On an average day at Self-Help Federal Credit Union’s branch in Fresno, Calif., ten or so people come in to sign up as new members, and around 20 people submit applications for home mortgages, car loans, small business loans or personal emergency loans (for as little as $500). Since opening in August 2015, this one branch has made more than 1,000 loans and counting. But these aren’t just any borrowers. At this branch, 70 percent of borrowers come from low-income households, and 91 percent are people of color.

Branch Manager Rosa Pereirra has witnessed those borrowers reclaim power over their financial lives in ways that still surprise her, even after 28 years in banking.

“Some of the folks coming in making $12.50 an hour, they’ve got $15,000 in their savings account,” says Pereirra. “I make a good living, but I don’t have $15,000 in my savings account.”

These borrowers and this branch are the exceptions and not, unfortunately, the rule. In the state of California alone, payday lenders make billions of dollars in payday loans per year, earning hundreds of millions in interest and fees — all largely targeted at low-income households and communities of color.

California-licensed payday lenders earned $458.5 million in fees on payday loans in 2016, according to the latest annual report from the state’s Department of Business Oversight. Nearly 75 percent of those earnings, $343 million, came from customers who took out seven or more payday loans. Some 77 percent of payday loan borrowers in California earn less than $40,000 a year — and payday lenders are more likely to set up shop in predominantly black or Latino neighborhoods, according to a separate study from the same department.

Self-Help’s Fresno branch, in the overwhelmingly Latino southeast part of the city, was the Federal Credit Union’s first “de novo” (the banking term for new) branch in the state. (Self-Help, based in North Carolina, had earlier merged with several other struggling credit unions in California.) Pereirra leaped at the chance to take on a leadership role at Self-Help, a financial institution created in 1980 to serve the underserved. She had 28 years of experience in community banking and credit unions in Fresno, as well as ten years of experience serving on the board of directors of a local food bank.

“Not to put other banks down,” she says, “But for the first time in my career, I really feel like I’m helping people.”

Pereirra realizes that other banks are still an important part of her work today, at a credit union branch that’s not yet three years old. As nonprofit organizations, credit unions can’t raise capital from traditional investors, so one of the biggest early sources of cash for a new credit union branch are other, larger banks and credit unions. Central Valley Community Bank, Fresno First Bank, and Educational Employees Credit Union (where Pereirra used to work) all have deposits at Pereirra’s branch. “They understand we’re not in competition for the same people,” says Pereirra.

Those big early deposits provide a source of cash to begin making loans, a necessary step for the branch to generate income. It’s especially important to get deposits from outside of your core market when your core market consists of underserved, low-income households and entrepreneurs who don’t have large deposits to start with.

Self-Help Federal Credit Union Branch Manager Rosa Pereirra. (Credit: Self-Help Federal Credit Union)

So imagine Pereirra’s excitement last October, when, after a few months of conversations and standard financial due diligence, the Fresno-based Central Valley Community Foundation announced it was depositing $2.6 million into Self-Help Federal Credit Union’s Fresno branch, instantly making the community foundation the branch’s largest single depositor and growing the branch’s deposit base from $9.7 million to $12.3 million. Pereirra describes the $2.6 million as the equivalent to 20 home mortgages or 175 car loans. Since October, her branch has already made another $2.6 million in loans across its portfolio, she says.

Central Valley Community Foundation’s deposit is just one example of a growing trend, where community foundations venture beyond grantmaking to realize the difference they can make by moving the cash in their coffers out of Wall Street and into investments that support the same communities that give these foundations their names — and their dollars.

“This deposit, it’s not just going to help people now, it’s going to help people for years to come,” says Pereirra. “In families that I’ve touched, you have generations of non-homeownership, then all of a sudden you have one person buy a house, and it seems that the rest of the family starts to buy a home. It happens a lot in our low-income families. Once they buy a house, it makes a ripple effect with the rest of the family members.”

Keep Investment Dollars Close to Home

As of 2017, community foundations across the United States held more than $91 billion in assets, according to the latest available data from the Foundation Center, which surveys and monitors public, private and community foundations. That same year, community foundations took in another $9.7 billion, and gave out $8.3 billion in grants. It’s not uncommon for community foundation assets to grow every year.

Community foundations bring in money from a variety of different sources. Some of it comes from galas, celebrity golf outings or other fundraising events. Some comes from corporate giving programs, when companies match employee donations. Some gets bequeathed in a person’s last will and testament. And about a quarter of community foundation assets comes in the form of donor-advised funds.

