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Can the Co-Op Save Us?

An ambitious experiment in Cleveland shows that the road to sustainable capitalism is bumpier than we thought.
May 30, 2014· 17 MIN READ
Steve Friess has written for Politico and The New York Times. He teaches journalism at Michigan State University.

Thirteen months ago, over champagne and canapés, everyone who’s anyone in Cleveland was milling around these rooms marveling at what had been created. It was late February, but the air in this vast hall of lush green plants soaking in perfect rows in a 750,000-gallon nutrient-enriched bath was as warm and humid as a spring day in California. The mayor, Frank Jackson, called it “a big day as we continue to move forward to transform our economy.” Sen. Sherrod Brown told the assembled crowd it would become a “model nationally, we hope.”

Where once there was a collection of burned-out, mostly vacant homes, now stood a $16 million, four-acre building whiter than the surrounding snow, capable of producing more than 3 million heads of lettuce a year through a hi-tech, energy-efficient, no-pesticide year-round practice known as hydroponics. Green City Growers opened with 25 employees—many chronically unemployed, undereducated, or newly out of jail—who were promised that after a few years of paying in, they would be owners entitled to equity and an annual share of the profits.

The fawning media coverage commenced on cue that week, just as it had attended the launches of GCG’s sibling companies, Evergreen Cooperative Laundry and Evergreen Energy Solutions, in 2009. All three are part of the Evergreen Cooperatives initiative, a novel and ambitious effort to pull desperately depressed neighborhoods at Cleveland’s city core out of poverty by starting up a series of companies that the employees, hired from the area, would eventually own. The neighborhoods are part of a four-square-mile swath of the inner city known as the Greater University Circle that also happens to host several of Cleveland’s wealthiest and most durable “anchor” institutions, notably the Cleveland Clinics, Case Western Reserve University, and University Hospitals.

Yet Green City Growers, like its two siblings, would suffer from an important and surprising flaw: Its business plan was long on feel-good idealism and seemingly logical conjecture, short on insight on how the market for the product actually worked. Somehow the city, the citywide philanthropy the Cleveland Foundation, and the other financiers facilitated or donated the capital to build and operate this greenhouse without ever checking whether the price of their produce would compete with that of other growers. “Why truck it in from out of state when you can have it right here?” asked Graham Tucker, Green City Growers’ general manager, in a promotional video filmed in early 2013.

The assumption, as it had been with the laundry and the energy operation, was that the anchor institutions would provide a certain amount of business that would at least provide a break-even cushion from which the companies could expand, repay their loans, and realize profits. As Tucker suggested, the thinking was that the hospital and university cafeterias, which buy their lettuce primarily from California farmers, would leap at the chance to buy locally and save the expense and negative environmental impact of having it trucked from 2,000 miles away.

But those California growers had long-term contracts with wholesalers at rock-bottom prices based on huge volume sales, a supply chain that an upstart like GCG couldn’t simply muscle in with goodwill and community boosterism. “At one point we were nearly double the cost of California lettuce because of the markups,” John McMicken, who joined Evergreen Cooperative Corporation—the umbrella company under which the three businesses are organized—as acting CEO two months after the Green City Growers kickoff soiree, tells me.

McMicken’s 18-year career has largely focused on document management for law firms and other businesses, but he’s the one showing me the GCG facility on this brisk March day in part because the prior GCG CEO, Mary Donnell, recently left—I am unable to ascertain whether she was fired or quit—so for now, he’s overseeing the greenhouse’s day-to-day operations. That’s far afield of why he came into the Evergreen orbit in the first place; his initial talks with Evergreen involved his launching a fourth co-op business closer to his own field, the scanning and storage of documents for anchor institutions. Instead, he was asked to put that plan on hold and take the helm of a would-be conglomerate in which all three companies were struggling.

