Over the last two years, Reinvestment Fund, with support from the Robert Wood Johnson Foundation, has been engaged with community investors to better understand the unique challenges and opportunities to driving capital to small and midsized cities.  

Small and midsize cities have fallen behind their larger peers in attracting community development investments. Diminished access to capital for investments that can improve social determinants of health in small and midsize cities manifests in negative economic and social trends affecting these localities. For example, since 1980, smaller cities have seen their share of national income fall from 18.3 percent to 14.6 percent* despite populations growing in those places.  

Together with the Urban Institute, we engaged in structured dialog with practitioners from practitioners from over 40 organizations representing banks, credit unions, mission driven financial institutions, such as community development financial institutions (CDFIs, like Reinvestment Fund), foundations, and healthcare organizations seeking to shift their investment practices. 

The challenges, opportunities, and strategies we uncovered are captured in a report released by the Urban Institute this week, Making Community Development Capital Work in Small and Midsize Cities.  

Among the challenges, is the small and nascent community development ecosystems in these cities. The lack of federal incentives to help support small- and medium scale community development investment was also clear. This is a missed opportunity for community empowerment and wealth-building that the new Biden administration should seize. 

While the report lays out some practical strategies to change the trajectory of disinvestment in smaller places, we also believe that with important supports and changes to rules and formulas that guide the allocation of federal resources and policy, these strategies could unlock the flow of much needed capital across the nation.  

Several of the actions in the early weeks of the new administration align with improving the social determinants of health and mitigating the COVID-19 pandemic’s impact on them. While the administration seeks to tackle big issues like health, wealth, and equity, their ability to address disparities and fuel opportunity beyond big cities will be critical to our recovery as a nation.  

Three policy strategies in particular promise to stabilize local economies and grow community investment systems.  

  1. Provide dedicated sources of capital for community development financial institutions (CDFIs) to support implementation of major investments in communities that have the potential to thrive with the right supports. Small and midsized cities in America are home to twice the total population of bigger cities, yet have fewer resources and capacity to address economic, racial and health disparities**. CDFIs promote equitable development and support built environment projects that contribute to the health and wealth of communities, especially in areas of need and opportunity. Incentivizing CDFIs and their partners with dedicated resources can drive investment to the right places, including into small and midsized cities. There are more than 1,000 CDFIs working in underserved communities across the nation to ensure access to capital. Invest in these community lenders by growing and maintaining appropriations to the CDFI Fund to $1 billion annually. 
  1. Expand the New Markets Tax Credit (NMTC) program to catalyze more investment in underserved communities. The NMTC Program, which has contributed over $50 billion in catalytic investments to low-income communities, was originally created with CDFIs and other mission-driven lenders in mind. Reinvestment Fund strongly supports President Biden’s proposal to expand the NMTC Program to $5 billion annually and to make it permanent. The program should also be more closely aimed at the work of CDFIs so that funds can better contribute to equitable outcomes, since CDFIs are mission driven organizations that prioritize equity in community investment. Additionally, the program should assess and incent the use of NMTCs in smaller places. Historically NMTC funding has disproportionately gone to larger metropolitan areas for community development projects (over 90% of the total NMTC investment), leaving behind small to mid-sized cities that make up most of the United States. 
  2. Modernize the Community Reinvestment Act (CRA) to effectively and efficiently meet regulatory requirements in support of communities served by the traditional banking sector, and from which the sector benefits. While the CRA has been successful in supporting community development investments in underserved areas, it has largely followed areas served by the brick-and-mortar locations of banks. Additionally, the larger the bank’s assets, the greater the requirement that it engage in community development activities. In smaller places served by smaller, local banks, we have seen this activity neglected.  CRA regulations are long overdue for an update. An improved, evidence-based, and more consensus-driven framework for the CRA will both strengthen and streamline guardrails to protect the communities it was intended to help.  

The Biden administration has its work cut out for it on a national and global scale, but focusing on local community investment, especially in smaller places – the backbone of the United States – is an action-oriented step to improve equity and move the needle on the social determinants of health from the ground up.  

—

*Jed Kolko, “Yes, Rich Cities Are Getting Richer. But That’s Not the Whole Story,” New York Times, updated November 1,  2020, https://www.nytimes.com/2020/02/19/upshot/rich-city-poor-city-population-growth.html. 

**City Types for Improving Health and Equity: Understanding America’s Small and Midsize Cities – City Health Dashboard https://www.cityhealthdashboard.com/citytypes