No EZ Answers

The empowerment zone program held lots of promise. So why didn't it deliver?

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.

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This article was originally published in the July 2007 print edition of Entrepreneur with the headline: No EZ Answers.

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