Evergreen Cooperative Corporation acting CEO John McMicken holds lettuce being grown in the company's greenhouse in Cleveland. (Photo: Duane Prokop/Getty Images)

By mid-March of this year, McMicken is clearly seeing some payoff from his efforts. The energy operation, he says, has been profitable since the fall in large part because it broadened its mission from the initial plan of installing solar panels to include a range of odd-job tasks, from painting houses to cleaning out vacant buildings. Both the laundry and the greenhouse recently landed major contracts that should pull them out of the fiscal danger zone, the latter a deal with a major Northeastern distributor of hydroponic produce that would begin, as of late April, buying 200,000 heads of lettuce a month.

Still, McMicken is openly baffled by the decisions made before his arrival. If the idea was to build growing businesses with profit potential that could lift hard-luck locals and their communities out of poverty, he wonders, maybe the businesses Evergreen opened could have been, you know, ones with long-term growth prospects and larger profit margins?

“It was a mistake?” I ask him about the greenhouse that had been so celebrated one winter before my visit.

“I think so. I think so,” he replies without hesitation. “At capacity, we’re going to be profitable, but…it’s difficult to build wealth on these margins.”

If you’ve heard anything at all about Evergreen, it’s probably gushing. Under headlines like the one in Fast Company that declaimed, “How the Evergreen Cooperative Is Lifting Cleveland Residents out of Poverty,” the project has been presold as a success—a panacea, even. As recently as October, journalist Erik Reece, writing in Harper’s, made Cleveland the answer to his “search for an economy that won’t kill us,” suggesting that Evergreen Energy Solutions was the “antithesis of a shareholder-owned coal mine,” where the laborers have little say in work conditions that result, too often, in injury and death. Particularly when the first cooperative businesses opened, respected publications ranging from Bloomberg Businessweek to Time to The Economist provided reports about this crazy-enough-to-work new approach in prose that failed to scrutinize the details or provide any balancing perspective. All the attention has occurred amid a broader trend of reexamining traditional economic metrics, from the “triple bottom line” to new ways of measuring GDP to growth in interest in co-ops; in the U.K., the co-op economy was worth £35.6 billion in 2012.

In an odd inversion of the usual circumstance in which a reporter is granted access to a private enterprise, I have been allowed in because Evergreen’s leaders want to open up about what’s really been happening here. They’ve realized that there is such a thing as too much good publicity, and the expectations have been set far too high. Even before I drive to Cleveland to see the three Evergreen businesses, the co-op’s chief architect, Ted Howard, warns me that he’s wary of another fluff piece about just how wonderful and perfect Evergreen is making Cleveland. “We’ve been learning important lessons here,” he says before scheduling my visit. “We’re by no means perfect.” McMicken echoes this when we meet: “We, in many ways, closed the door down on some of the hype while we focused on our operations and our staff and the health and well-being of our business. We have to have a real story to tell, that we’ve launched ourselves into consistently successful businesses. That has to be the focus.”

Howard is a principal of the Democracy Collaborative, a policy research institute affiliated with the University of Maryland. He and cofounder Gar Alperovitz, a much-decorated economics professor, cast about the globe for years for ways to create wealth in inner cities.

The co-op’s chief architect, Ted Howard, warns me that he’s wary of another fluff piece about just how wonderful and perfect Evergreen is making Cleveland. “We’ve been learning important lessons here,” he says.

In the Pyrenees Mountains, they believed they had found one. In the 1940s, a progressive Catholic priest named José María Arizmendiarrieta sought ways to pull the Basque village of Mondragón out of the doldrums of the post–Spanish Civil War era devastation by creating a polytechnical school to train local people in various trades while advocating a “humanist” approach to business. In the mid-1950s, five engineering graduates formed an employee-owned business that built kerosene heaters, adhering to Arizmendiarrieta’s ideals, which required profit sharing and a living wage. Soon other co-ops focusing on other goods and services formed as well, and in 1959, they together created a savings bank, Caja Laboral Popular, which used local residents’ deposits to make inexpensive business loans for other start-ups. The bank became the nerve center for the various Mondragón businesses, a financial spine that gave each co-op and the community whose money was deposited there an interest in the co-ops’ communal success.

