Federal Policy Update

1. Federal Policy Update Matt Josephs Senior Vice President for Policy Local Initiatives Support Corporation (LISC) AHIC Conference October 7, 2014

2. Overview of the Presentation Tax Reform FY 2015 and 2016 Appropriations Housing Finance Reform Community Reinvestment Act 2014 Elections

3. Image Source: thefiscaltimes.com

4. Tax Reform in the 113th Congress In the first half of the 113th Congress and early in the second half, there was some momentum for comprehensive tax reform – to the point where there was a moratorium against introducing stand-alone tax legislation. Chairmen Baucus and Camp visited together various businesses around the country to help highlight what is working and what needs to be fixed in the tax code. Both indicated an interest in taking a “blank slate” approach to tax reform; that they would take all tax expenditures out of the code and determine from there which ones should remain. In the summer of 2013, Senators Baucus and Hatch asked all members of the Senate to provide to them a list of which tax expenditures should remain in a revised tax code, citing three criterion for inclusion: 1. Does it help grow the economy? 2. Does it makes the tax code fairer? 3. Does it promote important policy objectives?

5. Arguments for Preserving the Housing Credit It helps grow the economy, not only through direct investments in some of the nation’s most distressed urban and rural communities, but also by catalyzing additional investments and “freeing up” rental income of low-income persons for more productive economic uses; It makes the tax code fairer by passing along real and tangible economic benefits to low-income families that, according to the Congressional Budget Office, don’t often accrue benefits through the tax code; It promotes important policy objectives, including financing affordable housing and spurring investments in communities and projects that cannot attract traditional capital investments; and, It spurs activity that would not occur but for the tax incentive. The Housing Credit is somewhat unique in that it directs investments to activities in which companies would not otherwise invest because: (a) it does not further their normal business operations; and (b) if not for the benefits provided in the tax code, they would not be profitable for the company.

6. Tax Expenditures: What is the current distribution? Some of the government’s largest tax expenditures compared with those that benefit low-income populations (costs over a five-year period) Source: Daniel Mandel, Tax Expenditures and Social Policy: A Primer. Smart Subsidy for Community Development.

7. Distribution by Income Class of the Mortgage Interest Deduction – federal tax expenditures at 2012 rates and income levels Source: Joint Committee on Taxation

8. Rep. Camp’s Draft Proposal • Representative Camp introduced a comprehensive tax reform proposal in February of 2014. • The proposal preserved the 9% Housing Credit, but made many other proposed modifications to the Housing Credit and other changes to the code that could prove very detrimental to affordable housing: • Repeal of the 4% credit and private activity bonds • Extending the credit period to 15 years • Extending the depreciation period to 40 years • Repealing the 130% basis boost • Limitations on occupancy preferences • Lowering the corporate tax rate from 35% to 25% will also affect pricing of the credit.

9. Impact of Chairman Camp’s Proposal • The ACTION Coalition estimates that the changes to the tax code contained in Chairman Camp’s proposal could result in the development of 54,000 fewer affordable housing units annually, a reduction of over 60% of annual Housing Credit production. • Multifamily tax exempt bonds (used with 4% credits) are responsible for more than 40% of annual Housing Credit production. In 2012 alone, 38,000 apartments were created using tax exempt bond financing. • According to a report prepared by Novogradac and Company, the cumulative effect of extending the credit period to 15 years, lowering the corporate tax rate to 25%, and extending the depreciation period to 40 years would result in a loss of as much as 19% of housing credit equity – over $1.5 billion or 13,000 units annually. • Eliminating the basis boost means that properties serving the most vulnerable populations and communities may not be able to be financed.

10. LIHTC: A Fix for Floating Rates (S.1442; HR 4717) • The credit rates for both the 9% credits and the 4% credits are based on a formula that is set monthly and tied to U.S. Treasury’s borrowing rates, which are at historic lows. • Lower Treasury borrowing rates reduce the tax credit rates, which in today’s interest rate environment results in 15-20% less equity being available for projects. • This makes development and rehabilitation of properties more difficult, especially for properties that target the lowest income populations. • The Housing and Economic Recovery Act of 2008 set a temporary floor of 9 % for the 9% credits. • S.1442 (28 co-sponsors) and HR 4717 (65 co-sponsors) would make this fix permanent, and would also extend it to the 4% credit.

11. Status of Tax Extenders In the absence of comprehensive tax reform, Congress must now consider the status of about 55 tax provisions that expired in 2013. Included in this set of expired provisions is the temporary fix that retained the floor for the 9% credit. The Senate Finance Committee passed an extenders package this summer that included a fix for both the 9% and the 4% credit for all credits allocated through 2015. The House Ways and Means Committee did not vote out an extenders package, but rather held separate votes to on individual provisions that had expired so that these could be made permanent. The 9% and 4% credit fixes were not brought up for votes in Committee. When Congress returns for a lame duck session, they are likely to vote on the entire extenders package – minus perhaps a few provisions. Relative to the 9% fix, the 4% fix has a higher hurdle for inclusion because: it wasn’t part of the extenders package last year; it does have costs attributed to it (it is more costly than the 9% fix); and it is inconsistent with Chairman Camp’s Tax Reform proposal, which called for the elimination of the 4% credit.

