This article is from Dollars & Sense: Real World Economics, available at http://www.dollarsandsense.org/archives/2013/1113scher.html


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This article is from the November/December 2013 issue of Dollars & Sense magazine.

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Financing the New Economy

The New Hope in Credit Unions and Cooperation

BY ABBY SCHER | November/December 2013

For the last three years, labor organizer Ellen Vera has been piecing together Our Harvest Cooperative, an inspiring project launched primarily by the United Food and Commercial Workers (UFCW) and Mondragon USA, the U.S. arm of the famed Basque co-op network. The goal? Generating 150 to 200 family-wage jobs in farming, food processing, and delivery in the rust belt city of Cincinnati. Regional restaurants and institutions like Cincinnati State University are eager for fresh, locally cultivated food without the huge carbon footprint generated when produce is transported from afar. And through sheer grit, this Cincinnati “food hub” produced a business plan with the help of the Ohio State University Cooperative Development Center and put ten acres into cultivation right in the city. The Cincinnati Central Credit Union and other community members offered small loans to support the project’s launch. Farming apprentices paid through the federal Pell Grant program working with a seasoned organic farmer are growing 40 different types of crops, from corn to melons to tomatoes and “everything you can grow in the area,” said Vera.

Despite servicing community-supported agriculture (CSA) and Cincinnati State, the project remains small. The enterprising organizers and extension consultants had gone as far as they could without a big infusion of capital. “We tried with other banks,” Vera said, “and didn’t get very far.” Another pool of funds was also beyond reach: union pensions, which are governed by tight fiduciary rules that discourage risky investment in a startup. A UFCW senior staffer admitted it was hard “to convince union pension funds to look beyond the bait and switch of Wall Street, but you have to convince them this is safe.”

Then in August, the venture announced that it had received a large loan from Farm Credit of Mid America and CoBank, a cooperative bank created by the merger of regional rural co-op development banks founded during the New Deal and capitalized by long-term federal loans. With $92 billion in assets, CoBank is huge but focused on rural investment. Now Our Harvest can buy machinery, tractors, and a refrigerator truck, and develop washout and pack-up areas. If the project is successful, its founders hope, it can open new horizons in the alternative economy and serve as a prototype for other unionized, worker-owned food hubs throughout the country.

There’s a lot to learn about the state of banking and finance from this story. The most obvious lesson is that commercial banks aren’t at the center of funding the New Economy—one in which we live sustainably on this earth, wealth is shared equitably, democratic workplaces flourish, and we earn the livings that we all deserve. A second lesson is that the federal government can still be a vital source of funding, even when it is under attack in the Tea Party age. A final lesson is more hopeful. It is that we already have working examples of the kinds of cooperative banking and financial institutions we need in order to scale up our vision of a New Economy beyond corporate control: from cooperative banks to credit unions, to federal loans and the community’s own investment. By enriching this sector, we can nurture the power of workers over capital, an age-old struggle that the most recent financial crisis makes only more urgent. But as we will see, this sector, while rich with possibility, faces real constraints.

The Failure of Too-Big-to-Fail Banks

The 2008 financial crisis only made more visible the disconnect between the speculative too-big-to-fail banking sector and the kinds of investment that nurture good jobs, a resilient and democratic economy, and a sustainable world (see Abby Scher, Greetings From the New Economy, D&S, July/August 2012). The world of speculative finance has nothing to do with productive lending, as economist Michael Hudson, ex-Wall Streeter John Fullerton, and many others have noted. Yet finance makes up 30% of U.S. profits. Important values of solidarity and a healthy earth are pushed out of the calculus, as rapid-fire computerized trading buys and sells stocks and bonds in a great churning where the bottom line is the only thing that matters. Even worse, as Fullerton has argued, “a major lesson of the recent financial crisis is that [financial] firms do not manage risk, they move it” until it “explodes into view.”

Banks’ traditional lending gives as little consideration to ecological or social goals, including job growth. Bank lending to small businesses—the arena that famously produces the most new jobs, especially during downturns—dropped 18% from June 2008 to June 2011, according to a November 2012 study for the Small Business Administration. During that same period, bank lending overall dropped by about 9%. And big banks were the worst. The smaller banks that didn’t get bailouts devoted more funds to small-business lending even as the too-big-to-fail banks cut back. For the cooperative businesses that are the heart of the New Economy movement, the credit drought they face in the best of times only worsened. Meanwhile, big banks take whatever deposits they do receive and leverage them for investments far from the communities where the deposits were made. The Community Reinvestment Act, a 1970s-era law encouraging banks to invest in the poor neighborhoods where they accept deposits, while vital, is clearly not enough.

