Key Housing, Community Development and Energy Provisions in the Proposed FY 2015 Budget

Published by Peter Lawrence on Wednesday, March 5, 2014 - 12:00am

On March 4, the Obama Administration released its $3.9 trillion fiscal year (FY) 2015 budget request. The budget requests $1.07 trillion in FY 2015 discretionary spending, the $56 billion more than the level agreed to in the Bipartisan Budget Act of 2013. This $56 billion increase, split evenly between defense and non-defense spending, would be fully offset by revenue raising and mandatory spending reforms to remain within the budget caps.

A summary of how several key housing, community development and renewable programs fare in the FY 2015 budget request follows.

U.S. Department of Housing and Urban Development

The FY 2015 request includes $46.7 billion of total appropriated funding for the Department of Housing and Urban Development (HUD). This is about $1.2 billion or 2.6 percent more than the amount appropriated under FY 2014 funding levels, but only $32.6 billion in net appropriations, about 3.3 percent less than in FY 2014.

Public and Assisted Rental Housing

Project-Based Rental Assistance (PBRA)

The budget requests $9.7 billion for Project-Based Rental Assistance, which is about $200 million less than the FY 2014 funding level of $9.9 billion. The president’s budget requested $10.3 billion to fully fund PBRA in FY 2014. For the first time, the Administration proposes to shift to a calendar year funding cycle for the PBRA program, as it provides for Tenant-Based Rental Assistance. This shift would make renewal funding needs more predictable, but it would also mean that contracts expiring in the course of FY 2015 will not receive a full 12 months’ of renewal funding.

The administration is proposing to establish a “pay for success” demonstration allowing HUD to enter multi-year agreements to repay private investors who provide upfront funding for energy efficiency retrofits of HUD-assisted housing.

Tenant-Based Rental Assistance (TBRA)

Tenant-Based Rental Assistance is proposed to be funded at $20.045 billion. Of that amount, $18.006 billion is for Section 8 Housing Choice Voucher contract renewals, which is a 3.7 percent increase over FY 2014. It appears this level of funding would be sufficient to renew vouchers in use, but it is unlikely to be sufficient to restore funding for the tens of thousands of vouchers lost due to sequestration.  The budget requests $75 million for the HUD-Veteran Affairs Supportive Housing (HUD-VASH) program and $150 million for Tenant Protection Vouchers, a $20 million increase from FY 2014.

Public Housing Capital & Operating Funds

Both the Public Housing Capital and Operating funds would receive funding increases: the proposal provides $1.925 billion for the Public Housing Capital Fund and $4.6 billion for the Public Housing Operating Fund (representing a 2.7 percent and 4.5 percent increase over FY 2014 levels, respectively).

Rental Assistance Demonstration

The administration is proposing to remove the 60,000 unit cap on its Rental Assistance Demonstration (RAD) program and requests $10 million for incremental funding to enable RAD conversions where such incremental funding is needed for financial feasibility.

Community Planning and Development (CPD) Programs

The Community Development Block Grant (CDBG) program is proposed to be funded at $2.8 billion, representing a $230 million or 7.5 percent decrease from FY 2014 ($3.03 billion) enacted levels. The HOME Investment Partnerships Program (HOME) is proposed to be funded at $950 million, with $10 million set-aside from this amount for the Self-Help Homeownership Opportunities Program (SHOP), a $50 million or 5 percent decrease. HOME program funding would remain 41 percent below FY 2011 levels ($1.61 billion).

Homeless and Supportive Housing Programs

McKinney-Vento Homeless Assistance Grants are proposed to be funded at $2.4 billion, a $301 million or 14 percent funding increase over FY 2014 funding. This amount includes a $2.07 billion set aside for the continuum of care and rural housing stability assistance programs, and $225 million for Emergency Solutions Grants. The proposal provides $440 million for the Housing for the Elderly (Section 202) program, a 14.5 percent increase over FY 2014 levels. The Housing for Persons with Disabilities (Section 811) program is funded at $160 million, a 14.6 percent increase from FY 2014 funding levels. The budget would provide $332 million for the Housing Opportunities for Persons with AIDS (HOPWA) program to provide housing and supportive services to persons living with HIV and AIDS, which is slightly above the FY 2014 enacted funding level and equal to the FY 2012 level.

