Full text of Bridges (Federal Reserve Bank of St. Louis) : Bridges, Winter 2008-2009

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Linking

Lenders

And

Communities

Winter 2008-2009

P U B L I S H E D Q UA RT E R LY
BY T H E C O M MU N I T Y
de v e l o p m e n t
DE PA RTM E N T OF
T H E F E D E R A L R E S E RV E
B A N K O F S T. L O U I S

I N DE X

4

The “Seven Deadly
Sins of Nonprofits”

Bridges
6

Calendar

Business Cycles and Crime Rates

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Spanning
the Region

The Ripple Effect

As Economic Crisis Expands, Community Development Feels the Pinch
By Amy Simpkins and
Roby Brock

T

he economic situation
over the last few months
has been tumultuous.
Fannie Mae and Freddie Mac
entered government conservatorship. The potential failures
of Bear Stearns and insurance
giant AIG required large-scale
intervention to minimize
market disruption. And the
Fed introduced aggressive new
liquidity measures to address
the seemingly daily changes in
economic markets.
This national and global economic crisis hit close to home
for professionals working in
community economic development. The entire field has been
affected by tightening credit
and capital markets. Individuals, neighborhoods and cities

alike continue to face difficult
challenges to finding financing
for community economic development initiatives.
In September, community
development organizations,
financial institutions, private
developers and representatives
from state and local governments gathered in Conway, Ark.,
to discuss the implications.
National Impact
The meeting, co-sponsored
by the Federal Reserve Bank
of St. Louis and the University
of Central Arkansas Community Development Institute,
assessed the rapidly developing
situation by focusing on the
direct impact such changes
were having on community
economic development.
continued on Page 2

William Emmons gives an overview of the credit crisis during a meeting in Conway, Ark.
Emmons is an economist at the Federal Reserve Bank of St. Louis.

Ripple Effect
continued from Page 1

Federal Reserve Bank economist William Emmons kicked
off the event with an overview
of the credit crisis, its origins
and implications for the future.
Emmons said the crisis stems
from over-leveraging, resulting
in increased risk. As he sees
it, the challenge facing the Fed
and other decision-makers is to
not only ensure that the banking system remains viable, but
to recognize that every institution may not survive.
Though realistic about the
widespread repercussions of the
crisis, Emmons was nonetheless
optimistic that a rebound could
be realized more quickly, given
the level of attention from both
policymakers and the public.
“By bringing this situation to
the forefront of the dialogue, we
can hopefully come to a quicker
solution or stability,” he said.
Ultimately, confidence in the system and trust in banks is needed
to resolve the crisis, he said.
Conversations throughout
the day looked at the breadth
of implications that the crisis
has for individual homeowners,
community development organizations, municipal and state
finances, and private developers.
Community development
organizations are fighting to
make sure the progress made
in neighborhood revitalization and homeownership is
not lost as a result of dramatic
increases in foreclosures.
Don Phoenix of NeighborWorks America said nonprofit

organizations that are key to
neighborhood stabilization are
being forced to look at alternative business models, such as
fee-based systems and leasepurchase products, to survive
in an era of declining subsidies
and deal volume. Nonprofits
can be an integral part of the
solution, Phoenix said, but they
must be responsive to the realities of the changing market.
Cities and counties face challenges in both the short and
long term. The most immediate implication is in the bond
and tax credit markets where
there are few buyers, resulting
in a pent-up supply with very
little demand. In the long run,
municipalities and states both
expect revenue and tax receipts
to drop. In addition, help from
the federal government likely
will decrease.
The Response
In the midst of these challenges to traditional development financing mechanisms,
states have been responding
to the crisis through efforts to
combat foreclosures.
Across the country, states are
helping consumers avoid foreclosure and stay in their homes by
passing foreclosure intervention
regulations or laws, preventing
rescue scams, funding refinance
programs, creating loan-modification programs, initiating statewide counseling campaigns, and
supporting foreclosure hotlines.
(To read more about state
responses to foreclosure, visit
the Pew Center on the States at
www.pewcenteronthestates.org.)

LINKING

LENDERS

What’s Happening in Arkansas
Local Arkansans working in
the field added a note of optimism to the meeting, saying
that, while economic times are
challenging, there are bright
spots of opportunity.
Scott Beardsley of First Security Bank/Crews & Associates,
a national lease corporation
with broker-dealer operations,
works with municipalities and
school districts nationwide.
Beardsley’s firm does “plain
vanilla” public finance for projects like school buildings and
water system bonds, as well as
lease-purchase agreements for
government entities.
“We’ve seen a dramatic impact
on the national leasing stage,”
said Beardsley, who suggested
that rising interest rates based
on fear of the unknown are
complicating deals. “But in our
broker-dealer operations, ironically, we’ve seen no change.”
Beardsley noted that earlier
in September, 17 bond issues
were on the ballot in Arkansas.
Despite market turmoil, 13
measures passed. That 76percent passage rate was
slightly higher than the 70
percent traditional average.
With voter approval, the
bonds are ready for placement, but Beardsley warned
that those higher interest rates
would be a factor.
“Anytime there’s uncertainty,
people are unsure of what’s going
to happen, and so they will often
pad the interest rates,” he said.
“We’re still seeing projects go
forward. We do expect all of the
bonds that were approved this

