Leveraging Federal Funds for Housing, Community, and Economic Development
Gao ID: GAO-07-768R May 25, 2007Each year the federal government funds numerous affordable housing and community and economic development initiatives through an array of programs, such as the Department of Housing and Urban Development's (HUD) Section 108 Loan Guarantee (Section 108) program. Yet, the need for federal money to fund these initiatives has continued to grow, while the federal budget increasingly has been strained by other competing funding priorities. To help finance their initiatives and achieve program goals, recipients of funding under these federal programs often have combined or "leveraged" their funds with other federal, state, local, and private sector resources. While leveraging is generally recognized favorably by public and private sector officials, its use in federal programs has not been widely analyzed. This report responds, in part, to Congress's request that we examine leveraging as it relates to federal housing, community, and economic development programs. Specifically, this interim report (1) examines the perspectives of stakeholders--government and industry officials, academics, and others with knowledge of or experience with leveraging--on the use, implications, and measurement of leveraging in housing and community and economic development programs and (2) describes the type of data HUD collects that could be used to determine the extent of leveraging in the Section 108 program. Additionally, enclosure II describes how federal funds may have been or could be leveraged in the Section 108 program.
Leveraging can be a useful tool for financing affordable housing and community and economic development and generally is regarded favorably by public and private sector officials; however, its use may have unintended consequences, and commonly used measures of leveraging have certain limitations. Leveraging can occur at an institutional level (to fund multiple initiatives) and at a project level (to fund a discrete activity or development). Leveraging also may occur because programs require that program dollars be matched with other funds or because program dollars are limited and participating communities or other recipients need to seek additional funds for their initiatives. Although stakeholders we interviewed and the literature we reviewed generally regarded leveraging as useful, they also noted that it may have implications such as inefficiencies resulting from differing application and reporting deadlines in public programs and the potential substitution of federal for private funding, which could direct scarce federal funds from the neediest communities. Finally, stakeholders and the literature agreed that the most common way to describe the extent of leveraging for programs or projects is through a ratio, which expresses the proportion of dollars that other sources contributed against dollars that the program contributed. However, most of our interviewees said that what a ratio can reveal about the success or efficiency of funding a program or project depends partly on the circumstances of the development, such as its location and the availability of potential investors. HUD collects data on the other sources and amounts of funds communities plan to leverage with Section 108 loan funds to finance various housing and community and economic development projects. HUD maintains these data in Section 108 memorandums, which the agency prepares as a record of actions taken with respect to a Section 108 loan guarantee application. However, because these data represent projected sources and amounts of funding, they cannot be used to determine the actual amount of leveraging in the Section 108 program. Nonetheless, available data on projected funding can provide insight into the extent to which communities planned to leverage Section 108 loan funds with other federal, state or local, and private sources.
GAO-07-768R, Leveraging Federal Funds for Housing, Community, and Economic Development
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May 25, 2007:
The Honorable Maxine Waters:
Chairwoman:
Subcommittee on Housing and Community Opportunity:
Committee on Financial Services:
House of Representatives:
Subject: Leveraging Federal Funds for Housing, Community, and Economic
Development:
Dear Madam Chairwoman:
Each year the federal government funds numerous affordable housing and
community and economic development initiatives through an array of
programs, such as the Department of Housing and Urban Development's
(HUD) Section 108 Loan Guarantee (Section 108) program.[Footnote 1]
Yet, the need for federal money to fund these initiatives has continued
to grow, while the federal budget increasingly has been strained by
other competing funding priorities. To help finance their initiatives
and achieve program goals, recipients of funding under these federal
programs often have combined or "leveraged" their funds with other
federal, state, local, and private sector resources. While leveraging
is generally recognized favorably by public and private sector
officials, its use in federal programs has not been widely analyzed.
This report responds, in part, to your request that we examine
leveraging as it relates to federal housing, community, and economic
development programs. Specifically, this interim report (1) examines
the perspectives of stakeholders--government and industry officials,
academics, and others with knowledge of or experience with leveraging-
-on the use, implications, and measurement of leveraging in housing and
community and economic development programs and (2) describes the type
of data HUD collects that could be used to determine the extent of
leveraging in the Section 108 program. Additionally, enclosure II
describes how federal funds may have been or could be leveraged in the
Section 108 program.[Footnote 2]
To examine the perspectives of stakeholders on the use, implications,
and measurement of leveraging in housing and community and economic
development programs, we reviewed academic, industry, and other
literature and interviewed stakeholders. To describe the type of data
HUD collects that could be used to determine the extent of leveraging
in the Section 108 program, we interviewed HUD officials, reviewed
relevant program regulations and guidance, and reviewed our prior
reports in this area and reports of others. To describe how funds may
have been leveraged in the Section 108 program, we collected
information on the proposed sources and amounts of funds used to
finance a random sample of 50 proposed Section 108 projects. For a
detailed description of our scope and methodology, see enclosure I.
Enclosure III describes how we categorized some of the types of funding
sources that can be leveraged with Section 108 funds and selected
programs under those categories. We conducted our work in Washington,
D.C. and Chicago from November 2006 to May 2007 in accordance with
generally accepted government auditing standards.
As agreed with your office, we will provide a final report in the fall
of 2007, which will address any further information we have gathered
relating to the objectives listed above. For example, we plan to assess
how generally accepted measurements of leveraging can be used in
combination with other indicators to measure the performance of
housing, community, and economic development programs. In addition, we
plan to review how or the extent to which leveraging occurs in the
following additional programs: the Department of the Treasury's
Community Development Financial Institutions (CDFI), Low-Income Housing
Tax Credit, and New Markets Tax Credits programs; and HUD's Community
Development Block Grant (CDBG), HOME Investment Partnerships (HOME),
and HOPE VI programs.
Results in Brief:
Leveraging can be a useful tool for financing affordable housing and
community and economic development and generally is regarded favorably
by public and private sector officials; however, its use may have
unintended consequences, and commonly used measures of leveraging have
certain limitations. Leveraging can occur at an institutional level (to
fund multiple initiatives) and at a project level (to fund a discrete
activity or development). Leveraging also may occur because programs
require that program dollars be matched with other funds or because
program dollars are limited and participating communities or other
recipients need to seek additional funds for their initiatives.