Mondragon Corporation, as it has been known since the 1980s, is now a behemoth that encompasses nearly 300 companies and more than 80,000 employee-owners who make and sell products ranging from bicycles to car parts. Its revenues in 2012 topped $19 billion, making it the seventh-largest conglomerate in Spain and a darling of progressives who view its success as proof that a hybrid of capitalism and socialism can be both profitable and humane. (This is probably easier to do in Spain, with its cradle-to-grave free public health care and education through university. Even with those advantages, Mondragon runs into harsh market realities, as seen by the 2013 bankruptcy of one of its largest companies, the appliance maker Fagor.)

In 2007 the Cleveland Foundation approached Howard and Alperovitz with the hope that they could divine how the vast wealth and spending power of the Greater University Circle’s health care, education, and cultural institutions could be brought to bear to help the surrounding distressed neighborhoods. The duo saw a prime opportunity to test a large-scale American version of the Mondragon model. The juxtaposition in Cleveland’s core—rows of boarded-up houses stand just blocks from a forest of gleaming new hospital and university buildings and architecturally avant-garde museums—fascinated Howard. “These world-class multibillion-dollar institutions are succeeding, but the neighborhoods are failing,” is how Howard saw the situation. Over breakfast with me in March, he recalled his and Alperovitz’s impressions and subsequent approach. “So how do you break down that divide and get those resources to everybody’s benefit?”

The answer sounds eminently reasonable. Build a network of start-up, community-based, and community-located businesses organized on shared ownership, also known as a co-op. The businesses, which would have to succeed or fail in the competitive marketplace like any other company, would nonetheless have a head start because the anchor institutions that were contributing to the start-up funding would, it was believed, naturally become clients too. As an added incentive, Evergreen co-ops would emphasize environmentalism—hence the name—because, Howard says, “it’s the right thing to do and because the anchor institutions are trying to position themselves as leaders in sustainability and being green and so forth.”

Even before this, co-ops had enjoyed buzzword status. Farmers have relied on the pooling of their outputs for decades to consolidate their market power and insulate from bad years. More recently, nonprofit food co-ops owned by member-customers have boomed, in part on the surge in interest in locally grown and artisanal foods.

Yet the Evergreen effort takes the idea a step beyond, seeking to create a network of worker-owned for-profit companies offering wide-ranging and unrelated products.

Little, however, has gone quite the way Howard and his colleagues planned. The businesses have been squeaking by, only recently verging on profitability. The managers of each company have been replaced within the past year after stumbling, the business plans—as illustrated by GCG’s challenges—failed to analyze the marketplace in fundamental ways, and the touted projections of the number of jobs and the amount of equity were dramatically off-the-mark. “Some of our own expectations were naive,” Howard says ruefully when I wonder if he wishes he could take back his oft-cited prediction that the laundry’s employees would have $65,000 equity after seven years on the job. They won’t. “We thought the companies would be more successful, more profitable, early on.” (Welcome back to any readers who’ve started businesses and fell off their chairs laughing at that one.) “That’s our mistake; bad on us. Therefore, we thought that would mean that these capital accounts for workers would start to grow, and we could project—we never should have talked about that, but we didn’t know.”

To date, the three co-ops employ about 90 people, hardly a number that can put a dent in an inner-city segment of 44,000 residents where the average household income is less than $18,500 and the unemployment rate is more than 25 percent. It is fruitless, I discover when I try, to ask random residents or shopkeepers in the area about Evergreen because, despite being featured in magazines and TV reports around the globe, its drop-in-the-ocean impact has barely caused a ripple in the local consciousness. Those who were fortunate enough to land one of those jobs are enthusiastic and grateful—each employee-owner I meet parrots back to me the line that as employee-owners they work harder and take more pride in their work—but even they marvel about it as if they’ve been happily struck by lightning.