“The only thing workers own right now is astronomical debt,” says Brendan Martin, founder of the co-op lender The Working World, which provided $650,000 in financing to the New Era Windows cooperative (formerly Republic Windows and Doors) in Chicago earlier this year. (See Kari Lydersen and James Tracy, “The Real Audacity of Hope,” D&S, Jan/Feb 2009.) Instead, the movement needs to “have serious productive capital in the hands of workers.” “Banks don’t want that,” he continued. “They want the peonage state we’re in now where most of our interest goes to them.”

Cooperative Finance for a New Economy

Instead of just battling the big banks, activists are working to strengthen a diverse alternative financial system that pursues social goals and offers affordable lending, but that currently remains undercapitalized, and in the case of credit unions serving low-income communities, is even shrinking. This diverse sector includes community lenders like cooperative and community loan funds, credit unions—nonprofit, democratically run cooperatives whose depositor-owners have one vote no matter how much is in their account—and cooperative banks like CoBank and the Washington D.C.-based National Cooperative Bank. Visionaries in 22 states are organizing to replicate the Bank of North Dakota, a state bank founded in the wake of a farmer uprising early in the 20th century. The bank holds government deposits and works through community banks to loan to business enterprises (including the fossil fuel industry), homebuyers, and students (see Abby Scher, Banking on the Public, D&S online).

The alternative financial sector needs strengthening. While the large CoBank and National Cooperative Bank are prominent exceptions, many of the institutions that support cooperatives and other democratic New Economy enterprises remain undercapitalized, are curbed by regulations promoted by commercial banks, or are only beginning to create ties of solidarity with other parts of the cooperative sector. But they are taking the best ideas from abroad and getting serious about scaling up.

Credit unions are the most common type of cooperative in the country, with about 94 million members and more than $1 trillion in assets. They operate on tight margins even with tax-exempt earnings and a pay scale far below that of the commercial banking sector. “In good years, credit unions may achieve Return on Average Assets (ROA) or net income of 1%,” according to a 2012 Federal Reserve report. They also are less likely than commercial banks to buy securities to generate income.

A 2013 International Labor Organization report argues that financial cooperatives (credit unions and co-op banks, which can serve nonmembers) offer relative resilience during busts because they “aren’t involved in risky ventures.” Except that sometimes, as in the case of the U.S. and German credit unions that bought mortgage-backed securities, they are. Five big wholesale credit unions that served like correspondent banks (processing payments and offering loans and investments to their credit union members) went under after the crash, largely because of their investments in toxic mortgage-backed securities. This both cut any income the credit unions generated from their membership in these institutions, and led to hikes in their required payments to the depleted federal deposit insurance system for credit unions.

Thankfully, deposits in the more mainstream, bank-like credit unions grew as people fled the corporate banks during the Move Your Money campaign almost two years ago, as did mergers with failing enterprises. By 2012, the earnings of federally insured credit unions were growing and it was a record year for the industry as a whole, according to the annual report of the National Credit Union Administration (NCUA), a federal agency. Meanwhile, small credit unions—those with assets under $10 million—lost members and labored to find the loan opportunities that provide these low-margin cooperatives with income.

Low-income credit unions, those with majority low-income members, were hit hard by the recession as their members struggled (and continue to struggle); the extra deposit fees to cover the losses in the insurance fund also hit them hard, according to a February 2012 study written by Cliff Rosenthal, then-president of the National Federation of Community Development Credit Unions, for the San Francisco Federal Reserve.

Still, because of their social benefit to low-income communities and the challenging economic environment in which they operate, these credit unions, once officially recognized by the federal government, have looser restrictions than regular credit unions. American Banking Association lobbying has ensured that business loans over $50,000 issued by credit unions are capped at 12.5% of a credit union’s capital. Low-income credit unions are exempt from this cap and the credit union industry as a whole is trying to end it. Low-income credit unions also can accept deposits from nonmembers, which other credit unions cannot, and are eligible for supplemental capital from the NCUA’s new Community Development Revolving Loan Fund. They also got a helping hand from the Dodd-Frank banking law, which mandated that credit union regulators support economic and racial diversity and help preserve the credit unions that are often the lifelines of their communities. Today, 1,915 federal credit unions are designated as serving low-income communities, and 103 received $1.4 million in grants from the fund in 2012, according to the NCUA’s annual report.