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COMMUNITIES

week to be sold between now
and Dec. 1.”
Greg Nabholz is a commercial real estate developer whose
company is affiliated with a
national brokerage firm and
a family-owned construction
business. Nationwide, commercial property transactions
fell about 74 percent in the first
six months of 2008 compared
with the same period in 2007,
he said. In Arkansas, the yearover-year transaction decline
has topped 50 percent. “You’re
seeing the number of deals
shrinking and thus the commission revenue,” Nabholz said.
He also said three factors
have fundamentally altered his
business model.
First, lending standards have
tightened while greater investor
equity is required to jump-start
projects.
Second, appraisals are coming in lower because surveyors
are being more conservative as
they face unparalleled scrutiny.
Third, rising construction
costs, from raw materials to
labor, and flat leasing rates
have compounded the diminishing situation.
“We’ve had to be creative in
putting deals together,” Nabholz said.
Amidst the volatility, Gene
Eagle, vice president of the
Arkansas Development Finance
Authority (ADFA), said he sees a
window of opportunity for more
public-private partnerships.
“My concern is that we get
too conservative because of the
problems that the rest of the
country is experiencing,” Eagle

said. “I see it as an opportunity
for the state to make an investment in its people, in education
and economic development
opportunities.”
ADFA is an Arkansas state
agency that can issue bonds
and direct loans for public
housing and limited industrial
projects. In recent years, the
agency also has been a catalyst
for developing pools of risk
capital to develop and recruit
knowledge-based companies
in Arkansas. However, only
a narrow range of projects
qualify for this type of funding
due to state restrictions.
Eagle agreed that market
uncertainty was creating higher
interest rates for deals—to the
point that fewer deals might
make sense. He sees it as an
opportunity for the state to
leverage its low debt and solid
credit rating.
“I think we need to utilize
our own credit rating as a state,
and it’s time to take some risk
in order to try to build and
grow companies and grow our
tax base,” Eagle said. He supports more investment from the
state in private, seedling companies with growth potential.
Panelists agreed that Arkansas is not likely to see the dramatic economic downturn in
housing that states like Florida
or Nevada are experiencing, in
large part because Arkansas’
housing market didn’t accelerate as rapidly as housing
markets in those states.
Nor is Arkansas likely to
see a financial meltdown like
Wall Street did. By and large,

States Are Taking Action

States with high-cost lending regulations or laws
States pushing for regulations or laws to respond
directly to the subprime crisis
States that align brokers’ interest with borrowers
States with foreclosure task forces

Source: Pew Center on the States 2008, based on research by PolicyLab Consulting

community banks in the state
remained conservative in their
lending habits. There was,
however, an overextension of
housing credit in northwest
Arkansas that led to one bank’s
collapse and some stern warnings from federal regulators for
other banks.
Panelist Paul Young, finance
director for the Arkansas
Municipal League, a nonprofit
organization representing more
than 500 cities across the state,
said banks in Arkansas have
not only remained relatively
strong, but have supported
the credit underwriting that
finances infrastructure projects.
“Arkansas has always been
supported by a strong appetite
among banks in Arkansas for
Arkansas paper,” Young said.

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“While a lot of these transactions these days are done in
some sort of rated format, I see
a lot of bonds that are being
done on a nonrated basis, as
they always have been.” This is
because community banks are
comfortable with the credit worthiness of the issuers, he said.
Beardsley sees a bit of
vindication for firms like his.
“We’ve gone in and evaluated each deal based upon the
merits of whether or not they’re
going to pay. We haven’t used
a lot of synthetic derivatives
or investment swaps or other
items,” he said.
“I’ve had some frustration in
the past when clients have chosen to use a Wall Street firm to
do a transaction where they’ve
promised them a lot of bells

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and whistles, and now we’re
seeing some of that coming
back to bite them,” he added.
He concluded that there is
some uncertainty in the market,
“but we’re ready to take advantage of the core values that
we’ve always thrived on.”
Amy Simpkins is a community
development specialist at the
Little Rock Branch of the Federal
Reserve Bank of St. Louis.
Roby Brock is a freelance business
reporter based in Little Rock, Ark.
He is the host of a weekly statewide business news program,
Talk Business, and is editor of
www.talkbusiness.net.

Passion Blindness

The “Seven Deadly Sins” of Nonprofit Organizations
A commentary by Yvonne S. Sparks

decreased economic and community
development activity at a time when
demand for such services and activities
will no doubt be growing. Generally
speaking, making preparations to mitigate the impact of predicted financial
contraction is a function of leadership.
Organizations that have a chance to
survive will do so only if their board
and staff leadership have the courage
to face the current and worsening economic climate head-on and prepare.
Compounding the financial issues
is the unfortunate fact that many, if
not most, nonprofit organizations—
regardless of their constituency, size
or industry—are not prepared for hard
times. They are already struggling with
internal problems that make life difficult
during good times. Add those to a
crisis, and trouble is inevitable.

“But love is blind, and lovers
cannot see the pretty follies
that themselves commit…”
When William Shakespeare penned
these famous words, he clearly did not
have nonprofit organizations in mind—but
he could have. Most nonprofits are, after
all, started by passionate people with a
deep love for what they do. And, surprisingly, that love, that passion is often their
downfall. I call it “passion blindness.”
Creating a nonprofit organization
requires passion. Nonprofit organizations are by definition mission-driven.
Put another way, the reason that people
form nonprofit organizations, particularly those that serve people or places
in need, is that founders often believe it
is their calling to create an organization
that allows them to transform deeply
felt passion into action.
To bring an organization into being
is an act of great faith, sheer will and
tenacity. It is the intensity of this calling that may cause those in the field
to overlook opportunities and to fail to
respond soon enough when trouble is
on the horizon.