Sharon Kaiser left one of the region’s largest laundry companies to join Evergreen Cooperatives but quickly wondered whether she’d made the right decision. (Photo: Duane Prokop/Getty Images)

Grassroots community activists are cautious about how they discuss Evergreen because, clearly, the political muscle behind it is potent. But they wonder if all the low-interest loans and grants that have been funneled into the project—more than $25 million so far—couldn’t have been better spent helping more than 90 people. “It seems like a whole lot of money to me,” said Jan Thorpe, a founder of the nonprofit Inner Visions of Cleveland, which funds microloans to low-income entrepreneurs. She was quick to call the Evergreen concept “bold” and “a fabulous idea” before also saying, “I’m not running their books; I’m not running their program. But there are a lot of uses for a lot of that money. There are a lot of other ways that that can be used.”

Howard says he’s in no position yet to disagree. Everything that Evergreen has done, he asserts, has produced valuable insight, a learning-by-doing that makes the entire effort even more useful to the dozens of consultants and academics who are looking to it for guidance on what works and what doesn’t. “It’s one of the most important community and economic development experiments going on in the country,” Howard says. “We realized it’d be very useful to see what cooperative ownership at this scale could look like, because most people in the United States think of a co-op, and they think of a food co-op. But what does a manufacturing co-op look like? What does it look like when there are tens of thousands of people working in a network of business? Because that was the model we wanted to create here.”

The first business, Evergreen Cooperative Laundry, opened in October 2009 with $5.8 million from a variety of sources—grants from the Cleveland Foundation and the city as well as low-interest loans from the Evergreen Cooperative Development Fund, which is, in turn, capitalized by donations from the anchor institutions. The original employees earned $10 an hour for the first six months, then received a raise to $12 and the opportunity to buy into the company via a 50-cent deduction from future paychecks. Once the employee has paid a total of $3,000, he or she becomes an owner and can receive a share of any profits. Employee-owners also have impressive benefits, from free health insurance to access to a program designed to help them buy foreclosed, long-vacant homes at extremely low cost.

Problems started immediately. The first manager had no laundry-industry experience, so the organization of the plant was a mess, recalls 27-year-old Sharon Kaiser, an original employee and now a floor supervisor and equity owner. “They were just running, and they’d throw some stuff on a cart,” says Kaiser, who left a job at the region’s largest industrial laundry for Evergreen only to wonder very soon after whether it was a bad decision. “It’s more than just throwing it on a cart. It has to be clean. It has to be packed neat…. It was hard in the beginning.”

What’s more, the expectation that the anchor institutions would feel obligated to provide a certain amount of laundry work—that was, after all, how Evergreen brass explained the project in press reports and speeches—was, at best, a puzzling misunderstanding. The Cleveland Clinic, for instance, had recently built its own in-house laundry facility, Case Western had precious little laundry, and University Hospitals was mostly under long-term contracts with the region’s large industrial vendors. The laundry did land some valuable business—a couple of nearby hotels and nursing homes—but the volume was about half of the 5 million pounds per year needed for it to become profitable.

When I visit the laundry in March, the nearly five-year-old operation has finally had its first good break in the form of a 2.5-million-pound-per-year, five-year contract with University Hospitals. It is, in some ways, proof that the Evergreen formula may not work without the anchors directing some business to it.

By now, ECL was expected to be a legitimate operator in a competitive marketplace and throw off profits, but instead its survival is tied almost to a fluke, a fortuitously timed lifeline. Last year UH’s main laundry handler, Pittsburgh-based Paris Co., was forced during contract-renewal negotiations to subcontract a chunk of new business to Evergreen. The amount of laundry UH was producing had grown since the last contract anyway because UH acquired two other major hospital systems, so Paris handed Evergreen a piece of that extra work. “It really was win-win-win,” McMicken says. “University Hospitals has no increased cost; they’re paying exactly what they’ve been paying…. It was the business decision Paris had to make: ‘Is it worth it for us to re-sign our largest customer for seven years?’ They have more work anyway. So they throw us some bread crumbs that fell off the table.”

Allen Grasa, a veteran industrial laundry manager hired to be ECL’s CEO last June, admits things were touch-and-go for a while, the laundry nearly exhausting its start-up capital on wages. “We are just about there; we are turning the corner to profitability,” Grasa says. “The previous regimes didn’t know what they were doing.”

