Impact Voices | August 11, 2020

Dismantling structural racism in community development finance

Annie Donovan
Guest Author

Annie Donovan

ImpactAlpha, Aug. 11 – By most measures, the federal New Markets Tax Credit (NMTC) Program has been a resounding success. Since its creation nearly two decades ago, the program has generated more than $52.5 billion in investments to fuel economic development in low-income communities, supporting more than 830,000 permanent and construction jobs and more than 218 million square feet of commercial real estate. For every $1 of public investment, $8 of private-sector investment is leveraged.

Despite these catalytic investments, there is one area where the program underperforms that should be addressed by Congress: Community Development Entities (CDEs) owned or led by Black, Indigenous, and other People of Color (BIPOC) have consistently fared worse in the fierce competition for access to the credits.

This is not to say that NMTC capital does not reach communities of color. In fact, some $28 billion of the aggregate investment was delivered to majority-minority census tracts, creating 244,000 permanent jobs. However, the program is not serving minority-run community investors, thereby limiting their opportunities to grow and support high-impact projects in the communities they serve.

The Government Accountability Office (GAO) studied this issue in 2009. It found that from 2005 through 2008, minority-owned CDEs were successful in about 9% of the NMTC applications they submitted and received about 4% of the credits for which they applied. By comparison, non-minority CDEs were successful in about 27% of their applications and received about 15% of what they requested.

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Although the study was inconclusive as to why, it suggested that “when controlling for other CDE characteristics, minority status is associated with a lower probability of obtaining an allocation.”

In response, the CDFI Fund conducted an intensive and highly regarded training targeted to minority- and Native-owned CDEs, which helped increase the number of awards to minority applicants. Nonetheless, the disparity persists, with BIPOC  organizations winning approximately 14% of allocations from 2017 to 2019, up from roughly 8% in previous years.

Lost opportunity

Having spent four years as the director of the CDFI Fund, I would assert that the disproportionate results reflect the same deeply seated structural barriers that prevent minority-owned enterprises from accessing credit in other parts of the economy, such as small business loans and venture capital investments.

This is even reflected in the community finance world. For example, Hope Policy Institute analyzed CDFI Fund data earlier this year and found that minority-led CDFIs have a lower average asset size when compared to their white-led counterparts, holding just 12% of total CDFI assets.

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This disparity comes through in the competitive process for NMTCs. Organizations with smaller balance sheets and smaller staffs tend to receive lower scores, as these characteristics tend to be judged as lower “capacity.” The process also rewards incumbents that have a “track record” of making similar investments, making it doubly hard for new entrants to break into the program, even if highly capable.

Why is this so important? In addition to questions of fairness and equity, it’s because the NMTC program helps to bolster the capacity of the community investment field as a whole. Too often, BIPOC investors lose out on that opportunity, which constrains their ability to finance businesses, nonprofits and community development efforts that are not only overlooked by the mainstream marketplace, but might be missed by other CDEs as well.

Congress has a clear opportunity to address this. The House of Representatives recently passed H. R. 2, the Moving Forward Act, which includes a provision to make the New Markets Tax Credit (NMTC) program permanent at $5 billion per year. The Local Initiatives Support Corporation (LISC) wholeheartedly supports a permanent NMTC program and an even larger allocation of credits, given the current rate of over-subscription. However, more allocation alone won’t be enough to even the playing field.

Congress should also give BIPOC-owned organizations a better shot at accessing credits.

On-ramps and set-asides

More specifically, Congress should allow the CDFI Fund to create an on-ramp for BIPOC CDEs. The Fund already offers similar on-ramps in other programs, such as the Native American CDFI Awards (NACA) program, where Congress allocates a special pool of financial and technical assistance resources for Native CDFIs; and the Small and Emerging CDFI Awards program, where smaller CDFIs receive smaller awards, but have better odds of being funded, and as they grow, graduating from the program.

Similarly, an NMTC set-aside could be created for small or emerging minority- and Native-owned applicants. The allocations could be smaller for first time allocatees, and thresholds could be established to “graduate” out of the pool once a competitive track record is established.

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Over the years, I’ve watched the NMTC industry resist set asides of many types in this program, and mostly I’ve agreed with that resistance. But, this case is different. This is structural racism at play, and we must work to dismantle it.

As one of the largest recipients of NMTCs over the life of the program, LISC is a quintessential NMTC program incumbent; self-interest is not our motivation. (LISC received $50 million in the latest round of NMTC awards). We believe it is the right thing to do for the health of our industry. By making the NMTC program more inclusive and equitable, Congress will build the resilience of our nation’s community investment infrastructure, support a more productive national economy, and most importantly, build assets for BIPOC investors as well as minority communities.

Annie Donovan is chief operating officer at The Local Initiatives Support Corporation.