New Markets Tax Credit:

Better Controls and Data Are Needed to Ensure Effectiveness

GAO-14-500: Published: Jul 10, 2014. Publicly Released: Aug 11, 2014.

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What GAO Found

The financial structures of New Markets Tax Credit (NMTC) investments have become more complex and less transparent over time. The increased complexity is due, in part, to combining the NMTC with other federal, state, and local government funds. Based on GAO's survey of Community Development Entities (CDEs) an estimated 62 percent of NMTC projects received other federal, state, or local government assistance from 2010 to 2012. While combining public financing from multiple sources can fund projects that otherwise would not be viable, it also raises questions about whether the subsidies are unnecessarily duplicative because they are receiving funds from multiple federal sources. In addition, in some cases the complexity of the structures may be masking rates of return for NMTC investors that are above market rates. For example, a study done for the Department of the Treasury (Treasury) found an investor apparently earning a 24 percent rate of return, which is significantly above market rates of return. In that case, the investor leveraged the NMTCs by using other public funds to increase the base for claiming the NMTC. Treasury and the Internal Revenue Service issued guidance about allowable financial structures in the early years of the NMTC program, but the guidance has not been updated to reflect the subsequent growth in complexity, such as the use of other public money to leverage the NMTC. Treasury also does not have controls to limit the risk of unnecessary duplication in government subsidies or above market rates of returns. Without such guidance and controls the impact of the NMTC program on low-income communities could be diluted.

The costs of complex NMTC financial structures may not be fully reflected in fees charged by CDEs, and they could be reflected in other costs such as higher interest rates. Treasury has taken steps to ensure businesses are better informed about fees and other costs, but is not collecting these additional data itself. Without these data, Treasury is limited in its ability to analyze NMTC program benefits.

GAO also found that the data on equity remaining in businesses after the 7-year credit period were unreliable because, in part, instructions on what to report are unclear. As a result, at this time it is not possible to determine how much equity remains in low-income community businesses after 7 years.

Similarly, data on NMTC project failure rates were unavailable. GAO reviewed data of performance on loans from CDEs to low-income community businesses as an indicator of whether the businesses will be viable over the long term. However, data on loan performance were also incomplete because some reporting of this information by CDEs is optional. As a result, it is not possible to determine, at this time, the NMTC project failure rate with certainty.

Why GAO Did This Study

In recent years, private investors have claimed more than $1 billion in NMTCs annually. The credits are combined with private loans and other public funds to support investments in low-income communities. GAO was asked to review the financial structure of NMTCs.

This report assesses: (1) the complexity and transparency of NMTC financial structures and controls over the size of federal subsidies; (2) what is known about the types and amounts of fees and other costs of the financial structures; (3) what is known about the equity remaining in low-income community businesses after the 7-year credit period; and (4) what is known about NMTC project failure rates. GAO reviewed Treasury NMTC data and surveyed CDEs that allocated credits to 305 projects in 2010-2012.

What GAO Recommends

Treasury should issue further guidance on how other government programs can be combined with NMTCs; ensure adequate controls to limit the risks of unnecessary duplication and above-market rates of return; and ensure that more complete and accurate data are collected on fees and costs, the equity remaining in the business after 7 years, and loan performance.

Treasury agreed with GAO's recommendations to improve data collection on equity remaining and loan performance. Treasury said that a recently formed working group, that includes representatives from the Community Development Financial Institutions Fund and the Internal Revenue Service, is considering GAO's other recommendations.

For more information, contact James R. White at (202) 512-9110 or whitej@gao.gov.

Recommendations for Executive Action

  1. Status: Open

    Comments: The Department of the Treasury has not issued guidance on how funding or assistance from other government programs can be combined with the New Markets Tax Credit (NMTC), as GAO recommended in July 2014. Treasury said, in September 2015, that the Community Development Financial Institutions Fund (CDFI Fund), which administers the NMTC program, plans to procure new empirical research assessing the extent to which other government programs are being used to leverage the NMTC. Treasury has said that this research would help examine the various types of public support used for community development projects and assess the depth of the subsidy necessary to mitigate risk and attract new private capital to businesses located in low-income communities. In November 2015, CDFI officials reported to GAO that they had awarded a contract for this research and that they were reviewing and finalizing a workplan; however GAO has not yet obtained a copy of this contract. CDFI officials anticipated that the contract will be completed in March 2017.

