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Report: Rhode Island has turned away over $1billion in federal affordable housing funds

“From 2014 to 2020, Rhode Island was eligible for up to $1.553 billion in 4 percent tax credit funds, but we only spent $171.4 million, turning away a total of $1.381 billion. That works out to an average of $197.3 million of federal funds turned away each year,” writers report author Phoebe Dragseth. “With the housing crisis roiling Rhode Island, now is not the time to turn down federal funds allocated to our state to build affordable housing. Rhode Island must act fast to put in place the policies necessary to maximize the 4% credit federal funding stream.”
Photo for Report: Rhode Island has turned away over $1billion in federal affordable housing funds

Published on December 22, 2021
By Steve Ahlquist

Rhode Island has turned aside over a billion federal dollars earmarked for affordable housing since 2014. In a report compiled and written by intern Phoebe Dragseth and Senator Samuel Bell (Democrat, District 5, Providence) it is detailed how Rhode Island has turned away an average of $197.3 million per year in federal funding for affordable housing available under the 4 percent tax credit program of the federal Low Income Housing Tax Credit.

“From 2014 to 2020, Rhode Island was eligible for up to $1.553 billion in 4 percent tax credit funds, but we only spent $171.4 million, turning away a total of $1.381 billion. That works out to an average of $197.3 million of federal funds turned away each year,” said Dragseth. “With the housing crisis roiling Rhode Island, now is not the time to turn down federal funds allocated to our state to build affordable housing. Rhode Island must act fast to put in place the policies necessary to maximize the 4% credit federal funding stream.”

In the report Dragseth and Bell identify three primary reasons for the state’s failure to access this federal funding:

  1. Insufficient state funding for affordable housing. Until the very end of 2020, 4% credits only subsidized 30% of construction cost. Thus, additional subsidies are needed to finance the construction of affordable housing. Today, even with the 27% boost to a 38% subsidy, some additional state subsidies are still needed.
  2. State affordable housing funds have not been used to help make 4% credit projects work. State funds have typically gone to build affordable housing units with purely state subsidy and no matching 4% funds – mainly because the income limits for state subsidies are too high to qualify for 4% funding.
  3. Simply relying on the private market to take advantage of this program does not work because markets are not perfectly efficient. The assumption that private corporations will appear to take advantage of every opportunity does not happen in reality. In general, developers avoid utilizing 4% credits because they can make more money devoting their time and energy to building higher income housing.

“For years, we have struggled to bring affordable housing production to the scale where it will meaningfully mitigate the housing crisis. Excitingly, our results show a path forwards to get to scale,” writes Senator Bell. “By taking advantage of the massive 4% credit federal funding stream, we can vastly increase our affordable housing production to the point where it will begin to seriously slow down the housing crisis. Affordable housing is a big problem. It is an expensive problem. To solve this challenge, it will take a significant investment. That is why it matters that we have such an enormous amount of federal funds available. We have the money. We just need to stop turning it away.”

Dragseth and Bell include the following ten recommendations:

  1. Rhode Island Housing should immediately issue the full annual allocation of 4% credit-qualifying private activity bonds (PAB), and state agencies should cease issuing PABs subject to the cap that do not qualify for 4% credits.
  2. State and local affordable housing funds should be devoted exclusively to providing gap subsidies to make 4% credit projects work.
  3. Existing state and municipal programs that subsidize housing, such as Rebuild RI, the state TIF, historic tax credits, affordable housing trust funds, TSAs (tax stabilization agreements), underassessments, etc. should be prioritized for making 4% credit projects work.
  4. The state should devote $500 million of ARPA (American Rescue Plan Act) funding towards capitalizing a state corporation that will build the 4% credit-funded affordable homes that the private market will not.
  5. If the Build Back Better Act passes with these 4% credit provisions, the state should issue general obligation bond funding to cover the subsidies needed for the state corporation to ensure that no 4% credit funds will be wasted.
  6. Sites that mitigate segregation and environmental concerns but still fall within Qualified Census Tracts and Difficult Development Areas (QCTs and DDAs) should be prioritized.
  7. To minimize the amount of state funds needed for gap subsidy, we suggest that the state provide the land for the state corporation to build on from existing underutilized state land, especially land within QCTs and DDAs.
  8. In order to attract a sufficient increase in the construction workforce to handle the volume of construction needed, prevailing wage should be paid on all projects.
  9. To reduce the gap subsidy, social housing projects should be included to allow market-rate profits to cross-subsidize 4% credit-funded affordable units.
  10. The state should consider using inclusionary zoning to require all market-rate developments to build at least 20% of the units as affordable units that tap into 4% credit funds.

Read the full report here: Money Rejected: How Rhode Island Has Turned Away $197.3 Million per Year in Federal Funds for Affordable Housing

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