Obama Administration Initiatives

Project Rebuild/Neighborhood Stabilization Program

Bringing back an initiative originally proposed as part of the president’s jobs bill in 2011, the administration is proposing to provide $15 billion under Project Rebuild, an initiative similar to the Neighborhood Stabilization Program. The funding for Project Rebuild would be offset.

Housing Trust Fund

The administration is proposing to provide a $1 billion mandatory appropriation for the Housing Trust Fund, which has yet to receive any funding. HUD has not yet finalized the program regulations but housing advocates anticipate that Federal Housing Finance Agency Director Mel Watt may direct Fannie Mae and Freddie Mac to make contributions to the Housing Trust Fund. The GSE’s contributions to the fund were suspended when Fannie Mae and Freddie Mac were placed into government conservatorship. The latest estimate of the contributions as originally authorized by the Housing and Economic Recovery Act of 2008 is about $750 million.

Choice Neighborhoods Initiative

The Choice Neighborhoods Initiative is proposed to be funded at $120 million, which is 33 percent more than the FY 2014 enacted level.

U.S. Department of the Treasury

Community Development Financial Institutions Fund

The administration proposes to fund the Community Development Financial Institutions (CDFI) Fund at $225 million, a slight decrease from FY 2014 funding levels. The administration also proposes to extend the CDFI Bond Guarantee program’s authorization by one year, through FY 2015, at $1 billion, a $250 million increase from FY 2014.

Tax proposals

Low-Income Housing Tax Credit (overall cost of all LIHTC proposals per OMB: $1.3 billion over 10 years)

  • Private Activity Bond Conversion proposal (OMB cost: $860 million over 10 years)
  • Similar to FY 2014 proposal: This proposal would allow states to increase their LIHTC authority by converting some of their private activity bond (PAB) volume cap into LIHTC allocations.
  • States would be authorized, at their discretion, to convert up to 8 percent of their PAB cap to 9 percent LIHTC authority.
  • The maximum increase in LIHTC authority states would be allowed to convert under this proposal would be 23 percent.
  • Conversion rate would be determined by $1,000 times twice the applicable percentage of the 30 percent value LIHTC in December of the previous year. For example, using the December 2013 rate of 3.25 percent, for every $1,000 of PAB cap, states could increase their LIHTC authority by $65.This proposal came out of the administration’s desire to balance housing policy by promoting more rental opportunities; this change would allow states to issue more LIHTC at a lower cost than by increasing per-capita allocations.
  • Similar to FY13 proposal: Modifies 50 percent test to allow developers to use non-tax-exempt bond financing while still generating 4 percent LIHTC and forgo issuing tax-exempt bonds to finance projects (eliminates “bond cap burning”).

Modify LIHTC rate formula (OMB cost: $64 million over 10 years)

