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Community Development and Racial Equity: Does the NMTC Program Need to Reckon with Race?

Published by Teresa Garcia on Thursday, December 3, 2020

Journal Cover December 2020   Download PDF

With the COVID-19 pandemic and economic recession disproportionately affecting people of color–along with instances of violence against Black people gaining national attention–there is a renewed focus on racism in America and how systemic racial inequalities need to be addressed.

The Novogradac 2020 New Markets Tax Credit Fall Virtual Conference in October explored this issue in the context of community development with a panel called, “Does the New Markets Tax Credit Program Need to Reckon with Race?”

“We have been going through a racial reckoning that is in part spurred on by the pandemic because we’ve seen through the pandemic a disproportionate impact on communities of color and low-income communities,” said conference panel moderator Annie Donovan, chief operating officer of Local Initiatives Support Corporation and the former director of the Community Development Financial Institutions (CDFI) Fund. “It’s time for us to not only talk about inequalities or the criminal justice system, but what are the ways in which inequities, in particular racial inequities, are baked into our systems, or social systems and our economy?”

Exploring Systemic Inequality

Each of the panelists agreed that there are long-standing racial inequalities built into financial systems that must be addressed. Laura Vowell, director of business development for new markets tax credits (NMTCs) and historic tax credits at U.S. Bancorp Community Development Corporation (USBCDC), cited USBCDC’s research for its most recent NMTC allocation application to illustrate financial disparities along racial lines. She said that for every $100 in white family wealth, Black families have $5.04. Black families are twice are as likely to live in substandard housing and Black children experience nearly twice the rate of poverty as children of other races. Between 1983 and 2016, the median net worth of Black people dropped by 51.5 percent, while the median net worth of white people increased by 25.1 percent.

“[The NMTC] is meant to address issues in low-income communities; low-income communities are disproportionately populated by people of color due to racism, so [the NMTC] ostensibly is there to address racism,” said Vowell. “But because it is part of an intrinsically racist system, those inequities will continue even if we use the program as proposed. … We need to change how we’re doing things in order to stop perpetuating the racial inequality that our financial system creates.”

Inez Long, president and CEO of Black Business Investment Fund (BBIF), said she believes racism is embedded in the financial systems. “I have this opinion based on the work that I’ve done over the years,” said Long. “I started out working as a commercial banker and I learned very early that there were some loans made to certain people within the community that I was allowed or encouraged to do, but for loan requests from people of color I was always forced to use the most conservative approach to loan policy guidelines to make decisions regarding those deals.” Later in her career, Long said she also observed challenges that Black businesses faced were a lack of equity or net worth and the assumption that these businesses were a bad high-risk investment. Similarly, Long said that community development entities (CDEs) with smaller staffs and assets are often perceived as not having enough capacity to be successful in the NMTC; an untruth.

Donovan later noted how those factors typically play a significant role in determining which CDEs are awarded NMTC allocation authority. “The words ‘capacity’ and ‘track record’ are built into the way the CDFI Fund evaluates the applications,” said Donovan. “I think that, in combination with the way markets work, leads to the outcomes that we get.”

Dante Desiderio, executive director of Native American Financial Officers Association, an organization that represents more than 130 tribal governments, discussed how tribal communities also face additional challenges. “We know how to do these deals and we know that Indian Country needs these deals, but we’re not getting them,” said Desiderio. “We all know that tribal communities are different. We value community over individuals, which means the incentives for development and the need for capital are different. We’re a sovereign nation, which means you have to deal with different rules on project development. We occupy trust lands, which means that collateral is always a challenge.”

Desiderio said these factors make it difficult to attract capital from financial institutions that usually default to tried-and-true investments instead of making the effort to understand the unique needs, challenges and opportunities of tribal communities.

“To answer the question directly of whether there’s racism built into the NMTC system, I would say the system and those carrying it out have been indifferent,” said Desiderio. “I’m using that word on purpose. We don’t see the willingness of those who are making these decisions to listen or to understand our communities or to adapt the program in a way that fits our population. And that is a colonial mindset that is not healthy for our well-being and it doesn’t bode well for our eventual participation in the program in a meaningful way.”

