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March 7, 2014

The Obama Administration’s Fiscal Year 2015 Budget

On March 4, 2014 the Obama Administration issued its budget request for fiscal year 2015. Under the Budget and Accounting Act, the President’s budget should have been issued on the first Monday in February. The Administration cites the recent budget agreements in Congress and the FY 2014 Omnibus bill as the reason for the delay. While the submission deadline of the President’s budget is required by law, the actual numbers and funding levels in the budget do not become law. Instead the President’s budget serves as a framework for Congress to compare and complete its own budget, and it also serves as a set of policy recommendations for the upcoming fiscal year.

Budget Proposal for HUD Multifamily Programs

The newly released budget for FY 2015 adheres to the spending levels agreed to in the Bipartisan Budget Act, but the Administration has also included an additional $56 billion in offsets for an “Opportunity, Growth, and Security Initiative” which would be split between defense and non-defense programs. For the Department of Housing and Urban Development, the requested budget authority is $46.66 billion, an amount that is 2.6% more than what was appropriated for FY 2014 and 10.1% over the FY 2013 post-sequestration level. Below is a chart comparing the funding levels in this proposed budget with the FY 2014 and FY 2013 appropriations.
Project-Based Section 8 Tenant-Based Section 8 HOME Section 202 Section 811 Community Development Block Grant
FY 2015 Budget Request $9.75 Billion $20.045 Billion $950 Million $440 Million $160 Million $2.80 Billion
FY 2014 Enacted Level $9.92 Billion* $19.18 Billion** $1 Billion $384 Million*** $126 Million $3.03 Billion
FY 2013 Post-Sequester Level $8.85 Billion $17.96 Billion $948 Million $355 Million $156 Million $3.08 Billion
*Includes $400 million in advanced appropriations for FY 2015 and $265 million for PBCAs **Includes $17.36 billion for contract renewals ***Includes $72 million for Service Coordinators Project-Based Section 8 With the 2.6% funding increase over FY 2014, the Obama Administration’s FY 2015 budget proposes higher funding levels for some HUD programs. However, a major area of concern in this budget is the proposed funding level for the Project-based Section 8 program. The slated $9.74 billion falls short of the FY 2014 enacted level, which would again obstruct full-funding for 12 month contract terms. HUD has stated that the reason for this lower request in FY 2015 is due to the Department’s desire to shift contract renewals to a “calendar year” schedule beginning on January 1 rather than the current cycle of contract renewals beginning on October 1 (the first day of the new fiscal year). If this proposal were adopted, HUD believes that it will minimize funding disruptions that occur during end-of-year budget delays and that it would lead to consistent 12 month funding in FY 2016 and beyond. Yet the Department has been vague about the actual implementation of such a transition – NAHMA and other industry stakeholders are skeptical about the numbers adding up and the exact math that would be necessary to implement this proposal. Furthermore there is skepticism that this transition will actually lead to 12 month funding in the future. NAHMA will review this proposed change to Project-based Section 8 payments in consultation with our Federal and Regulatory Affairs Committees. Additional HUD Provisions in the Budget A stated priority in the Obama Administration’s proposed budget for FY 2015 is the preservation of critically needed rental housing. To make progress in this goal, the budget request is proposing an elimination of the Rental Assistance Demonstration (RAD) cap of 60,000 units to continue the conversion of public housing units into long-term project-based rental assistance contracts. Currently, numerous Public Housing Authorities (PHAs) are facing severe backlogs of large-scale conversion projects. According to the Department, eliminating the RAD cap will enable HUD to address the more than 180,000 current applications, and create approximately $6 billion in private financing for the recapitalization of public housing. Budget Proposal for Rural Housing Programs The U.S. Department of Agriculture’s Rural Development (USDA-RD) programs provide assistance for home ownership, multifamily housing, and essential community facilities in underserved rural areas nationwide. However, this mission was severely compromised in 2013 after devastating sequestration cuts slashed RD’s budget. Cuts to the Section 521 Rental Assistance (RA) program caused RD to not renew a number of contracts for multifamily properties in September 2013; the Agency will not make retroactive payments. NAHMA has since advocated for increased funding in RD’s programs and better oversight of the multifamily portfolio. The proposed funding levels for RD’s multifamily housing programs can be found in the chart below:
  Section 515 Section 521 Rental Assistance Section 538 (Loan Level) Revitalization and Rural Housing Vouchers
FY 2015 Budget Request $28.43 Million $1.09 Billion $150 Million $28 Million / RHVs: $8 M
FY 2014 Enacted Level $28.43 Million $1.11 Billion $150 Million $32.57 Million / RHVs: $12.58 M
FY 2013 Post-Sequester Level $29 Million $837 Million $150 Million $27 Million / RHVs: $9 M
RD has stated that the requested funding levels for Section 521 RA (coupled with savings proposals) will be sufficient to renew all expiring contracts in 2015. The 2015 budget also requests new authorities in an effort to “improve the management of the rental assistance program.” The authorities included in the request are:
  • The ability to renew contracts “at the discretion of the Secretary”;
  • Rental assistance agreements entered into or renewed during the current fiscal shall be funded up to one year and will not be renewed within the 12 month contract period;
  • A minimum of $50 in rent for tenants unless they qualify for a “hardship exemption”; and
  • The ability to verify income through IRS and HHS databases.
These new authorities will also be proposed in tandem with a separate multifamily housing reinvention legislative package that will also include permanent authority for several financing options for the annual pilot program used to preserve and revitalize the existing Section 515 portfolio.

