Planning magazine — February 1997

People, Power, Politics

An assessment of the federal empowerment zones.

By Renee Berger

For the armies of anti-poverty activists battered into near oblivion during the Reagan and Bush administrations, 1993 was an unexpectedly good year. Buried in the federal budget was a mammoth new program — known as the Empowerment Zones/Enterprise Communities program — that promised to resuscitate impoverished neighborhoods by providing new housing and decent jobs for the unemployed.

There was some initial skepticism. Urban commentator Nicholas Lemann wrote in the New York Times Magazine in January 1994 that the EZ/EC program was politically wired and programmatically flawed.

Nevertheless, local officials greeted President Clinton's December 1994 announcement of the first designations with enthusiasm. Six empowerment zones were created — in Atlanta, Baltimore, Chicago, Detroit, New York City, and jointly in Philadelphia and Camden. Two "supplemental empowerment zones" were created in Los Angeles and Cleveland, while four cities — Boston, Houston, Oakland, and Kansas City, Missouri — were designated "enhanced enterprise communities." Three rural empowerment zones and 105 enterprise communities were designated as well. (See "Power to the Zones," February 1995.)

Even before the winners were chosen, grassroots activists in the chosen cities had begun caucusing, foundation executives had organized brainstorming sessions with officials of the U.S. Department of Housing and Urban Development, which runs the urban part of the EZ/EC program, and mayors and their planning staffs had begun dreaming about how to kindle hope and, perhaps, provide real opportunity.

The EZ/EC program offers tax breaks whose estimated value is $2.5 billion over five years. It also provides $1.3 billion in flexible grant assistance from Title XX of the Health and Human Services block grant. Total cost to taxpayers: $3.8 billion over 10 years.

The six urban empowerment zones will each receive $ 100 million in grant money and a variety of financing tools, including loan guarantees, tax-exempt bond financing, accelerated property depreciation, and wage tax credits. The three rural zones will receive $40 million each plus the same financing tools.

As for the 105 enterprise communities, each will get $3 million in grant funds, and some of the same tools. All the designated communities will get preference for certain federal programs — community development banks, for example.

So how are they doing? Have the zones lived up to their promise? Most of all, have they generated jobs? Those are the questions that concern us here.

Slow timetable

It should be noted first of all that it took far longer to set up the empowerment zones than anyone had anticipated. For the better part of 1995 and, in some places, part of 1996, empowerment and enterprise zone cities were consumed with creating organizational structures and formulating the performance benchmarks required for federal grants. During that time, there were many complaints — from neighborhood activists and the media — that "nothing is happening."

"Business groups often spend years working on a new product, all behind closed doors," says Diane Bell, the head of Baltimore's empowerment zone. "But here we don't have that luxury."

Producing organizational plans for the zones also turned out to be more difficult than expected. Those involved had to deal with all sorts of power plays by mayors and city councils, government agencies, and community groups.

"You're dealing with people from different worlds," says Bell. "Some knew the complexities of the process, others didn't." Even more problematic were the debates in Chicago, Atlanta, and New York City about whether the plans outlined in the city's application had to be followed to the letter — or not at all.

Hurdles

The focus here is on two of the EZ cities, Baltimore and Detroit. Both are battle-scarred from years of disinvestment and the loss of their manufacturing base, which in turn has meant the loss of thousands of jobs.

Detroit's zone is a large one, covering 18 square miles and three neighborhoods, where half the residents are below the poverty line and almost a third are unemployed. Fewer than half the zone residents are likely to graduate from high school.

That makes the hurdles high — even with $100 million per city. "We are not going to obliterate poverty," says Detroit's empowerment zone transition chief, Kate Levin. Levin was hired by the city to establish the management structure to run the zone program.

Detroit ran into snags in the very beginning. A coordinating council composed of local activists, members of the religious community, government and business representatives, and others, was formed to write the zone application. If the zone was designated, the council hoped to establish an independent nonprofit corporation to implement the plan.

After receiving designation, coordinating council members met privately with lawyers to draft state and local legislation that would enable them to establish the new Empowerment Zone Development Corporation. But several city council members argued that an autonomous development corporation would conflict with the city charter by undermining the council's contract oversight responsibility. The six-month battle that ensued between the coordinating council and the city council brought things to a halt.

Eventually, the nonprofit corporation was established, but it's not autonomous. The city council reviews all contracts — and the city manages them.

The other battle waged in Detroit was over the coordinating council's resistance to using Title XX money to fund the operations of the development corporation. Years of cynicism, bred during the administration of former mayor Coleman Young, had led to fears that the city would siphon off the funds. Instead, the coordinating council wanted the private sector to foot the bill for administration.

Levin and Mayor Dennis Archer contended that this stricture was unrealistic and that the private sector would not pay 100 percent of the operating costs. After months of debate, the council and the city agreed that the zone grant funds would pay for part of the operating costs.

More of the same

Chicago, Atlanta, and Camden (half of the Philadelphia/Camden empowerment zone) had similar tales. In each, strong mayors weighed in after receiving empowerment zone designation, rekindling wars with community groups that had been partners during the initial planning.

