Massive corporate layoffs, imploding banks, global investors desperately searching for the stock market’s bottom — lately, nearly all the economic news has been about as apocalyptic as the Book of Revelation. Even in Vermont, where local banks and credit unions are actually doing OK, most of the financial news that gets reported is the depressing kind.
So this week, the first of “Financial Literacy Month,” Seven Days decided to buck the downbeat trend and dig up some good news on Vermont’s money front. Better-than-Nevada news, anyway. According to Realty Trac, an online real-estate marketplace, Vermont listed just six foreclosures in January, or one foreclosure for every 51,906 housing units — the lowest rate in the nation. Nevada, which has the highest foreclosure rate in the country, saw one foreclosure for every 76 housing units.
The state’s relative good fortune has a lot to do with Yankee thrift and conservative values. And bartering for goods and services is an idea that’s as old as the hills. But Vermont’s unique economic position is also a result of political policies and programs that seem to have anticipated the meltdown. Act 250, the localvore movement, character-based lending — they don’t sound so crazy now. Obama, take note.
Money With a Mission:
A local lending institution that’s totally unregulated by the federal government but didn’t lose a dime when the financial markets collapsed last fall? The Vermont Community Loan Fund of Montpelier has never invested in the stock market. But it does lend money to small and sometimes unsteady startup companies and nonprofits that may have trouble getting loans from more traditional lenders. Fewer than 1 percent of them default — that’s a far better rate than most banks and credit unions can boast.
At the same time, nonprofit VCLF consistently earns a return of between 2 and 4 percent for its investors. In its 21 years of operation, it has never lost any of them money.
The winning formula? Assisting in the creation of good jobs, affordable housing and childcare centers in Vermont.
With $18 million in outstanding loans, VCLF is Vermont’s largest alternative lender. Executive Director Will Belongia attributes the fund’s success to its unique relationship with clients. Rather than basing loans on complex financial matrices or borrowers’ credit scores, VCLF assesses its risks based on actual knowledge of its clients — what’s sometimes called “character-based lending.”
Since VCLF never sells its loans, it has a vested interest, literally, in its borrowers’ success. And, as an unregulated lender, it has a lot more flexibility to extend or restructure loans based on borrowers’ particular needs and circumstances. “There’s more art to our lending than science,” Belongia adds, “and we have the luxury of being patient.”
Vermont Smoke and Cure of South Barre is one of VCLF’s many successful clients. “As a young company, it’s really been crucial to have someone like the Vermont Community Loan Fund,” says CEO Chris Bailey. “I think they’re more willing to take risks on a new company than banks are. It’s been very valuable for us.”
Vermont’s Greener Pastures:
Going local isn’t only about sustainability — there’s money in it, too.
Merchants Bank, which has operated solely in Vermont for 160 years, posted $12 million in profits in 2008, a calamitous year for much of the U.S. financial industry. Merchants’ sunny returns reflected a 16 percent increase in lending and a 7 percent rise in deposits.
“Dislocation” in the national banking sector has left openings for community banks, notes Merchants President Mike Tuttle. “With all the concern and angst about what’s happening out there, people have gravitated to a company that’s more understandable to them,” he says.
Merchants’ secure footing contrasts sharply with the wobbly stance of two, big, out-of-state banking corporations that do business in Vermont.
Cleveland-based KeyCorp, for example, reported a $1.5-billion loss last year, due mainly to the Rust Belt’s crumbling real-estate market. Key turned to the feds for a $2.5 billion bailout.
Exposure in the Midwest also contributed to the massive losses of Citizens Bank, headquartered in Rhode Island. Citizens has the further misfortune of operating under the aegis of the Royal Bank of Scotland, which lost a staggering $34 billion last year — the worst performance ever by a United Kingdom corporation. Stephen Hester, the Scottish bank’s new chief executive, recently quashed rumors that it was selling Citizens, admitting that it’s “unsaleable today at an attractive value.”
