From the July 2007 issue of Entrepreneur

When entrepreneur Chuck Morris heard that Knoxville, Tennessee, was selected as a federal Empowerment Zone in 1999, he was understandably excited. His marketing communications firm, Morris Creative Group, seemed to be in a prime position to benefit: It was located in a historic building in the heart of the zone. Morris hoped he could use the program to get a low-interest loan to expand his business.

He didn't qualify, however, because neither he nor his employees lived in the zone. It was a big disappointment. "One of the promises of the Empowerment Zone was access to more capital," says Morris, 40, whose annual revenue is about $1 million. "That would have been an extraordinary opportunity for us, but there was no flexibility in the basic rules."

His friend Stanley Johnson, also of Knoxville, had an even more frustrating experience with the Empowerment Zone program, which was enacted in 1993 to revitalize poor urban and rural areas and is scheduled to continue through 2009. A zone resident, Johnson sought financing to open a business servicing and selling pre-owned vehicles. He seemed like the perfect candidate: He was an inner-city resident with a comprehensive business plan, 10 years of experience as a finance director and a solid credit record. However, the local board denied his loan application.

"It was a slap in the face," says Johnson, 36, who later got a conventional bank loan for Stan Johnson Super Auto Center, which reached $800,000 in sales before he sold the business in 2006. "If they turned me down, I can imagine all the other people who had great ideas for businesses but couldn't get in the door."

Morris and Johnson's experiences aren't surprising, given the tepid assessment the program received in the Government Accountability Office's most recent study of the Empowerment Zone program. In its first of three rounds, the program directed $1 billion in flexible funding toward blighted areas in 11 communities. There, local authorities decided how the money should be spent over 10 years to combat endemic poverty and unemployment and boost economic growth. In 1999, the U.S. Department of Housing and Urban Development directed another $1 billion to 11 more Empowerment Zones, including Knoxville. In the third round in 2001, HUD chose another eight Empowerment Zones and 40 urban and rural Renewal Communities, but this time it offered only tax incentives.

The GAO looked at the results of round one and found improvements in some zones. However, monitoring of how communities spent their money was so inadequate, it was hard to determine whether Empowerment Zone initiatives contributed to that progress. What's more, the study found that in some zones, there was actually a drop in key indicators of prosperity. In the Atlanta, Chicago and Los Angeles Empowerment Zones, for instance, the number of businesses and jobs declined.

No EZ Answers

How can this be, when so much money was spent to improve these areas? And why is it that the program did not help entrepreneurs like Morris and Johnson? It's complicated--really complicated--say the experts.

First, $1 billion sounds like a lot of money, but it's like a cup of water dumped in a desert--hardly enough to make a difference in areas dominated by shuttered factories, run-down housing and desperately poor people.

Second, there aren't strong federal guidelines dictating how the flexible-funding grants should be spent. Empowerment Zone communities have developed plans using various approaches, usually a combination of investments in neighborhood development, economic development and human services. But in some areas, prolonged squabbling between political entities and community groups over how to use the money bogs down implementation of the plans.

"In Atlanta, [a round-one community], they didn't have the capacity to translate their strategic plan into tangible projects and initiatives," says Michael Rich, associate professor of political science at Emory University and part of a national team of researchers that has studied Empowerment Zones.

"Whoever stayed at the table long enough got their ideas included in the final strategic plan," says Harrison Blackmond, chair of the Blackmond Givens Group, which provided management services to the Empowerment Zone in Detroit, another round-one city. "The focus in Detroit was on 'fixing' people--providing job training, counseling, medical services. But if we were able to fix people, they moved out of the zone as quickly as possible."

Overall, Blackmond believes the program did not accomplish much for the people it was supposed to help. "The social service agencies were paid," he observes, "but very little of the money made a difference in the lives of individuals in the community."

Most of the round-one Empowerment Zones have wound down, although a few, such as Atlanta, have permission to continue using their unexpended grant funds. In other cities, like Knoxville, community groups and city officials continue to fight over how to spend their remaining dollars.

Even positive stories sometimes highlight the program's problems. In Chicago, the CC Investment Group, which owns and manages $25 million worth of affordable and moderate-income apartments, benefited from the Empowerment Zone by saving $160,000 in transfer and sales tax exemptions. However, the company had to hire one consultant to track down these opportunities and another to actually take advantage of them.

"The program is well-meaning, but you have to hire consultants to figure it out," says Peter Cunningham, 37, managing partner of CC Investment Group, which he co-founded with Scott Cimino, also 37. "There doesn't seem to be one source of information about these benefits, and that makes things very difficult."