Baltimore's empowerment zone covers seven square miles, ranging from barren industrial areas to densely populated neighborhoods dominated by public housing projects. The poverty rate in the zone is 41 percent, the unemployment rate 17 percent. Roughly 72,000 people, 10 percent of the city's population, live within the zone.

Yet Baltimore's experience, though not friction-free, was more positive than Detroit's. The initial board was formed almost immediately after the zone designation, and last year representatives were added from the six newly formed "village centers" — nonprofit organizations established to provide a meeting place and neighborhood voice in the empowerment zone.

The Rouse Corporation provided free office space in a downtown building and Mayor Kurt Schmoke dug into city coffers (later reimbursed by Title XX money) to staff the new Empower Baltimore Management Corporation. Substantial additional support came from the Baltimore-based Annie E. Casey Foundation.

The management corporation, a local observer explains, "is remarkably autonomous, despite the mayor controlling a significant portion of the board positions and its executive director having been a mayoral appointee." A 50-member advisory council provides community input.

The board is responsible for approving and overseeing contracts. It has its own procurement procedures, a fact that has "frustrated some city agencies," Bell says.

Assessing progress

After organizing their empowerment zones, cities next had to produce performance benchmarks — not an easy task, according to those involved. "There was a changing cast of staff and requirements, as the federal government itself was figuring out what it wanted," says Bell. Gloria Robinson, Detroit's planning director, says delays occurred when HUD changed the forms needed to report on performance benchmarks. With the change, the entire process took six to nine months.

Even when HUD signed off on the benchmarks, the money didn't arrive immediately. First the zone cities had to develop financial procedures for drawing down Title XX grant funds, which are administered by the states. Some states were reportedly concerned that the cities involved would be unable to meet fiduciary requirements. Other states used this argument as an excuse for governors to torment mayors they didn't like.

In Georgia, for instance, according to a senior HUD official, "state officials have, for over 18 months, systematically stymied Atlanta's efforts to use their Title XX allocation." In other states, Title XX money is only now beginning to flow.

HUD has played an active role in the benchmarking but is keeping hands off in matters of state and local governance. The agency views itself as a facilitator in the early stages of the EZ/EC program, says the official cited above. Thus, it is reluctant to de-designate a city, appreciating that progress can be slow in a new program. The contrast with the more prescriptive, hands-on programs of the 1960s and 1970s, the years of the Great Society, could not be greater.

New jobs?

According to HUD's EZ/EC FLASH website (www.ezec.gov), the empowerment zones would appear to be generating thousands of jobs. Again, Detroit serves as a microcosm. In recent speeches, both Vice President Al Gore and outgoing HUD Secretary Henry Cisneros claimed that the city's empowerment zone has attracted $1.8 billion in private money. Part of that money, they say, comes from Chrysler's $750 million investment in a new engine plant.

But Rosa Sims, a veteran community activist who currently heads the Detroit office of the Local Initiatives Support Corporation, a prominent national intermediary organization that fosters community development, explains that the $ 1.8 billion private-sector investment was actually a pledge by area financial institutions.

Moreover, says Sims, planning for the Chrysler plant had been under way for over three years before Detroit won empowerment zone designation. Meanwhile, Robinson, the city's planning director, estimates that 700 to 750 jobs have been generated in the zone since designation.

In Baltimore, the Empower Baltimore Management Corporation, working through a city job placement effort called the Employ Baltimore Initiative, reports that 400 zone residents have found positions. The city recently received a HUD grant for its reverse commuting program, which will help bring enterprise zone residents to unfilled jobs in the outer suburbs.

As for finding jobs for zone residents, the obstacles are profound. Michael Seipp, director of the Historic East Baltimore village center, estimates that more than half of the people he sees have substance abuse problems and many have criminal records that will prohibit them from working in certain kinds of jobs. Title XX funds are earmarked for job training and counseling services for such residents.

Baltimore's performance report, submitted to HUD last July, identifies roughly 30 businesses as having newly located or expanded in the empowerment zone. Most are mom and pop outfits, with two larger concerns, the Sandtown-Winchester Nursing and Rehabilitation Center and the Parrot Island Restaurant, accounting for nearly half of the reported 500 jobs created. Many of these jobs existed before the zone was created.

One of the zone's small businesses is Dynatech Integrated Systems, a four-year-old, computer-testing firm based in Columbia, Maryland. It employs 15 people in a new, 13,000-square-foot plant in the East Harbor neighborhood. Marsha Parham, Dynatech's director of operations, says Baltimore's empowerment zone management corporation helped the firm obtain financing for its new building.

But according to Pamela Trickey, Dynatech's director of technology, only two or three workers there this fall were EZ residents. Moreover, they were not regular employees. They were temporary contract workers, earning about $6.50 an hour with no fringe benefits. Co-owner Earl Scott, who grew up in the neighborhood, reportedly has ambitions to hire more local residents. But the fact remains that small businesses, while crucial to the regeneration and economic balance of empowerment zones, typically pay less and offer less security than large firms do.