Although stakeholders we interviewed and the literature we reviewed
generally regarded leveraging as useful, they also noted that it may
have implications such as inefficiencies resulting from differing
application and reporting deadlines in public programs and the
potential substitution of federal for private funding, which could
direct scarce federal funds from the neediest communities. Finally,
stakeholders and the literature agreed that the most common way to
describe the extent of leveraging for programs or projects is through a
ratio, which expresses the proportion of dollars that other sources
contributed against dollars that the program contributed. However, most
of our interviewees said that what a ratio can reveal about the success
or efficiency of funding a program or project depends partly on the
circumstances of the development, such as its location and the
availability of potential investors.
HUD collects data on the other sources and amounts of funds communities
plan to leverage with Section 108 loan funds to finance various
housing, community, and economic development projects. HUD maintains
these data in Section 108 memorandums, which the agency prepares as a
record of actions taken with respect to a Section 108 loan guarantee
application. However, because these data represent projected sources
and amounts of funding, they cannot be used to determine the actual
amount of leveraging in the Section 108 program. Nonetheless, available
data on projected funding can provide insight into the extent to which
communities planned to leverage Section 108 loan funds with other
federal, state or local, and private sources. See enclosure II for
information about the Section 108 projects we reviewed.
Background:
Traditionally, a range of governmental and financial entities and
academics have defined or conceptualized leveraging as using one source
of funds to attract additional sources of funds.[Footnote 3] Thus, for
example, a low-income housing development in which the federal
government's initial investment attracted, or was the impetus for,
additional private or other investment could be seen as a project that
involved leveraging. However, some have said that leveraging also can
be thought of broadly to mean the combining of multiple sources of
funds.[Footnote 4] Under this broader conceptualization, the investment
of federal funds does not necessarily have to be the impetus for the
investment of other funds.[Footnote 5] Thus, for example, a low-income
housing development for which the federal government provided "gap"
financing also could be seen as a project that involved
leveraging.[Footnote 6] For purposes of this report, we refer to
leveraging in this broader sense--the combination of multiple sources
of funds, including other federal, state, local, and private funds, to
finance development projects, among other things.
Congress established the Section 108 program in 1974 as a part of the
CDBG program.[Footnote 7] As amended in 1977, the law permitted
entitlement communities--generally cities designated as central cities
of metropolitan statistical areas, other cities with populations of at
least 50,000, and qualified urban counties--to borrow up to three times
their current year's CDBG allocation to obtain additional resources for
financing larger-scale housing and community development projects that
otherwise could not be accomplished with a single year's CDBG
allocation.[Footnote 8] In 1990, the Cranston-Gonzales National
Affordable Housing Act extended participation in the program to
nonentitlement communities--smaller communities, including many rural
communities whose CDBG programs are administered by the state--and
raised the amount communities could borrow to five times their current
year's CDBG allocation (or in the case of nonentitlement communities,
five times the state's allocation).[Footnote 9]
Eligible communities must apply to HUD to obtain approval for a Section
108 loan guarantee. Both HUD field offices and headquarters play a role
in managing the loan program. Generally, field offices assist
communities and states in preparing their applications, make
recommendations to headquarters to approve or deny loans, and monitor
funded activities. Headquarters provides final approval for all loan
guarantees, negotiates loan terms with applicants, and arranges for the
sale of loans. The maximum amount HUD can commit to guarantee to a
community is fives times the community's annual CDBG allocation, and
HUD guarantees repayment of 100 percent of the community's Section 108
indebtedness.
Under the Section 108 program, a community's current and future CDBG
allocations serve as the principal collateral for the loan (that is, a
community or state's CDBG funds are used to make payments due on the
guaranteed loan if other funds, such as project-related income, are
insufficient for that purpose). To date, HUD has not been required to
make a payment to the holder of a note guaranteed under Section 108 as
a result of a default.
The Section 108 program does not require communities to leverage
program funds as a condition of receiving a loan guarantee. However,
Congress created two sources of funds for use specifically in
conjunction with Section 108 loan proceeds--Economic Development
Initiative (EDI) and Brownfields Economic Development Initiative (BEDI)
grants.[Footnote 10] HUD awards grant funds under both programs to
states and communities undertaking initiatives funded in whole or in
part with Section 108 loan funds.[Footnote 11] As discussed later in
this report, communities often leverage (combine) Section 108 loan
funds with other federal, state, local, and private sources of funds.
From 2001 through 2006, federal commitments to proposed Section 108
projects--that is, reservations of funds to guarantee loans--averaged
approximately $290 million annually. Commitments declined sharply
between 2005 and 2006, from approximately $337 million to $220 million.
During the same period, advances--Section 108 loan funds provided to a
community--averaged $325 million annually.[Footnote 12]
From 2001 through 2006, HUD approved 358 applications for loan
guarantees. The number of applications HUD approved ranged from 36
(2006) to 73 (2002) and averaged approximately 60 per year. Most of the
communities HUD approved for loan guarantees during this period
proposed using their Section 108 loan funds for economic development
and physical infrastructure projects (see fig. 1).
Figure 1: Proposed Section 108 Projects by Type, Fiscal Years 2001
through 2006:
[See PDF for Image]
Source: GAO analysis of HUD data.
[End of figure]
Leveraging Can Occur in Different Ways and for Different Reasons, but
Its Relationship to Success or Efficiency in Funding Is Not Well
Understood:
Based on our conversations with stakeholders and a review of the
literature, we found that leveraging occurs in different ways and for
different reasons, depending on the program. Further, the stakeholders
with whom we spoke discussed several unintended implications of
leveraging that were echoed in some of the literature. Finally, while
the most common way to express the extent of leveraging is through a
leverage ratio, stakeholders agreed that what a ratio can reveal about
the success or efficiency of an institution in funding a program or
project has certain limitations.