Treasury Department Proposals

Along with proposed changes in HUD and RD, the Obama Administration’s FY 2015 budget contains proposals to reform and expand the low-income housing tax credit (LIHTC). The first proposal would allow states to convert a portion of their tax-exempt Private Activity Bond authority into allocated LIHTCs. This conversion will reduce transaction costs by eliminating the need for unnecessary bond issuance procedures. This proposal was first introduced in the Administration’s FY 2014 budget request. The second proposal would add a third criterion to the LIHTC qualifying criteria. When a taxpayer elects this criterion, at least 40 percent of the units in the project would have to be occupied by tenants with incomes that average no more than 60 percent of AMI. No rent-restricted unit, however, could be occupied by a tenant with income over 80 percent of AMI; and, for purposes of computing the average, any unit with an income limit that is less than 20 percent of AMI would be treated as having a 20 percent limit. Maximum allowable rents would be determined according to the income limit of the unit. The third proposal would add preservation of federally assisted affordable housing as an eleventh selection criterion that state qualified allocation plans (QAPs) must include in their allocation of LIHTCs. The proposal would be effective for allocations made in calendar years beginning after the date of enactment. A fourth proposal would change the formulas for 70 percent present value credit rate and 30 percent present value credit rate LIHTCs. The Housing and Economic Recovery Act of 2008 provided a temporary minimum applicable percentage of nine percent for the 70-percent present value credit rate for buildings placed in service before December 31, 2013. The American Taxpayer Relief Act of 2012 extended the nine-percent rate to apply to credit allocations made before January 1, 2014. The Obama Administration believes the new discount rate would better reflect the private-market discount rates. The change would apply to both 70 percent and 30 percent allocated LIHTCs. Under the proposal, the discount rate to be used would be the average of the mid-term and long-term applicable Federal rates for the relevant month, plus 200 basis points. The fifth proposal would permit a Real Estate Investment Trust (REIT) that receives LIHTCs to designate as tax exempt some of the dividends that it distributes. Dividends so designated would be excluded from the gross income of the shareholders that receive them. The amount so designated could not exceed the quotient of the REIT’s LIHTCs for the year (divided by the highest corporate tax rate). The proposal continues that if there are insufficient earnings and profits to pay this amount of dividends, the unused authority to designate tax-exempt dividends could be carried forward indefinitely. Also, if a REIT or regulated investment company (RIC) is a shareholder that receives these tax-exempt dividends, the recipient could designate as exempt a corresponding amount of dividends that it distributes. NAHMA supports this proposal. Finally, the budget proposes protections for victims of domestic abuse that would be required in all Long-Term Use Agreements. These provisions would apply to both the low-income and the market-rate units in the building. The owner could not refuse to rent any unit in the building to a person because that person had experienced domestic abuse. Moreover, an experience of domestic abuse would not be good cause for terminating a tenant’s occupancy. Under the Agreement, an owner could bifurcate a lease so that the owner could evict a tenant or lawful occupant who engaged in criminal activity directly relating to domestic abuse.

Conclusion

Congress is unlikely to adopt the President’s budget. Differences between the Administration and the majority party in the House may instead result in another round of separate budgets. However, with the FY 2014 Omnibus presetting the federal limit for FY 2015, there is a diminished chance that political disagreements will force another continuing resolution or a government shutdown. Still, the President’s budget is important to examine because it gives us an in-depth look at the Administration’s policy priorities. Some of these policy proposals could appear in future legislation as well, so they are important to note early on. NAHMA will follow the progress of this budget and monitor its most concerning proposals. We will advocate to Congress that funding for programs such as project-based Section 8 cannot under any circumstance fall below the FY 2014 levels and that any appropriations must ensure full-funding for multifamily housing programs. To view the president’s budget proposal, please click here.

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