Opportunity Zones have come under fire recently – here’s how looking at history can help us ensure the program’s success
In a recent post, we discussed some of the most common criticisms of the Opportunity Zones initiative and why the most recent data suggests they may be shortsighted. We also discussed some actions that could be taken to ensure the program’s viability in the future.
When evaluating a government program like this, it’s important to avoid looking at the results in a vacuum. Putting OZ data alongside that of similar initiatives can help us understand how successful it’s been and what we might learn from the mistakes made with those other initiatives.
How Opportunity Zones Compare to Other Federal Programs
One of the biggest complaints about the OZ initiative is that its use has been far too narrow, and it’s true that the 1,362 designated census tracts that received OZ investment pre-2019 represented only 16% of all available tracts, which is fewer than hoped for. But even with those disappointing numbers, Opportunity Zones have still outpaced comparable federal community development programs.
Take, for example, the New Markets Tax Credit program, which has been criticized for being too heavily tilted toward real estate in the same way OZ has. In 2019, NMTC “reached projects and businesses in approximately 400 census tracts,” less than a third of those reached by OZ.
This is despite the fact that, as a recent Congressional Research Service report discovered, “virtually all of the country’s census tracts are potentially eligible for the NMTC” because of the varied definitions of low-income communities.
NMTC isn’t the only program lagging behind Opportunity Zones. One of the most well-publicized government programs in existence is the Low Income Housing Tax Credit, which was created “to encourage new construction and rehabilitation of existing buildings as low-income rental housing for households with income at or below specified income levels.”
A joint investigation from NPR and PBS’s Frontline in 2017 found that “LIHTC has produced fewer units than it did 20 years ago, though it’s costing taxpayers 66 percent more in tax credits.” While this is a worrying development regarding LIHTC, it also highlights the need for Opportunity Zones, which can increase the construction of new affordable housing units, for which there is obviously a need but not enough supply to go around.
Another government initiative might be having even less of an impact: according to the Government Accountability Office, the Small Business Administration’s marquee loan program “accounts for a little more than 1% of total small-business loans outstanding,” raising questions about whether it should even exist.
What do we draw from this? It’s not that these programs are completely ineffective, just as Opportunity Zones should not be written off simply because they haven’t lived up to some expectations. Changes can and should be made to increase their effectiveness, and the fact that they go through these ups and downs is evidence of why examining only a brief period is not enough to make a verdict on the OZ initiative.
Cutting Down on Fraud and Abuse
Many other government initiatives have also been marred by excessive corruption. For example, Low Income Housing Tax Credit syndicators were found to be charging exorbitant fees, and states have spent millions on complex bureaucracies that increase the budgets of construction projects, making it harder for developers to create the type of housing for which the program was designed. There have also been corruption scandals involving the mismanagement of funds and tax credits.
The New Markets Tax Credit has had similar issues that stemmed from complex bureaucracy and a lack of transparency, with the GAO finding that some developers were combining funds from other government programs in order to increase their basis for the tax credit. And a recent report on the Small Business Administration found that it “didn’t follow several congressional mandates in implementing its huge Paycheck Protection Program designed to keep businesses afloat during the coronavirus pandemic,” thereby prohibiting many borrowers from receiving loans as intended.
This sort of corruption is something that must be recognized and dealt with. Government programs tend to attract bad actors who wish to take advantage of these incentives at the expense of the public, which is why it’s important to weed out problematic funds and individuals so they don’t take down a worthwhile program. So how do we do that?
Learning From History to Improve the OZ Program
The way to combat corruption is proper reporting and transparency, and it doesn’t matter if this drive for accountability comes from government oversight or industry practices. If investors are given proper information, they can avoid being swindled, and the government’s money can be protected.
However, the government hasn’t been active in pursuing proper oversight of these programs, which is what makes private-sector solutions necessary. In 2015, the GAO said the IRS’s oversight of state agencies’ handling of the LIHTC has “been minimal.” The GAO released recommendations for the NMTC along similar lines to “ensure adequate controls” regarding unnecessary duplication and “more complete accurate data on fees and costs.”
What we’re seeing is that we can’t necessarily count on the government to institute reporting requirements that will alert investors and regulators of potential fraud. While more regulations may be proposed, if they are not, the industry needs to address these matters on its own or else risk losing OZ altogether. It’s not that those in the industry are fighting tighter regulations – quite the opposite, in fact. Industry leaders have been instituting practices that exceed the current minimums.
JTC has been the leader in Opportunity Zone fund administration, developing a set of best practices with the goal of transforming the industry and ensuring the program’s long-term viability. This includes proper impact measurement and reporting to help investors and the public understand a project’s actual impact on the community.
Whether these practices become the law of the land or simply a calling card for the best funds remains to be seen, but given time, the cream will rise to the top, and with proper oversight, we can remove bad actors to allow the OZ program to do the good it was intended to, good it is already doing across the country. By concentrating on best practices, we can ensure Opportunity Zones will be even more successful than they already have been.
Learn more about our Opportunity Zone best practices by watching our OZ Initiative – Best Practices Video today!