According to Stakeholders and Literature, Leveraging Can Occur at
Different Levels and for Different Reasons:
Leveraging can occur at the institutional or at the project level (see
fig. 2). At the institutional level, an institution or organization
pools funds from multiple sources, which later are used to finance
individual projects. For example, under the CDFI program, the federal
government makes investments in certified institutions, which the
institutions use to leverage (in this case match) additional sources of
funds.[Footnote 13] The certified institutions then determine how they
will use these pooled resources to finance a range of housing and
community and economic development activities. In comparison, at the
project level, a community or other development authority leverages
funds as necessary for discrete projects. For example, under the
Section 108 program, communities may use Section 108 loan funds to
finance a variety of projects, and each individual project may contain
a different mix of funding sources, depending on its size and type. As
previously described, at either level, leveraging may occur in the
traditional sense--federal program funds are used to attract other
sources of funds--or in the broader sense--sources of funds are
combined for development, but no one source of funds is specifically
intended to attract the other sources of funds.
Figure 2: Leveraging at the Institutional and Project Levels:
[See PDF for Image]
Source: GAO.
[End of figure]
Leveraging also may occur as a result of statutory or regulatory
requirements, program design, or for other reasons. For example, the
HOME program statute generally requires states and communities to match
25 percent of their HOME allocations on an annual basis.[Footnote 14]
According to HUD officials, Congress thought it was important for
states and communities to make permanent contributions to the
development of affordable housing in their areas, so it included a
matching (leveraging) requirement in the HOME statute. Under the New
Markets Tax Credit program, leveraging is not legally required, but
applicants that propose projects that leverage additional funds are
rewarded with additional points in the competitive application process
for issuance of tax credits.[Footnote 15] Finally, some programs, such
as the Section 108 program, do not require or provide incentives for
recipients of program funds to leverage, but leveraging often occurs
anyway in these programs--for example, to stretch limited federal
dollars or promote partnerships among public and private investors.
Finally, many with whom we spoke said that while leveraging is often a
useful tool for improving communities, it may be harder to do in highly
distressed urban areas or in rural areas than it is in more developed
urban areas. They explained that the risk of investment in highly
distressed urban areas is often too high to attract significant private
investment.[Footnote 16] For example, in our 2002 report on the HOPE VI
program--a program designed to improve severely distressed public
housing, which is often located in distressed urban communities--we
found that 79 percent of the funds contributed to HOPE VI projects were
from federal sources while 12 percent were from private
sources.[Footnote 17] Our 1989 report on the Urban Development Action
Grants (UDAG) program similarly found that more-distressed cities
expected to need more UDAG funding to complete projects and had lower
amounts of leveraging than less-distressed cities that received UDAG
funds.[Footnote 18] Similarly, some stakeholders said that the number
of investors in rural areas may be limited. An Office of Thrift
Supervision report on rural development noted that it is not uncommon
for only one or two financial institutions to serve a rural community,
and some communities lack access to such institutions.[Footnote 19]
Although Generally Regarded Favorably, Leveraging Also Has Implications
Such as Potentially Substituting Federal for Private Funding:
Many with whom we spoke and much of the literature we reviewed
indicated that leveraging can help facilitate housing and community and
economic development.[Footnote 20] For example, as discussed
previously, leveraging is often used as a way to stretch scarce federal
funds and promote partnerships between the public and private sectors
to improve conditions in communities. However, leveraging at the
project level can be challenging and inefficient, partly because
federal, state, and local funding sources often have different
application and other requirements and deadlines. For example, the Low-
Income Housing Tax Credit program requires developers to complete
housing projects within 2 years of receiving a tax credit allocation
from a state.[Footnote 21] However, according to some stakeholders with
whom we spoke, this 2-year deadline can make it difficult to leverage
the tax credits with certain other federal financing sources, such as
HOPE VI grants because such large-scale developments can take more than
2 years to complete.
The inclusion of federal funds in housing and community and economic
development project finance also helps to spread the investment risk
between potential private sector investors and the federal government,
thereby encouraging private sector participation in development.
However, some of the literature we reviewed noted the potential in
public-private partnerships for the uneven distribution of investment
risks among investors, with the federal government often bearing
greater risks and costs relative to the partnership benefits.[Footnote
22]
According to some stakeholders, at the institutional level, communities
and investors generally are not encumbered by differing application and
other requirements, and investors generally are isolated from the
investment risks associated with particular projects, and thus may be
more willing to invest in housing and community and economic
development initiatives. However, when federal funding is provided at
the institutional level, the market could play a greater role in
influencing what development is completed because the federal
government plays a more limited role in determining how funds are used
at this level than it does at the project level. Moreover, when funding
is provided at the institutional level, it may be difficult to trace
federal funding down to specific projects because of its more limited
role.
Finally, some of the literature we reviewed suggested that a proportion
of projects that involve leveraging also likely involve some level of
substitution--that is, the replacement of private dollars that
otherwise would have been invested in a project (if lower-cost public
funding were not available) with public dollars.[Footnote 23] One
suggested means of limiting the level of substitution and appropriately
sizing public subsidies is the inclusion of a "but for" test--a test
designed to determine whether a project would have been completed but
for, or in the absence of, the investment of public funds.[Footnote 24]
However, such tests may not be good at predicting, for example, the
private sector's willingness to absorb risk and thus the appropriate
proportion of private investment and public subsidy for a
project.[Footnote 25] Some stakeholders said that the amount of
substitution in federal programs can be minimized through the inclusion
of matching requirements. However, others said that requirements to
leverage might preclude certain communities (for example rural and
severely distressed urban communities) from receiving federal funds
because they would be unable to attract sufficient additional funding.
Further, such requirements may provide incentives for more developed
communities to apply for federal funds because they can easily match
them with private sources, substituting private funding with public
funding and potentially diverting scarce federal resources from the
projects where they were most needed.
Leverage Ratios Are Commonly Used to Measure the Extent of Leveraging,
but They Have Certain Limitations:
Based on our conversations with stakeholders and our review of the
literature and housing and community and economic development program
guidance, a common way of expressing the extent or amount of leveraging
that occurs at either the institutional or the project level is with a
leverage ratio. A leverage ratio relates the dollars other sources
provide to the dollars a program provides to an institution or a
project. For example, the leverage ratio for a particular project may
be 1:1, meaning that the other federal, state, local, and private
sources collectively contributed a dollar for every program dollar
contributed to the project. In general, an institution or project with
a high leverage ratio is one in which the investment of all other funds
is large relative to the investment of program funds (for example, 10:1
or 25:1). Similarly, an institution or project with a low leverage
ratio is one in which the investment of all other funds is reasonably
small relative to the investment of program funds (for example, 2:1 or
0.5:1).
