Cross Sectoral Economic-Related Institutional Innovation

 by
 Gar Alperovitz

     Over the last three to four decades a wide range of particularly interesting locally based economic and other institutions, together with related policies, have evolved in diverse parts of the nation. Some are traditional non-profit efforts which use business activities both in support of their basic missions and to generate additional resources. Others involve specifically structured firms which help anchor jobs in localities and thus strengthen the local tax base in ways which permit greater local public resource allocations for service provision. Still others involve new public ownership and\or investment strategies which either help non-profit efforts (particularly in connection with housing) or contribute to local community finances and job and tax-base stabilizing efforts. All have implications, direct or indirect, for the provision of public service. Beyond this some have larger implications for democratic practice and accountability.
     Commonly–and importantly–such efforts in different ways also often:
     1: Change the nature of asset and wealth ownership;
     2: Offer new ways to finance services–directly or indirectly through tax base implications.
     In part the various developments have been driven by necessity: Traditional "tax-and-spend" policies are increasingly hampered by political constraints. Almost certainly this will remain the case and there is, accordingly, every reason to believe such institutional development will continue. Key issues involve how to build upon the foundations which have been established, how to refine what has been learned, and how to insure that public mission goals are not compromised.
     To date, what is sometimes called the "silo effect" of narrowly focused concerns has greatly limited cross-sectoral learning. However, it is clear that there is much to learn across and between sectors. What follows is a brief listing of specific areas of development, together with examples and some suggestions concerning emerging issues.

 *
     A well-documented area of increasingly important innovation involves non-profit service organizations which utilize business development, asset-building and wealth-holding approaches to support general service missions. A recent Chronicle of Philanthropy study of 14,000 non-profit organizations estimated that $61 billion was earned (in 1998) in support of service activities. Lester Salamon calculates that in general income from fees, charges, and related business activities grew from 13 percent in 1977 to 43 percent in 1996 of non-profit social service providers' revenues
     In the future, as Burton Weisbrod  predicts, all but certainly "increased fiscal pressure on non-profits will lead them to generate new, more creative forms of commercial activities, and that these new forms will further blur the distinctions between nonprofit organizations and private firms."
     Pioneer Human Services (PHS), in Seattle, Washington, is illustrative: Initially established with donations and grants, PHS is now largely self-supporting. PHS provides drug-and-alcohol-free housing, employment, job training, counseling, and education to recovering alcoholics and drug addicts. Its overall operating budget is over $50 million. Various businesses both generate revenues and offer jobs and job training to theoretically "unemployable" people: Pioneer Industries includes a light metal fabricator which has contracts from Boeing, Xantrex, Leviton, and others; a Food Buying Service which distributes over seven million pounds of food to nonprofit organizations in 20 states; the 132-room St. Regis Hotel which offers drug-and alcohol-free housing for low-income individuals and tourists; and a 150-seat Mezza Café, along with its satellite, Pronto, and two smaller Mezza Cafés.
     Several analysts who have studied the emerging trend have raised questions about whether important service mission goals of non-profits will be compromised by the new business and wealth-building strategies. Some efforts, like Pioneer, seem clearly to be maintaining mission clarity–indeed, its service mission has been enhanced by the strategy. Clearly, too, a number of non-profits have gained greater independence by virtue of their access to sources of revenue which are not dependent on foundations or government. In other cases–some universities which are doing research for corporations, or selling advertising space on athletic uniforms, for instance–this is far from clear, and the integrity of a number of other non-profits has already been called into question. Such questions are likely to take on increasing urgency as time goes on: For better or worse, given the underlying pressures driving change, it appears that the trend is unlikely to be reversed.
     Community development corporations (CDCs) utilize wealth-related strategies to serve "small publics" in geographically defined areas. The assets they commonly develop (housing, retail, and, in several leading cases, larger businesses) are lodged in a non-profit institution anchored in–and designed to benefit–citizens of specific low-income neighborhoods. CDCs are now found in virtually every significant size American community. They have grown from a few hundred in the 1960s to roughly 3500-4000 today.
      A 1998 survey found 40 percent of urban CDCs reported owning and/or operating a business (34 percent of rural CDCs did so). Over half also reported some form of business lending activity with a total of nearly $2 billion in outstanding loans. CDC production of housing was important in many ownership situations; roughly 73 percent of new or rehabbed units were owned directly by the CDC involved. In addition, CDCs had developed 71 million square feet of commercial and industrial space by 1998.
     A leading example, "New Communities Corporation" in Newark, New Jersey, estimates that it owns $500 million in real estate and other assets--including a shopping center, a Pathmark supermarket, and 3,000 units of housing. Its enterprises employ 2,300 neighborhood residents and create $200 million in economic activity each year. Profits help operate five day-care centers, a nursing home, job training programs, and a medical day-care center for seniors.
     Critics have charged that many CDCs have lost touch with their local communities and have become too narrowly focused on housing production. On the other hand, a 1997 assessment found a new and "widespread trend of CDCs hiring organizers or placing an emphasis on citizen participation when they moved to broaden their functions away from specialized service delivery."A recent survey found that 56 percent of CDCs were engaged in advocacy and community organizing in 1998.
     Key questions for the future involve accountability, advocacy, and whether greater social service funding might be supported directly or indirectly by CDC economic efforts.
     A Community Land Trust (CLT) is a non-profit corporation established to develop and own housing (or own land leased for housing) especially in neighborhoods undergoing development which drives the prices of existing property beyond the reach of low-income residents. CLTs are currently at roughly the stage of development CDCs were in the 1960s–with perhaps 120 significant efforts laying groundwork for subsequent expansion. A recent report by PolicyLink in Oakland, California, observes that they are also reaching out to other groups and constituencies:
the community land trust in Concord, New Hampshire, is working with the Neighborhood Reinvestment Corporation on an IDA program to help families save for home ownership. North Camden CLT in New Jersey has spear-headed a comprehensive community planning initiative. Durham Community Land Trust in North Carolina provides construction job training for community residents. The Burlington Community Land Trust has been a mainstay of the city's Enterprise Community, cleaning brown-field sites, developing community facilities for various social service organizations, and redeveloping abandoned commercial buildings.


