Key Housing, Community Development and Energy Provisions in the Proposed FY 2016 Budget

Published by Michael Novogradac on Tuesday, February 3, 2015 - 12:00am

On Feb. 2, the Obama administration released its $4 trillion fiscal year (FY) 2016 budget request. The budget requests $1.09 trillion in FY 2016 discretionary spending, $74 billion more than the levels in the Bipartisan Budget Act of 2013. This $74 billion increase, split $38 billion more for defense and $37 billion 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 2016 budget request follows.

U.S. Department of Housing and Urban Development

The FY 2016 request includes $49.3 billion of total appropriated funding for the Department of Housing and Urban Development (HUD). This is about $4 billion, or 8.7 percent, more than the amount appropriated under FY 2015 funding levels.  As in previous years, the FY 2016 request depends on significant projected FHA and Ginnie Mae receipts that offset the cost of the HUD program budget, which the Congressional Budget Office has rejected in the past.  The FY 2016 request is about $41 billion in net discretionary spending, about $6 billion more than in FY 2015.

Public and Assisted Rental Housing

Project-Based Rental Assistance (PBRA)

The budget requests $10.8 billion for Project-Based Rental Assistance (PBRA), which is about $1 billion more than the FY 2015 funding level. The administration is in the process of implementing a shift to a calendar-year funding cycle for the PBRA program, as it provides for tenant-based rental assistance. This shift makes the annual renewal funding needs more predictable, but it also means that contracts expiring in the course of FY 2016 will not receive a full 12 months of renewal funding, unless Congress provides the program a substantial increase in the FY 2016 HUD spending bill.  HUD claims that the proposed increase is sufficient, but it should be noted that HUD is also proposing rent reforms that would reduce the funding necessary to ensure a full 12 months of renewal funding that Congress has rejected in the past.

The budget proposes a Multifamily Performance-Based Energy Conservation demonstration from FY 2016 through 2018. This program would allow HUD to facilitate the financing of energy and water conservation improvements in up to 20,000 assisted multifamily housing units. The term for payments made under agreements would last up to 12 years and includes a provision for energy savings audits.

Tenant-Based Rental Assistance (TBRA)

Tenant-based rental assistance is proposed to be funded at $21.1 billion. Of that amount, $18.3 billion is for Section 8 Housing Choice Voucher contract renewals, which is a 4.8 percent increase over FY 2015. It appears this level of funding would be sufficient to renew vouchers in use and restore funding for 67,000 vouchers lost due to sequestration.  The budget requests $178 million for additional 22,500 vouchers for families, veterans, tribal families and victims of domestic or dating violence.  HUD-Veteran Affairs Supportive Housing (HUD-VASH) program does not receive a specific set-aside as in previous budgets.  HUD also proposes $150 million for Tenant Protection Vouchers as requested in previous budgets, a $20 million increase from FY 2015.

Public Housing Capital & Operating Funds

Both the Public Housing Capital and Operating funds would receive funding increases: the proposal provides $1.97 billion for the Public Housing Capital Fund and $4.6 billion for the Public Housing Operating Fund (representing a 5.1 percent and 3.6 percent increase over FY 2015 levels, respectively).  HUD also proposes a Utilities Conservation Pilot to incentivize PHAs to take measures to save on energy and water costs.

Rental Assistance Demonstration

The FY 2015 CR-Omnibus bill increased the cap on the Rental Assistance Demonstration (RAD) program from 60,000 to 185,000 public housing units, enabling all pending applications to go forward as well as a few others.  The administration is proposing once again to remove the unit cap and requests $50 million for incremental funding to enable RAD conversions where such incremental funding is needed for financial feasibility.

Moving To Work

There currently are 39 public housing agencies (PHAs) operating under a Moving To Work (MTW) agreement, which provides those PHAs with regulatory flexibility to operate their public housing and voucher programs. Administration proposes to expand MTW to 15 more PHAs with 150,000 aggregate public housing and voucher units.

 Community Planning and Development (CPD) Programs

The Community Development Block Grant (CDBG) program is proposed to be funded at $2.8 billion. That represents a $186 million, or 6.7 percent, decrease from FY 2015 ($3.07 billion)-enacted levels. The administration is also proposing legislative reforms intended to facilitate joint applications and targeting funding to areas of greatest need. The HOME Investment Partnerships Program (HOME) is proposed to be funded at $1.06 million, with $10 million set-aside from this amount for the Self-Help Homeownership Opportunities Program (SHOP), a $150 million or 16.7 percent increase.HOME program funding would remain 34 percent below nominal FY 2011 levels ($1.61 billion).

Homeless and Supportive Housing Programs

McKinney-Vento Homeless Assistance Grants are proposed to be funded at $2.5 billion, a $345 million or 16 percent funding increase over FY 2015 funding. This amount includes a $2.2 billion set-aside for the continuum of care and rural housing stability-assistance programs and $250 million for Emergency Solutions Grants. The proposal provides $455 million for the Housing for the Elderly (Section 202) program, a 8.3 percent increase from FY 2015 levels. The Housing for Persons with Disabilities (Section 811) program is funded at $177 million, a 31.1 percent increase from FY 2015 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 2015 enacted funding level and equal to the FY 2012 level.

