As Delivered on Friday, June 8, 2018, in Boston, Massachusetts
Thank you, Mayor Fischer. It’s good to see you again, and Mayor Barnett. Glad to be here today. I share the enthusiasm that Cory Booker and Tim Scott might have reinvigorated in your last gathering around the Opportunity Zones legislation and the creation of these Opportunity Funds.
At The Rockefeller Foundation, despite our introduction, we’re a 105-year-old philanthropic institution that does work in the United States and around the world. Perhaps most relevant for this discussion is we fundamentally believe in mayors in this country. We have active programs in more than two dozen cities, and we try to share the ethos that mayors carry – which is a pragmatic, practical focus on delivering results for communities; experimenting, trying new things; and working together in a context of public-private partnerships to make things happen – sometimes in a setting where it seems like other forms of government have less of those characteristics. So, we are glad to be here and look forward to working with you going forward.
The Opportunity Zones legislation, just by way of update, has been an extraordinarily fast-moving piece of policy in our country since Tim and Cory put it forward in the Senate. As you know, Ron Kind and Patrick Tiberi were the sponsors in the House. Tremendous bipartisan support from both sides. And while the bill passed in late December, the initial deadline to designate zones was first March 22nd, and then April 22nd, which resulted in tremendous, tremendous, very quick progress. And I’ll provide a few thoughts on that.
But the big opportunity here, as you already know, is that America has more than $6 trillion in unrealized capital gains, and when we evaluate the scale of the tax benefit being offered to those holding those unrealized capital gains – if they move some of those gains into designated Opportunity Zone funds – they would benefit from, frankly, the largest tax benefit since World War II to invest in low-income communities around this country.
Without getting into too many details, there are three elements to the tax benefit that investors gain from. The first is a ten-year deferral on paying capital gains tax, at all. The second is when they do pay the nominal tax ten years later, they get a significant reduction in the actual cost of the tax in nominal terms. And the third is any gains experienced in the ten-year period that the money is invested in low-income communities via Opportunity Funds, is completely tax-free.
So, this is – one way or another – an incredible public investment in public-private partnerships and investment opportunities in lower-income communities across this country, and we are already seeing very significant fund formation activities because of the sheer tax benefit being offered. As someone mentioned to me the other day, you do not need to have $1 billion in pre-IPO Facebook stock to get how important this is for tax planning purposes.
Now, whether or not all of that investment capital – which many estimate to be in the scale of tens of billions of dollars a year when up and running – actually generates the kind of impact on lifting up vulnerable families and lower-income communities, is really up to those of us around this table and many of the actions we choose to take. I know that each of you have economic development plans and have a serious focus on creating jobs in your communities, and we think this – we believe there’s an opportunity for us to work together to create real change.
Just to give you a sense of what is happening in the designation of Opportunity Zones: as you know, 25 percent of the low-income census tracts per state – up to 25 percent of those tracts could have been designated by governors as Opportunity Zones. Every state and territory except Guam submitted their recommendations. All but four states have had them approved. And the entire territory of Puerto Rico has been designated an Opportunity Zone in a special designation.
We estimate that almost 9,000 – 8,762 census tracts will ultimately be designated as Opportunity Zones. And when you look at those census tracts, they are lower-income, they do have higher poverty rates, they are more ethnically and racially diverse. The designated zones have a median household income of $33,000, and a median unemployment rate of 13 percent, and an average poverty rate of 31 percent. So that part of it feels like the designations did reach communities in need.
They also tend to have lower home values, and lower monthly rents, and lower rates of home ownership, which, of course, also creates some risk. As costs go up, communities – instead of being lifted up themselves – might be pushed out, depending on the actions we take together. And of course, there are significantly higher African-American and Hispanic American population ratios within those communities.
We’re enthusiastic, but we are also recognizing that taking advantage of this legislation will present some challenges. First, a lot of the impact-oriented organizations – I look forward to hearing from Enterprise and others as we go forward – are going to have to make a shift from working with debt-based instruments to working with, really, private equity and equity-based investment instruments, which is going to be challenging and present some risks.
Second, there is the challenge of unintended consequences that everyone around this table knows better than I do, so we just look to the examples taking place in West Louisville and elsewhere to learn on how to get this right. And hopefully we can share best practices and communicate with each other.
And, there’s been some challenges with maintaining the momentum. I think once the designations happen, governors – the follow-up from governors’ offices has been somewhat uneven in our view. And so we think the next wave of leadership will come hopefully from mayors and local community leaders as we go forward.
The Rockefeller Foundation is prepared to work with you in at least three ways, but this was also an opportunity for us to come and listen to how we can be most helpful.
First, we think you each have an opportunity to present – either via your economic development teams or in another format – a genuine pipeline of investable opportunities to designated Opportunity Funds. That takes some work, of course. That takes a lot of strategic thinking around how to make sure that the investments are part of your vision for economic development in your lower-income communities. And it takes, obviously, the investment sophistication to present that pipeline of investable opportunities in a form that’s most attractive. So, we’re prepared to work with you on that task and others as we go forward.
Second, we see that there is an opportunity to put mayors, governors, local community economic development officials in front of investment firms and investment fund managers in a more structured way. And so, especially as we get into the fall of next year, we hope to offer and create platforms – for those of you that want to take advantage of it – to be in front of some of the larger funds and some of the more national funds that get developed as this goes forward.
And third, we are very focused on trying to make sure that we ride this process through to impact, in terms of lifting up vulnerable communities. And to that end, we have helped coordinate a group of 16 or so other foundations through an entity called the U.S. Alliance for Impact Investing. That includes most of the larger foundations in America. And we think if that group can put forth standards, offer philanthropic partnerships for specific communities, and develop investment structures that are preferred in terms of lifting people up as opposed to pushing them out, we have a greater chance of being successful.
And we note that those are activities that might otherwise take place if there was more policy guidance from, say, the Department of the Treasury, but in this context, we’re not seeing that, and we’re seeing the federal administration of this being led largely – almost exclusively – by IRS regulatory behavior here towards investors.
So that’s sort of where we are. I look forward to learning from the rest of the discussion here, and I do think this is – as I started with – the biggest single opportunity for driving private investment into low-income communities in America since World War II, and our opportunity to take advantage of that is probably in the next 18 months.
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