     Various groups are also beginning to expand the CLT concept in new directions. In 2001 the Nehemiah Corporation, for instance, announced a new multi-million urban land trust to purchase land and provide below-market leases to community service organizations. (Nehemiah, based in Sacramento, California, is making its initial land purchases in Atlanta, Baltimore, Charlotte, N.C., and Indianapolis.) A similar approach has been adopted by the New Columbia CLT in Washington, D.C. New Columbia purchases land to help support low income residents who are developing co-operatives.
 It is rarely realized that asset-based strategies have also been developing rapidly at the level of the municipality in recent decades–under the leadership of both Republicans and Democrats in all parts of the country. Again, one of the main forces producing new forms of enterprise, asset development, and institutional wealth-holding is the need for additional resources to support public programs.
     A decade ago David Osborne and Ted Gaebler devoted a chapter of their classic book, Reinventing Government, to the emergence of new forms of municipal businesses: "Enterprising Government: Earning Rather Than Spending."As they observed: "Pressed hard by the tax revolts of the 1970s and 1980s and the fiscal crisis of the early 1990s, entrepreneurial governments are increasingly ... searching for non-tax revenues." Since that time numerous additional efforts have appeared. In addition to revenue-sharing agreements in real estate developments, municipalities are earning revenues from methane recapture programs, leasing public land and offices, selling data processing services, and running innovative self-sustaining health care programs and telecommunications enterprises.
     In Glasgow, Kentucky, the municipally owned utility offers residents electricity, cable, telephone services, and high speed Internet access at reduced costs compared to their private competitors. The city also has access to an ‘Intranet' which links local government, businesses, libraries, schools and neighbors. Residents can also choose their cable TV provider: the municipality offers a package of 53 cable channels for under $15.00 a month. Tacoma, Washington's broadband network "Click!" also offers individuals and private companies internet and cable service. Over one hundred and fifty communities had built or were actively planning networks like those operating in Glasgow and Tacoma, including 30 in Iowa alone, as of 2000.