Surviving the Current Economy
We offer this call to action now during a time when the nonprofit sector is
at a crossroads—dependent for its very
life upon the generosity of others (i.e.,
individuals, foundations, members or
government programs). The sources of
funds that the sector is so dependent
on are themselves at stake in the current financial environment. Individuals and institutions, like foundations

and governments, are tightening their
belts as they watch assets shrink.
That means that most nonprofits must
tighten their belts as well.
Organization executives are often
so busy meeting current needs they
neglect to plan for an unforeseen
financial crisis. In addition, it is often
difficult to convince board members
and supporters to create and donate
to a “rainy day” fund, even though
for decades experts have advised
organizations to have six months of
operating expenses on hand. An even
more daunting challenge is creating a
worst-case operational plan. By developing various operating scenarios that
reflect fewer staff and less money, an
organization would know exactly what
services it could continue to provide
during a crisis.

LINKING

LENDERS

According to a 2007 report by the
Third Sector, a Boston-based think tank
devoted to research on the nonprofit
sector, there are more than 1.4 million
nonprofit organizations in the United
States. They account for 5.2 percent
of the gross domestic product and for
more than 8 percent of salaries and
wages paid in the nation. This does
not include the more than 350,000
churches that are also nonprofit organizations. Moreover, private sources
invested more than $250 billion in
nonprofits in 2006, individuals nearly
$200 billion and volunteers gave the
equivalent of more than $65 billion in
donated services.
There is no question that pressures
on the nonprofit sector will almost
certainly result in job losses, in fewer
services to those most in need and in

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The Seven Deadly Sins
The problems that often plague
nonprofits come down to seven things—
“Seven Deadly Sins,” if you will. Mind
you, these are known in theology as
“Cardinal or Capital Sins.” They are
mortal, and they particularly may affect
the mortality rate of the organizations
during economic downturns. They are
as follows:
Pride: Many of those who join boards
are doing it out of the desire to have
their name listed on the letterhead and
adding it to their resume to prove how
involved they are in the community.
They are not there to offer expertise or
raise funds or take on the challenges
of governance. They are, essentially,
nonessential to the organization. They
take up a seat that could be occupied
by someone who has something of value

to offer the organization. According to
theological sources, the opposite of
pride is humility. Service to the community, no matter what it is, should evoke
a sense of responsibility that is humble.
This is particularly so when the people
served by an organization are those
least able to help themselves. That is
why nonprofit organizations have an
obligation to be as efficient as possible.
Sloth: There is nothing worse for a
nonprofit executive than to have a lazy
board, lazy staff or to be lazy themselves. Executives who do not routinely
and vigilantly scan their environments
for potential threats and board members
who refuse committee service, do not
come to meetings, and, worse, don’t
contribute financially or raise money for
the organization fall into this category.
By definition, this is their duty. The corresponding virtue is diligence. Boards
must demand diligence from executives
and the executives from their boards.
Another expression of this virtue is zeal
or integrity. Staff members cannot be
left out, either. Some people want to
do as little as possible, but claim to be
passionate about the cause. Passion
is no substitute for integrity, and your
name on the letterhead and the payroll
puts your integrity on the line.
Lust: I know this must sound strange
in this context; however, the opposite
of lust is purity of soul and motive. If
the motive is the mission, then this sin
can easily be avoided. Suffice it to
say that if everyone is mission-focused
and mindful of the business of the
organization, lusting after something
other than carrying out the mission and
protecting the organization from harm
can be avoided or at least mitigated.
People may lust over positions, money
or recognition, but good leadership that
is pure in its motivation is the antidote.
Gluttony: Overindulgence in anything
usually leads to illness. Taking on
more clients than you can handle when

finances are tight and accepting donations with strings attached just to pump
up the budget can lead to no good end.
Gluttony is balanced by temperance or
self-restraint. Gains born of competition, hubris or avarice almost inevitably
lead to failure. Focus on mission is
essential, along with the honest assessment of organizational capacity which,
these days, may have to be scaled back
so that the organization might be saved.
Greed: Lusting for being bigger and
better than the other guy (i.e., gluttony
and lust combined) is probably one
of the worst and most common sins.
Nonprofits desperate for operating capital often make “deals with the devil”
to get a grant or to satisfy a donor who
wants them to veer away from their
core mission or take on something
totally beyond their actual capacity.
Obviously, this sin is closely related
to gluttony, but its opposing force is
different. It is charity. Remaining true
to the organization’s charitable purpose
with steadfast discipline will often
effectively steer an organization away
from the path of greed. Giving time,
energy, thought, hard work and treasure
(money) to the cause is charity of the
kind that can trump greed.
Wrath: Wrath or anger most often
occurs when personalities and egos
clash in the context of the organization.
Whether it is among board members, the
board and executive or among the staff,
anger eats away the energy that should
be focused on the work or repositioning
the organization to weather the storm in
hard times. Some of the most vitriolic
and vicious battles I have witnessed
have taken place in staff and board
meetings of nonprofit organizations when
the time comes to bite the proverbial
bullet and cut services or lay people off.
People seem to forget that there is
no ownership here. You may disagree,
but the collective responsibility is to get
the job done. It is here where board
leadership is most important. The chair