However, stakeholders identified some limitations in the usefulness of
leverage ratios for conveying detailed information on a program or
project. According to stakeholders, at the institutional level,
leverage ratios are a useful expression of the success or efficiency of
the institution in attracting or combining resources for future
development initiatives--at this level, a higher ratio generally would
indicate more success or efficiency than a lower ratio. But, at the
project level, factors such as the local economy and the availability
of investors could have a positive or negative impact on a project's
ability to leverage additional funds, and thus its leverage ratio. In
addition, ratios used alone cannot convey information on the level of
substitution in a project.
As part of our ongoing work in this area, we plan to interview
additional stakeholders to obtain a broader understanding of the
perspectives that exist on the use, implications, and measurement of
leveraging for housing and community and economic development programs.
We also plan to further review how leverage ratios, in combination with
other indicators, can be used to measure the performance of housing and
community and economic development programs.
HUD Data Could Be Used to Estimate the Extent of Leveraging in the
Section 108 Program:
Although HUD does not calculate a leverage ratio for the Section 108
program, the agency collects and maintains some information that may be
used to estimate the extent to which projects supported by Section 108
loan guarantees plan to leverage other federal, state, local, and
private funds.[Footnote 26] Specifically, HUD collects information on
sources and amounts of funds that communities plan to use in
conjunction with Section 108 loan funds and documents this information
in a Section 108 memorandum. In most cases, these memorandums list the
type--for example, EDI and BEDI grants, tax-exempt bond and tax credit
proceeds, and developer equity--and amount of proposed funding sources
for projects that will be supported by Section 108 loan guarantees. See
enclosure III for more information on how we categorized some of the
types of funding sources that can be leveraged with Section 108 funds
and selected programs included under those categories.
However, agency officials acknowledged a limitation to the data that
affects the extent to which it can be used to accurately measure
leveraging in the Section 108 program. In particular, HUD only has data
on what sources and amounts of funds a community proposes to use (at
the time of its application to HUD for a Section 108 guarantee) to
complete a project. According to HUD, proposed sources and amounts may
differ from the actual sources and amounts used to complete a project,
and do not represent firm commitments. Some HUD data provided limited
support for this statement: in fiscal year 2006, HUD reported $1.8
million in unplanned uses of CDBG funds to make payments on Section 108
loans, indicating that the sources--in particular CDBG funds--
communities used in conjunction with Section 108 loan funds can change
over time.[Footnote 27]
Nonetheless, information from these memorandums provides some insight
into the extent to which communities planned to leverage Section 108
loan funds with other sources of funds to finance development projects.
For example, the total number of proposed sources of funds for each of
the 50 projects we reviewed ranged from 1 (Section 108 loan funds only)
through 15.[Footnote 28] The number of other sources used to finance a
project could be related to, among other things, its size and type. For
example, projects that used Section 108 loan proceeds as the only
source of funding generally were for small physical infrastructure
improvements in a community, such as the construction of a youth sports
center or the repair of sidewalks and gutters. On the other hand, those
projects that used multiple sources of funds often were larger-scale,
such as the renovation of a brownfields site into a mixed-use
commercial and residential complex. Enclosure II provides more detailed
information on proposed sources and amounts of funds for the 50
projects we reviewed.
In 2002, the Urban Institute found that each Section 108 dollar
leveraged an additional $1.54 in private funding and $0.68 in other
public funding, for a total of $2.22 in other funds leveraged.[Footnote
29] In other words, the program had a 2.22:1 leverage ratio. Because of
the small sample of Section 108 memorandums we reviewed, for purposes
of this report we were not able to calculate a similar ratio.[Footnote
30]
As part of our ongoing work for you in this area, we plan to assess
what data are available to measure the extent of leveraging in several
other federal programs including the Department of the Treasury's CDFI,
Low-Income Housing Tax Credit, and New Markets Tax Credits programs;
and HUD's CDBG, HOME, and HOPE VI programs and provide information on
how these programs leverage federal funds for housing and community and
economic development.
Agency Comments:
We provided HUD with a draft of this report for review and comment. The
agency provided technical comments, which we incorporated in the report
as appropriate.
As agreed with your office, unless you publicly announce the contents
of this report earlier, we plan no further distribution until 30 days
from the report date. At that time, we will send copies of this report
to the Ranking Minority Member, Subcommittee on Housing and Community
Opportunity and the Secretary of Housing and Urban Development. We will
also make copies available to others upon request. In addition, the
report will be available at no charge on the GAO Web site at
http://www.gao.gov.
If you or your staff have any questions concerning this report, please
contact me at (202) 512-8678 or at shearw@gao.gov. Contact points for
our Offices of Congressional Relations and Public Affairs may be found
on the last page of this report. Key contributors to this report are
listed in enclosure IV.
Sincerely yours,
Signed by:
William B. Shear:
Director, Financial Markets and Community Investment:
Enclosures - 4:
[End of section]
Enclosure I: Objectives, Scope, and Methodology:
The objectives of this interim report were to (1) examine the
perspectives of stakeholders on the use, implications, and measurement
of leveraging in housing and community and economic development
programs and (2) describe the type of data the Department of Housing
and Urban Development (HUD) collects that could be used to determine
the extent of leveraging in the Section 108 Loan Guarantee (Section
108) program. Enclosure II contains the results of our review of the
potential extent of leveraging in 50 selected Section 108 projects. See
enclosure III for a description of how we categorized some of the types
of funding sources that could be leveraged (combined) with Section 108
funds and selected programs included under those categories.