As the Loan Fund example shows, the federal government potentially can provide important capitalization, or it does when it feels some heat. Commercial banks succeeded in having credit unions temporarily barred from benefiting from TARP bailout money, but after an uproar the Obama administration directed unprecedented amounts into community development finance institutions that lend in poor communities. The Treasury Department’s Community Development Financial Institutions (CDFI) Fund was created in 1994 following a campaign by community development credit unions—including those serving low-income, minority, immigrant and other underserved groups—to “economically empower” these communities by investing in them. It has awarded more than $1.7 billion in grants, loans and tax credits since then, and got a big boost in funds from the American Recovery and Reinvestment Act of 2009, giving it a total appropriation of nearly $250 million for 2010. Yet only 41 community development credit unions (largely but not entirely “low income” credit unions) benefited from CDFI Fund awards from 2008 to 2010, amounting to 11.5% of the total distributed, according to the Federal Reserve report. In September 2013, 14.5% of $172 million in CDFI grants went to 35 community development credit unions. This strengthened their balance sheets. But more is needed.

Building the New Economy from the Inside

“The industry as a whole is shrinking. It’s a strange thing being in that world: every year credit unions disappear and the chartering of credit unions are at a snail’s pace of one or two a year,” said Deyanira del Rio, co-director of the New Economy Project in New York, who also serves as board chair of the Lower East Side People’s Federal Credit Union and board vice-chair of the National Federation of Community Development Credit Unions. “These are the institutions that should be the model for building a new economy but they are facing all these challenges.”

Building synergies across cooperatives is a key strategy of the new “horizontalism” seeking to challenge corporate control of the economy through self-management, as seen in Argentina and elsewhere. In the United States, such synergy could help low-income and other credit unions—and those that potentially borrow from them. Member-owned organizations of all sorts, from housing and worker co-ops to food and producer cooperatives, have more than 1 million members and $500 billion in revenue nationwide. That’s a lot of potential power, power that the national cooperative banks already support.

“How do we bridge the divide of financial cooperatives, worker cooperatives and consumer cooperatives? There aren’t a lot of great examples out there,” del Rio said. One easy way? “When a nonprofit or a worker co-op becomes a member, it expands their access to services.” The Lower East Side People’s Federal Credit Union where del Rio serves as board chair is alreading bridging the divide. “Our credit union is successful primarily because we give loans to low income housing co-ops,” says Linda Levy, its CEO. “There are very few lenders who would even lend to them so that’s our niche. The New Economy is about co-ops supporting co-ops and it’s interesting that that’s kept us going.” The credit union has worker co-op members planning to apply for loans, although it has not yet loaned to this form of enterprise.

With small-business loans often guaranteed by the individual entrepreneur, the structure of collective ownership requires some workarounds when it comes to credit union lending to worker co-ops. For instance, a local bank in Massachusetts provided a co-op with a loan once it tied loan payments to individual workers’ pay. Supporters of Our Harvest provided the collateral for the Cincinnati credit union’s loan to the initiative. Another ingenious tactic allows supporters to buy certificates of deposit that backs a line of credit— to a food co-op in North Carolina or the worker-owned Equal Exchange in Massachusetts.

Powerful Models: Cooperative Loan Funds & Co-op Loans

Preferred Shares

An interesting arena of alternative finance that more social ventures are exploring is the sale of “preferred shares.” An early adopter of the strategy is Equal Exchange, the worker-owned, fair-trade coffee and chocolate company based in West Bridgewater, Mass.

“The economy and capital are far too important to leave to capitalists,” said Rodney North, Equal Exchange’s “Answer Man” for the media. Equal Exchange has more than 130 worker-owners and more than $10 million in assets. The co-op raised $11.5 million by selling Class B, nonvoting “preferred shares,” offering a modest dividend, that buyers must hold for five years. “Clark Arrington of ICA [the consulting group] introduced Class B shares to the founders 25 years ago,” said North.

