Spring brought the possibility of new beginnings for U.S. communities that have been left behind, as March 21 was the first deadline for governors to choose up to 25 percent of their state’s most economically distressed communities to comprise Opportunity Zones. Once validated by the Treasury Department, these Opportunity Zones are eligible for private investment generated by capital gain tax deferments and other incentives tucked into the 2017 federal tax reforms.
This new program is laudably place-specific, given the divergence in economic fortunes between small and large communities that has been a defining feature of the U.S. economy over the last decade.
Yet previous place-based policies have, at best, an uncertain track record. It is an open question whether this market-driven approach will do any better. The incentives, as Brookings Senior Fellow Adam Looney has noted, favor communities already on the upswing and developers or businesses already poised to profit, rather than driving resources to communities that need the most help.
This is a recipe for deepening political and economic divides rather than tackling them, especially with the U.S. experiencing the largest single drop in trust in government ever recorded by the Edelman Trust Barometer. In such an environment, it is critical to adhere to three standard principles of development effectiveness—transparency, inclusiveness, and clarity of outcomes—to reinforce the program’s impact and credibility.
Transparency: A simple analysis shows that 32 out of 51 possibilities (the 50 states plus Washington, D.C.) created a dedicated web presence that provides information on their unique approach to Opportunity Zones. The timeline has been quick—the law gave governors 90 days to make their choices, though Treasury has offered an extension to April 21 for those who requested it. Such a rapid rollout heightens the stakes in leveling the playing field for access to information. Yet almost 40 percent of states are not updating their citizens in this most basic way.
For states with publicly accessible material, the level of information varies widely. Just 20 percent provided any description of the criteria and process used to make their final choices. Sixteen states provided their own maps and data, and 14 more provided links to external maps or resources so that the public could see which census tracts the governors were choosing from. Eleven states have published their governor’s final choices that were sent to Treasury.
As the process moves forward, the program should seek to set a much higher standard by doing the following:
- Mandate that each state provide and maintain a dedicated publicly accessible outlet for reporting and information on the program, updated at least annually.
- Mandate that states report on the amounts invested in each Opportunity Zone, including the legal owner and beneficial owner of the companies that are receiving investments, as well as the owner of the capital invested. Such transparency regarding beneficial ownership will help balance the benefits to investors with benefits to distressed communities.
Inclusiveness: During the process of making their choices, just one-third of states directly asked for input from the public, soliciting citizens’ feedback via a structured, accessible method. An additional 18 states formally solicited input from local government leaders (some of whom may have solicited input from local constituents at their discretion).
Prior experience demonstrates that successfully transforming communities through place-based strategies often depends upon high levels of participation and leadership by local residents in the design and execution of such programs. This is different and requires a much higher level of engagement than simply soliciting public or local feedback.
To do this, the Treasury should:
- Encourage or mandate states to set up citizen advisory groups, with a majority of members comprised by local residents, to help set priorities for validated Opportunity Zones. Such groups should be enabled to provide essential leadership and act as key partners in developing and guiding local strategies to identify and put together projects with high social value.
- Encourage states to mobilize local nonprofits, faith-based groups, universities, and philanthropies to draw upon their expertise, relationships, and resources to attract and support local input and leadership.
Just four states—California, Colorado, Idaho, and Vermont—simultaneously met the four dimensions of inclusivity and transparency: (1) published a dedicated web site; (2) asked for structured input from the general public; (3) published at least a link to the eligible census tracts from which their governor was choosing; and (4) published their governor’s final choices recommended to Treasury.
Clarity of outcomes: When making their recommendations, several of the states, based on Treasury’s guidance, gauged the likelihood of successfully attracting private capital and generating threshold rates of return.
Yet levels of investment are just inputs. The ultimate purpose is social and economic progress. The aim is not just to stimulate investment and economic growth, but economic growth that benefits the current residents of the Opportunity Zones. This requires a clarity of purpose and intent, which should involve:
- Mandating that projects receiving investments commit publicly to time-bound, outcome-based benchmarks for success, measuring the impact and benefits that local residents are expected to experience. These impacts would fit within a set of overarching priorities developed by the state, in conjunction with the citizen advisory groups. Examples include the number of jobs created that are filled by local residents, a targeted percentage increase in median incomes, or a targeted decrease in poverty rates. Progress on these indicators would be updated regularly on the states’ public reporting sites.
- Measuring the change in trajectory—that is, measure how trends over time regarding social and economic progress are affected as the program unfolds. Some areas are already experiencing improvements and even gentrification; others have been stuck or may have even regressed recently. The real impact of the program is whether its investments have had a substantial impact in positively accelerating these trends—whether the investments bend the curve in a positive direction, so to speak. The structure of the program provides a clear opportunity for evaluating this effect.
- Creating a Learning Lab to help states find and disseminate successful models, and bring them to scale. There are lessons to be learned and models to adapt from different points of the country and across the globe, and states will soon have their own experiences to share. Left to their own devices, it will be difficult for them to access and make use of such knowledge.
The last two recommendations highlight roles where philanthropic investment and leadership would be particularly valuable.
The promise reflected by the Opportunity Zones is welcomed good news for communities that have not been experiencing much hope over the past decade. Ensuring basic levels of transparency, inclusiveness, and clarity of outcomes will position the program to turn that hope into real progress. Otherwise it risks reinforcing political and economic divides, exacerbating the lack of trust between citizens and their government.