To examine the perspectives of stakeholders on the use, implications,
and measurement of leveraging in housing and community and economic
development programs, we reviewed academic, government, and industry
literature related to leveraging in the housing, community, and
economic development fields. To identify this literature, we conducted
a literature search on research databases and agency Web sites using
each of the terms "leveraging," "leverage," "private investment," and
"public-private partnership" in combination with each of the terms
"housing," "community development," and "economic development." For
example, we searched using the phrase "leveraging and housing." We also
interviewed representatives of several federal agencies, including the
Department of Agriculture, the Department of Commerce, the Department
of the Treasury, HUD, and the Office of Management and Budget, as well
as representatives of industry groups and other organizations involved
in housing, community, and economic development initiatives, including
the Coalition of Community Development Financial Institutions, the
Council of State Community and Economic Development Agencies,
Enterprise Community Partners, the International Economic Development
Council, Harvard University's Center for Housing Studies, the John D.
and Catherine T. MacArthur Foundation, Living Cities: The National
Community Development Initiative, the Local Initiatives Support
Corporation, the National Association of Affordable Housing Lenders,
the National Association of Development Organizations, the National
Community Development Association, the National Council of State
Housing Agencies, NeighborWorks America, and the New Markets Tax Credit
Coalition.
To describe the type of data HUD collects that could be used to
determine the extent of leveraging in the Section 108 program, we
interviewed HUD officials to identify what data the agency collects for
the Section 108 program. HUD officials explained that the agency
maintains information on the sources and amounts of funds communities
proposed using to finance development projects in Section 108
memorandums. HUD officials provided us with several examples of these
memorandums, which we reviewed prior to submitting a request for
further documentation, as described below. We also reviewed relevant
program regulations and guidance, budget documents, GAO reports, HUD
Inspector General reports, and other literature to determine what other
information was available on the extent of leveraging in the program.
To describe how federal funds may have been leveraged in the Section
108 program, we randomly selected a sample of 50 loan guarantees using
a summary spreadsheet containing high-level project information on the
358 loan guarantees committed from fiscal years 2001 through 2006, and
requested copies of the Section 108 memorandums for each of the 50
projects.[Footnote 31] We chose this period for review because HUD
officials said that those were the only years for which the agency
maintained electronic copies of Section 108 memorandums. In addition to
interviewing a HUD official knowledgeable in the procedures used to
collect and maintain the data contained in the Section 108 memorandums,
we reviewed the sample of 50 memorandums for their accuracy and
completeness and summarized project information in them, including
sources and amounts of funds. We found that the data contained in these
memorandums were sufficiently reliable for describing how communities
planned to leverage Section 108 loan funds with other sources of funds.
To simplify the presentation of funding source information for each
project (please refer to enclosure II), we classified sources into
three broad categories:
* other federal funding sources,
* state or local funding sources, or:
* private funding sources.
Enclosure III describes how we defined these categories and some of the
funding sources we included under each of the three categories.
However, due to the small sample size, our results cannot be projected
with enough precision to provide accurate generalizations to all
projects with Section 108 loan guarantees.
We conducted our work in Washington, D.C., and Chicago from November
2006 to May 2007 in accordance with generally accepted government
auditing standards.
[End of section]
Enclosure II: Descriptions of Proposed Sources and Amounts of:
Funds Used to Finance 50 Section 108 Projects:
To determine how funds may have been leveraged in the Section 108
program, we examined a random sample of 50 proposed Section 108
projects to determine the types and amounts of funding sources
communities planned to use to finance these projects. In varying
amounts of detail, the figures below illustrate how communities planned
to leverage Section 108 loan funds with other sources of funds for
development. Due to the small sample size, our results cannot be
projected with enough precision to provide accurate generalizations to
all projects with Section 108 loan guarantees.
Figure 3 provides information, by fiscal year, on the projected sources
for each of the 50 Section 108 projects we reviewed. Sources are
categorized by Section 108 loan funds, other federal funding sources,
state or local funding sources, and private funding sources.
Figure 3: Summary of Projected Sources for the Sample of 50 Section 108
Projects, Fiscal Years 2001 through 2006:
[See PDF for Image]
Source: GAO analysis of HUD data.
Note: ED (economic development), HSG (housing), PI (physical
infrastructure):
[End of figure]
Figures 4 through 7 provide information on the proposed funding sources
for the 50 projects in our sample by project type--economic
development, physical infrastructure, housing, and multiple-type
projects.
Figure 4: Proposed Funding Sources for Section 108 Economic Development
Projects, Fiscal Years 2001 through 2006:
[See PDF for Image]
Source: GAO analysis of HUD data.
[End of figure]
Figure 5: Proposed Funding Sources for Section 108 Physical
Infrastructure Projects, Fiscal Years 2001 through 2006:
[See PDF for Image]
Source: GAO analysis of HUD data.
[End of figure]
Figure 6: Proposed Funding Sources for Section 108 Housing Projects,
Fiscal Years 2001 through 2006:
[See PDF for Image]
Source: GAO analysis of HUD data.
[End of figure]
Figure 7: Proposed Funding Sources for Section 108 Multi-Type Projects,
Fiscal Years 2001 through 2006:
[See PDF for Image]
Source: GAO analysis of HUD data.
[End of figure]
Figures 8 through 13 provide more detailed information on several of
the Section 108 projects we reviewed.
Figure 8: Proposed Funding Sources--Denver, Colorado:
[See PDF for Image]
Source: GAO analysis of HUD data.
[End of figure]
Figure 9: Proposed Funding Sources--Flint, Michigan:
[See PDF for Image]
Source: GAO analysis of HUD data.
[End of figure]
Figure 10: Proposed Funding Sources--Tempe, Arizona:
[See PDF for Image]
Source: GAO analysis of HUD data.
[End of figure]
Figure 11: Proposed Funding Sources--Rialto, California:
[See PDF for Image]
Source: GAO analysis of HUD data.
[End of figure]
Figure 12: Proposed Funding Sources--Maunabo, Puerto Rico:
[See PDF for Image]
Source: GAO analysis of HUD data.
[End of figure]
Figure 13: Proposed Funding Sources--North Tonawanda, New York:
[See PDF for Image]
Source: GAO analysis of HUD data.