Donor-advised funds are a financial instrument for people who want to take advantage of the charitable deduction on their federal income taxes, but don’t necessarily have the time to pick a specific charity to receive those funds. If you put the money you earmarked for donation in a DAF, you can take the charitable deduction on your federal income taxes for that year. Then at a later date, you can direct that donation to the charity or charities of your choice. Some people just give instructions to their donor-advised fund manager, such as “give my money away to arts and music education” or “give out grants to help beautify parks.” Some just let the fund manager decide what to do with it.

Donor-advised funds have become increasingly popular by themselves, and community foundations aren’t the only ones offering donor-advised funds as a service to those who can afford them. In 2016, the Chronicle of Philanthropy reported that Fidelity Charitable Gift Fund, a donor-advised fund managed by Fidelity Investments, knocked off United Way as the largest annual recipient of philanthropic donations.

As of 2016, donor-advised funds held $85.15 billion in assets, growing ten percent from the year before, according to the National Philanthropic Trust’s annual donor-advised fund market report. There were 284,965 donor-advised funds as of that year, up 6.9 percent from the year before. Also in 2016, $23.27 billion went into donor-advised funds, and $15.75 billion was granted out from donor-advised funds.

But where do the dollars go in between being gifted to a community foundation and being granted out later? The short answer is Wall Street, to big investment houses whose responsibility is to maximize the financial return on those assets, even though the owners of those assets can’t take them back without paying a penalty and taxes on those funds. In maximizing the financial return, donor-advised fund clients should later have more funds to give away. As Fidelity Charitable’s website reads: “Your donation is also invested based on your preferences, so it has the potential to grow, tax-free, while you’re deciding which charities to support.”

Some community foundation money does end up in community banks — in addition to the deposit it made into Self-Help Federal Credit Union, Central Valley Community Foundation also maintains its operating account at Central Valley Community Bank. But as with other community foundations, the bulk of Central Valley Community Foundation’s assets are managed by more traditional investment houses that invest those funds in stocks, bonds and other assets around the world.

All across the country, however, there’s been an uptick in the number of community foundations that are moving money out of big investment houses and into more local investment options.

As Next City reported previously, the Chicago Community Trust created the “Benefit Chicago” fund to pool its assets (including those from donor-advised funds) with assets from the MacArthur Foundation and invest that pool, totaling $100 million, into projects that benefit low- and moderate-income communities in and around Chicago.

In Grand Rapids, the city with the largest wealth inequality in Michigan, the Grand Rapids Community Foundation provided a $200,000 loan to a new loan fund that focuses on entrepreneurs who have been excluded from small business lending because of their income, net worth and other factors that often align with racial disparities.

In the Washington, D.C. metropolitan area, the Washington Regional Association of Grantmakers partnered with Enterprise Community Loan Fund to create the “Our Region, Your Investment” initiative, which provides loans to support tenants in purchasing their own affordable buildings in D.C., preventing those buildings from being sold to market-rate developers, most likely leading to displacement.

Credit: National Philanthropic Trust 2017 Donor-Advised Fund Report

In Philadelphia, earlier this year, The Philadelphia Foundation partnered with Reinvestment Fund to create the PhilaImpact Fund, a commitment to invest $30 million in community foundation assets into neighborhood development projects that support regional growth and local initiatives benefiting low- and moderate-income households throughout Greater Philadelphia.

“We have had donors come to us saying they wished there were more opportunities for this,” says Mark Froehlich, chief financial officer at The Philadelphia Foundation. “Foundations hold so many assets that have yet to be tapped for this type of work.”

Make the Laws Work for You, over Time

People often give money to and through community foundations because they love the places they call home, and community foundations have oriented their entire operations around that premise.

“As a community foundation, we’re inherently place-based in our mission,” says Froehlich. “We put so much effort into making sure we’re spending those grant dollars well, that we’re supporting the region, making strategic decisions, but we understand there is so much more we can do with [the rest] that’s invested.”

But as much sense as it makes for community foundations to invest more of their assets into the communities after which they’re named, it’s not so simple in practice. The laws, regulations and informal customs governing community foundations are similar to those found in private foundations established by wealthy families or university endowments. Those laws, regulations and customs all typically require that the entity managing the philanthropic assets invest those assets responsibly, with a focus on optimizing financial return. It’s a concept known in shorthand as “fiduciary responsibility;” the idea is that following these protocols maximizes the amount that can be disbursed in grants every year.

The board of directors at each foundation has the final say when it comes to fiduciary responsibility. “We still have a fiduciary responsibility, so it was a board conversation and a board decision to open the account [at Self-Help Federal Credit Union] and make it available for the purposes that it’s available for,” says Elliott Balch, chief operating officer at Central Valley Community Foundation.