Welcoming Remarks by Jonathan Fanton to the Small Business Investment Alliance, September 30, 2004

Good afternoon. I am delighted to welcome the Small Business Investment Alliance to Chicago, a city where investments like yours are helping transform the lives of our poorest residents as they are in cities and towns across America.

In a moment, I will talk about the work that brings us together.  But first a few words about MacArthur.  This is a big week for the Foundation with the announcement of our new class of Fellows: twenty-three people whose creativity and courage lifts our spirits, deepens our humanity, fires our determination to help others, and illuminates the wonders and dangers of the natural world.

Sometimes people think that all MacArthur does are the genius awards or support for public radio and television.  But we do much more with $200 million of grants and low-interest loans we make every year. We work internationally in 65 countries, in four fields: human rights, biodiversity conservation, population and reproductive health, international peace and security. And as I will describe later, we do about half of our work domestically.

The MacArthur Foundation is privileged to be a member of the SBIA and to make common cause with you who bring capital, commitment, and competence in the quest to make the American dream a reality for millions ready to work and for thousands of urban neighborhoods and small towns ready to rise.

Your institutions and ours share a belief deeply rooted in American history: that given an opportunity, Americans want to work at a decent job, want to control their own destiny, want to contribute to building a strong and competitive country.

So I begin today by acknowledging the critical role that each of you is playing in connecting disadvantaged and under-employed people around the country to the engine of the economic mainstream.

All of you invest capital in Small Business Investment Companies (SBICs) and venture funds. These funds, in turn, help entrepreneurs, many in low-income areas, who have the will and the skill to create or expand job-generating companies, but who lack access to the right kinds of financing.

The results are impressive.

In the last decade, SBICs provided 8 percent of all venture capital for small businesses in the United States, $23.7 billion. In 2002 alone, SBIC financing totaled $2.7 billion in companies employing 1.1 million people.  More than a quarter of this activity took place in low- and moderate-income communities.

Results will emerge more slowly from the newer field of community development venture capital.  But we can already see jobs and other community benefits generated by these funds, along with a modest but growing record of successful exits.  For example, the Sustainable Jobs Fund which many of us helped capitalize in 1999 has put over $10 million into 18 companies to date.  These firms now employ 1,500 people almost twice the number employed when SJF made its initial investments.   Earlier this year, SJF sold one of its companies at a healthy return and we look forward to more of the same in the months and years ahead.

SJF and other CDVC leaders are involved in a new project to standardize and improve the methods for measuring the financial and social returns of their community development investing.  But even as we await the results of this project, we have enough experience to appreciate the impact of public policies and private initiatives aimed at people, places, and parts of our economy that are under-utilized.  All of us need to tell the story so there can be no doubt in the boardrooms of your banks, the city council chambers, or the halls of Congress, that small business investment pays significant human and economic dividends.

For decades, talk about urban America has been dominated by the perception of steady decay and skepticism about the potential for development.  But the track record of small businesses demonstrates a different reality: neighborhoods, cities, and regions brimming with assets and untapped potential buying power, land, infrastructure, people willing to work.

But to realize this economic potential, we know that attention must be given to other issues as well affordable housing, good schools, safe streets, strong community organizations that build social capital. That is why MacArthur spends almost $100 million each year on an interrelated set of domestic issues: community and economic development, urban and regional policy, affordable housing, systems reform in education, juvenile justice, and mental health.

In Chicago, we are addressing all of these issues in sixteen about half of the citys high-poverty neighborhoods in a partnership with LISC.  The theory of action is bold: comprehensive investment at significant scale, over ten years, can produce healthy neighborhoods with a bright and steady future.

Historically, most of MacArthurs support for economic development has come through our program-related investments.  Since the mid-1980s, we have provided over $100 million in low-cost loans and equity investments to other lenders, banks, credit unions, and venture capital funds with a community development mission.  These Community Development Financial Institutions have used our money to leverage billions of dollars in additional investment much of it from organizations like yours.  Collectively, these funds help expand homeownership, build childcare and other human services, finance charter schools, produce or preserve affordable rental housing, and deliver fairly-priced banking products to low-income people.

They also provide debt and equity capital to small businesses. We think this investment in small business makes good sense.  As all of you know, small business is the true driver of job creation in the American economy. According to a report released last month by the Small Business Administration, 99 percent of all American businesses are small*, they create 75 percent of the net new jobs, and they employ over half of the nations non-farm private employees.