[End of figure]
[End of section]
Enclosure III: Descriptions of Programs or Entities We Included Under
Categories for Federal, State or Local, and Private Funding Sources:
As described in our report and in enclosure II, communities often
leverage Section 108 funds with other sources of funds to finance
development projects. We classified each of the sources of funds listed
in our sample of 50 HUD Section 108 memorandums into three general
categories: "other federal funding sources," "state or local funding
sources," and "private funding sources." Generally, we considered
federal funding to be that which is appropriated or otherwise
authorized by the U.S. Congress. We considered state or local funding
to be that which is appropriated or otherwise authorized by state or
local governmental entities. Finally we considered private funding to
be that which is contributed by a private source, such as a bank or a
foundation. This enclosure describes more fully some of the funding
sources we placed into these categories.
Other Federal Funding Sources:
Brownfields Economic Development Initiative (BEDI) Grant Program:
Established in 1998 and administered by the U.S. Department of Housing
and Urban Development (HUD), the BEDI grant program supports state and
local efforts to commence redevelopment or continue phased
redevelopment efforts on brownfields sites.[Footnote 32] The BEDI grant
program serves a purpose similar to that of the Economic Development
Initiative (EDI) grant program when it was first established--to
enhance the viability of a project financed with a Section 108 loan
guarantee. Currently, HUD makes BEDI grant awards contingent upon
applicants also obtaining a Section 108 loan guarantee.
Community Development Block Grant (CDBG) Program:
Through CDBG, HUD provides annual formula grants to states and local
jurisdictions called "entitlement communities." States distribute the
funds to localities that do not qualify as entitlement communities.
CDBG funds can be used to implement a wide variety of community and
economic development activities directed toward neighborhood
revitalization, economic development, and improvement of community
facilities and services. Although some consider CDBG grants to be a
state or local source of funds because they are distributed to
subrecipients by states and entitlement communities, we consider CDBG
to be a federal source because the grants are originally funded at the
federal level through Congressional appropriations.
Economic Development Administration (EDA) Public Works and Economic
Development Grant Program:
The Department of Commerce's EDA Public Works and Economic Development
Grant Program provides funds to help distressed communities attract new
industry and business growth, diversify local economies, and create
jobs. These grants support various types of projects such as water and
sewer system improvements; access roads to industrial parks or sites;
business incubator facilities; and other infrastructure improvements
needed for business retention and expansion. Generally, the grants are
targeted to communities demonstrating the greatest need for such
improvements. Grant recipients are required to match up to 50 percent
of the amount of award with local matching funds. The amount of
matching funds required is based on the level of economic distress of
the recipient community. Recognized Indian tribes may be eligible for
up to 100 percent assistance, and may not have to provide matching
funds.
Economic Development Initiative (EDI) Grants Program:
HUD's EDI program was established in 1994 to encourage communities to
make greater use of the Section 108 loan guarantee program, by
providing an additional source of financing for projects and reducing
or paying for some of the costs of borrowing under the loan program.
HUD stopped making competitive grants under the EDI program in 2001;
however, HUD may still make special purpose or targeted EDI grants to
qualifying communities pursuant to congressional directives.
Historic Rehabilitation Tax Credits:
Historic Rehabilitation Tax Credits are available for work on certified
historic structures that will need substantial rehabilitation. Eligible
applicants receive a tax credit equal to 20 percent of the amount of
qualified rehabilitation expenditures.
Home Investment Partnership Program (HOME):
Through HOME, HUD provides annual formula grants to states and
localities to fund a wide range of activities designed to build, buy,
or rehabilitate affordable housing or provide direct rental assistance
to low-income people. Specifically, states and localities use HOME
funds for grants, direct loans, loan guarantees or other forms of
credit enhancement, rental assistance, and security deposits. We
consider HOME funds to be a federal source because the grants are
originally funded at the federal level through Congressional
appropriations.
Low-Income Housing Tax Credits:
Under the Low-Income Housing Tax Credit program, states are authorized
to issue federal tax credits for the acquisition, rehabilitation, or
new construction of affordable rental housing. The credits generally
are sold to investors, including individuals, financial institutions,
and corporations to raise development funds for a project. These
outside investors use the tax credit to offset taxes otherwise owned on
their tax returns. To qualify for credits, a project must have a
specific proportion of its units set aside for lower-income households,
and the rents on these units must be limited to 30 percent of
qualifying income.[Footnote 33] The amount of the credit that can be
provided to a project is determined by size of the allocation, eligible
costs, number of tax credit units, type of credit, and investor
pricing. Investors may claim these credits on their tax returns
annually for 10 years. State housing credit agencies usually award tax
credits through competitive rounds. Each state receives an annual
allocation of $1.75 per capita, adjusted each year by a cost of living
adjustment factor. States must reserve a minimum of 10 percent of the
credit for nonprofit developers. Although some consider these tax
credits to be either a state or private source of funds, we consider
them to be a federal source because they represent foregone federal
income and, therefore, are a direct cost to the federal government.
New Markets Tax Credits:
The New Markets Tax Credit program was established by Congress in 2000
to help revitalize impoverished, low-income communities. Tax credits
are allocated to Community Development Entities, who sell the tax
credits to investors--including individuals, financial institutions,
and corporations--who in turn use the proceeds to make investments in
low-income communities and eligible businesses. The tax credit allows
the investors to reduce their tax liability by 39 percent of the amount
of the investment over a 7-year period. The New Markets Tax Credit is
nonrefundable, meaning that taxpayers do not receive payments for tax
credits that exceed their total tax liability. Although some consider
these tax credits to a private source of funds, we consider them to be
a federal source because they represent foregone federal income and,
therefore, are a direct cost to the federal government.
State or Local Funding Sources:
Housing Trust Funds:
Housing trust funds are funds established by cities, counties, and
states that permanently dedicate a source of public revenue to support
the production and preservation of affordable housing. There are at
least 257 housing trust funds in the United States.
Tax Increment Financing (TIF):
TIFs allow a municipality to provide financial incentives to stimulate
private investment in a designated area (a TIF district) where blight
has made it difficult to attract new development. The TIF program can
be used to support new development or the rehabilitation of existing
buildings in the industrial, commercial, or residential projects.
Funding for TIF eligible activities is derived from the increase in
incremental tax revenues generated by new construction or
rehabilitation projects within the boundaries of the TIF district.
