Philadelphia’s perpetually cash-strapped City Hall is not a place often looked to for innovative finance solutions. But in the realm of non-profit funding, Philly’s Commerce Department has helped the city become a role model of sorts.
Following legislation passed earlier this year, Massachusetts will soon begin implementing a new corporate tax credit system modeled off on a program pioneered in Philadelphia in 2002 and recently expanded to the entirety of Pennsylvania by the state government. Philadelphia’s original program allowed private companies to commit to a 10-year partnership that would parlay $100,000 of their annual business tax obligation into funding for a community development corporation to execute commercial development or housing projects.
Kevin Dow, deputy director of commerce for the City of Philadelphia, said the program was being copied because of its popularity at home. “We find it’s been very successful, essentially because these businesses would have paid these taxes no matter what,” Dow said. “This gives them the incentive to invest in communities where they may not have in any other situation… It’s really a no-brainer.”
Since the program was introduced a decade ago, it has been expanded to allow a broader cohort of general economic development non-profits to participate. This year, as many as 35 CDCs and non-profits in Philadelphia will receive funding from corporate tax credits, including the New Kensington Community Development Corporation, Nicetown CDC and Project H.O.M.E.
Andrew Frishkoff, executive director of the Philadelphia Local Initiatives Support Corporation (LISC), was excited to see his organization chosen to become one of the first non-CDC organizations to receive funding this year. “It’s going to allow us to work more closely with our partners in Philadelphia to expand our sustainable community initiatives here,” said Frishkoff, who is also the former director of neighborhood economic development at the city’s Commerce Department.*
The benefits to neighborhood-based economic development groups are obvious. Often these groups rely on grants from philanthropies or government that must be renewed on annual or biannual basis, making major long-term planning difficult. This financing mechanism changes that paradigm by providing the groups with a predicable multi-year revenue stream. “One of the struggles they have as a sector is that sustainable funding is hard to come by,” Dow said. “This gives them the stability to focus on long term projects without having to worry about raising funds for their staff.”
The program is so popular locally that it’s actually growing beyond its funding capacity. In past years, groups could receive $100,000 annually for 10 years. This year, the maximum tax credit was reduced to $85,000 to allow for more organizations to share in the bounty. “This was such a good program for us, and we wanted expand it but we just didn’t have the resources,” said Dow. The program was also recently modified to allow two corporations to act as partners for an individual non-profit, in response to burdens presented by the flagging national economy.
Dow said another strength of the program is that it removes CDC funding from political uncertainty. Over the past several years, federal budget cuts and the recession have led to sharp reductions in the amount of grant dollars available on both a national and local level for community development efforts. “With this program, you’re not at the whim of any particular politician,” Dow said.
Dow acknowledges that the program has its weaknesses. Program metrics had been lacking in past years, he said. “One of the things we learned from the first [round of tax credits] is that we didn’t do as good a job as we could qualifying the work of the CDCs.”
Dow has pushed to tighten the program. “We’re now reviewing those organizations…we have a team of individuals here, and that team works closely with our contracting unit,” he said. “We do on-site visits and fact checking. That hadn’t been happening to the extent we would have liked.” While there is only a single city employee in the department directly overseeing the $3 million tax credit program, Dow said that everyone on his larger Community and Economic Development team keeps an eye on spending through the larger relationships they have with recipient organizations.
These pitfalls are worth noting as Massachusetts moves forward with installing its own tax credit program. Bob Van Meter, executive director of Boston LISC, who has worked closely with state legislators to bring the program to Massachusetts, said that Pennsylvania officials had been extensively consulted in order to understand the strengths and flaws of the system.
“One of the differences is that the way it’s currently envisioned, and this may change, is that the state will issue an [Requests for Proposals] and CDCs will compete for an allocation of credit from the state, and then they will shop that credit around to an investor,” Van Meter said. The use of an RFP strategy would bind CDCs to using tax credits for specific projects, and potentially avoid some of the laissez-faire qualities of the Philadelphia program. An RFP system cannot be implemented in Pennsylvania because of a tax uniformity clause in that state’s constitution.
The State of Massachusetts had previously funded its regional economic development agencies through line items in the state budget. Van Meter said that in past years, a speaker of the house that was opposed to economic development operations had killed budget items, effectively eliminating huge chunks of state funding overnight. He believes this program will de-politicize the process.
Van Meter said he also hopes to get private tax credit partners directly involved in the communities they will now be supporting. “There is the potential that implementing this will broaden our stakeholders and build connections between community organizations and the private sector,” he said.
In any case, according to Van Meter, the introduction of tax credits will revolutionize economic development in his state. “This is the most significant support for community development organizations in Massachusetts in 20 years,” he said. “We hope that this will encourage comprehensive approaches to community development across the state.”
* A previous version of this story misidentified Andrew Frishkoff’s former position at the Commerce Department.