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February 11, 2011
New Markets Tax Credits Come Under Media Scrutiny
    by Robert Kropp

Mark Pinsky of the Opportunity Finance Network talks with SocialFunds.com about revelations that tax credits intended for underserved communities were used to finance the renovation of a luxury hotel in Chicago.


The Treasury Department's New Markets Tax Credit (NMTC) program, which since 2003 has led to $50 billion in investments in 3,000 businesses, came under fire in the media recently, when Bloomberg reported that funds from the program were used to finance the $116 million renovation of the Blackstone, a luxury hotel in Chicago.

According to Bloomberg, both Prudential Financial and JPMorgan Chase received millions of dollars in the tax credits for lending money for the upscale project, while Chicago's West Side, where unemployment was 35% in 2000, "languishes without money from New Markets."

Given the current political environment, in which an ideologically driven Congress seeks to slash spending on social programs regardless of their long-term economic benefits, community development financial institutions (CDFIs) and other organizations that direct NMTC funds to underserved communities responded with concern over the allegations. After CBS picked up the story, the New Markets Tax Credit Coalition issued a statement in which it took issue with important aspects of the coverage.

"Both CBS and Bloomberg contend that the individual poverty rate…includes the counting of students and others in similar living situations," the Coalition stated. "According to the US Census Bureau, students and others living in similar circumstances are not included in the determination of the individual poverty rate for a community."

Furthermore, the statement continued, "CBS and Bloomberg make much of the absence of NMTC projects in the economically distressed west side of Chicago. Yet, a Chicago‐based organization is providing $12 million of NMTC allocation for an expansion of a community-based health center creating over 100 new permanent jobs within three blocks of St. Agatha's church in the North Lawndale community on Chicago's west side."

Mark Pinsky, President and CEO of Opportunity Finance Network (OFN), a network of more than 170 CDFIs, also issued a statement in response to the media coverage.

"The intent of the New Markets Tax Credit Program is to spur new investments from new sources in new markets," Pinsky wrote. Observing that CDFIs have provided "financing that benefits low-income, low-wealth, and other disadvantaged people and communities…to the tune of more than $30 billion," Pinsky continued, "OFN has always strongly supported disciplined targeting of NMTCs to ensure that they maximize value for underserved communities and taxpayers alike."

SocialFunds.com spoke with Pinsky about the NMTC program, the recent media coverage, and what can be done to prevent funds from the program being used in such a manner as occurred in Chicago.

"New Market Tax Credits were created to spur economic growth in markets that were underserved, by bringing new investors in," Pinsky said. "They are issued to institutions called Community Development Entities (CDEs), which could be CDFIs, or banks, or government entities."

According to the Treasury Department, "In order to be certified as a CDE, an organization must… have a primary mission of serving Low Income Communities or Low Income People and maintain accountability to residents of the Low Income Communities that it serves."

"The program requires that you meet certain criteria on the ground, a certain level of poverty and that sort of thing," Pinsky said. "But statutes can be imperfect measures, and it's unfortunate but not entirely avoidable that one or two projects got used for purposes like that. An overwhelming majority of the credits get used for the right purposes."

The Bloomberg article noted that JPMorgan Chase was not the only big bank to secure tax credits for projects that seem at odds with the mission of NMTCs. US Bancorp used $39 million to finance an antique car museum in Tacoma, Washington, setting up an affiliated corporation to qualify for the funding.

In Pittsburgh, Goldman Sachs used NMTCs to invest $30.5 million in the construction of a shopping center in an area that included a Whole Foods Market.

According to Goldman spokesman Stephen Cohen, "Now…Goldman is putting hundreds of millions of dollars of its own money into New Markets developments in what it calls highly distressed neighborhoods," Bloomberg reported.

"Goldman Sachs has a subsidiary that is certified as a CDE, as does JPMorgan Chase and all the big banks," Pinsky said. "That's not a bad thing at all, because we need as many institutions as possible working in these markets."

"We'd like to see priority given to CDFIs as recipients of the credit allocations," he continued, "But we would not want to see only CDFIs being eligible."

Asked what steps can be taken to maintain the program's integrity, Pinsky said, "We've advocated for tighter control by Congress over the use of the funds. We'd like to see a greater scrutiny over the use of funds during the application process."

"If there's a problem, let's fix it," he continued. "It's a really important program that's worked well and benefited millions of people. Anything draconian would be irresponsible."

The statement from the New Markets Tax Credit Coalition concluded, "There is substantial evidence that the New Markets program is working. According to the Government Accountability Office (GAO) the Credit is an effective incentive for spurring long term investment in low income areas."

 

 
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