Arrington, now working in Tanzania, told D&S by email that Equal Exchange came up with the strategy “to address the problem of attracting outside capital to a pure worker-owned company without diluting worker control and worker governance of the company. The Class B shares also had the advantage of allowing former worker owners to remain shareholders after leaving the company and for existing worker owners to have a larger equity stake in the company without diluting the control of other worker owners. Additionally our producer co-ops could own shares and could even elect to be paid with Class B shares.”

The cooperative sector got another potential boost in federal financing in recent years. Following a concerted campaign by the U.S. Federation of Worker Co-ops and the cooperative movement, in 2012 the Small Business Administration (SBA) clarified that worker co-ops with fewer than 500 staff are small businesses that are eligible for SBA-backed loans. That opens up a wider array of lending institutions, including community banks, to worker co-ops. The SBA also gave the Cooperative Fund of New England an unprecedented low-cost loan of $1 million to re-lend to worker co-ops and producer co-ops out of its $30 billion Small Business Lending Fund (created by the Small Business Jobs Act of 2010). The U.S. Department of Agriculture, long a supporter of rural cooperatives, is working on a loan guarantee program for small business conversion into co-ops, reports staffer Bruce Reynolds.

Among worker co-ops, there is a movement to have the co-ops fund their own growth, and build economies of solidarity with food co-ops and credit unions. Common in Quebec, Italy, Spain, and Latin America, such mutual financial support among co-ops would create a new pool of capital, enriching what comes from loan funds, credit unions, banks, or the government. To promote this idea, the Eastern Conference on Workplace Democracy, in collaboration with the Grassroots Economic Organizing newsletter (geo.coop), held a one-day conference on co-op financing in July in Philadelphia. It was one big brainstorm. Worker cooperatives themselves “need to be the primary financers,” says Eric Tusz-King, vice president of the Canadian Worker Cooperative Federation, and a member of a cooperative that is building energy-efficient housing in New Brunswick. His federation launched the $20 million National Cooperative Investment Fund. Quebec’s Desjardins Solidarity Credit Union is an even stronger model. Created with the support of the CSN labor organization, it holds 40% of the provincial government’s deposits and has 2,940 cooperative enterprises among its clients. With $175 billion in assets, it is the sixth biggest financial institution in Canada.

Quebec law also requires worker cooperatives to commit their surpluses to the cooperative movement if they go out of business. The surplus is called “indivisible reserves,” and the Canadian Federation is in the midst of a two-year exploration of whether to pursue such laws in other provinces, or at least encourage its members to structure themselves in that way voluntarily. These reserves can be used by the co-op as a whole while it is in operation but not divided among the worker-owners. In the United States, during a recent discussion sponsored by the Canadian Federation, one cooperator suggested it might be possible to pursue tax credits at the state level to promote indivisible reserves; each individual member could get a tax credit if his or her cooperative adopted the policy.

Italy goes further and requires cooperatives by law to contribute 3% of their annual surpluses toward the loan fund of their choice to develop the cooperative sector. This depth of support helps explain one of the solidarity economy’s biggest success stories: Emilia Romagna, a region the size of New England, has 7,500 cooperatives accounting for one third of its GDP.

In Western Massachusetts, a regional ten-member network of worker co-ops was inspired by Italy’s co-op law and is contributing to co-op growth by contributing 5% of their enterprises’ surpluses to the Cooperative Fund of New England (CFNE). In December 2012, the partnership, called the Valley Alliance of Worker Co-operatives (VAWC), launched the VAWC Intersectoral Cooperative Development Fund to loan to their network and beyond. They join other co-ops, like Cabot Creamery and Equal Exchange, in investing in the CFNE. Founded in 1975, CFNE has $18 million to invest and is growing as much as 20% a year. It is a nonprofit but not a cooperative, which made it eligible for the low cost loan from the SBA while its sister lender in Minneapolis, North Country Cooperative Development Fund, was not.

Sometimes cooperatives have pulled out money when they felt they were not getting high enough returns. This was the case with the Minneapolis-based North Country, said its director, Christina Jennings. Indeed the economic downturn produced losses for the Fund. Founded in 1978 as a nonprofit, it became a cooperative in 1988 and now gets one-third of its capital from its 170 cooperative members from around the country. It remains small, with only $8 million to lend; $190,000 is dedicated to a Worker Ownership Fund launched with USFWC. The average loan is $100,000, a sum too small to be of interest to business lenders at big banks. With only ten to 15 new loans a year, the Fund is not at a scale where it can support itself on fees and interest without grants or low-cost loans.