Employees earned $10 an hour for their first six months, then received a raise to $12 and the opportunity to buy into the company. But an oft-cited prediction that they’d have $65,000 in equity after seven years won’t come true.

That said, the plant can handle as much as 10 million pounds of laundry. Short of another major anchor deal like UH, however, Grasa says he has no idea where that kind of business might come from.

The day I meet Orlando Santaella Sr. is an important one for Evergreen Energy Solutions. We are introduced on a muddy five-acre corner lot where Santaella and his coworkers—one of whom is his son, Orlando Jr.—are putting the final touches on a $3.5 million solar project that included constructing 26 rows of panels. When the solar field goes online, it is expected to generate electricity for The Medical Center Company, or MCCo, which supplies power to several University Circle entities, including the hospitals and museums. MCCo expects to recoup the money in 15 years of energy-cost savings. “We’ve been waiting over a year for this,” says Santaella as he inspects wiring hookups.

Unlike the other two co-ops, E2S is working much more as it was intended. The anchor institutions have channeled a steady amount of work, whether it’s the Cleveland Clinic paying E2S to install and manage solar panels on the roofs of several buildings or the Famicos Foundation, a prominent affordable housing developer, hiring the company to weatherize homes. The company’s managers have nimbly pivoted to seek out other sorts of handyman gigs—painting, installing siding, cleaning out abandoned structures—when the number of energy-related assignments wanes. CEO Domenic Fatica says he expects the employee-owners among his 14-person crew to enjoy some profit taking at the end of 2014. That would make it the first Evergreen co-op to do so.

Santaella, too, has become a bit of a proud exhibit for Evergreen. He emerged at age 43 penniless and virtually unemployable after serving 10 years in the federal pen for dealing cocaine. He was released to a halfway house; his applications for even menial service jobs were summarily discarded once he checked the box that indicated he’d been convicted of a felony.

It felt hopeless, he says, until his son, who had already been hired at E2S, helped him land an interview. The manager “asked me the same questions you asked me about my past, how long I’ve been down,” says Santaella after work as he snuggles on a couch with his girlfriend, speaking over the din of a Die Hard flick playing on his big-screen TV. “I explained to him that I just need a chance. He reached out to me and he said, ‘You deserve a chance. You’re not a bad guy; you just made some choices.’ So he gave me that opportunity, and I’ve been there ever since.”

His is the sort of tale that the well-meaning theorists behind the Evergreen Cooperatives want to offer the world. “That’s a good story; that’s a great, compelling story,” McMicken says. “We just need to be able to replicate that 20 times, 50 times.” In the course of my Cleveland visit, I encounter several permutations of it. DiCarlo Johnson, 25, for instance, got his job at E2S in late 2012 on a recommendation of an inner-city staffing agency called Toward Employment that arranged a job interview and helped write his résumé. An ex-con who had spent two years in prison for drug charges, Johnson was barely getting by working for $7.70 an hour at a steel-painting shop when the E2S opportunity and its $10 hourly starting wage arose.

Santaella’s case is also instructive in ways that indicate problems Evergreen may need to address. He now lives eight miles from the Greater University Circle area in a two-story house he was able to buy through an affordable-mortgage program offered to Evergreen employee-owners through the Cleveland Housing Network. There’s nothing wrong with the situation per se—he’s helped rehab a house that had blighted the block for years—except that a basic tenet of the entire project was to create wealth that would remain in University Circle and help improve those hard-luck neighborhoods.

McMicken acknowledges that Santaella’s migration is no accident , estimating that about half of the original employees of the laundry have moved away. “There’s a number of our employees who we’ve hired from these neighborhoods who began to do well enough financially to move out of those neighborhoods, so that becomes a challenge for us,” he says. “When it comes time to report the data [to Evergreen’s benefactors] on how many of your employees live in your target neighborhood, we’ve lost quite a few who originally lived there.… It’s a pretty tough hill to climb for us, to be able to track, on an ongoing basis, exactly what percentage of the staff today lives in these neighborhoods today. Because it changes; it’s life.”

