CA Opportunity Zones: Guiding Principles on Outcomes & Metrics

Opportunity Zones are a community development program authorized by the federal Tax Cuts and Jobs Act (2017), with the goal of encouraging patient capital to invest in long-term community development projects. The federal legislation allows newly authorized Opportunity Funds to aggregate and deploy capital by investing a minimum of 90% of assets in designated census tracts and investment types. In return, investors in Opportunity Funds can defer, reduce and even eliminate their federal capital gains taxes after five to ten years of local investment. Read more about how Third Sector sees Opportunity Funds as a potentially transformative economic tool here.

The Opportunity

Over the coming weeks, Governor Newsom’s administration and the CA legislature will need to announce a finalized Opportunity Zone (OZ) policy and approach. As a national expert on how to tie government resources to social outcomes, Third Sector is excited to share guiding principles to help inform any potential OZ legislation.

Third Sector’s Approach to Impact Management

Third Sector brings over 8 years of experience helping governments, service providers, community-based organizations, and other stakeholders identify and improve their social impact. Our proven approach to managing, improving, and achieving outcomes operates on five key components. 

We outline guiding principles to apply these components to any CA OZ legislation below.

Selecting Outcomes & Metrics

Third Sector recommends identifying priority outcomes and specific metrics, regardless of whether they are tied to tax conformity incentives. These high-level outcomes goals (e.g., affordable housing) and specific metrics (e.g., number of formerly homeless individuals who have been stably housed as a result of an OZ project) will provide focus to state and regional administrators as they work to support, build, and launch OZ projects in CA.

Three guiding criteria can help identify priority outcomes, and clarify whether a potential outcome is appropriate for prioritization in any legislation or as a basis for tax conformity.

1. Alignment: Is this an outcome that aligns with the overall goal of the OZ program? Do residents of and community members in OZs value this outcome?
2. Impact: Is there a reason to believe, or existing evidence, that a potential OZ project can actually impact this outcome?
3. Measurability: Is the data on this outcome accessible? Does the achievement of this outcome and the collection of relevant data fall within the time horizon of the OZ program? Are there proxies that are more easily measured?

In addition to outcomes such as housing, clean energy, etc., legislation and reporting may identify priority process measures that will help the state measure quality implementation of the OZ program. Process measures may include amount of funds deployed, the location, stakeholders engaged during project construction, etc. The above principles can also be used to narrow down the priority list of process measures as well.

Data Access & Continuous Improvement

Although there will likely be reporting requirements for CA OZ funds who wish to take advantage of conformity, administrative data should be used to validate the achievement of these outcomes, where possible. Any CA OZ legislation should ideally identify the following components of a data access and sharing strategy. Alternatively, the legislation could direct GoBiz, or a different CA administrative body, to determine the following:

• Additional data sources that will be used to validate the achievement of the priority OZ outcomes
• Parties responsible for producing an outcomes report
• The timelines and standards for this outcomes report (e.g., frequency, required content, etc.) and process for sharing publicly

However, simply reporting on OZ outcomes is not enough to enable success of the program in CA: we should also build in a process for continuous improvement. A pre-defined continuous improvement process can ensure that CA remains flexible and responsive to community needs, especially if the desired outcomes are not being achieved. For example, as a result of an OZ continuous improvement process, five years in, we might change regional zoning, state subsidies and support, or other state OZ-related policies and funding allocations.

Continuous improvement processes can take many forms, and can be as high- or low-touch as is desired and feasible. However, successful continuous improvement processes include the following elements:

• Clear ownership and shared accountability: The state government is the owner of the process, but other stakeholders and community members will provide input and support implementation
• Clear stakeholder input process: Stakeholders know how to provide input, where to go to collect data/feedback, how to interpret data/feedback, and who to go to for decision-making
• Regular meetings: There are regular meetings attended by multiple stakeholders and decision-makers to discuss continuous improvement strategy, assess progress, and implement action steps
• Specified decision-making process: There is a specified process and decision-making structure for collecting, analyzing, responding to, and implementing data and feedback

Incentives

In addition to tax conformity, CA may want to consider building additional financial/non-financial incentives for projects, localities, and regional administrations that work towards or achieve the priority CA OZ outcomes. Additional incentives could include a minimized reporting burden for certain types of projects, fast-tracked regulatory approvals, or expanded funding and supports for future projects.

Any CA OZ legislation that provides any incentives (in the form of tax conformity or otherwise), should consider the following principles:

• Align incentives with the identified priority outcomes to ensure a consistent understanding of CA’s OZ goals and encourage stakeholders to work on projects that improve those outcomes
• Consider investor, community, and regulatory timelines, to ensure that the activities the legislation incentivizes can actually achieve the desired outcomes on a reasonable timeline and within the OZ program period
• Reduce the risk of perverse incentives by focusing on improving positive outcomes rather than reducing negative ones (e.g., increasing the number of people living in affordable housing rather than reducing the number of homeless individuals)

Building on The Existing Investor Reporting Framework

Third Sector’s impact management approach, and the guiding principles outlined above, are compatible with the Beeck Center & US Impact Investing Alliance OZ Investor Reporting Framework. That said, that Impact Reporting framework is tailored towards an investor audience, whereas the above principles are tailored for legislative and administrative implementation. To the extent possible, CA should leverage many of the outcomes, standards, and measures outlined in the Investor Reporting framework, with the goal of aligning national OZ conversations and better understanding national OZ impact using similar measurements.

About Third Sector

Third Sector is a nonprofit consulting firm that advises governments, community organizations, and funders on how to re-invent how they pay for and invest in social services, addressing pressing challenges such as economic mobility and the well-being of our children. Our proven approach is to collaborate deeply with our clients and stakeholders to define impact, draw actionable insights from data, and drive outcomes-oriented funding. Since 2011, we have helped over 40 communities implement effective practices that have transitioned hundreds of millions of dollars in public funding and deployed tens of millions of dollars in private capital to programs that measurably improve lives. Third Sector Capital Partners, Inc. (“Third Sector”) is a 501(c)(3) nonprofit advisory firm. These guiding principles are not an attempt to influence legislation, but rather, reflect Third Sector’s expertise and recommendations in an effort to share learning and knowledge directed towards the design of best policies.