What’s at Stake?

Panelists said this indifference to the needs of people of color has social and economic costs.

“What we lose by remaining indifferent is we lose the opportunity for greater participation, which in my mind, means a lack of growth in our overall economy because if more people are allowed to participate, it grows America’s [gross national product],” said Long.

Desiderio called 2020 a “wake-up call” that brings to light how economic disparities in Indian Country are costing the lives of native people during the pandemic. “We’ve seen our health care facilities have been inadequate and underfunded to be able to deal with this crisis,” said Desiderio. “We also see the housing issue. We have the longest waiting list in the country for housing and we have the highest occupancy rates.” He said the lack of available housing stock has meant an inability to social distance effectively, which has led to increased transmission of COVID-19.

Beyond the health crisis, the pandemic has also highlighted disparities in school funding. Desiderio said underfunded schools means tribal communities often do not have the infrastructure in place to administer online or distance learning, putting their children at a disadvantage.

Vowell said keeping the systemic status quo means missing out on the voices of people of color. Vowell said many of the participants in the NMTC–such as investors, attorneys, accountants, community development entities and developers–are roles held disproportionately by white people. “There are very few people of color working actively in this industry,” said Vowell. “There’s a disproportionately low number of CDEs led by people of color that win allocation at all and definitely none that win consistently. So even if we invest a disproportionately high amount of our allocation into communities of color, we’re still missing that opportunity to have the decisions and the power of that decision to be held more in the hands of people of color.”

Vowell said it’s important to evaluate the entire structure of the NMTC to see who benefits from the program.

“All of us focus naturally on the visible and calculable benefits that we create from this program and we feel good about it,” said Vowell. “We pat ourselves on the back, and in doing so, we miss the opportunity to really examine who is accumulating wealth in relation to maintaining the status quo of the program.”

Solutions

Addressing injustices engrained in systems, such as the NMTC, will require a fundamental shift in how stakeholders measure success and racial equity, said panelists.

“This [NMTC] program was effectively intended to address inequities caused by racism,” said Vowell. “To do that you can’t just look at proportional investment into communities so you can claim that, ‘The population looks like this and we invested this much into the communities.’ We should be reaching well beyond that because I think what we’re trying to change with this program, or what we should be, is not just who uses that end-user benefit, but which populations have control of and access to the resource.”

Donovan agreed. “I think the talking points of the industry have been that a majority of the credits go to benefit minority communities, but … there’s more to this than just that,” she said. “It’s where is the wealth being built, who is getting access to the credits and is there a difference between the deals that get done when CDEs that are led by people of color have access to them versus white-led organizations.”

Both Long and Desiderio suggested creating a proportionate set-aside of NMTC allocation authority for CDEs led by Black people, indigenous people and other people of color.

“Too often Black, Indigenous and people of color tend not to be the developers of the projects, so they tend not to benefit from the profit of the project that goes into that low-income census tract,” said Long. Long suggested that white-led CDEs could do several things to improve this racial finance gap: they could commit to 1) a percentage of their pipeline to projects that have developers who are ethnic, 2) making joint investments with Black-led CDEs to provide more capital into projects and 3) utilize more Black professionals, attorneys and CPAs in their NMTC transactions.

Vowell similarly said that representation matters. She shared how USBCDC’s CDE changed its strategy three years ago to focus its investments on reducing the racial wealth divide. “We do that by looking for projects with representational leadership, understanding do the leaders and the boards represent the community demographically and geographically,” said Vowell.

Donovan said that seeking change legislatively could be powerful, citing the example of how there were few rural NMTC investments early in the incentive until Congress required it.

Ultimately, panelists agreed that the NMTC community is in a powerful position to make meaningful change for people and communities in need. “The NMTC program has so much potential and so much promise, especially for our communities because the community development aspect is so important,” said Desiderio.

“I love the new markets credit,” said Vowell. “I love how flexible it is. I love that we can invest in so many different kinds of projects and structures and it can help fill the needs of so many different types of communities, but then what opportunities are we missing to ensure that those dollars are going to the places and the people who need it most?”

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