Small business development is important and exciting philanthropic work.  But, at best, ours is a supporting role.  The private sector your institutions stands at center-stage. You provide the equity these businesses depend on, the patient risk capital that allows entrepreneurs to sow and grow their dreams.

Take the example of Ricochet, a Philadelphia-based manufacturer of protective clothing for paramedics, ambulance personnel, and search and rescue teams. Over the past decade, Philadelphia's textile workforce has been displaced by the relocation of manufacturing jobs overseas.  But with the help of $1.5 million in venture capital from the Reinvestment Fund and the Community Development Venture Capital Alliance, Ricochet has re-employed this highly trained workforce - an untapped resource that brought critical skills and experience to a young company.

Last fall, I toured Ricochet, a modern, bright facility in what was once an abandoned warehouse on the edge of the Tioga-Nicetown [tee-oh-gah] neighborhood.  As Ricochets Vice President, Bill Hord, took me around, he spoke passionately about these jobs not just any jobs, but good jobs with decent wages, incentive pay, comprehensive benefits.  I saw forty-two talented, committed people proud of their work, eager to show a guest new technology for cutting and assembling material into state of the art protective gear for emergency workers. Their market has been booming since 9/11, as you might imagine.

Ricochet has plans to expand, and with growth will come opportunities for these workers and a dimension of personal development not readily available in the kitchen of a fast food chain or the warehouse of a home improvement giant.

When thinking about this example and others, we should remember that the government has a vital role to play in fostering business growth and economic development, especially when partnering with the philanthropic and the private sectors. We know that private philanthropy can help by nurturing innovative ideas by providing seed capital and technical assistance, and by raising visibility and documenting success stories.  And in a country where business and free enterprise are the engines that fuel the economy, the private sector and its capital are indispensable. 

But the public sector also provides critical resources, tax incentives, and information. When we consider the progress of community-oriented business development over the past few decades, the Small Business Administration has played a major role.  The CDFI Fund at the US Treasury Department, now 10 years old, has also made important contributions, and more recent programs, like the New Markets Tax Credit, are rolling out at a significant scale.

But there can be no doubt that the single-most important stimulant for community investing whether in housing, human services, or small business has been the Community Reinvestment Act.  This landmark 1977 legislation, passed with bipartisan support, is credited with unleashing over $1 trillion of private sector funds into low-income and underserved communities nationwide.[1]

As I am sure you are all aware, CRA regulators are calling for changes that would leave only the countrys largest banking institutions subject to rigorous community investment standards.  Such a change would be a major step in the wrong direction. CRA regulation may need some improvement, but its basic purpose remains sound: to encourage private sector investment in communities in need but poised to recover; in people out of a job but eager to work; in regions struggling with global competition but ready to contribute to robust economic growth.

To illustrate the potential impact of such changes, consider what might happen here in Illinois.  Banks that would be made exempt under the proposed changes originated nearly 11,000 small business loans for close to $1.5 billion statewide in 2002.  Currently, these banks control more than $3.4 billion in deposits from residents of Illinois low- and moderate-income areas.

If the proposed changes were enacted, 86% of all FDIC-regulated banks in Illinois currently defined as large would immediately become small  -- and therefore exempt from the full CRA exam process.  At the end of the day, a change of this magnitude would leave rigorous community investing standards in place for fewer than 3% of all banks and less than 25% of all FDIC-regulated assets statewide.

CRA has been the heart and soul of community development finance for nearly three decades.  Its social and economic dividends are real and substantial. The transformation under way in many of our urban neighborhoods is fueled by investments in small business; those of us who see this progress first-hand need to bear witness in defense of CRA. Now is a time to stay the course with a public policy that works.

And you can help. You represent the best of the American business community, giving tangible form to the idealism latent in capitalism, to high expectations that raise performance standards, and to an optimism deeply rooted in our national character.

I close by expressing my admiration for the work you do in guiding the investments of your institutions to people and places ready to use them wisely to help America reach a threshold of fairness and opportunity worthy of the richest society in all of human history.

Thank you.

* i.e., with fewer than 500 employees

[1] Dan Immergluck, Credit to the Community: Community Reinvestment and Fair Lending Policy in the United States, M. E. Sharp: Armonk, New York and London, England, 2004.

Community Development