Food Deserts and Development Finance Options in North Carolina

[caption id="attachment_4296" align="alignleft" width="150"] Farmer's Food Share - Courtesy of Donn Young Photography[/caption] On January 27, 2014, the North Carolina General Assembly’s House Committee on Food Desert Zones heard testimony about food deserts in North Carolina. A “food desert” is defined in the Food, Conservation, and Energy Act of 2008 as an area “with limited access to affordable and nutritious food.” Maps and census tract data about food deserts can be found in the Food Access Research Atlas compiled by the U.S. Department of Agriculture (USDA). Food deserts are often found in low-income areas. A recent media report pointed out that North Carolina contains 349 low-income food deserts; that is, communities with a high proportion of low-income residents and containing no supermarkets (1) within one mile in urban areas or (2) within 10 miles in rural areas. While it might seem counter-intuitive for farming communities to lack access to food, rural areas are particularly susceptible to food deserts. As pointed out in my 2010 report on rural asset-building strategies (co-authored with Lisa Stifler), looking forward, food deserts are expected to increase in number in rural areas as rural populations decline and food industries continue to shift food distribution channels to larger superstores in more populous communities. With low-income food deserts now located in 80 out of North Carolina’s 100 counties, food deserts are increasingly being viewed as a statewide issue requiring a coordinated policy response. This post describes some of the policy approaches presented to the House Committee on Food Desert Zones and then takes a closer look at a proposed approach involving development finance tools, such as loans and grants.

Range of Policy Approaches In the hearing last month before the House Committee on Food Desert Zones, national and state experts—including my faculty colleague and fellow CED Blog author Maureen Berner—described a variety of policy approaches that have been used around the country to deal with food deserts. The slide presentations can be viewed on the Committee’s website. The policy prescriptions range from enticing existing corner grocers to stock healthier foods, to connecting local farmers with institutional purchasers of food such as schools and hospitals, to supporting grocery store cooperatives like the Company Shops Market in Burlington, North Carolina, to promoting value-added production facilities related to North Carolina agricultural products. Local food policy councils across the state, about which my faculty colleague Rick Morse has written about in this blog, are exploring how local food systems can be part of the solution in addressing food deserts. The Development Finance Approach A key question is how to convince retail grocers to locate in places—food deserts—where they have obviously already determined are not desirable or profitable for them. An approach proposed to the Committee by The Food Trust (and also mentioned in a presentation by NC Department of Commerce Assistant Secretary Pat Mitchell) was to provide various incentives to grocers that agree to locate in food deserts, or to existing corner stores in food deserts that agree to refit their stores to accommodate healthier foods. This proposal essentially amounts to a development finance program, in which the public sector enters into partnerships with private sector grocers to reduce the number of food deserts in North Carolina. The presentations to the Committee did not offer many details about the finance tools that would be required, so I looked up a 2011 report by The Reinvestment Fund, entitled “Healthy Food Retail Financing,” which describes the development finance tools developed by the Fresh Food Financing Initiative (FFFI) in Pennsylvania. The tools developed as part of FFFI in Pennsylvania, designed to attract grocers to food deserts, included the following:

1. Grant products for grocers in food deserts: Up to $250,000 per store was available for grocers locating in food deserts, and “extraordinary grants” of up to $1 million were available to grocers who, among other things, located in very low-income communities, offered a significant number of high-quality jobs, and demonstrated substantial economic impact in line with neighborhood development plans.
2. Loan products for larger supermarket projects: A bank-syndicated loan pool of more than $40 million was dedicated to financing supermarkets in food deserts. The loan pool included over $32 million in capital from banks, and an additional $8 million in subordinated debt from nonprofit and public sources that served as a credit enhancement to reduce the risk to the banks, thereby attracting and retaining bank capital in the pool.
3. Loan products for smaller grocery projects: A nonprofit created a separate loan fund for projects that were not attractive to the bank-syndicated loan pool, such as very small projects or projects with shorter payment periods.
4. New Markets Tax Credits: FFFI secured an allocation of New Markets Tax Credits, which allowed it to offer equity as part of its broader mix of financing tools.

FFFI programs have been implemented in other states as well, primarily on a statewide basis. North Carolina hasn’t established a statewide approach yet, as the General Assembly is still considering its options. In the absence of state action, do North Carolina local governments possess statutory authority to implement a similar array (albeit on a smaller, local scale) of development finance tools? North Carolina Local Governments and the Development Finance Approach The short answer is yes, but maybe not with the statutes that first come to mind. Focusing only on the grant and loan products described above, there are several possible sources of statutory authority for local governments to implement development finance tools for grocers in food deserts. First, let’s tackle the most frequently-cited statute for loan programs and incentive grants, G.S. 158-7.1 (the Local Development Act), which turns out not to be a perfect fit for a development finance program in food deserts. North Carolina case law regarding incentives under G.S. 158-7.1 (Maready v. City of Winston-Salem) is clearly focused on substantial job creation and increasing the tax base in the context of interstate competition, as explained in a prior blog post. Retail grocers locating in food deserts will only rarely meet those criteria, and existing corner stores that agree to refit their stores almost certainly won’t. G.S. 158-7.1 does, however, provide authority for the establishment of a general credit enhancement program such as a loan loss reserve for banks that offer loans to grocers in food deserts, and for local governments acting as lender and offering market-rate loans to grocers directly. A better statutory fit for offering incentives or loans in low-income food deserts would be the community development statutes, G.S. 160A-456 (cities) and G.S. 153A-376 (counties). These statutes authorize local governments to engage in community development programs for the benefit of low- and moderate-income persons. A conservative test to determine whether authority exists under these statutes for a particular program is one used for federal Community Development Block Grant programs: whether the population benefiting from the grant or loan consists of at least 51% low- and moderate-income persons. A grocer locating in a low-income food desert and serving low-income persons probably fits the criteria. There are other sources of statutory authority for grants and loans that don’t require job creation, provided some other important public purpose is served. For example, financial assistance could be offered to a small corner grocer who agrees to locate in a blighted area that is a designated urban redevelopment area (as described in this post) or in a municipal service district for downtown revitalization (described in this post). Of course, resolving the statutory authority question is just one step in establishing a development finance program to address food deserts. Expertise in finance and development is required to effectively implement such a program, and not all local governments have the necessary expertise on staff or through local partners. The School of Government often provides that expertise to local governments through its Development Finance Initiative (DFI), and other partners could be enlisted in the effort. The FFFI effort in Pennsylvania included partners with lending expertise and specialized knowledge of supermarkets.