 *
     Most of the above efforts also contribute to keeping jobs in local communities, thereby also helping support the local tax base, and thus the provision of public services. The impact of the following efforts is even greater in this respect–especially in comparison with outside-owned corporations which commonly are less "anchored" in local communities.
     Over the last three decades firms owned in significant part by their employees–often, especially local employees–have become widespread. Most involve ESOPs (Employee Stock Ownership Plans) which establish a "Trust" which receives and holds stock in a given corporation on behalf of its employees. ESOPs date from the 1950s, but the rapid development of modern ESOPs was greatly stimulated by legislative changes in 1974 (and thereafter) which provided tax benefits to corporations contributing stock to an employee trust–and, importantly, also to retiring owners of closely-held businesses who sell their corporation to their employees and reinvest the profits within a defined time frame.
     The number of ESOP-style worker-owned firms rose from 1,600 in 1975 to 4,000 in 1980, to 8,080 in 1990 and to roughly 11,000 according to the most recent estimates. The number of worker owners involved rose, correspondingly, from a mere 248,000 in 1975 to 8,800,000 in 2002. Asset holdings total more than $400 billion.  The National Center for Employee Ownership (NCEO) estimates that total worker holdings (of all forms of stock ownership or stock options) reached approximately $800 billion in 2001–i.e. roughly 8 percent of all U.S. corporate stock.
     ESOPs benefit workers and employees in a number of ways. A recent survey of Washington state firms, for instance, found that median hourly pay in ESOP firms was 12 percent higher than pay for comparable work in non-ESOP firms. Worker-owners of ESOPs ended their careers on average with almost three times the retirement benefits of others with similar jobs.*
     Critics of ESOPs commonly decry the lack of democratic control offered to workers in most trust arrangements. They point out that many–indeed, most–ESOPs currently do not involve any real participation. Several considerations suggest that greater democratic control of ESOPs is likely to develop as time goes on: First, a significant share of ESOP companies (some 3,000 or roughly 30% of ESOPs in privately held companies) are already majority owned by workers. Of these, some 40 percent to 50 percent already have voting rights. Second, as workers within specific firms steadily accumulate stock they become majority owners as time goes by. NCEO surveys suggest an increase of approximately 50% in the number of privately held ESOPs which are majority owned in the past decade. The third–and perhaps most important--reason to expect change is that several studies demonstrate that greater participation leads to greater productivity, hence greater competitiveness in the marketplace.
     Critically, ESOPs and other employee-owned firms are inherently powerfully anchored in local economies--and the local tax base needed to support public services.
     Traditional co-operatives, of course, have for many decades mixed public-serving principles with economic activity. More than 100 million Americans are members of some 48,000 co-ops in the United States. Each year these generate $120 billion in economic activity: Roughly 10,000 credit unions (total assets over $500 billion) supply financial services to 82 million members; approximately 30 percent of farm products are marketed through cooperatives; 26 million Americans purchase their electricity from rural electric cooperatives; and cooperatively-owned (or affiliated) insurance companies serve 50 million policy holders. At least twenty cooperatives have annual sales of more than $1 billion.
     Particularly interesting are new directions in state public policy using pension funds and other investment strategies to help achieve broader public goals. Briefly: There are currently more than 2200 public employee retirement systems boards operating at the municipal, state and federal level in the United States. Taken together, they manage roughly $3 trillion in assets. Some of the newer possibilities are suggested by California, Alaska and Alabama:
     The California Public Employees' Retirement System (CalPERS), now in operation for more than 65 years, currently oversees more than $156 billion in pension funds for 1.2 million state employees. CalPERS has targeted investment to low income housing and other projects and has become an increasingly powerful force for improved corporate governance: Its "focus list" singles out poor performing companies and those with poor governance practices. Companies which have been singled out in one year on average outperform the S&P 500 by some 14% in the years after CalPERS draws attention to their poor practices. CalPERS also places a great deal of emphasis on information disclosure and the independence of boards of directors.
     Retirement Systems of Alabama (RSA), which manages the pension investments of state employees and teachers in the state, has also been in operation for more than sixty years. Under the direction of CEO David Bronner it has aggressively invested in a wide range of local Alabama industries, and has even used its assets to help create worker-owned firms. Investments range from aerospace to tourism development and, among others, include: $100 million in the Alabama Pine Pulp Company, $60 million in a statewide golf course network, the Robert Trent Jones Golf Trail (maintaining a 33 percent ownership stake), and $250 million in Alabama-backed Ginnie Mae mortgages. RSA also has invested in major office buildings in cities like Montgomery, and has helped form two media conglomerates involving over 350 local newspapers and more than thirty-six television and radio stations. Stock in these is jointly owned by RSA and the employees of the companies. It also recently purchased at controlling interest in USAirways. RSA has a total of $25 billion under management.