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of a board of directors has the responsibility to ensure that anger among board
members does not escalate to the point
of inaction, wrong action and damage
to the organization. The executive has
the same responsibility at the staff
level. The balancing characteristic is
composure. It is incumbent upon the
board and staff leadership to maintain
their own composure and that of the
staff so that they can carry out their
work and the organization may survive
to serve another day.
Envy: Last, but certainly not least, is
envy or jealousy. If you vote for someone to be chair of the board, then you
are accepting the role of follower. I have
often heard board members who, having
been given the opportunity to serve,
decline in favor of another, then talk
about how much better a job they could
have done. The same is true among
staff members. Another function of
leadership is to ensure that, when staff
members get reshuffled in reorganization efforts, they do not allow jealousy to
poison the organizational environment.
Jealousy in any context is destructive.
Its opposing force is kindness and/or
admiration. People who take on the
challenging work, who do the hard part
with integrity, commitment and results,
deserve both.
No amount of passion, compassion
or even need can substitute for clearheaded thinking, planning and preparation. In other words, board members
and executives cannot afford to be
blinded to the threats to their existence
by their passion for the work.
In today’s environment, it is crucial
that nonprofit organizations embrace
the fact that, just because you are
nonprofit, does not mean you are not in
business. It is a business. Successful
business people plan and make hard
decisions and the best ones execute
those plans and decisions to survive
hard times. So must nonprofits.

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Sparks Joins
St. Louis Fed
Yvonne S. Sparks recently joined the
Federal Reserve Bank of St. Louis as
senior manager in the Community
Development Office.
Sparks has more than 30 years
of experience as a nonprofit and
community development manager,
executive, trainer and consultant.
Her areas of expertise include nonprofit board and executive training,
community engagement process
design and management, strategic
planning, community building, and
neighborhood leadership training.
Her volunteer and civic involvement
includes a three-year term on and
serving as chair of the Consumer
Advisory Council of the Board of
Governors of the Federal Reserve
System and service on the boards
of directors of numerous nonprofits
and public organizations.
Sparks earned a master’s degree
in public administration from
St. Louis University and an undergraduate degree in administration
of justice from the University of
Missouri-St. Louis. She also earned
a certificate from the Kennedy
School of Government at Harvard
University’s Program for Senior
Executives in government and did
post-graduate work in public affairs
at the University of Texas, Dallas.

Sparks

Have you

Heard
Scam Offers Consumers
Loans from the Fed
Consumers need to be aware that
solicitations promising personal loans
through a Federal Reserve lending
program are a hoax.
Targeted consumers are told they
can work with a broker to receive a
sizable, secured loan from the Fed.
However, the consumer must first
deposit large sums of money in a
bank account as a security deposit.
The Federal Reserve has no involvement in these solicitations and does
not directly sponsor consumer lending
programs.
Consumers with questions about
solicitations they suspect may be
fraudulent should contact the Federal Reserve Board Consumer Help
Center at 1-888-851-1920 or at
www.federalreserveconsumerhelp.gov.

Fed Adjusts Dollar Amount
Of Fee-Based Trigger
Effective Jan. 1, 2009, home
mortgage loan fees of $583 or more
will trigger additional disclosure
requirements under the Truth in Lending Act. This adjustment in the dollar
amount of the fees is based on the
annual percentage change reflected
in the Consumer Price Index that was
in effect on June 1, 2008.
The adjustment does not affect
new rules adopted by the Federal
Reserve Board in July 2008 for
“higher-priced mortgage loans.” Coverage of mortgage loans under the
July 2008 rules is determined using a
different rate-based trigger.
The Home Ownership and Equity
Protection Act of 1994 restricts credit
terms, such as balloon payments,
and requires additional disclosures
when total points and fees exceed
the fee-based trigger or 8 percent of
the total loan, whichever is larger.

Homeowners, Low-Income Workers Eligible for Federal Tax Breaks
In light of the economic crisis, and with tax season
right around the corner, the Federal Reserve Bank of
St. Louis wants to make sure taxpayers know about
two new tax breaks and one that has been around
for awhile.
The two new provisions include a tax credit for
first-time homebuyers and an additional tax deduction for property owners. These are temporary
tax breaks that were included in the Housing and
Economic Recovery Act of 2008. The act, signed
into law in July, is meant to help homeowners and to
boost the housing industry.
The new tax credit is a loan for first-time homebuyers
who have purchased a house between April 9, 2008
and July 1, 2009. The loan must be repaid over the
course of 15 years. However, it is interest-free and provides the homeowner with immediate access to capital.
The temporary tax deduction is for homeowners
who do not itemize deductions on their tax returns.
The deduction will benefit low-income taxpayers,
young families and those who are close to paying
off their mortgages and who do not have significant
reason to itemize their tax returns. The deduction will
be in addition to the standard deduction claimed by
those who do not itemize their federal tax returns.

Calendar
JANUARY

For details on either of these tax credits, go to
www.irs.gov.
A third tax break that regularly goes unclaimed
by many taxpayers is the Earned Income Tax Credit
(EITC). Millions of low-income, working-class Americans are unaware that they are eligible to receive
thousands of dollars through the federal EITC.
A booklet from the St. Louis
Fed—You’ve Earned It! What the
Earned Income Tax Credit Can
Do for You—explains how the tax
G]c¸dS
credit works and who qualifies.
3O`\S
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Eligible taxpayers can receive up
to $4,500 with their income tax
refund. The typical refund in the
Bank’s Eighth District has been
about $2,000.
Copies of the booklet are
free and may be ordered by calling
314-444-8761 in St. Louis; 501-324-8296 in Little
Rock, Ark.; 502-568-9202 in Louisville, Ky.; and
901-579-4101 in Memphis, Tenn.
The booklet also is available online at
www.stlouisfed.org/community/other_pubs.html.

