Clinton Seeks More Private Funding for Inner Cities : Urban centers: Administration offers incentives. It also wields the threat of regulatory pressure.

Increasing the flow of private investment to America’s inner cities is emerging as the cornerstone of the Clinton Administration’s strategy for revitalizing depressed urban centers.

Across the government, at least half a dozen major initiatives are being pursued with a common objective of attracting more capital from banks, pension funds, insurance companies and private businesses.

The Administration is dangling several carrots for investors, including tax incentives for companies that invest in designated urban “empowerment zones” and federal seed money for a nationwide network of new community lending institutions. But it is also brandishing a potentially big stick in the form of stepped-up regulatory and legal pressure on banks and insurance companies to make more services available in inner cities.

“It is incumbent that we find a way to build a bridge between the variety of sources of capital and the needs of our communities,” said Nicolas P. Retsinas, assistant secretary for housing at the Department of Housing and Urban Development.

This focus on attracting private capital fits several of President Clinton’s broad policy and political goals. At a time of fiscal strain, it allows the Administration to supplement limited federal expenditures on cities with private dollars. And it reflects Clinton’s priority on bottom-up development, which attempts to enhance inner-city stability by bolstering community institutions and increasing the number of homeowners and small business owners.

While the emphasis on encouraging private investment and homeownership echoes the themes of Clinton’s Republican predecessors, his emerging strategy envisions a more assertive government role.

That role is evident in the pressure on banks to provide capital and the proposed creation of complementary public initiatives on job training, vocational education, crime prevention and, eventually, welfare reform.

But, like its disappointing predecessors over the last quarter of a century, this latest attempt at urban renewal raises the question of whether any combination of carrots and sticks can reverse such corrosive long-term trends as the decline of inner-city manufacturing jobs and the rise of out-of-wedlock births and violent crime.

“Until our streets are safe, all the capital in the world won’t save our neighborhoods,” said Paul Herdeg, executive director of the Union-Miles Development Corp., a group working to redevelop a low-income community in Cleveland.

Administration officials readily agree that private investment alone will not revive depressed inner-city neighborhoods. But they tend to reverse the equation, maintaining that all their other urban reform initiatives “will founder unless there is sufficient financial capital to mobilize the human capital and modernize the physical capital,” as Housing and Urban Development Secretary Henry G. Cisneros said recently.

As a candidate, Clinton stressed the link between private investment and urban revival after touring South-Central Los Angeles with Rep. Maxine Waters (D-Los Angeles) after the 1992 riot. After meeting with community activists in Waters’ home, Clinton said residents were looking for local economic development, not expensive new federal programs.

“If you don’t enable people to borrow the money to get into business in the neighborhoods where they live . . . it’s going to be hard to have any fundamental change,” Clinton said.

After Clinton’s arrival in Washington, that sentiment inspired an array of activities. Because many involve obscure changes in federal banking or housing policy, they have largely escaped notice. But experts said they represent efforts to tap for inner-city investment virtually every major source of private wealth in the economy.

Among the key initiatives:

Empowerment zones--Under provisions of the budget bill passed last summer, firms that hire residents in six urban and three rural areas designated as “empowerment zones” will receive a 20% tax credit on the first $15,000 they pay in wages. The bill also establishes 65 smaller “enterprise communities” that can offer much more limited tax breaks. In addition, the Small Business Administration is slated to announce at least 10 “one-stop capital shops” that will attempt to substantially increase distribution of federal loans in these targeted communities.

Pensions--At the Labor Department, Olena Berg, the assistant secretary who regulates the nation’s huge private pension system, has been aggressively urging fund managers to invest more of their $4 trillion in assets in affordable housing, urban development and other economically targeted investments.

Historically, the flow of pension dollars into such activities has been limited by fund managers’ fears of violating federal standards for prudent investing.

“I am trying to make sure the community out there broadly knows, as long as you do this kind of investing appropriately . . . there’s no reason you can’t do it,” Berg said. One pension partnership is already underway.

HUD has won congressional approval for a plan to attract pension funds into housing construction by guaranteeing a steady supply of low-income tenants with federal housing subsidies. The first taker in that $100-million offer will be the AFL-CIO pension fund, which has announced plans to invest $660 million in affordable housing over the next five years.

