WASHINGTON - The Treasury Department's community development programs may be on the chopping block as the Bush administration tries to reduce spending by cutting Clinton-era economic development efforts.
The Community Development Financial Institutions Fund and Bank Enterprise Award would essentially be eliminated if the President's 2006 budget is passed, as would 16 other development programs scattered across five agencies.
They would be consolidated into a Commerce Department program that would receive $3.7 billion of funding, considerably less than the amount currently devoted to such programs individually.
The impact on banks could be significant. Small banks classified as community development financial institutions could potentially lose substantial funding. And large banks that receive Community Reinvestment Act credit for investing in CDFIs might find these investments less attractive, according to industry observers.
Mark Pinsky, the president of the National Community Capital Association, which represents CDFIs, said members of the Philadelphia-based group are strongly against the proposal.
There may be some merit in consolidating programs that are not working, Mr. Pinsky said, but creating a new bureaucracy is not the answer.
"Let's figure out what's really redundant," he said. "Not, Let's throw every program that has the words community development in it in a pot, and throw out the pot."
To go forward, the President's proposal would need the approval of the House Financial Services Committee, the Senate Banking Committee, and the appropriations committees.
But his winning the support of Congress is not a sure thing given the political popularity of programs that would be eliminated. These include the Department of Housing and Urban Development's Community Development Block Grants, which had a budget of about $5 billion in 2005.
"I don't think this is going to happen," said Massachusetts Rep. Barney Frank, the ranking Democrat on the House Financial Services Committee. "It's a great mistake. It's basically a decision to try to achieve his deficit-reduction goal at the expense of poor people."
James Ballentine, the director of community development for the American Bankers Association, said it is hard to condemn the President's proposal without knowing what the new Commerce Department program would look like. Nonetheless, he said he is concerned about the impact on community-development lending.
"Banks, particularly large institutions, have really used the CDFI not only for purposes of them receiving CRA credit, but they've really been able to use CDFI funding to tap into communities that were untapped before," Mr. Ballentine said.
What could be more damaging than the budget reduction, he said, is the message it sends to low- and moderate-income communities and the institutions that serve them.
Last year 68 CDFIs - which include banks, credit unions, and loan funds - received about $50 million under the CDFI program.
Joe Black, a vice president for Southern Development Bancorp in Arkadelphia, Ark., said that without the annual grants from Treasury, his company could not have grown to assets of $420 million, and that other, younger CDFIs could have a harder time. Southern Development received $1.6 million in 2004.
"The CDFI funding provides seed capital that institutions can use to leverage private resources by giving them an incentive to invest, and now they won't have that," Mr. Black said.
It would also be harder for Southern to expand into additional rural areas, he said.
Anne Arvia, the president and chief executive of the $1.6 billion-asset ShoreBank Corp., said the Chicago company is self-sustaining. But without government support through CDFIs, the lack of guaranteed federal funds would make it harder for ShoreBank to attract partners willing to invest in low-income communities, she said. Moreover, banks would not be eager to put their money in institutions such as ShoreBank without the guaranteed CRA credits they get from CDFI investments.
"I think it lessens opportunities for us and other CDFIs to serve as a catalyst for positive social change," Ms. Arvia said.
Also slated for elimination in the Bush budget is the Bank Enterprise Award. The 10-year-old program, which is administered by the CDFI Fund, received $10 million of funding in fiscal 2005. The competitive grants are given to banks that have invested in CDFIs or distressed communities.
In July, the last time the awards were given, $17 million was doled out to 49 banks and thrifts. The average application was for $347,093.
The 7-year-old New Markets Tax Credit program would survive the reorganization, largely because it is authorized until fiscal 2007. Under the Bush budget, the Treasury Department would receive about $8 million to administer the program and outstanding obligations of the CDFI fund.
The New Markets Tax Credit gives investors - often banks - a tax credit worth 39% of their investment, which must be aimed at reviving distressed communities. Mr. Pinsky said that over the life of the program, the total value of the tax breaks is $15 billion.
But the tax credit alone would not be as effective without the other CDFI programs, said Lisa Richter, the vice chairman of the National Community Investment Fund in Chicago, which invests in banks that serve low-income communities.
The "tax credit primarily funds commercial real estate and, to some extent, small business, but it specifically does not fund mortgages and financial services to low-income people," Ms. Richter said.