The Working World, the nonprofit lender that came to the aid of Republic Windows workers who were struggling to convert their factory into a cooperative, itself struggles to raise financing. “Getting investors to give to our loan fund is really difficult,” said staffer Steve Wong. “We get a small, maybe 5% return, so the workers are the ones who reap the awards,” he continued. “We don’t get paid unless the cooperative is profitable. With Republic Windows, we’re not taking any payments for two years,” cutting into fees that help keep the fund going.

A key way CDFIs like community loan funds and low-income credit unions get capital is through low-interest loans or deposits from socially responsible investors for whom a 1-2% return is perfectly OK. Glance at a list of contributors to the Lakotas Fund, working on reservations in South Dakota, or the Cooperative Fund of New England, and you will see the Sisters of St. Francis of Philadelphia, the Christian Brothers, and others. These religious communities are pathbreakers who the CDFIs immediately praise when asked where they get their funds.

The Sisters of St. Francis of Philadelphia lends to both North Country and CFNE. Sister Nora Nash directs the social investment for the Sisters’ pension fund, which dedicates several million dollars to “alternative” investments of about $60,000 each. A committee of sisters makes the final decision on the loans, many of which roll over from year to year. “A major part of our investment policy is investing in CDFIs. We believe it is an important mission of the Sisters to invest in community development, sustainability and systemic change,” said Sister Nora.

The Future

Alliances throughout the cooperative sector are only growing, offering promise to New Economy advocates even during this New Gilded Age of disenfranchised workers and despoiled earth. “There’s so much momentum now, so much more going on than a year ago,” observed Christina Jennings of North Country.

In September, Laboral Kutxa, the Mondragín cooperative’s bank with $24 billion in deposits, and the National Cooperative Bank in Washington, D.C. announced they would support each other’s customers and exchange best practices in solidarity lending with the goal of revitalizing local economies and community prosperity.

“We can become a new power, creating the structures that allow us to do for ourselves,” said Ed Whitfield of the Southern Grassroots Economies Project, which supports the development of co-ops and a solidarity economy. “If the wealth we produce is systematically extracted from these communities, you have what we have today. These questions of ownership structures are key ... for the structural transformation that needs to take place to move from these extractive systems.” The goal: democratic ownership of productive spaces and productive opportunities such as that being nurtured in the soil of Cincinnati.

is a sociologist and journalist who was co-editor of Dollars & Sense in the 1990s. She is now a D&S Associate and an Associate Fellow of the Institute for Policy Studies.

Clifford Rosenthal, “Credit Unions, Community Development Finance, and the Great Recession,” Federal Reserve Bank of San Francisco, February 2012 (www.frbsf.org); Alan J. Robb, James H. Smith and J. Tom Webb, “Cooperative Capital: What it is and Why Our World Needs It,” Financial Cooperative Approaches to Local Development Through Sustainable Innovation, June 10-11, Trento, Italy (www.smu.ca); Johnston Birchall, Resilience in a Downturn: The Power of Financial Cooperatives, International Labour Organization, 2013; John Fullerton, et. al., Economics, Finance, Governance and Ethics for the Anthropocene, Capital Institute, June 2012; Special Issue on Financing Cooperatives, Grassroots Economic Organizing (www.geo.coop); National Credit Union Administration 2012 Annual Report, May 2013 (www.ncua.gov); Michael Hudson, “The Road to Debt Deflation, Debt Peonage, and Neofeudalism,” Levy Economics Institute, February 2012; Elissa Yancey, “Cincinnati union co-op Our Harvest grows a national profile from roots in College Hill,” WCPO Cincinnati, Aug. 11, 2013 (wcpo.com); “Cincinnati State and Our Harvest Cooperative: Partners in Local Food,” Cincinnati State, May 15, 2013 (cincinnatistate.edu); Brian Headd, “An Analysis of Small Business and Jobs: Research Study,” Small Business Administration, March 2010 (sba.gov); Rebel A. Cole, “How Did the Financial Crisis Affect Small Business Lending in the United States?” Small Business Administration, November 2012 (sba.govv); “Paying More for the American Dream III,” April 2009 (www.nedap.org).

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