Avoiding Community Displacement Through Workforce Development — An Opportunity Zone Perspective
by: Karen Wawrzaszek, CEO The Pomona Society
Supportive policies that aid our work in system change are critical to alleviating poverty in Washington, D.C. Private capital alone cannot make progress without a policy framework that is advancing the good will attempted. The integration of private capital and legislation for housing, community, and workforce development has a long history in our country. There is a certain homogeneity about affordable housing making it easier to test policies to stabilize it for the underserved as well as organize private investment. However, workforce development is a trickier proposition but a critical component to improving generational poverty in many of our communities.
Some economists have long held that reducing taxes for the wealthy and their businesses would increase economic activity and help businesses grow. This in turn would have a “trickle down” effect on the rest of society in the form of jobs and higher wages.[i]These principles have been used in place-based economic development strategies at the local, state and federal government levels with the aim of uplifting economically distressed communities. The general consensus? They simply have not worked.
Take for example the “Empowerment Zones” and “Enterprise Communities” programs established by the Clinton Administration in the 1990s. Over five years at a cost of $3.5 billion, these programs utilized public-private partnerships (P3s), regulatory relief, tax incentives and block grants designed to “stimulate the economy, create jobs, revitalize economically distressed urban communities, making these areas more attractive for private investment and job creation”.[ii]One analysis of Enterprise Zones in Maryland done by the U.S. Government Accountability Office (GAO) found that the program had no certifiable influence on improved economic conditions in those communities.[iii]
Additionally, researchers at the Brookings Institute have looked at tax incentives more broadly to better understand their influence on business growth, job creation, and greater societal impact. Like the GAO, they found limited evidence to support the idea that tax incentives “influence business decisions to nearly the extent policymakers claim nor are they properly targeted to businesses and industries that can offer the greatest economic and social benefit”.[iv]
It’s important to understand this failed history because a new version of place-based tax incentives called “Opportunity Zones” (OZs) are taking the country by storm with broad implications for America’s economically distressed communities with our focus being on Washington, DC. Program guidelines required “Chief Executives” of each US state to nominate up to a quarter of its “Low-Income Community census tracts” (LICs) for OZ designation. LICs are defined in the tax code as census tracts with poverty rates of 20 percent or more with median family incomes less than or equal to 80 percent of the state median family income (if they live outside of a metropolitan area) or 80 percent of the statewide or metropolitan area median family income (whichever is higher).[v] In the early stages of the program, Congress encouraged Governors to nominate communities that are, 1) “currently the focus of state, local or private economic development initiatives, 2) “have demonstrated success in geographically targeted development programs in the past”, and 3) have recently experienced significant layoffs due to business closures or relocations”.[vi]This guidance was by no means legally binding.
The OZ eligibility criteria was broad, making 57% of the nation’s communities eligible for nomination; some truly struggling economically, others not so much.[vii] The US Treasury certified nearly 9,000 OZ’s from state nominations.[viii]According to the Economic Innovation Group (EIG), these OZs are host to an estimated 31.3 million people with average poverty rates of 31% and median family incomes just under 60% of the area median. The average OZ also has an unemployment rate of 14.4% with 70% living in “severely distressed” census tracts. On the flip-side, eligible OZs are also home to 24 million jobs and 1.6 million businesses; three-quarters of them experienced employment growth from 2011 and 2015.[ix]OZs were targeted for their need for investment and potential for promising returns. This is a delicate but necessary balance to meet in the hopes of incentivizing investors to allocate capital to communities that have been left out of the nation’s strong economic recovery post-Great Recession.
Designation as an OZ gives investors a chance to reallocate capital gains (or profits) from their previous investments into what’s called a Qualified Opportunity Fund (QOF). QOFs are US Treasury certified institutions granted the rights to hold investment funds for OZs. When an investor puts their capital gains into an QOF, they can defer payment on those taxes for as long as the money remains in the QOF.[x]The incentive to keep their money in the QOF is a progressive reduction in the amount of taxes paid on those gains the longer the money remains in the fund. After 10 years, investors will not have to pay any taxes on those gains.[xi]The QOF is then responsible for taking that money and reinvesting it into projects that help advance the economy in an OZ; projects eligible for QOF funds are broad allowing money to go into affordable housing, small businesses, grocery stores, job training programs, and others.[xii]In applying broad criteria for OZ and QOF eligibility, the hope is that investors will be able to cut through bureaucratic red tape and consider long-term investments in overlooked communities creating more economic opportunity and better paying jobs for people living in OZs.
Each state did a relatively good job nominating OZs that exceed the minimum eligibility requirements as noted above (see designated tracts designated for DC below). However, several very serious concerns have arisen from the OZ legislation that call the potential success of the program into question. One major concern is the complete lack of governmental oversight of QOF investments. At this time there are no restrictions on what kinds of businesses or projects that QOF money can be allocated to aside from a few “sin businesses”.[xiii]There are currently no federal data reporting or tracking mandates for QOFs and no requirements to include the voice of local residents in investment decisions.[xiv]There is also great concern that investments will solely be focused in areas that are currently gentrifying or on projects that were destined to happen already but were not yet in process.[xv]Nowhere in the country is this concern greater than in Washington, D.C. where 75% of OZs are already rapidly gentrifying.[xvi]
Consider Long Island City, New York, the formerly scheduled second headquarters of Amazon and also a qualified opportunity zone. In theory, there are no rules stopping a QOF in Long Island City from using its funds to help build Amazon’s new campus.[xvii]This theoretical investment would do nothing to help the lower-income families that have long lived, and struggled, in Long Island City and would not create any better paying jobs for low-skilled workers. This is not exactly the intent of the OZ program and would likely force low-income families out of the area.
To overcome these downfalls and ensure QOF investments are focused on uplifting low-income families, local government leaders must step up and exert their influence. Local leaders can mandate transparency about QOF investment activities and establish their own data collection and assessment framework tracking program impacts. They can mandate engagement with local residents who are the area’s true experts on community-wide needs. Their voice can be a powerful influencer in identifying investment gaps in the community and target businesses or opportunities that can maximize social benefit. To date, there are several leaders stepping up to this challenge and compelling measurement standards.
The most important thing governments can do, is create workforce development programs that provide opportunity to prepare residents to compete in a changing economy and continue to reside in their home community. To advance in today’s economy, with technology disrupting every job and every industry, people need to adapt with it; all they need is the opportunity and local governments have the power and resources to make that happen.
While there is massive potential for capital inflows into the DC community (and others), we need to be careful that affected community members are able to build assets and overall wealth through participation in the various investments (rather than playing the typical tenant role ) — pushing stakeholders further from proximity of their livelihoods (which I argue is a regressive tax) when the tax law holding periods expire. If we don’t engage in a meaningful workforce development program and asset ownership model, we risk losing local residents as a side effect of increased asset values that the community can’t absorb.