashioned way, by providing a needed service and needed jobs, and paying property taxes.

Of course, elected officials accountable to the voters oversee the spending of those taxes, but to whom are CDCs accountable? Although these organizations are nominally under the control of boards of directors that include community residents, neighborhoods as a whole have no formal means to oversee or direct them. In fact, occasionally a CDC will explicitly ignore what it takes to be the majority view in a neighborhood. The Fifth Avenue Committee—which has grown from eight employees in 1992 to 40 today—decided last year against neighborhood-based elections for its board of directors. Board members feared, in part, that newcomers from middle-class Park Slope might take over the organization and move it off its mission, which includes "combating displacement caused by gentrification." The fear was that residents might instead work for standard neighborhood improvements, such as better parks and schools. Instead of permitting an open election, Fifth Avenue Committee bylaws actually dictate specific racial and income quotas on its board. "At all times, a majority of the board members will be people of color. At all times, a majority of board members will be people who currently are or at some time in the past have been low-income. At least 30 percent of the board will be people who are currently low-income."

How can an outfit with "community" in its name get away with excluding certain classes of local residents? The Fifth Avenue Committee’s director of community organizing candidly puts it this way: "There is a very small subset of funders that is concerned about accountability issues. Most other funders just sort of like us because we’re a CDC. By definition, we do good things, and that’s good enough for them."

Foundation funders believe that they are supporting projects conceived and refined by low-income community residents. In reality, CDC directors are middle-class professionals. The Fifth Avenue Committee and Urban Edge both have office staffs dominated by local residents—mostly black and Hispanic—but both are run by white professionals with degrees from elite universities. Judging by the attendance at the NCCED Washington convention, many black professionals hold CDC executive jobs, too; this seems to be another quasi-public-sector career path that attracts capable African-Americans, already so overrepresented in the public sector.

But the lack of neighborhood oversight and strong outside board members can also lead to the old War on Poverty problem: corruption. Banana Kelly—founded in 1978 with the quintessential CDC motto: "Don’t Move, Improve"—is the poster child here, its financial records subpoenaed by the New York State attorney general and one of its employees reportedly interviewed by the FBI and the New York City Department of Investigation. Writes the New York Times: Banana Kelly’s "finances have become chaotic. Some board members and former employees have raised questions about how government money was used and about the form in which [chairwoman Yolanda Rivera] is compensated." With the organization so cash-strapped that its offices lacked toilet paper, the Times reported, chairwoman Rivera used "part of the organization’s dwindling resources—what she calls general, or unrestricted funds—to pay for travel, including a trip to a conference in Kenya for her and several associates."

CDC advocates continually imply that theirs is a true volunteer movement—"a uniquely American force in the best traditions of the social and economic institutions observed by Alexis de Tocqueville in early-nineteenth-century communities," as the NCCED puts it. Yet among themselves, CDC advocates acknowledge that subsidized building renovation does not inherently create Tocquevillian ties that bind. Hence they have hatched the so-called community building movement, which seeks self-consciously to construct the neighborhood structures—block clubs, crime watches, recreation leagues—that arise spontaneously in neighborhoods where residents pay their own rent or mortgage and feel real responsibility for their environs. The community building of the CDC world attempts to professionalize all that—to use hired organizers and paid advocates as substitutes for Tocquevillian community institutions.

Congressional Republicans have fallen for CDCs hook, line, and sinker. In the waning days of the Clinton administration, the Republican Congress hugely pumped up the key engine of the CDC explosion, the Low Income Housing Tax Credit, from $1.25 per capita per state to $1.50 for 2001, $1.75 for 2002—and indexed to inflation for subsequent years. CDCs are salivating at such new federal pots as the "New Markets Initiative"—a subsidized tax-credit-supported approach to commercial development. As the LISC web site puts it, ominously: "The New Markets Tax Credit promises to be as valuable for community-sponsored economic development as the Low Income Housing Tax Credit has been for rental housing development." If it brings the same sort of investment based not on assessment of markets but, instead, on brownie points for various kinds of "social responsibility," this is bad news for cities, where good policing has already sparked commercial development in poor neighborhoods. Further bad news is Comeback Cities author Grogan’s recent formation of a group called CEOs for Cities, which seeks increased support of businessmen for CDC subsidy schemes.

Instead of falling for such stuff, Congress and the Bush administration should begin doing everything they can do to bring inner-city neighborhoods into the mainstream economy. They should put time limits on the Section 8 rental vouchers that are the CDCs’ lifeblood, and so try to weaken the movement. And they should encourage and help cities to spark revival the old-fashioned ways: by providing safe streets, effective schools, attractive parks, and work-oriented, values-laden social programs. Cities must help themselves, too, by controlling costs, lowering taxes, minimizing regulation, and encouraging private housing and commercial development. Shortcuts like CDCs are doomed to be dead ends.


City Journal is a publication of the Manhattan Institute for Policy Research (MI), a leading free-market think tank. Are you interested in supporting the magazine? As a 501(c)(3) nonprofit, donations in support of MI and City Journal are fully tax-deductible as provided by law (EIN #13-2912529).

Further Reading

Up Next