MARCH

12-16

1-3

Indiana Economic Development Course—
Muncie, Ind.
Sponsor: Center for Economic and
Community Development, Ball State
University
765-285-1628
www.bsu.edu/cecd/edc

CDFI Institute—Washington, D.C.
Sponsor: Coalition of Community
Development Finance Institutions
703-294-6970
http://cdfi.org

1-4
The National Main Streets Conference—
Chicago
Sponsor: National Trust for Historic
Preservation
202-588-6219
http://mainstreet.org

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LENDERS

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The Tax Credit Finance Course—
Washington, D.C.
Sponsor: Council of Development Finance
Agencies
216-920-3073
www.cdfa.net

APRIL
15-17
Social Enterprise 2.0: Dare to Dream,
Dare to Do—New Orleans
Sponsor: Social Enterprise Alliance
202-375-7774
www.se-alliance.org

Monthly Business Cycles, Arrest Rates
Show Little Effect on Criminal Activity
By Thomas A. Garrett and
Lesli S. Ott

L

ocal governments and
economic development
officials, especially those
in urban areas, know that high
crime rates adversely affect
residential and business immigration to their communities.
They know that crime rates—
along with educational quality,
infrastructure and employment opportunity—are part
of what determines whether a
city or region is attractive and
whether it is an economic success. Research on the effects of
crime on the general economic
growth of local areas generally
finds that areas with higher
crime rates experience lower
rates of economic growth and
development.1
Economists explain an indi­
vidual’s propensity to commit a crime by examining the
expected costs and benefits of
criminal activity. Empirical
research on crime has modeled
the direct cost to an individual
as the probability of arrest
and incarceration (i.e., deterrence) and the direct benefit
as the value of the illegally
acquired goods.2
Criminal behavior also
depends upon other cost comparisons, such as forgone wages
and employment opportunities.

The reasoning is that higher
wages and employment opportunities decrease the attractiveness of acquiring assets through
criminal activity. Much work
has been done to estimate the
effect of deterrence and economic conditions on crime, but
the mixed results from these
studies do not allow a definitive
conclusion.3
Crime in the Eighth District
We recently completed a
report that explores the effects
of deterrence and economic
conditions on crime in U.S. cities. Part of the report presents
descriptive statistics on crimes
and arrests for seven major
crimes (murder, rape, rob­bery, assault, burglary, larceny
and motor vehicle theft) in
the Eighth District cities of
St. Louis, Little Rock, Memphis,
and Louisville. These data are
shown in the Table. Crime
rates and arrest rates are per
100,000 in population and have
been normalized by each city’s
1990 population, thus providing average crime and average
arrest rates for each city over
the respective sample period.
(See notes to Table for the
sample periods for each city.)
Some differences across the
cities are worth noting. Of the
four cities, St. Louis has the
highest average murder rate

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(3.5 per 100,000), robbery rate
(81.2 per 100,000), assault rate
(312.1 per 100,000), burglary
rate (224.1 per 100,000) and
motor vehicle theft rate (170.9
per 100,000). The rate of rapes
in Memphis (9.7 per 100,000)
is higher than the rate of the
other three cities. Little Rock

has the highest rate of larceny
at 582.8 per 100,000.
Deterrence and Business Cycles
It appears that, at least when
comparing averages across cities,
there is a positive relationship
continued on Page 8

Average Crime and Arrest Rates for Eighth District Cities
Rate per 100,000 Population (1990)
St. Louis

Louisville

Little Rock

Memphis

Murder

3.53

1.48

1.69

2.10

Rape

5.55

3.34

8.47

9.69

Robbery

81.17

40.77

42.92

63.18

Assault

312.09

101.91

285.17

166.75

Burglary

224.11

125.26

220.80

214.25

Larceny

538.97

254.60

582.77

335.11

Vehicle Theft

170.92

77.82

69.46

153.34

Murder Arrests

2.77

0.74

1.69

1.62

Rape Arrests

3.78

1.11

5.08

5.17

Robbery Arrests

20.42

11.49

14.12

13.73

Assault Arrests

209.49

58.55

198.77

76.59

Burglary Arrests

28.23

24.46

32.75

26.18

Larceny Arrests

79.91

46.69

85.83

70.13

Vehicle Theft Arrests

20.67

14.45

9.6

14.38

Note: The rates shown above were found by normalizing the mean values from the sample of each city by the 1990 population (per 100,000) for each city. The sample period
for each city is: St. Louis—December 1983 to December 2004; Louisville—January 1993
to December 2002; Little Rock—December 1983 to December 2004; Memphis—January
1985 to December 2004. The 1990 population for each city was: St. Louis—396,685;
Louisville—269,838; Little Rock—177,086; Memphis—618,894.

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Endnotes

Crime

1 Greenbaum, Robert T. and Tita,
George E. “The Impact of Violence
Surges on Neighborhood Business
Activity.” Urban Studies, December
2004, 41(13), pp. 2495-514; Mauro,
Luciano and Carmeci, Gaetano.
“A Poverty Trap of Crime and
Unemployment.” Review of Development Economics, August 2007,
11(3), pp. 450-62.