KeyBank and Citizens’ Vermont chiefs both point out that their own operations are sound. In Vermont, each institution has kept to the conservative lending practices typically associated with Yankee banking.
People’s United Bank, which bought Chittenden early last year, continued to make money in 2008, although at a reduced rate. Upon acquiring Chittenden, the Connecticut-based corporation ordered a cut of 71 positions in Vermont and the closure of five branches.
Merchants, by far the largest of Vermont’s 15 community banks, remains inconspicuous on the national scene — which may explain why it hasn’t been swallowed up yet, as have a couple of other Vermont-based banks in the last 20 years. But Merchants’ overseers also aren’t angling for a buyout. As Tuttle puts it, “We like being an independent.” Plus, the very commodity that makes Merchants attractive to growing numbers of Vermonters — its localism — would vanish if the bank became just another link in someone else’s chain.
Kevin J. Kelley
Slow and Steady Wins the Race:
Ask a traditional investment adviser how to manage your portfolio, and she’ll probably counsel you to sprinkle your assets across a variety of sectors in different regions and at various risk levels, like casting seeds to the wind. But what if you’re the type who prefers to plant seeds carefully in arable soil and watch them grow? An alternative investment strategy, dubbed “slow money,” may be more your speed.
To encourage smart, sustainable investment, entrepreneur and venture capitalist Woody Tasch has pulled together a group of likeminded partners to create a national organization called Slow Money. The goal of the “nongovernmental agency” is to demonstrate that financing agricultural, mission-based businesses can be part of the long-term solution to many of this country’s economic and environmental woes.
Tom Stearns, president of High Mowing Seeds in Wolcott, is one of Slow Money’s founding members. He says Vermont is an ideal place to try it out.
“If you spend $10 million here, you actually get something out of it,” Stearns says. “In California, $10 million would get lost.” Slow Money has already ponied up $35,000 for a feasibility study to determine which types of projects would thrive in Vermont.
For example, Vermont needs more slaughter- houses. Traditionally, an entrepreneur would need to raise several million dollars to build one, then hope it generates enough business to be profitable.
The Slow Money approach involves acquiring additional monies to create a chain of symbiotic businesses: a slaughterhouse, a company that distributes meat to stores and restaurants, and a nonprofit that educates farmers about sustainable ways of raising cattle. As a corollary, markets for the meat would be secured in, say, Vermont’s public schools.
Not surprisingly, Slow Money has taken some time to get up and running.
“Slow Money looks at this whole complex of different issues and says, ‘We believe money can work in a way to give the investors a reasonable return, while at the same time allowing fertility to prosper and local businesses to thrive and good food to get out to people,” Stearns says. “These aren’t mutually exclusive.”
Free Green After Four:
In today’s economy, a bachelor’s degree is de rigueur for most careers. But how many students who enter Vermont’s colleges and universities actually get that diploma in four years?
Not as many as you may think. According to figures from the Association of Vermont Independent Colleges, only 63.7 percent of students who set foot on campuses each year graduate in six years or fewer. Their collective debt has grown accordingly. Student-loan default rates have jumped to 6.9 percent, up from 5.2 percent a year ago, according to an article last week in the Wall Street Journal.
“One often overlooked contributor to the high cost of higher education is how long it takes students to graduate,” explains Kevin Coburn, communications director for Green Mountain College, a small liberal-arts school in Poultney with about 800 undergrads. As Coburn points out, there’s an increasingly urgent sense among college students that they need to graduate on time.
In response, GMC is offering its fall 2009 freshmen a tantalizing guarantee: Graduate in four years, or we’ll cover your tuition. Students who maintain at least a 2.0 grade point average, take a minimum of 15 credits per semester, and meet regularly with their faculty advisers won’t have to pay their own way if their education runs longer than four years.
GMC’s free green is nothing to sneeze at: The college’s combined tuition, room and board run more than $35,000 per year. Its administrators are banking on their low student-to-faculty ratio and hands-on role of faculty advisers to ensure they don’t give away too much free learning.