Orlando Santaella Sr., right, served 10 years in prison for dealing drugs. He couldn’t find work after his release until a friend referred him to Evergreen Energy Solutions. Now he installs solar panels for a living. (Photo: Duane Prokop/Getty Images)

Just as McMicken can’t force people to live where they don’t want to, neither can he rewind the clock on the decisions made to launch Evergreen with two capital-intensive businesses, the greenhouse and the laundry, each with specific capacities and modest growth potential. “If you think back to the original goal of wealth building, that implies that we’re going to employ these people for a long, long time—10 years, 15 years, 20 years, right?, to amass wealth by sharing in the profits of your company,” he says. “Well, how are you going to keep somebody challenged and happy folding sheets for 15 years? Ten million pounds a year—that’s it, that’s all we’ll ever do. It’s a finite cap and a pretty skinny operation, in terms of profit margins.” Walking past a plain of budding heads of lettuce, he mutters, “Same with the greenhouse.”

The next logical step for growth for these operations would be to build another facility, but McMicken and others think that would be too expensive without the same sweetheart loan deal that got them started, and that’s a nonstarter. “We’re not going to keep funding the wash; that was never the model,” says John Wheeler, senior vice president for administration at Case Western and an Evergreen board member. “We never bought into that we’re just going to keep investing like that. There’s been a lot of discussion about what other businesses we might fund, as opposed to parlaying these businesses into even bigger entities. Maybe you need a dozen businesses.”

This conundrum has pointed out to Howard a key difference between the Cleveland model and that of Mondragon: the Caja Laboral Popular. The development of that co-op bank—what we call a credit union—provided a steady flow of cheap capital reinvested into the businesses and gave them an ongoing opportunity to experiment and expand. That, however, was the 1960s in Spain, long before financial institutions were as regulated as they are now, “so it was easy for them to build a bank from scratch, which is what had them take off.” A modern credit union, even if Evergreen could start one, would be severely limited by law in what sort of business loans it could issue. So instead, the decisions on start-up capital belong not with Evergreen employee-owners but with the philanthropic entities that support them.

“This is upland cress, like a watercress,” McMicken explains on our greenhouse walkabout. “It’s got a nice little spice to it, really kind of heats up a salad. This is basil; this is pretty young still.”

The same could be said for Evergreen. These are still early days, but even onetime skeptics say it is at least a new idea getting a trial by fire. “When I was exposed to it, I had a pretty cynical approach to it,” Wheeler says. “The idea that a bunch of do-gooders are going to come together and create entrepreneurs in these depressed neighborhoods was kind of hard to contemplate. It still is, even now that it’s a challenge.… Having said that, there aren’t any other magic silver bullets that have worked to provide some economic stimulus in those neighborhoods. It’s worthwhile staying the course because to the extent we can get it to work over time, it could really be a key formula for helping out.”

The key, as McMicken explains regarding the growth prospects of the companies, and Howard echoes the next morning at our breakfast, is scalability. Can Evergreen create opportunities that can lead to jobs and wealth building for more than the relatively few area residents now benefiting?

“Maybe [Evergreen] will always be small and marginal, but, you know, Mondragon, for the first 15 years or something, had three companies that weren’t very good,” he says. “Then they had the insight about the bank, and this thing took off. Maybe we’ll get scale, or not. The jury’s out on that. Can we get the scale?”

It is a question of great consequence that many are eagerly watching. The day after our breakfast, Howard was in Jacksonville, Fla., offering community leaders his insights on how Evergreen was working. Likewise, groups in Washington, D.C., New York, and Amarillo, Texas, have heard his spiel and are contemplating co-ops. Perhaps, the thinking goes, the Evergreen model works via a national network of locally centered operations?

“It’s been harder than I thought, but I’m heartened we’re still here,” Howard says. “We’ve stabilized, and we’re back on a growth curve, and I think Evergreen has been able to—it’s something that represents a possibility or hope for people, in a field where so much of what people have tried has just hit a dead end. This has been a learning laboratory; it’s been an experiment. I don’t say Evergreen’s the answer, but I’d think it’s been able to unlock the imagination for people way beyond Cleveland.”