States determine what activities are eligible with TIF funds, and these
activities may include land acquisition, site preparation, building
rehabilitation, public improvements, and interest subsidy.
State Tax Credit Programs:
States may also administer tax credit programs to support activities
such as historic preservation and economic development. For example,
Michigan sponsors a historic preservation tax credit program where a
state income tax credit of up to 25 percent is available for
preservation of certain historic properties; however, if combined with
a federal historic preservation tax credit of 20 percent, a project
only will be eligible for an additional 5 percent state tax credit. The
State of Michigan also administers the Brownfield Single Business Tax
Credit program, which provides an incentive in the form of a tax credit
for eligible redevelopment investments on a brownfield property. The
credit is applied against the Single Business Tax liability of the
developer.
Private Funding Sources:
Nonprofit organizations, developers, private banks and lending
institutions, businesses, and individuals provide an array of financial
support--such as developer fees, private loans, grants, land donations,
and individual financial contributions--to Section 108 and other
federal housing and community and economic development projects.
[End of section]
Enclosure IV: GAO Contact and Staff Acknowledgements:
GAO Contact: William B. Shear, (202) 512-8678 or shearw@gao.gov:
Staff Acknowledgements: In addition to the contact named above, Charles
Wilson, Jr., Assistant Director; Marianne Anderson; Alison Martin; John
McGrail; Marc Molino; LaSonya Roberts; Barbara Roesmann; Cory Roman;
and Jim Vitarello made key contributions to this report.
(250324):
FOOTNOTES
[1] As described in further detail in this report, the Section 108
program allows communities to borrow against their current and future
Community Development Block Grant allocations to fund larger-scale
housing and community and economic development projects.
[2] Also as will be discussed in this report, the Section 108 data
derive from information on proposed sources and amounts of funding at
the time of application for program funding. Because the data do not
represent actual funding, we describe the funding conditionally--for
example, "may have been leveraged."
[3] The traditional conceptualization of leveraging includes financial
leveraging--the degree to which a business or an investor utilizes
borrowed funds. For example, a company that uses borrowed funds to
invest in a real estate development project is considered to be using
leverage to carry out its investment strategy.
[4] For example, see R. Quercia, W. Rohe, and D. Levy, "A New Look at
Creative Finance," Housing Policy Debate, 11, issue 4 (2000): 943-972.
[5] We have referred to leveraging in both the traditional and the
broader sense in several reports. See GAO, Empowerment Zone and
Enterprise Community Program: Improvements Occurred in Communities, but
the Effect on the Program Is Unclear, GAO-07-727 (Washington, D.C.:
Sept. 22, 2006); Public Housing: HOPE VI Leveraging Has Increased, but
HUD Has Not Met Annual Reporting Requirements, GAO-03-91 (Washington,
D.C.: Nov. 15, 2002); and Urban Action Grants: An Analysis of
Eligibility and Selection Criteria, and Program Results, GAO/RCED-89-
143 (Washington, D.C.: July 7, 1989).
[6] Gap financing is a source of funds that is used to complete a
project's funding needs when all other available sources of funds have
been exhausted.
[7] 42 U.S.C. § 5308.
[8] Communities can use Section 108 loan funds to carry out these
activities themselves or can reloan the funds to a third-party
borrower.
[9] P.L. 101-625, § 910.
[10] The EDI program was established in 1994 to encourage communities
to make greater use of Section 108 loan guarantees by providing
additional financing for projects and paying for some costs of
borrowing under Section 108. BEDI was established in 1998 to support
state and local efforts to start or continue redevelopment on
brownfields sites--abandoned, idled, or underused real property where
actual or potential environmental contamination complicates
redevelopment--and enhance the viability of projects financed with
Section 108 loan guarantees. By statute, HUD must make BEDI grant
awards contingent on applicants getting a Section 108 loan guarantee
(42 U.S.C. § 5308(q)). Communities have 5 years from the date grants
are committed to use them.
[11] HUD stopped making competitive grants under EDI in 2001. However,
HUD still may make special-purpose or targeted EDI grants to qualifying
communities pursuant to Congressional directives. HUD still makes
competitive BEDI grants.
[12] This average excludes advances made in 2005. Advances made in this
year were artificially low (approximately $168 million) because no
public offering was held that year. HUD obtains funding for Section 108
loans though public offerings of pooled loans on the private sector
capital market. The average for advances can exceed the average for
commitments because communities have up to 5 years from the date of
commitment to use their loan funds.
[13] Congress created the CDFI Fund under the Riegle Community
Development and Regulatory Improvement Act of 1994 (P.L. 103-325) to
promote economic revitalization and community development through
investment in certified institutions. The CDFI Fund makes financial
assistance awards in the form of equity investments, loans, deposits,
or grants to certified institutions. Before receiving any financial
assistance through the CDFI program, a CDFI must be certified by the
CDFI Fund--which does so after determining that a program has a primary
mission of promoting development, its predominant business activity is
lending or investing in development, and it serves (an) economically
distressed investment area(s) or targeted population(s). Institutions
must match these investments dollar for dollar with funds of the same
type from nonfederal sources. For purposes of this report, we
considered matched funds to be leveraged funds.
[14] 42 U.S.C. § 12750. Under HOME, HUD provides formula grants to
states and localities to fund activities that build, buy, or
rehabilitate affordable housing for rent or home ownership or provide
direct rental assistance to low-income households.
[15] See "Notice of Allocation Availability Inviting Applicants for the
2007 Allocation Round of the New Markets Tax Credit Program," 71
Federal Register 70835, 70841 (Dec. 6, 2006).
[16] Investment risk is the potential for fluctuation in the value of
an investment, which could result in loss of principal.
[17] GAO-03-91. HOPE VI provides demolition and revitalization grants
to public housing authorities. Demolition grants fund the demolition of
distressed public housing, the relocation of affected residents, and
provision of supportive services for permanently relocated residents.
Revitalization grants fund the capital costs of major rehabilitation,
new construction, and other physical improvements; demolition of
severely distressed housing; and community and supportive service
programs for residents, including relocated residents. To increase the
number of affordable housing units developed at HOPE VI sites, HUD
encouraged housing authorities to use their grants to leverage funding
from other sources.