Community development financial institutions--As a candidate, Clinton frequently touted the experience of the South Shore Bank, which provided credit to help revive a Chicago neighborhood abandoned by traditional commercial bankers. The House has already passed Administration legislation to provide subsidies for the development of a nationwide network of such community development lending institutions. The bill has also cleared the Senate Banking, Housing and Urban Affairs Committee and is expected to be enacted into law this year. Community development banks could each receive as much as $5 million in federal aid to match capital they raise on their own.

Bolstering credit--At the same time it promotes the development of alternative sources of credit, the Administration is intensifying pressure on commercial banks to lend in depressed neighborhoods.

In December, federal bank agencies proposed regulations to stiffen enforcement of the 1977 Community Reinvestment Act, which requires banks to serve the communities in which they are located.

The proposed new rules, which are expected to become final as early as this spring, establish more rigorous “performance-oriented” standards that banks must meet in making available credit and other services in low-income areas.

At the same time, Justice Department officials have announced stepped-up enforcement of the laws barring racial discrimination in bank lending. Last month, the Justice Department reached a consent decree with Shawmut National Corp., which required the New England lender to pay damages of $10,000 to $15,000 each to minority loan applicants unfairly denied credit.

“It is a very high priority of the Department of Justice,” said Paul Hancock, chief of the housing section in the Justice Department’s civil rights division. “There will be more cases coming.”

Combined with the proposed new community reinvestment regulations, these prosecutions “probably more than any legislation we could pass gives bankers an indication that people are serious,” said Rep. Joseph Kennedy (D-Mass.), chairman of a House Banking, Finance and Urban Affairs subcommittee.

In a parallel initiative, the Administration is backing legislation by Kennedy that would collect data on insurance redlining--a move that could be the first step toward federal efforts to require firms to make insurance more readily available in inner cities. However, the legislation’s prospects are uncertain.

Businesses and housing developers in low-income areas often complain that they are unable to obtain bank credit because they cannot purchase insurance at reasonable rates.

Still under discussion within the Administration is an idea floated last spring by Treasury Undersecretary Frank N. Newman that could enormously expand the availability of credit in inner cities. Newman raised the possibility of imposing on mutual funds, insurance companies and other financial institutions the community reinvestment requirement that now applies only to banks. “We’re going to be looking at it,” Newman said.

Such an expansive mandate would generate enormous political resistance, and senior policy-makers such as Robert E. Rubin, director of the National Economic Council at the White House, are openly skeptical of the idea.

So far, in pursuing this urban capitalism agenda, the Administration has largely managed to avoid tussles with the financial industry. But commercial bankers warn that conflicts could develop between the pressure to provide more credit to low-income borrowers and banking regulators’ insistence on high standards of prudent lending.

Community activists generally applaud the Administration’s efforts. “Across the spectrum . . . the focus on rebuilding communities has created a lot of excitement,” said Robert Weissbourd, managing director of Shorebank Advisory Services, a subsidiary of the Shorebank Corp. in Chicago.

Still, the pace of change has produced some frustrations: The Administration, for instance, probably will not even designate the empowerment zones until sometime this summer at the earliest. “These are ideas that should reap some benefits,” Waters said, “but most of our communities feel it’s much too slow in coming.”

The biggest hole in the urban capitalism strategy may be the paucity of direct incentives, beyond the limited empowerment-zone dollars, for large-scale job creation in distressed neighborhoods.

For the most part, experts said, increasing the flow of bank capital could encourage the development of local service businesses--such as Laundromats or small groceries. But those establishments alone “won’t create either the kind or number of jobs we need,” said James H. Johnson, director of the UCLA Center for the Study of Urban Poverty.

The most difficult decision for the Administration may be if it should focus on the most economically and socially desolate neighborhoods, where previous efforts at revitalization have had little success. Instead, in a form of triage, some analysts say they believe that the Administration should direct limited private and public resources toward transitional working-class minority neighborhoods where family and community structures are more stable.

“It’s not something people want to talk about or be upfront about,” said Richard Nathan, director of the Rockefeller Institute of Government at the State University of New York. “But the dilemma is whether this policy process is going to make fine distinctions. Can we act strategically to save neighborhoods where we have a chance?”

Times researcher Tracy Shryer in Chicago contributed to this story.