A Treasury Department fund that banks and credit unions often tap to help revive economically depressed areas is one of the casualties in the Bush administration’s 2002 budget.

The President has proposed cutting the Community Development Financial Institution Fund’s budget by 42%, to $68 million. That is the lowest budget proposal for the program in five years; community development lenders had hoped for $125 million. Since 1995 the fund has awarded more than $560 million to hundreds of banks, thrifts, credit unions, and other institutions that promise to use the money to improve distressed rural and urban communities.

“President Bush articulated support in a broad way … and we were hopeful that we would get at least the current levels,” said Laura Schwingel, the director of the Coalition of Community Development Financial Institutions, a Philadelphia-based trade group. “To say the least, we were a little surprised.”

“A typical government program lasts about five years, but this is not your typical government program,” said Joe Black, the program director for $249 million-asset Southern Development Bancorp. Inc. in Arkadelphia, Ark. “I have regret and remorse that this fund, which has been key in empowering organizations and communities, may soon end.”

To be certified as a CDFI by the Treasury, a financial institution must have a primary mission of serving distressed communities in a specific market and promise to match the government money at least one to one. Money is also available to noncertified banks and thrifts, through the Bank Enterprise Award Program. The money must be used for lending in underserved communities or as investments in CDFIs.

In the proposed $68 million budget, $42 million would be allocated for certified CDFIs and $16.5 million to the Bank Enterprise program. The remainder is for operating costs.

The number of institutions competing for the awards is likely to increase this year, Ms. Schwingel said, noting that last year 308 certified institutions competed for 143 awards.

The CDFI Coalition, the National Federation of Community Development Credit Unions, and their members are all trying to persuade Congress to support a larger budget for the fund. “Increased support will enable CDFIs to continue to rebuild and revitalize our nation’s communities,” the Coalition told a congressional subcommittee in testimony this month.

However, the administration has been making its case for cuts in the CDFI budget. It argued that after six years, CDFIs should be making a return on their investments and therefore need less money from the government. The acting director of the Treasury, Jeffrey C. Berg, said in Congressional testimony this month that the department needs to “test the effectiveness of various incentives for investment in low-income communities so that we know better what works and what does not” before allocating more money to any program.

The lending institutions that compete for the awards are not buying this logic.

Eric Weaver, the executive director of the San Jose, Calif.-based Lenders for Community Development, said that until there are no more distressed communities, all CDFIs would need the government’s help, no matter how much return their investments produce. His organization is a consortium of 23 California banks that have pooled resources to make loans in low-income communities.

“There is a value in using a market-based approach to investing in a distressed community, but that does not mean the market on its own can solve the problems,” he said. “Cheap and patient capital is part of the mix.”

The budget for the fund is in the subcommittee on Veteran Affairs, Housing and Urban Development, and Independent Agencies but probably will not be reviewed and amended for another six to eight weeks, according to a Treasury spokesman. Though neither the Treasury nor the CDFI groups were willing to predict a dollar figure the subcommittee would settle on, some CDFI members are hopeful that Congress will increase the fund’s budget before it is approved.

Caryl K. Stewart, who is president of the Vermont Development Credit Union in Burlington, is among the hopeful ones.

“From what we are hearing this is going to be an attractive program to Bush since it promotes investment into a community at the private level,” she said. “And I am optimistic it will go back up.”

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