As resources have declined, cities are increasingly seeking creative ways to drive healthy growth and innovative means of funding this growth. Through federal programs and other innovative funding sources, cities have had success funding infrastructure improvements, housing and other programs that drive economic development in distressed areas.
Designed to drive physical and economic revitalization, renew neighborhoods and incentivize private economic activity in distressed areas, Section 108 of the Housing and Community Development Act of 1974 is a loan guarantee component of the Community Development Block Grant (CDBG) Program. The Section 108 Loan Guarantee Program (Section 108) provides communities with a source of financing for economic development, housing rehabilitation, public facilities and other physical development projects. A designated public entity can use these funds to undertake eligible projects or loan them to a third-party developer to undertake such projects. The program allows local governments to transform a small portion of their CDBG funds into federally guaranteed loans.
This program also allows cities to borrow funds from private financial institutions at below-market interest rates to support federally approved projects. These 20-year loans are backed by the federal government and are not included as part of the city’s general debt obligations.
Projects may include economic development, housing rehabilitation, public facilities rehab, construction and installation of building improvements. Cities have used these funds for infrastructure improvements to support residential development and as public contributions for private projects. Examples of public infrastructure improvements include building sidewalks, adding utility lines and reconstructing residential streets. Funds have also been used to redevelop dilapidated buildings and create affordable housing.
The Tax Cuts and Jobs Act of 2017 allowed governors to identify certain census tracts as Opportunity Zones, subject to approval from the U.S. Department of Treasury. An Opportunity Zone is an economically distressed community where new investment, under certain conditions, may be eligible for preferential treatment. The State of Indiana nominated 156 census tracts as Opportunity Zones. This designation attracts capital investment into areas that are economically distressed by providing federal capital gains tax advantages for investments made in these areas.
To be eligible for identification as an Opportunity Zone, the census tract must qualify as “low-income” by meeting one of the following requirements:
- The tract has a poverty rate of at least 20 percent.
- For a census tract in a metropolitan area, the tract’s median family income does not exceed 80 percent of the greater of: the metropolitan area median family income or the statewide median family income.
- For a census tract in a non-metropolitan area, the tract does not exceed 80 percent of the statewide median family income.
Public-Private Partnerships and Public-Public Partnerships
Municipalities and government entities are increasingly using public-private partnership (P3) contracts for infrastructure and development projects. As an alternative delivery model, P3s can give cities and developers a great deal of flexibility in design and implementation. Public-public partnerships (PUPs) have more recently emerged as an alternative to P3s and only include public entities (entities that are nonprofits and not from the private sector). PUPs typically have a nonprofit motive to improve services, offer an alternative to privatization and create knowledge-sharing that builds a larger breadth of technical expertise. Many municipalities have found that P3s produce positive outcomes like economic incentives, service improvements and the ability to shift risk, and are also finding specialized benefits by collaborating through PUPs.
As resources continue to decline, it will become increasingly important that public and private entities understand how to use these tools to drive economic development in distressed areas.