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Auditor Logo Susan Montee

Report No. 2008-23
April 2008

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The Low Income Housing Tax Credit Is Costly and Inefficient, and Improvements Are Needed in Program Administration
This audit evaluated the Missouri Housing Development Commission's (MHDC) administration and the cost-effectiveness of the state's Low Income Housing Tax Credit (LIHTC) program. The credit is a supplement to the federal LIHTC provided by the federal government to every state. The federal credit began in 1986 with Missouri's state credit being established in 1990. MHDC staff use both credits along with other financing sources to provide financing for new housing construction or rehabilitation of existing properties. Developers submit housing proposals to the MHDC which are evaluated in an annual project selection process. Approximately 37,000 low income housing units have been approved for construction using the state LIHTC from 1998 to 2008. State law requires the State Auditor to perform a cost-benefit analysis of all state tax credit programs, and this report is part of ongoing work.

LIHTC is costly
Through fiscal year 2007, a total of $1.6 billion in LIHTCs have been authorized, and $329 million have been redeemed, resulting in $1.27 billion in credits which remain outstanding or pending issuance. For fiscal year 2007, Missouri ranked second in per capita state funding of all states with state LIHTC programs. Missouri was one of three states with a per capita rate exceeding $20. The other states had per capita rates of $4 or less. At the program's current pace, we project a total of $4.1 billion in credits will be authorized and $1.8 billion will be redeemed by 2020, leaving an estimated $2.3 billion in credits outstanding or pending issuance, with annual redemptions exceeding $100 million. (See pages 14 and 16)

Credits issued and redeemed exceed MHDC projections
State LIHTCs issued and redeemed are significantly exceeding the projections MHDC provided the General Assembly in 1997 when state law changed to allow the state credit match limit to increase to up to 100 percent of the federal credit. MHDC estimated the average state tax credit allocation rate would be 50 percent of the federal credit; however, MHDC matched the federal credit level at a rate of 97 percent in 1998, 99 percent in 1999 and essentially 100 percent from 2000 through the current period. For the period 1998 to 2007, MHDC's analysis projected increased issued and redeemable tax credits for this law change at $107 million. Our analysis, using the assumption of a 100 percent match of the federal credit and considering another issue missing from that estimate, projected the increase to be $383 million. Based on actual data through fiscal year 2007, the 1997 statutory change resulted in a $537 million increase in redeemable credits from 1998 through 2007. (See page 15)

The current LIHTC model is inefficient
For every $1 in LIHTC authorized and issued, the current tax credit model provides only about $.35 towards the development of housing. The remaining $.65 goes to investors, syndication firms, and to the federal government in the form of increased taxes resulting from the use of state tax credits. The audit discusses several options to improve the tax credit model, one of which would allow MHDC to issue approximately half as many credits as are currently being issued while providing the same level of equity for housing development. (See page 17)

Project selection process lacks detail
MHDC staff does not create detailed documentation to disclose how projects are selected to receive tax credits. Of the 50 states which use the federal LIHTC, 46 use some form of scoring system in their project evaluation and selection process. This lack of detail has contributed to the perception that political influence impacts project selection. (See page 26)

Allowable project cost limits are high
The allowable project cost limits used during the project evaluation process exceed cost limits recommended by the National Council of State Housing Agencies. The National Council recommends state housing agencies base cost per unit standards on federal Housing and Urban Development (HUD) guidelines and recommends agencies have a defined methodology to support limits exceeding the HUD guidelines. MHDC staff could not provide documentation explaining the criteria used to establish the higher cost limits. High cost limits do not promote cost containment. MHDC also allows project builder's fees which exceed National Council recommendations. (See page 27)

Improvements are needed in program administration
Weaknesses exist in procedures to recapture tax credits on noncompliant projects. State law also limits the recapture period to 10 years when the minimum compliance period for projects is 15 years under federal rules. MHDC has not developed a strategic plan to assess long-term low income housing needs and establish long-term low income housing goals to measure performance. Also the LIHTC program's economic benefit to the state being reported to the General Assembly is overstated. In addition, MHDC has no policy requiring developers notify tenants when low income housing projects are being converted by developers to market based housing or to aid tenants in relocation. (See page 36)

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Missouri State Auditor's Office