How Congress can help America’s communities spur economic growth

Like an “ideas competition” for economic policy wonks, the Senate Banking Committee put out an unusual call last month for proposals to increase economic growth. It’s unclear what the committee will do with these proposals, but as a community and economic development nonprofit that works in smaller rural and urban areas across the country, the National Development Council (NDC) took this call for ideas as a unique opportunity to shed light on a little known but significant problem.

At a time when infrastructure has become a critical national issue, banks have lost incentive to invest in small-scale public works projects, such as replacing lead pipes and broadband installation in rural areas. The challenge is two-fold: underwriting small infrastructure projects, which cost between $200,000 to $3 million, is often too cumbersome to be worthwhile for banks to take on willingly. While the Community Reinvestment Act requires banks to make capital available in their communities, the opportunities to meet related obligations while investing in infrastructure are limited.

{mosads}Compounding this problem is a recent regulatory change that prevents banks from meeting their minimum liquidity requirements with investments backed by municipal bonds. The combination of these two restrictions, one market and one regulatory, makes it more difficult for small urban and rural communities to meet the challenge of building and replacing essential public infrastructure. Why? Because tax-exempt municipal bonds are frequently used for small-scale infrastructure projects, and banks are now disincentivized from buying tax-exempt municipal bonds.

But a simple regulatory fix would address these disincentives while easing the regulatory burden on banks. This can be achieved by allowing banks to count loans to community development financial institutions (CDFIs) for public facilities and infrastructure improvements as meeting their liquidity requirements. Meanwhile CDFIs would take the burden off of banks by underwriting smaller public works projects that utilize tax-exempt muni bonds. At the same time, CDFIs have a strong record of providing hands-on underwriting and financing for smaller projects while tying investment to community impact and job creation.

At NDC, we have been using a similar approach to develop social infrastructure using a nonprofit public-private partnership (P3) model to finance projects such as justice centers and laboratories, which tend to be in larger communities. But this model can be made to work for small infrastructure projects as well. Incentivizing banks to work through CDFIs by allowing them to count tax exempt instruments purchased through CDFIs as meeting their liquidity requirements would catalyze economic growth where it is most needed — in smaller and less well-capitalized areas of the country.

Community development financial institutions have demonstrated their ability to invest in housing, health clinics, charter schools, and small business lending. Encouraging these institutions to engage in building and rebuilding infrastructure is a logical next step for Congress to take in spurring the nation’s economy.

Daniel Marsh is president and CEO of the National Development Council, a community and economic development nonprofit dedicated to catalyzing small businesses, affordable housing, and infrastructure since 1969.

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