     A somewhat different but related effort is that of the Alaska Permanent Fund which invests directly on behalf of all citizens of the state. In 1977 the state began to develop a long range strategy to capture and invest proceeds from oil and other mineral exploration and development. One major outcome is recorded in the Alaska state Constitution, which now directs that a significant portion of revenues derived from oil development be allocated to the Alaska Permanent Fund for further investment. Earnings are used to increase the size of the principal, offset the possible impact of inflation on long run returns–and, most important, provide annual dividends to residents of the state. Over the last decade, as a matter of right, every individual state resident received dividends from publically-owned and managed investments. In 2000 these averaged just under $2,000 a year ($10,000 for a couple with three children).
 *
     In most of the above areas a boundary is crossed between one sector (usually service related) and another (economic). In some, local job stability as a necessary condition of service provision is an important goal. In most cases the governmental sector is also directly involved in a variety of ways.
     Traditionally such cross-sectoral efforts have raised concerns among critics worried about whether service, economic, or public policy goals might be compromised in one way or another. Since powerful forces appear to be at work generating the trends, a more relevant question in each area almost certainly is: How can we best draw upon the experience of the last several decades to develop effective policies and strategies to build upon the trends in future?
     Among the important issues:
     * Are non-profits which establish businesses likely to be forced to commercialize their education or other activities in ways which undermine the integrity of their social service contribution?
     * Do business activities require different strategies–hence, personnel–which inevitably change the internal culture of non-profit organizations?
     * Can non-profit efforts stay within I.R.S. guidelines which require non-taxed business activities to be "substantially related" to their tax-exempt purposes?
     Although some political scientists have studied the cross-sectoral implications of job creation strategies for local service provision, other disciplines have not focused much attention on such issues. Additional questions here include:
     * In connection with ESOPs and related firms, how can we measure and assess the total "public balance sheet" costs of job targeting strategies on the local tax base–and, in turn, on larger public service and other outcome measures?
     * How can efficiency and accountability be achieved when complex goals–including service provision, job retention or creation, local tax-base integrity, and local democratic accountability are all involved in policy choices (particularly, for instance, in connection with large order public investment strategies)?
     * Is the new exploration of public municipal enterprise likely to be lasting and significant? Over time can such efforts add significant resources to local service provision–directly through profit flows or indirectly via job creation, tax-base implications?
     A general but increasingly important issue emerging in democratic theory studies is also involved. Simply put, the question may be stated: Can there be Democracy with a big ‘D' in the political system as a whole if there is little democracy with a small ‘d' in citizen experience–i.e., in their own community? If the answer–as Toqueville and Mill held–is No, then it follows (as many now argue) that the conditions which nurture democracy, locally, must be specified and ultimately met.
     This emerging large order framing of democratic theory problems has moved well beyond questions of civil society and associational activity urged by Robert Putnam and other scholars. A particular concern involves the constraints which local economic conditions have increasingly put on all forms of public decision-making at the local level. The question posed in such studies is whether some of the new strategies can help rebuild the economic and social basis of public decision-making, hence ultimately of local and national democratic experience.
 #
------
Gar Alperovitz is Lionel R.Bauman Professor of Political-Economy and a Principal of the Democracy Collaborative at the University of Maryland. His most recent book (with Thad Williamson and David Imbroscio) is Making a Place for Community, Routledge 2002, explores many of these themes in connection especially with community economic stability issues.
 
 
 

* The recent bankruptcy of United Airlines is sometimes wrongly attributed to the fact that it is significantly owned by employees. Aside from the fact that most airlines are now experiencing difficulties--and that most ESOPs have been organized in (and work best in) small and medium-sized non-publically traded firms--a number of experts judge that United's failure to deal with participation issues (not its structure) was a limiting factor. One of the few successful airlines, Southwest, is significantly employee-owned.