Obama Administration Initiatives

Housing Trust Fund

The administration is not proposing to provide a $1 billion mandatory appropriation for the Housing Trust Fund, as it has in the past.  However, last December, Federal Housing Finance Agency Director Mel Watt directed Fannie Mae and Freddie Mac to start setting aside contributions to the Housing Trust Fund through the course of 2015. On Jan. 30, HUD published interim program regulations, but funding is not expected to be available until 2016. The latest estimate of the calendar year 2015 Fannie Mae and Freddie Mac contributions as originally authorized by the Housing and Economic Recovery Act of 2008is about $260 million.  However, the FY 2016 budget estimates that only $120 million will be allocated to the Housing Trust Fund in FY 2016. This estimate is notably lower than initial estimates, in part because an additional $61 million will come out of the assessment to capitalize the Treasury’s HOPE Reserve account.

Choice Neighborhoods Initiative

The Choice Neighborhoods Initiative, which is designed to comprehensively revitalize high poverty public and assisted housing communities, is proposed to be funded at $250 million, which is more than triple the FY 2015 enacted level.

Upward Mobility Project

The administration is also proposing to create a new initiative, the Upward Mobility Project, which would allow up to 10 of the following:

  • Communities;
  • States, or
  • Consortia of states and/or communities

to blend four block grant programs (two from HUD and two from HHS):

  1. HUD: Community Development Block Grants
  2. HUD: HOME Investment Partnership Program Block Grants
  3. HHS: Community Services Block Grants
  4. HHS: Social Services Block Grants

This initiative is designed to let recipients experiment with their block grants to fund targeted and concerted economic development projects to reduce poverty and make families more self-sufficient.

Local Housing Policy Grants

The budget proposes $300 million in mandatory spending to provide grants to local governments to create policies, programs or regulatory initiatives to promote a more elastic and diverse housing supply.

 U.S. Department of the Treasury

Community Development Financial Institutions Fund

The administration proposes to fund the Community Development Financial Institutions (CDFI) Fund at $234 million, a slight increase from FY 2015 funding levels. The administration also proposes to extend the CDFI Bond Guarantee program’s authorization by one year, through FY 2016, at $1 billion, a $250 million increase from FY 2015.

Tax proposals

Low-Income Housing Tax Credit (overall cost of all LIHTC proposals per OMB: $3.993 billion over 10 years)

  • Private Activity Bond Conversion proposal (OMB cost: $3.7 billion over 10 years)
  • Similar to FY 2015 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 18 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 about 50 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 2014 rate of 3.22 percent, for every $1,000 of PAB cap, states could increase their LIHTC authority by $64.40.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 LIHTCs at a lower cost than by increasing per-capita allocations.
  • Similar to FY15 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: $191 million over 10 years)
  • Similar to FY 2015 proposal: Rather than extend the minimum 9 percent LIHTC rate, this proposal would use revised formulas, effective Dec. 31, 2015, 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 2015 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. High housing cost areas, where rents of residents earning 60-80 percent AMI cross-subsidize rents of residents earning below 40 percent AMI,
  2. Low-income neighborhood revitalization, and
  3. Rural areas where very low-incomes and sparse populations make it difficult to finance and 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 income qualification purposes, which would assist preservation transactions.
  • Preservation selection criterion in QAPs (no cost)
  • Similar to FY 2015 proposal: States would be required to add a new selection criterion in their qualified allocation plans (QAP) for preservation projects.
  • Remove the Qualified Census Tract basis boost population cap (OMB cost: $136 million over 10 years)
  • New proposal: Under current law, a 130 percent basis boost is available for properties in qualified census tracts (QCT) designated by HUD with poverty rates at or above 25 percent or where tract median incomes are at or below 60 percent of the area median income. This QCT designation, however, is subject to a cap if the aggregate population of the census tracts exceeds 20 percent of the metropolitan area population.
  • This proposal would remove the aggregate population cap, enabling properties in more areas within the metropolitan region to receive the 130 percent basis boost.
  • Providing Domestic Violence Protections in LIHTC Projects (no cost)
  • Similar to FY 2015 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 investments (QEIs) made after Dec. 31, 2014, to offset AMT liability. (OMB cost: $10.1 billion over 10 years)

Manufacturing Communities Tax Credit

As proposed in last year’s budget, 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, 2016 through 2018. The MCTC could be structured like the NMTC. (OMB cost: $4.9 billion over 10 years)

Production and Investment Tax Credit

The administration would extend prior law for facilities on which construction begins before the end of 2015. For facilities on which construction begins after Dec. 31, 2015, 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.

The administration also proposes to make permanent 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 scheduled to expire after Dec. 31, 2016, and the election to claim the investment tax credit in lieu of the production tax credit permanent. (OMB cost: $31.5 billion over 10 years)

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: $2.1 billion over 10 years)

Energy Efficient Commercial Building Property Deduction

The proposal modifies and makes permanent the deduction for energy efficient commercial building properties (Section 179D), which can be used to help finance energy efficient upgrades of multifamily housing.  For properties placed in service before Jan. 1, 2016, the proposal would extend current law and update it to apply the 2004 industry energy efficiency standard, instead of the 2001 standard.  For properties placed in service after Dec. 31, 2015, the deduction would be made permanent, increased to $3 per square foot, and updated it to apply the 2004 standard. (OMB cost:  $2.7 billion over 10 years)