continued from Page 7

2 Ehrlich, Isaac. “Crime, Punishment, and the Market for Offenses.”
Journal of Economic Perspectives,
Winter 1996, 10(1), pp. 43-67;
Levitt, Steven. “Using Electoral
Cycles in Police Hiring to Estimate
the Effect of Police on Crime.”
American Economic Review, June
1997, 87(3), pp. 270-90.
3 Cornwall, Christopher and Trumbull, William N. “Estimating the
Economic Model of Crime with
Panel Data.” Review of Economics
and Statistics, May 1994, 76(2),
pp. 360-6; Lee, David S. and
McCrary, Justin. “Crime, Punishment, and Myopia.” NBER Working Paper 11491, National Bureau
of Economic Research, 2005.
4 Wilson, James Q. and Herrnstein,
Richard. Crime and Human
Nature, 1985. New York: Simon
and Schuster.
5 The “broken windows” hypothesis suggests that preventing
more minor crimes can lead to a
reduction in more serious criminal
offenses. See Wilson, James Q.
and Keeling, George. “Broken
Windows.” Atlantic Monthly, March
1982, pp. 29-38; Corman, Hope
and Mocan, H. Naci. “Carrots,
Sticks, and Broken Windows.”
Journal of Law and Economics, April
2005, 48(1), pp. 235-66.
6 Benson, Bruce; Iljoong, Kim; and
Rasmussen, David W. “Estimating
Deterrence Effects: A Public Choice
Perspective on the Economics of
Crime Literature.” Public Choice,
July 1994, 61(1), pp. 161-8.
7 Garoupa, Nuno. “The Theory of
Optimal Law Enforcement.” Journal of Economic Surveys, September
1997, 11(3), pp. 267-95.
8 Miceli, Thomas J. “Criminal
Solicitation, Entrapment, and the
Enforcement of Law.” International
Review of Law and Economics, June
2007, 27(2), pp. 258-68.

between arrest rates and crime
rates. Of course, this positive
relationship does not reveal
any causal relationship. It may
certainly be the case that a
long-run negative relationship
between arrests and crime exists
and that the direction of causality is not from arrests to crime,
but rather from crime to arrests
as police allocate more resources
to combat an increase in crime.
We also conducted statistical analyses to explore whether
changes in each of the seven
criminal offenses can be
explained by changes in the
city’s business cycle (as measured by changes in unemployment and real wages), as well
as changes in deterrence (as
measured by arrests).
Unlike previous time series
studies that looked at longrun relationships (i.e., 20-year
trends) between economic conditions and crime, the current
study explores whether shortrun (i.e., month-to-month)
changes in city economic
conditions and deterrence
influence changes in city
crime growth rates. We used
monthly data for 23 large cities
in the United States, as well as
the Eighth Federal Reserve District cities of St. Louis, Louisville and Little Rock (Memphis
is included in the top 23). In
addition, we empirically tested
the hypothesis that arrests follow an increase in crime.
Our study found weak
evidence across U.S. cities that

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LENDERS

changes in economic conditions
significantly influence shortrun changes in crime. However, we did find that short-run
changes in economic conditions
influence property crimes in a
greater number of cities. This
likely reflects the fact that
nonviolent property crimes are
more likely to result in financial
gain than more violent crimes.
In addition, we found little
evidence to support the deterrence hypothesis in the short
run, as changes in arrests had
no influence on crime in many
U.S. cities. It may be that
arrests are not the best measure
of deterrence, and thus the lack
of a large number of statistically significant relationships
between arrests and criminal
activity reflects this fact. This
supports the suggestion by previous authors that criminals are
myopic with regard to changing
probabilities of arrest and do
not consider the likelihood of
the negative consequences of
committing a crime.4 Similarly, the results may reflect
the reasonable possibility that
criminals do not have perfect
information regarding changes
in deterrence and thus are not
able to adjust their criminal
activity accordingly.
The hypothesis that arrests
respond to increases in crime
was also empirically tested.
We found much stronger evidence that, in many U.S. cities,
an increase in the growth rate
of crime results in an increase
in the growth of arrests for that
crime. In other words, arrests
follow crimes. This supports

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the notion that law enforcement reallocates its resources
in response to increases in
crime. One interesting finding
was that the causal relationship
from robbery to robbery arrests
was statistically significant
for 17 of the 23 cities, and the
relationship from vehicle thefts
to vehicle theft arrests was
statistically significant for 12 of
the 23 cities in the sample.
It is reasonable to expect
that, over time, an increase
in all types of crimes would
garner an increased response
from law enforcement, especially the more violent crimes
of murder and rape. Several
factors explain why increases
in less violent crimes garner a
law enforcement response in
the short run while increases in
the most violent crimes do not.
First, violent crimes are committed with less forethought
than property crimes and are
often part of an overall increase
in criminal activity, such
as drugs and gangs. These
activities may require years
of law enforcement planning
and strategy via task forces
and interagency cooperation
to reduce. A classic example
is New York City in the 1980s.
Second, preventing less violent
crimes may also reduce the
number of more violent crimes,
as suggested by the “broken
windows” hypothesis of law
enforcement.5 Thus, combating a rise in less violent crimes
is relatively less costly in terms
of law enforcement resources
and may, in fact, reduce the
number of violent crimes.

