2018 Lane Reports

Qualified Opportunity Funds Need the Illinois SAFE Act

The Lane Report, November 2018
Thursday, November 1, 2018 10:00 am
by Marc J. Lane

The U.S. Treasury Department has now fleshed out guidelines for taxpayers seeking to defer or reduce their capital gains tax by investing in Qualified Opportunity Funds which, in turn, will provide equity investments in new and expanding businesses, infrastructure and energy projects, commercial real estate, affordable housing, and other needs-driven ventures in under-resourced Qualified Opportunity Zones. Treasury Secretary Steven Mnuchin has predicted that over $100 billion in capital investment will soon find its way into projects which propel economic growth that benefits all of us, wherever we may live.

Qualified Opportunity Funds are intended to attract capital from individuals, corporations, institutions and funds that haven’t historically participated in community investing. Inevitably, challenges will arise in ensuring that private-sector investment decisions are aligned with the best interests of communities. So protections against program abuses and the collection of data to measure positive social impact will both prove indispensable to the Opportunity Zones’ success.

We already know that tax incentives can help catalyze investment where it’s needed the most. Low Income Housing Tax Credits, to name one example, attract about $9 billion in private-sector investments every year to support new and rehabbed affordable rental housing. And the New Markets Tax Credit program has funded $80 billion of investments in small businesses, retail, and manufacturing and community facilities since it was launched in 2001, creating more than a million new jobs.

But we also know that public and private co-investment is necessary to leverage the impact of any tax-incentive program intended to benefit distressed communities. That’s where the SAFE Act, now working its way through the Illinois General Assembly, comes in. The Act would skew public resources in favor of “Safe and Full Employment” Zones, those communities most in need of violence prevention and reduction, many of the same communities that Qualified Opportunity Funds are intended to systematically lift out of poverty.

The SAFE Act would seek to treat the root causes of violence and prevent its spread. A Safe and Full Employment Coordinating Board would identify concentrated geographic areas throughout the state that have suffered from under-investment and experienced high levels of crime, incarceration and community violence. Local Economic Growth Councils would then create their own plans to address violence, reduce incarceration and expand economic opportunity. SAFE Zones would be given first priority in the allocation of existing Federal, state and local spending on job creation, employment training, child care, health care and other services to combat community disinvestment that breeds violence.

The SAFE Act has already passed the Illinois Senate. Let’s urge its passage through the House. Once signed by the Governor, it becomes exactly the kind of public policy and public investment the Opportunity Zones need to realize their full potential.

*           *           *

We stand ready to help investors, community organizations and other stakeholders pursue the enormous capital-formation power that Qualified Opportunity Funds offer.


Marc J. Lane is a Chicago attorney and financial adviser and the vice chair of the Cook County Commission on Social Innovation.

Peterborough's problem was daunting: Sixty percent of prisoners serving short-term sentences historically had gone on to re-offend within a year after their release. But policymakers were confident that a solution was within their reach. They attracted private investment to pay experienced social service agencies to provide intensive, multidisciplinary support to short-term prisoners, preparing them to re-enter society and succeed outside the penal system. - See more at: http://www.chicagobusiness.com/article/20131007/OPINION/131009850/a-new-kind-of-futures-contract-for-illinois#sthash.ThgxeiFt.dpuf

The world's first social impact bond, or SIB, was introduced in 2010 to fund innovative social programs that realistically might reduce recidivism by ex-offenders in Peterborough, England, and, with it, the public costs of housing and feeding repeat offenders. Prudently building on the strengths of that initiative, Illinois Gov. Pat Quinn is rolling out SIBs to help solve some of the state's most vexing social problems.

A SIB isn't a traditional bond where investors are guaranteed a fixed return but a contract among a government agency that agrees to pay for improved social outcomes, a private financing intermediary and private investors. SIBs shift the risk of experimenting with promising but untested intervention strategies from government to private capital markets, with public funds expended only after targeted social benefits have been achieved.

Peterborough's problem was daunting: Sixty percent of prisoners serving short-term sentences historically had gone on to re-offend within a year after their release. But policymakers were confident that a solution was within their reach. They attracted private investment to pay experienced social service agencies to provide intensive, multidisciplinary support to short-term prisoners, preparing them to re-enter society and succeed outside the penal system.

The government decided which goals would be supported, but exactly how those goals would be achieved was left to the private sector. It was the investors, through a bond-issuing organization, who ultimately endorsed the allocation of investment proceeds — how much would be invested in job training, drug rehabilitation and other interventions.

If the Peterborough plan eventually shrinks recidivism rates by 7.5 percent or more, the government will repay the investors' capital and share the taxpayers' savings with them, delivering up to a 13 percent return. If the target isn't hit, the investment will have failed and the government will owe the investors nothing.

Illinois' SIB effort was spearheaded by the state's Task Force on Social Innovation, Entrepreneurship and Enterprise — the governor's think tank on social issues, which I am privileged to chair — with support from Harvard University's John F. Kennedy School of Government, the Rockefeller Foundation and the Aurora-based Dunham Fund. A request for information issued by the Office of Management and Budget on May 13 yielded responses from service providers eager not only to reduce recidivism here but also to create jobs, revitalize communities, improve public health outcomes, curb youth violence, cut high school dropout rates and alleviate poverty.

Now the governor has issued a request for proposals intended to spur better outcomes for Illinois' most at-risk youth — by increasing placement stability and reducing re-arrests for youth in the state's Department of Children and Family Services, and by improving educational achievement and living-wage employment opportunities justice-involved youth most likely to re-offend upon returning to their communities.

Kudos to Mr. Quinn for bringing SIBs to Illinois. May they soon start delivering on their promise.

- See more at: http://www.chicagobusiness.com/article/20131007/OPINION/131009850/a-new-kind-of-futures-contract-for-illinois#sthash.ThgxeiFt.dpuf
The world's first social impact bond, or SIB, was introduced in 2010 to fund innovative social programs that realistically might reduce recidivism by ex-offenders in Peterborough, England, and, with it, the public costs of housing and feeding repeat offenders. Prudently building on the strengths of that initiative, Illinois Gov. Pat Quinn is rolling out SIBs to help solve some of the state's most vexing social problems. - See more at: http://www.chicagobusiness.com/article/20131007/OPINION/131009850/a-new-kind-of-futures-contract-for-illinois#sthash.ThgxeiFt.dpu

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