“For us, the guarantee is really an expression of faith in our advisory system,” says Sandy Bartholomew, dean of enrollment management. “GMC is a small school where faculty members monitor student progress very closely.”
Swap and Trade:
In the never-ending quest for new forms of local capital, Vermont recently added another barter biz to the mix — the Vermont Sustainable Exchange. After two years of preparation, founder Amy Kirschner just launched the socially responsible business and says she expects to have as many as 100 members trading goods and services online by summer.
VSE is similar to other barter systems of its kind in that its members register their “offers” — goods or services they want to trade — and “wants” — goods or services they’re looking to access. Those goodies are all valued in trade credits, with one credit equivalent to one U.S. dollar. The reason: Even when no hard currency trades hands, the IRS still wants its slice of the pie.
Why use VSE over a normal bartering system — or cold cash, for that matter? As Kirschner explains, a statewide, business-to-business barter exchange allows companies to profit from their excess capacity. For example, a hotel has to cover its overhead costs regardless of how many rooms are occupied on a given night. In a barter system, it can offer its unsold rooms and earn trade credits for other services it may need, such as local advertising, catering and printing costs.
However, VSE differs from a traditional one-to-one bartering system in that members don’t have to seek out businesses that need precisely what they’re offering. Each party earns or spends trade credits based on its specific needs.
“This provides a secondary market for people to get extra customers in the door, and then they can use those credits to offset their cash costs,” Kirschner explains. “So it definitely affects their bottom line and increases their profitability.”
VSE certainly isn’t the first local virtual barter bazaar. The Vermont Barter Network, which has been around for many years, operates under a similar model.
By all accounts, cash-free commerce is making a comeback. According to the International Reciprocal Trade Association, organized bartering of this kind is now a $10 billion industry. As Kirschner puts it, “We’re just putting a new twist on an old idea.”
Collateral is key when you’re securing a traditional bank loan. Credit unions — and the Vermont Community Loan Fund — are more forgiving, but you still have to offer something of yours to secure their risk.
But Lena Cannizzaro, Laura Sivard and Arica Bronz were collateral-free when their employer — at a Pilates studio on Flynn Avenue in Burlington — approached them about buying the business. The women, ages 29, 27 and 35 respectively, found their way to Barre-based Community Capital of Vermont, a nonprofit lending agency that makes microloans to individuals who have limited resources and are looking to start businesses. Sixty percent of the borrowers are startups.
The trio had to jump through some hoops — they drew up a business plan, for example, and Sivard got some professional coaching — before they secured a small loan to start All Wellness. The business has been growing steadily since it opened almost a year ago, serving a mostly middle-aged female clientele with yoga, Pilates, physical therapy and health-counseling services.
Other CCV borrowers haven’t been as fortunate, according to Executive Director Emily Kaminsky. After years of boasting a 2 percent delinquency rate, she says, CCV now finds itself with 15 percent of its 100 loans on the books currently delinquent or in default. But, like the Vermont Community Loan Fund, “we can be more flexible than a bank can,” she points out. “We don’t have shareholders. We can let borrowers pay interest-only for a period of time.” To get through the downturn, CCV has cut its own staff from six to three.
Community Capital funds its operations on interest earned from loans, but its capital — $1.9 million of which is on loan — derives from multiple sources, including local banks, the state of Vermont and federal Community Development Block Grants. The group also manages loan funds for other municipalities, such as Colchester and Huntington. It’s committed to helping businesses that are integral to communities: Barre’s L.A.C.E. café, Diversity Hair Salon in Burlington, Vermont Canoe and The Pink Shutter in Montpelier have all been borrowers.
Like everyone analyzing the economy right now, Kaminsky stresses the importance of getting money into people’s hands. And Vermont has no shortage of entrepreneurs — more now, potentially, because of local layoffs. Capital is what it takes to convert those one-man and three-woman operations into the Vermont companies of tomorrow. CCV fielded more inquiries this March than in any other month over the past nine years.