[18] GAO/RCED-89-143. Under the terminated UDAG program, HUD granted
funds to distressed cities to combine with private funds for investment
in industrial, commercial, and neighborhood projects. HUD defined
"distressed" cities as those that ranked among the needier half of all
U.S. cities under measures such as the communities' percentage of pre-
1940 housing, poverty, and unemployment.
[19] Office of Thrift Supervision, "Best Practices in Rural
Communities" (Washington, D.C.: 1998).
[20] For example, see L. Riggin, P. Grasso, and M. Westcott, "A
Framework for Evaluating Housing and Community Development Partnership
Projects," Public Administration Review, 52, no. 1 (1992): 40-46; M.
Nenno, "State and Local Governments: New Initiatives in Low-Income
Housing Preservation," Housing Policy Debate, 2, issue 2 (1991): 467-
497; and R. Quercia, W. Rohe, and D. Levy, "A New Look at Creative
Finance," Housing Policy Debate, 11, issue 4 (2000): 943-972.
[21] Under the Low-Income Housing Tax Credit program, states are
authorized to issue federal tax credits for the acquisition,
rehabilitation, or new construction of affordable rental housing. The
credits generally are sold to investors, including individuals,
financial institutions, and corporations to raise development funds for
a project. These outside investors use the tax credit to offset taxes
otherwise owned on their tax returns. See also M. Stegman, "The
Excessive Costs of Creative Finance: Growing Inefficiencies in the
Production of Low-Income Housing," Housing Policy Debate, 2, issue 2
(1991): 357-373.
[22] For example, see S. Mullin, Econsult Corporation for the U.S.
Economic Development Administration, "Public-Private Partnerships and
State and Local Economic Development: Leveraging Private Investment"
(Philadelphia, Pennsylvania: 2002).
[23] See GAO, Federal Grants: Design Improvements Could Help Federal
Resources Go Further, GAO/AIMD-97-7 (Washington, D.C.: Dec. 18. 1996)
and C. Walker and others, The Urban Institute for the U.S. Department
of Housing and Urban Development, "Public-Sector Loans to Private-
Sector Businesses: An Assessment of HUD-Sponsored Local Economic
Development Lending Activities," (Washington, D.C.: 2002). For the
replacement of state funds with federal funds see GAO/AIMD-97-7 and J.
Gerenrot, D. Cashin, and A. Paulson, "Community Development Spending,
1981-2004," Chicago Fed Letter, no. 232 (Chicago, Illinois: 2006).
[24] The UDAG program included such a test. The UDAG statute specified
that grants might be made under the program only when HUD determined
that there was a strong probability that (1) the nonfederal investment
in the project would not be made without the UDAG grant and (2) the
grant would not substitute for nonfederal funds that were otherwise
available to the project. 42 U.S.C. 5318 (j). Cities and private
investors were required to certify that projects that received UDAG
funds were in compliance with the statutory requirements.
[25] For example, see C. Walker and others, "Public-Sector Loans to
Private-Sector Businesses: An Assessment of HUD-Sponsored Local
Economic Development Lending Activities."
[26] Because Section 108 does not have a leveraging requirement, HUD is
not required to and does not collect data that could be used to
calculate an actual (as opposed to an estimated) leverage ratio, as
discussed in this report. According to HUD, the agency is considering
changing its Integrated Disbursement and Information System (IDIS) to
include information on sources and amounts of funds for Section 108
projects. HUD said that such changes would be subject to the results of
the Office of Management and Budget's ongoing Program Assessment Rating
Tool (PART) evaluation of Section 108 and that any changes would not
take effect prior to 2009.
[27] Communities make unplanned uses of CDBG funds when an intended
source of funds, such as project-related income, is not used to make a
payment on the loan. Communities are expected, but not required to
report unplanned uses to HUD. As a result unplanned uses may exceed
$1.8 million.
[28] One loan guarantee in our sample (Monessen, Pennsylvania)
supported 38 different projects proposed by multiple nonentitlement
communities that formed a consortium. For each individual project
described, the community did not list more than 15 sources of funds,
although the aggregated number of sources for all 38 projects was 95.
[29] The Urban Institute collected leveraging data by reviewing loan
files for a sample of 201 Section 108 loans made to third parties from
1994 through 1999 in 51 communities determined to be the greatest
utilizers of such third-party loans (in terms of dollar-volume).
However, the researchers acknowledged a limitation--missing leveraging
data--and noted that leveraging results for Section 108 loans were from
data collected on 149 economic development projects. Although the 51
communities accounted for 96 percent of Section 108 third-party lending
during that period, Section 108 loans are often used by communities
themselves in order to undertake various local projects. For purposes
of calculating the leveraging ratio, the study defined "public" funds
to include Section 108, EDI/BEDI, other federal loans, state and local,
and other CDBG funds, and "private" dollars to include private lending,
equity, stock, personal borrowing, and other funding.
[30] Due to the small sample size (50 proposed projects), our results
cannot be projected with enough precision to provide accurate
generalizations to all projects with Section 108 loan guarantees.
[31] To determine the accuracy and completeness of the information
provided in the summary spreadsheet, we performed basic checks on the
data and interviewed a HUD official who is responsible for maintaining
the spreadsheet. Based on these checks and HUD's responses to our
questions about the completeness and accuracy of the data in the
spreadsheet, we determined that the data were sufficiently reliable for
the purposes of selecting the sample of Section 108 memorandums for our
further review, as well as reporting the total number of applications
for Section 108 loan guarantees HUD approved from 2001 through 2006 and
the amounts of Section 108 loan funds committed and advanced from 2001
through 2006.
[32] HUD defines brownfields as abandoned, idled or under-used real
property where actual or potential environmental contamination
complicates expansion or redevelopment.
[33] Projects must meet one of two low-income occupancy requirements:
(1) 20 percent of the units must be reserved for households with
initial, qualifying incomes at or below 50 percent of area median
income or (2) 40 percent of units must go to households with initial,
qualifying incomes at or below 60 percent of area median income.
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