Finally, it seems reasonable
that crimes that are more visible to businesses and tourists—such as robbery, vehicle
theft and assault—are likely
to result in greater attention
from law enforcement in the
short run, possibly through a
relatively inexpensive increase
in police presence.
The degree to which the
effect of crime on arrests persists over time is quite different across cities. For example,
robbery arrests are a result of
the change in robberies from
only the prior month in some
cities to the last 10 months in
other cities. This may reflect
differences in the effectiveness
of law enforcement across cities
to respond to crime.
Two points should be considered, however, when attempting to infer the effectiveness of
law enforcement.
First, the initial level of
crime and arrests is an important factor in evaluating the
effectiveness of changes in law
enforcement. For a city that
is already allocating a large
percentage of its law enforcement resources to combat
robberies, for example, the
opportunity cost of allocating
further resources to robberies
is much higher than it would
be in cities that have a lower
level of initial law enforcement resources allocated to
combat robberies.6 Thus, cities
already having a relatively large
percentage of their resources
allocated to combat robberies
may be unwilling (or unable) in
the short run to allocate further

Exploring Innovation

resources to combat a further
increase in robberies.
Second, our analysis does not
consider the optimal allocation
of law enforcement resources to
combat other crimes.7 Clearly,
zero crime in a city is not an
optimal level of crime, given
the nearly infinite resources it
would require to achieve this
objective, if it could be achieved
at all. The optimal level of each
crime and the desired level of
resources to combat each crime
certainly differ across cities and
are based on the preferences
of the citizenry, public officials
and law enforcement, as well
as different law enforcement
strategies.8

A Conference on Community Development

“Innovation in Changing Times”
April 22 – 24, 2009
Chase Park Plaza • St. Louis, Mo.

Exploring Innovation

The Federal Reserve Bank of St. Louis,
Community Development Office, is proud to announce
our planning partners for this event:

Thomas A. Garrett is an assistant
vice president and economist at the
Federal Reserve Bank of St. Louis.
Lesli S. Ott is a senior research
associate at the Federal Reserve
Bank of St. Louis.
The report, Local Crime and
Local Business Cycles, is available online at www.stlouisfed.
org/community/other_pubs.
html#research. Print copies are
available by calling Cynthia Davis
at 314-444-8761.

Changing economic conditions are presenting unique challenges
to those in the community development field. This conference will
focus on resiliency, sustainability and innovative programs that
can improve your organization’s performance and have a positive
impact on your community.
Registration will begin in January 2009. Watch your mail and our
web site for updates. www.exploringinnovation.org

Innovation: Anyone can do it!

On

the

internet

at

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the Region

Spanning

The region served by the Federal Reserve Bank of

St. Louis encompasses all of Arkansas and parts of Illinois,
Indiana, Kentucky, Mississippi, Missouri and Tennessee.

Habitat To Build “Green”
Subdivision in Memphis
Habitat for Humanity of
Greater Memphis will start
work this year on Trinity Park,
its first affordable housing
subdivision.
The 38-home development
in the Oakhaven neighborhood
just south of Memphis International Airport will feature
all “green,” or energy-efficient,
homes. The development is the
result of a partnership between
Habitat for Humanity International and the Home Depot
Foundation. The two organizations teamed up to create “Partners in Sustainable Building,” a
$30 million nationwide grant
program to make 5,000 Habitat
houses sustainable and energy
efficient over the next five years.
The Memphis Habitat
chapter is one of 30 affiliates
selected for the pilot program.
The pilot will target a variety
of markets, including rural and
urban areas, warm and cold
climates, and new construction
and rehabilitation. Groundbreaking for the Memphis
development will occur in
2009. The project is slated for
completion in 2011.
Green building is not new to
Habitat for Humanity of Greater
Memphis. Since 2006, Habitat

has completed 22 EcoBUILD
certified homes. EcoBUILD
is a voluntary green building
program created by Memphis
Light, Gas and Water to stimulate energy and environmental
awareness through the use of
energy-efficient and environmentally friendly technology,
materials and techniques in
new home construction.
Arkansas Offers Teachers
Housing, Rental Incentives
High-performing teachers
who are willing to work in
distressed Arkansas school districts may be eligible for rental
and homeownership incentives.
The Arkansas Teacher Housing Development Foundation,
a state agency established in
2003, oversees the program.
It works with school districts
that have difficulty recruiting
and retaining high-performing
teachers for grades K through
12, have a critical shortage
of teachers qualified to teach
any grades K through 12, and
have 50 percent or more of
district students performing
below “proficient” on any or all
benchmark examinations.
Since October 2007, when
the agency first began taking
applications, 18 teachers have
received down payment and

LINKING

LENDERS

closing cost assistance under the
homeownership incentive program. Another 30 teachers have
received rental assistance. The
recipients are predominantly in
rural areas of the state where the
majority of the distressed school
districts are located.
For more information, contact Melanie R. Yelder, foundation director, at 501-683-5401
or by e-mail at melanie.yelder@
dfa.arkansas.gov.

problems can be addressed by
neighbors in a timely manner,
more serious issues like crime
and falling property values may
be prevented.
The organization is seeking
support for operating expenses
and is planning to add a staff
member who can provide planning expertise.
For more information about
the NAN model, visit:
www.nanstl.org.

Neighbors Help Neighbors
Repair, Clean Up Homes
Neighbors Assisting Neighbors (NAN) has recently come
into the spotlight as a grassroots, nonprofit organization in
St. Louis County, Mo., working
on problem properties. The
group’s mission is to stabilize
neighborhoods by empowering
residents to interact with each
other and to help their neighbors with cleanup, home repair
and vacant property issues.
Target neighborhoods are
selected in partnership with
county government and existing
neighborhood organizations.
NAN has been active for some
time, but just recently received
its 501(c)3 tax exempt status.
With foreclosures and vacant
property problems in the news,
NAN emphasizes that, if these

St. Louis Business Incubator
Designed To Help Homeless
A new business incubator in
St. Louis is drawing national
attention because of the clients
it serves. The BEGIN New Venture Center is the first business
incubator in the nation to focus
on the homeless or those at risk
of homelessness. The center is
an innovative community partnership program of business
incubation and entrepreneurship, skills and trades training.
The incubator is the brainchild of officials at St. Patrick
Center, the largest provider
of services to the homeless
in Missouri. The incubator
builds on St. Patrick’s existing
concept of providing a one-stop
care facility to those in need.
The acronym BEGIN
expresses project goals to