12. Looking Ahead to the 114th Congress In the 113th Congress, the tax credit industry was focused first and foremost on preserving the Housing Credit in the context of tax reform, as well as making permanent the fixes for both the 9% and 4% floor. While this is most certainly going to be the top priority in the 114th Congress, there is a growing consensus that we may need to be “on the offensive” more going forward. The President’s 2016 budget is likely to include several provisions which would strengthen the program, including: A provision to allow states to convert private activity bond volume cap to LIHTC authority A provision to permit access to 4% credit without a requirement to finance property with tax exempt bonds A provision to allow credits to serve residents with incomes of up to 80% of AMI, so long as the average of all residents at a given property continue to remain at or below 60% of AMI. It is also notable that Bipartisan Policy Center’s Housing Commission recommended increasing the credit allocations to states by 50%.

13. Appropriations Image Source: grist.org

14. FY 2015 and FY 2016 Appropriations • Congress failed to pass a single appropriations bill for the FY 2015 budget, and instead passed a Continuing Resolution to fund the government at FY 2014 levels through December 11th, 2014. • At that time Congress will either pass an omnibus bill to fund agencies for the remainder of FY 2015, or if the Senate should flip to Republican control, may pass another short term Continuing Resolution so that the new Senate will be in place to vote on the budget. • The bigger battle will be over the FY 2016 budget, which the President will introduce in February or March of 2015, possibly to a Congress entirely under Republican control. • The Budget Control Act of 2011, which requires the government to operate within certain top-line budget caps for defense and non-defense programs, was waived for 2014-2015 but will be reinstated again for FY 2016. • It requires Congress to find an additional $1.2 trillion in savings over 10 years (either budget cuts or revenue increases) or else face across the board cuts known as sequestration. • This could result in additional cuts of up to 8% annually for domestic discretionary programs.  If the past is any indication, Congress will work to preserve section 8 spending levels, causing further erosion of HOME and CDBG funding.

15. HUD Budget Requests: FY 2015(Numbers in millions) Source: HUD Budget FY 2015

16. HUD Budget Requests: FY 2014(Numbers in millions) Source: HUD Budget FY 2014

17. HUD Budget Over the Past Ten Years (numbers in millions) Sources: HUD Budget in Analytical Perspectives: Budget of the U.S. Government; NLIHC FY07 Budget Chart for selected programs; Overview of FY2012 Budget, Department of Housing and Urban Development (Feb.14,2011); Fiscal Year 2009 Budget Summary, U.S. Department of Housing and Urban Development.

18. HUD Budget Authority: Comparative Summary between 2005 Enacted and the President’s 2014 Budget Request Enacted FY 2005 Budget Authority President’s Budget Request FY 2014

19. Housing Finance Reform Image Source: abcnews.go.com

20. Government Sponsored Entity (GSE) Reform

21. Image Source: bancvue.com

22. Community Reinvestment Act • The banking regulatory agencies have recently engaged in efforts to update the CRA Q&A guidance document. • In November of 2013, the regulators finalized the first set of changes to the Q&A document. The changes are intended to: • Clarify circumstances under which banks may receive CRA credit for community development activities statewide and regional areas surrounding their “assessment areas”. • Clarify circumstances under which banks can receive CRA credit for investing in nationwide funds, stating that “side letters” are not required for such investments. • Clarify that the community development lending performance is always considered in an institution’s lending test rating and can negatively impact that score. • On September 10th, the regulators posted several other proposed changes to the Q&A document, including: • Providing examples of what qualifies as innovative or flexible lending practices; • Clarifying guidance on what constitutes economic development; and • Providing examples of activities which are deemed to revitalize or stabilize a community. • Public comments on these proposals are due on November 10th, 2014

23. 2014 Congressional Elections Image Source:http://totalbuzz.ocregister.com/files/2012/04/donkey-elephant-fighting.jpg

24. Democrats are defending 21 seats (including six in states that Romney won). Republicans are only defending 15 seats, none of which are in states that Obama won. The Republicans need to pick up 6 seats, and 3 seats are solidly in their column (Montana, West Virginia and South Dakota). Several predictive models are showing a 60-70% likelihood that the Republicans will take over. Who Will Control the Senate?

25. Under Republican control, based on seniority: Senator Hatch from Utah would take over as chair of the Finance Committee. Senator Cochran from Mississippi could take over as chair of the Appropriations Committee (the current Ranking Member is Senator Shelby from Alabama). Senator Shelby could take over as Chair of the Banking Committee (the current Ranking Member is Senator Crapo from Idaho). On the Finance Committee, Senator Rockefeller (D-WV) is retiring, and Senator Roberts (R-KS) is in a tougher than expected re-election campaign. Other key retirements/tight races: Senator Johnson (D-SD); Senator Harkin (D-IA); Senator Pryor (D-AR); Senator Udall (D-CO); and Senator Hagan (D-NC) Potential Changes of Note in the Senate

26. Key Departures from Ways and Means Committee include: Chairman Camp is retiring. Kevin Brady (R-TX) and Paul Ryan (R-WI) will vie for the Chairmanship. Jim Gerlach (R-PA), Tim Griffin (R-AR) and Allyson Schwartz (D-PA) are retiring. Key Departures from Appropriations Committee include: Both the Chairman (Tom Latham, R-IA) and the Ranking Member (Ed Pastor, D-AZ) of the THUD subcommittee will be retiring. Other retirements include senior members Frank Wolf (R-VA), Jack Kingston (R-GA), and James Moran (D-VA). Key Departures from Financial Services Committee include: Spencer Bachus (R-AL), Shelly Moore Capito (R-WV), Michelle Bachman (R-MN), John Campbell (R-CA), Carolyn McCarthy (D-NY), and Gary Peters (D-MI). Potential Changes of Note in the House

27. Conclusion Image Source: consult-llewellyn.com