New Markets Tax Credit: Better Controls and Data Are Needed to Ensure Effectiveness
Highlights
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.
Recommendations
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.
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Department of the Treasury |
Priority Rec.
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. |
The Department of the Treasury (Treasury) has not issued guidance on how funding or assistance from other government programs can be combined with the NMTC, as GAO recommended in July 2014. However, Treasury has taken steps toward addressing this action. The Community Development Financial Institutions Fund (CDFI Fund), which administers the NMTC program, completed new empirical research assessing the extent to which other government programs are being combined with the NMTC. The findings of this research (issued in August 2017) indicate that some NMTC projects, especially those using other government funds to leverage the NMTC, potentially received more government funds than needed to close a financing gap. In July 2023, the CDFI Fund issued a notice in the Federal Register to solicit public comments on additional data to be collected from Community Development Entities. These data could be used to identify NMTC-financed projects that may have excessive public funding. In March 2024, Treasury officials told us that the CDFI Fund was in the process of updating its information systems to capture the additional data. Once fully implemented, these additional actions could help ensure that low-income community projects do not receive more government assistance than required to finance a project.
|
| Department of the Treasury |
Priority Rec.
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. |
The Community Development Financial Institutions Fund (CDFI Fund), which administers the NMTC program, completed new empirical research assessing the extent to which other government programs are being used to leverage the NMTC. The report on this research (issued in August 2017) found that NMTC projects using the leveraged structure described in GAO's July 2014 report were more likely to receive higher-than-expected rates of public funding. The report cautioned, however, that limits on the use of leveraged structures could have significant effects on the types of NMTC projects financed, and that some projects in highly distressed communities may need more public funding to attract private investment. The report also did not find sufficient evidence to support specific caps limiting investor rates of return. Still, in response to GAO's July 2014 recommendation, the CDFI Fund developed plans in the fall of 2017 to use findings and methods from this research to create guidance and tools that the Community Development Entities (CDEs) can use to analyze the depth of public funding in NMTC projects. CDFI Fund officials told GAO in December 2017 that the fund is also preparing to use the research's findings and methods to improve their oversight and analysis of NMTC projects. These additional analyses and reviews will help both the CDEs and the CDFI Fund to identify projects with potentially excessive or duplicative subsidies.
|
| Department of the Treasury | 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. |
The Department of the Treasury (Treasury) reported that as of May 2015, the CDFI Fund had reviewed the CDE disclosure sheets provided to low-income community businesses, as GAO recommended in July 2014, and determined that most of the useful data from the sheets were already being collected through other data-gathering tools used by the Fund. In January 2016, CDFI Fund officials reported that they did an initial comparison of the data on the disclosure sheets to the data in the Community Investment Impact System (CIIS)which is the system Community Development Entities (CDEs) use to submit reports to the CDFI Fund. Officials said they were continuing to investigate any differences between the disclosure sheets and CIIS, and had procured empirical research to help inform their review. The final report on this research (published in August 2017) recommended that CDFI Fund consider collecting data from the disclosure sheets as GAO had recommended. Having this additional information should be helpful in evaluating many of the transaction costs associated with structuring NMTC-financed projects, costs that can reduce some of the benefits available to low-income community businesses.
|
| Department of the Treasury | 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. |
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.
|
| Department of the Treasury | 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. |
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 Community Development Entities (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.
|