This shouldn't come as a surprise. During the 1980s, while federal legislation to create what were referred to as "enterprise zones" languished, 36 states took the initiative to form their own. Studies of the zones, which chiefly rely on tax incentives, conclude that few if any net new jobs have been created. Mostly, the studies note, "new" jobs are actually existing jobs that have shifted from one location to another in the same region.

On the other hand, the empowerment zones use tax incentives, wage credits, and grant support — a combination that promises greater inducements to businesses. In addition, state and local economic development financing tools, which can supplement those offered by the empowerment zone program, are more sophisticated today than they were even a few years ago. These are factors that bode well for the future.

In addition, business development and potential "new" jobs are a less important measure than whether more zone residents are job holders earning a living wage — regardless of whether the jobs are in the zone or are in new or existing businesses. And even if it turns out that much of the business development and job activity actually comes from regional shifting, one must welcome any new employment efforts that focus on needy residents in these long-abandoned areas.

Defining empowerment

The real test of the empowerment zone program, says one analyst, will be its ability to build capacity in the neighborhoods. But capacity building is a more exciting concept to academics and foundation executives than it is to the residents of the empowerment zone communities. For them, "empowerment" means a job and the power to manage their environment.

The strategic planning process that led to empowerment zone and enterprise community designation got lots of people fired up, and 300 communities submitted applications. Representatives of community groups sat down to work with city officials, and corporate moguls met with neighborhood merchants — often for the first time.

To be sure, there were fights. As in the 1960s, voices were raised over community participation versus community control. A HUD official confides that the agency worried about whether city planning departments, the likely agencies to coordinate the citizen outreach, would get past their "land-use approach." Many did. In Detroit, says Rosa Sims, the grassroots strategic planning process "got people who had been disconnected reconnected." Hundreds of people participated in meetings.

The next step, organizing, produced enormous pressures as boards were created, staff hired, and financial systems put into place. Baltimore's efforts in this respect are exemplary. A retreat organized by the board of the Empower Baltimore Management Corporation was attended even by the high-level corporate representatives.

The board also recommends half the members of the 50-member advisory council; the rest are recommended by the village centers. The council has become a significant force. As a result of its input, a third of the 19 positions on the board that are appointed by the mayor must come from empowerment zone representatives.

The progress of the six village centers has been uneven. In general, the communities that were better organized, such as Sandtown-Winchester and Historic East Baltimore, got off the ground more quickly Other places such as Poppleton, which is dominated by public housing projects, have had far more difficulty.

The empowerment zone plan calls for the management corporation to provide $200,000 to $300,000 the first year to each center to support job-readiness programs in literacy, substance abuse, and other areas. Future support will be contingent on performance. But so far, only three have submitted acceptable plans to the management corporation, and programs are still not under way.

A little luck

"We'd be dead in the water, if we looked at the $100 million as the end," says Baltimore's Diane Bell. The key is to use the funds strategically and to come up with financing tools to leverage other monies. Judging from Detroit and Baltimore, hardly any of the treasury has been tapped.

On the other hand, Detroit bankers now carry maps and brochures and make sales pitches for empowerment neighborhoods, says Kate Levin, and she — along with Rosa Sims and Gloria Robinson — praises the involvement of local residents. Moreover, some of the $1.8 billion that the city has attracted with the designation is already committed to real projects, which have provided jobs for at least some Detroiters.

In some respects, it seems that serendipity is as much a factor in the success of an empowerment zone as strategy. Chrysler would not be building a state-of-the-art plant in Detroit if the auto industry weren't on an upswing. And Baltimore has been encouraged to start a reverse commuting program because suburban businesses happen to be desperate for workers.

Another vital factor is political leadership. Mayors are key. Detroit's Dennis Archer was viewed as the city's savior by the businesses that supported him in his 1994 election. The empowerment zone gave the business community a focus for its good will, says Levin. And, though the state role is small, Baltimore's Diane Bell says that Gov. Parris Glendening made it clear that his staff should do everything possible to assist the zone. Undoubtedly, a future challenge for empowerment zones will be sustaining support as political leadership changes.

There is no doubt that the initial planning phase of the zone program was extremely valuable. The plans themselves provided clear directions, minimizing post-designation debates over program initiatives and priorities. As to whether the toolbox of waivers, preferences, and financing incentives — including Title XX funds — will make a real difference in empowerment zones, the jury is still out.

One problem for any urban program is unrealistic expectations. Baltimore's empowerment zone application included a goal of developing 5,100 housing units, but the zone has only the barest outline of a housing program. One empowerment zone staffer calls the goal "dreaming."

The problem with unrealistic expectations is that they breed skepticism when they fail. Think about how presidents Reagan and Bush used the alleged failures of the War on Poverty to justify draconian cuts in inner-city resources. The legacy is the defeatist belief that no government effort can make a difference.

The empowerment zone program could, in fact, lead to meaningful change — but it won't happen overnight.

Renee Berger is the president of teamworks, an economic development consulting firm in San Francisco.