0

AND

COMMUNITIES

Bridges

stimulate business, employment, growth, incomes and
neighborhoods. The mission
is to provide training, education and mentorship that result
in sustainable employment and
entrepreneurial opportunities.
The BEGIN Center has four
critical components:
• The BEGIN New Venture
Center is the business incubator within the homeless
center. It will provide new
venture creation.
• The BEGIN Training &
Education Center will provide
pre-training assessment, preincubation assessment, trades/
skills training and business/
entrepreneurial training.
• Clients will have a complete
network of wraparound
social support services available to them.
• The operation of social
enterprises will provide
clients with transitional jobs
training and employment
opportunities.
For additional information,
visit www.BEGINSTL.org
or contact Jan DeYoung at
314-802-0995.

Indiana’s Homebuyer Course
Exceeds Expectations
The Indiana Housing and
Community Development
Authority (IHCDA) announced
in September that Indiana’s
latest tool to educate prospective homebuyers has surpassed expectations. The free
online homebuyer education
course, IHCDA University,
has attracted twice as many
registered users than projected
during its first five months of
operation.
IHCDA officials originally
anticipated that 1,500 prospective homebuyers would use
the program in the first year.
Instead, in the first five months
it was available, the program
exceeded that expectation with
2,438 prospective homeowners
registered in the system. Of
that number, 1,800 have successfully completed the course;
and, of those, 803 are in the
process of closing or have
already closed on their homes.
IHCDA University was
designed as a tool to educate
prospective homeowners to
make smart purchasing decisions. The course is free and
available 24 hours a day via the
Internet to allow prospective
homebuyers to take it at their
leisure. IHCDA University

On

the

internet

at

takes about six to eight hours
to complete and walks potential buyers through several lessons, including getting ready to
buy a home, managing money,
understanding credit and getting the right mortgage loan
to meet their needs. Completion of the course also satisfies the homebuyer education
requirement that is necessary
for all homebuyers seeking the
0.125 percent mortgage rate
reduction offered through the
agency’s single-family purchasing programs.
For more information about
IHCDA University, visit http://
ihcda.knowledgefactor.com.

Bridges is a publication of the Community Development Office of the Federal
Reserve Bank of St. Louis. It is intended
to inform bankers, community development organizations, representatives of
state and local government agencies and
others in the Eighth District about current issues and initiatives in community
and economic development. The Eighth
District includes the state of Arkansas
and parts of Illinois, Indiana, Kentucky,
Mississippi, Missouri and Tennessee.
Glenda Wilson
Assistant Vice President
and Managing Editor
314-444-8317
Yvonne Sparks
Senior Manager
314-444-8650
Linda Fischer
Editor
314-444-8979
Community Development staff
St. Louis:

Matthew Ashby
314-444-8891
Jean Morisseau-Kuni
314-444-8646
Eileen Wolfington
314-444-8308

Memphis:

Teresa Cheeks
901-579-4101
Kathy Moore Cowan
901-579-4103

Little Rock: Lyn Haralson
501-324-8240
Amy Simpkins
501-324-8268
Louisville:

Lisa Locke
502-568-9292
Faith Weekly
502-568-9216

The views expressed in Bridges are not
necessarily those of the Federal Reserve
Bank of St. Louis or the Federal Reserve
System. Material herein may be reprinted
or abstracted as long as Bridges is credited.
Please provide the editor with a copy of
any reprinted articles.
Free subscriptions and additional copies
are available by calling 314-444-8761 or
by e-mail to communitydevelopment@
stls.frb.org.

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Case Studies Shed Light on Poverty in America
A new report from the Community
Affairs offices of the Federal Reserve System and the Brookings Institution examines the issue of concentrated poverty.
The Enduring Challenge of Concentrated
Poverty in America: Case Studies from
Communities Across the U.S. profiles 16
high-poverty communities, including immigrant gateway, Native American, urban
and rural communities.
One of the case studies focuses on Holmes County, Miss., located
in the district served by the Federal Reserve Bank of St. Louis. With
a poverty rate that stood at more than 41 percent in 2000, Holmes
County is both geographically and economically isolated. It has lost
many jobs during past decades—and continues to do so.
The information collected on all the communities in this report
contributes to an understanding of the dynamics of poor people
living in poor communities and the policies that will be needed to
bring both into the economic mainstream.
The Enduring Challenge of
Concentrated Poverty in America:
Case Studies from Communities Across the U.S.

A J O I N T P R O J E C T O F T H E C O M M U N I T Y A F FA I R S O F F I C E S O F T H E F E D E R A L R E S E R V E
S Y S T E M A N D T H E M E T R O P O L I TA N P O L I C Y P R O G R A M AT T H E B R O O K I N G S I N S T I T U T I O N

The report is available at www.stlouisfed.org/community.

Save the Date
April 16-17, 2009 | Washington, D.C.
Keynote speaker: Ben S. Bernanke
Chairman, Board of Governors, Federal Reserve System
The Federal Reserve System’s Sixth Biennial Community
Affairs Research Conference will feature original research
into financial services issues affecting low- and moderateincome people and communities.

PRSRT STD
U.S. postage
paid
st. Louis, MO
permit No. 444

Post Office Box 442
St. Louis, MO 63166-0442