  • Similar to FY 2014 proposal: Rather than extend the minimum 9 percent LIHTC rate, this proposal would use revised formulas, effective December 31, 2014, to produce annual allocated credit rates.
  • The discount rate used to determine the credit rate for the 70 percent present value and allocated 30 percent present value LIHTC (but not LIHTC generated by tax-exempt bonds) would be the average of the mid-term and long-term applicable federal rates for the relevant month, plus 200 basis points.
  • The administration’s goal in developing a new formula was to create a more “accurate” discount rate that more closely reflects an investors cost of borrowing rather than the government’s cost of borrowing.  The revised rate would also be more responsive to changes in market interest rates. While the proposed formula would be less generous than the minimum 9 percent rate in today’s low-interest rate environment, the formula would provide a higher credit rate in higher interest rate environments.
  • Income Averaging proposal (no cost)
  • Similar to FY 2014 proposal: Creates third income election of reserving at least 40 percent of units at an average of 60 percent of area median income (AMI), with a maximum of 80 percent AMI on initial certification
  • Average is determined over the entire property, not a building-by-building basis.
  • The administration’s goal is to encourage income mixing, which will be especially helpful in:
  1. Low-income neighborhood revitalization, and
  2. Rural areas where sparse populations make it difficult to maintain an appropriate income mix in properties.
  • Tenants in existing buildings whose income has risen over time above 60 percent AMI could be counted as under 60 percent for LIHTC qualification purposes, which would assist preservation transactions.
  • Preservation selection criterion in QAPs (no cost)
  • Similar to FY 2014 proposal: States would be required to add a new selection criterion in their qualified allocation plans (QAP) for preservation projects.
  • Increasing Investment By Expanding LIHTC Benefits to REITs (OMB cost: $466 million over 10 years)
  • Similar to FY 2014 proposal: Under current law, real estate investment trusts (REIT) have no incentive to invest in LIHTCs. This proposal would essentially provide an incentive to REITs to invest by designating a portion of their dividends as tax-free, equivalent to the value of the LIHTC.
  • Existing REITs are probably not interested, but it is conceivable that new REITs could be established to take advantage of this proposal.
  • Providing Domestic Violence Protections in LIHTC Projects (no cost)
  • Similar to FY 2013 proposal: Extends rules under the Violence Against Women Act for most federal housing programs to LIHTC projects.
  • The proposal clarifies general public use rule to allow developers to create housing for domestic violence victims.

New Markets Tax Credit

The administration proposes to make the new markets tax credit (NMTC) permanent at $5 billion annually. The proposal also would permit NMTC amounts resulting from qualified equity investment (QEIs) made after December 31, 2013, to offset AMT liability. (OMB cost: $8.7 billion over 10 years)

Manufacturing Communities Tax Credit

The administration would create a new tax credit, the Manufacturing Communities Tax Credit, at $2 billion annually for investments in communities suffering from major job loss events resulting from the loss of manufacturing facilities or base closures in each of the three years, 2015 through 2017. The MCTC could be structured like the NMTC. (OMB cost: $4.7 billion over 10 years)

Production Tax Credit

The administration would extend prior law for facilities on which construction begins before the end of 2014. For facilities on which construction begins after December 31, 2014, the proposal would permanently extend the renewable electricity production tax credit and make it refundable. The renewable electricity production tax credit would also be available to otherwise eligible renewable electricity consumed directly by the producer, rather than sold to an unrelated third party, to the extent that its production can be independently verified. Solar facilities that currently qualify for the investment tax credit would be eligible for the renewable electricity production tax credit in lieu of the investment tax credit through 2016. Solar facilities placed in service after 2016 would only be eligible for the renewable electricity production tax credit. (OMB cost: $19.3 billion over 10 years)

Investment Tax Credit

The administration proposes to repeal the permanent 10-percent business energy credit for solar and geothermal property for property placed in service after December 31, 2016, and the temporary 30-percent credit for solar investments and the temporary credits for qualifying geothermal heat pump property, small wind property, combined heat and power property fuel cells, and microturbines would be allowed to expire.

Renewable Energy Manufacturing Tax Credit

The proposal would authorize an additional $2.5 billion of credits for investments in eligible property used in a qualifying advanced energy manufacturing project, such as energy equipment and facilities for clean energy manufacturing. The 30 percent advanced energy manufacturing tax credit was created under Section 48C by the American Recovery and Reinvestment Act. The program was capped at $2.3 billion in tax credits and was oversubscribed by a ratio of more than 3 to 1, suggesting a deep pipeline of clean energy manufacturing opportunities. (OMB cost: $1.8 billion over 10 years)