    Recommendation: The Secretary of the Treasury should issue guidance on how funding or assistance from other government programs can be combined with the NMTC including the extent to which other government funds can be used to leverage the NMTC by being included in the qualified equity investment.

    Agency Affected: Department of the Treasury

  2. Status: Open

    Comments: The Community Development Financial Institutions Fund (CDFI Fund), which administers the New Markets Tax Credit (NMTC) program, has developed a plan to issue guidance to help ensure that Community Development Entities (CDEs) accurately report on sources of public funds and projected internal rates of return, as GAO recommended in July 2014. In August 2015, the CDFI Fund said that it intends to issue guidance with the release of its latest version of its data gathering system in fall 2015, but as of November 2015, the guidance had not been released.

    Recommendation: The Secretary of the Treasury should ensure that controls are in place to limit the risk of unnecessary duplication at the project level in funding or assistance from government programs and to limit above market rates of return, i.e., returns that are not commensurate with the NMTC investor's risk.

    Agency Affected: Department of the Treasury

  3. Status: Open

    Comments: The Department of the Treasury (Treasury) reported that as of May 2015, the CDFI Fund had reviewed the Community Development Entities (CDE) disclosure sheets provided to low-income community businesses, as GAO recommended in July 2014, and determined that useful data from the sheets were already being collected through other data-gathering tools used by the Fund. According to Treasury, the CDFI Fund had previously added 13 new questions to its annual data reporting instructions for CDEs and stated that these new questions closely mirrored the information gathered on the disclosure sheet. Treasury also noted that CDEs are required to retain a copy of the disclosure sheet, and that CDFI Fund staff can access this information when they conduct reviews of New Markets Tax Credit (NMTC) projects. On November 23, 2015 GAO requested additional documentation from Treasury to verify that these steps have been taken. We are awaiting a response.

    Recommendation: The Secretary of the Treasury should ensure that the Community Development Financial Institutions (CDFI) Fund reviews the disclosure sheet that CDEs are required to provide to low-income community businesses to determine whether it contains data that could be useful for the Fund to retain.

    Agency Affected: Department of the Treasury

  4. Status: Closed - Implemented

    Comments: The Department of the Treasury has implemented GAO's July 2014 recommendation to clarify instructions to Community Development Entities (CDE) on reporting data on the status of NMTC-financed projects at the end of the NMTC compliance period, including data on any equity which may be acquired by the low-income community businesses. In April 2015, the CDFI Fund issued instructions to CDEs for completing a new closeout report to be completed at the end of the 7-year NMTC compliance period. This new closeout report includes data on loan status, project status, and the dollar value of any equity remaining in the low-income community businesses. Having more complete and accurate data on the performance of NMTC-financedinvestments, including the amounts of any equity remaining in the low-income community investments, should help in evaluating the effectiveness of the NMTC program.

    Recommendation: The Secretary of the Treasury should ensure that the CDFI Fund clarifies the instructions for reporting the amount of any equity which may be acquired by the low-income community business at the end of the 7-year NMTC compliance period.

    Agency Affected: Department of the Treasury

  5. Status: Closed - Implemented

    Comments: The Department of the Treasury has implemented GAO's July 2014 recommendation to make reporting of all loan status data mandatory and has clarified its instructions to CDEs for reporting these data. In September 2014, the CDFI Fund issued new guidance to CDEs for completing their annual submissions of data on NMTC-financed projects. In prior year guidance, CDEs were not required to complete all data fields regarding the status of loans to low-income community businesses. These data fields included information about how well the CDEs' investments were performing, such as whether the loan was currently or previously delinquent or whether the loan had been restructured or charged-off. Because most of these fields were optional, GAO found that this information was incomplete and unreliable for reporting on the performance of NMTC-financed projects. Making reporting of this information mandatory should improve the reliability and usefulness of information on these low-income community investments.

    Recommendation: The Secretary of the Treasury should ensure that the CDFI Fund clarifies the instructions it provides to CDEs about reporting loan performance and make the reporting of that data mandatory.

    Agency Affected: Department of the Treasury

 

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