Tuesday, June 23, 2009

Hearing on the New Markets Tax Credit Program - Jui-Kai Li

On June 18th, the Subcommittee on Select Revenue Measures of the House Committee on Ways and Means held a hearing on the New Markets Tax Credit Program (NMTC). Testifying were Donna J. Gambrell - CDFI Fund, Michael Brostek - GAO, Ron Phillips - CEI, Blondel A. Pinnock - Carver Bank, Joseph Haskins, Jr. – Harbor Bank, William Michael Cunningham – CIR, and James R. Klein - Ohio Community Development Finance Fund.

In his opening statement, Chairman Richard E. Neal (D-MA) explained that the Subcommittee on Select Revenue Measures is beginning its hearing process with the Subcommittee on Domestic Monetary Policy and Technology of the Financial Services Committee on issues involving the New Markets Tax Credit program. He pointed to a recent GAO report showing that minority-owned or controlled entities are less successful than non-minority owned or controlled entities in the NMTC application process. He emphasized the importance of the New Markets Tax Credit program as a way to encourage investments in low income communities. He added that fairness in the application process is vital to its success. At the request of the Chairman, the CDFI Director and experienced applicants provided their recommendations with regard to changes to improve the program. The testimony is summarized below and copies of the written statements are available online at http://waysandmeans.house.gov/hearings.asp?formmode=detail&hearing=683

Testimony

During the hearing, two contrasting points of view were offered with respect to GAO’s findings of a lower success rate of non-minority owned or controlled entities in the NMTC application process. Members who support NMTC and criticize GAO’s findings

“The CDFI Fund agrees with the GAO’s conclusions that, within this highly competitive application environment, organizations that have identified themselves as minority-owned CDEs have not received allocation awards in proportion to their representation in the application pool. The CDFI Fund does not believe that this lower rate of success for minority CDEs, or for that matter the success rate of any other category of CDE, is attributable to biases in the application review or selection process.” said Donna J. Gambrell, Director, Community Development Financial Institutions Fund, United States Department of the Treasury. “Each applicant CDE is required to ‘check a box’ indicating whether it, or its parent company, is minority-owned or controlled…It could be the case that many non-profit organizations which have significant minority executive control fall within the CDFI Fund’s definition of a minority-owned entity, but perhaps have not been checking the box.”

Ms. Gambrell said the lower rate of success does not result from biases but from undercounting of awardees that are minority-owned CDEs by GAO. Failing to self- identify the status of minority bank is regarded one of the reasons of the lower rate. “Our knowledge of the allocatees suggests there is greater participation…We think the reason for the discrepancy between our numbers and those of GAO is because this information is not required by the application, but rather is one of several characteristics on which applicants may or may not choose to self-identify.” said Ron Phillips, President of the New Markets Tax Credits Coalition. Mr. Phillips is also the president of a private non-profit community development corporation and CDFI.

Given the success of applying NMTC, some minority banks think the asset size is another reason to cause their competitors’ lower rate of success. “Again, minority CDEs are by nature smaller so it is not their minority status that lowers their success rate. This is obvious in our opinion given there are no large minority CDEs to use as a basis for comparison.” says Blondel A. Pinnock, President, Carver Community Development Corporation. “Local minority and non‐minority organizations are usually smaller with limited assets and capacity to deal with the complexity of public programs... they generate projects that are smaller and businesses with little or no assets enabling access to private commercial capital. Because projects are smaller, impacts are small when compared to larger single purpose transactions.” says James R. Klein, Chief Executive Officer, Ohio Community Development Finance Fund. But still no sufficient statistical evidence was provided by these banks to explain why minority status lowers the probability of success more than CDE’s asset size.

Doubts concerning the fairness of the NMTC

On the other hand, some minority companies not funded by the NMTC doubt the fairness of the allocation process. “We believe our applications may not have been funded, in part, because we are an African American firm.” said William Michael Cunningham, Social Investing Advisor, Creative Investment Research, Inc. Mr. Cunningham says he partnered with a few minority and non-minority companies to apply for the NMTC. But projects which he thinks are competitive were not funded. He worries that the NMTC does not achieve its original intent to help the development of the low income communities. “The NMTC may be operating in a discriminatory and unfair manner, contrary to Congressional intent… the bulk of the societal and monetary benefits derived from the program are being captured by real estate developers, accountants, lawyers, and consulting firms, not low income community residents.”

Recommendations concerning the NMTC Program

Although contrasting opinions were offered as to whether status as minority-owned or controlled lowers the rate of NMTC application success, members provided recommendations about NMTC program. These are summarized below.

Continued outreach to minority-owned CDEs.
Encouraging partnerships between minority CDEs and experienced Allocatees

Training and technical support from the NMTC Coalition

Make small CDFI banks a priority for CDFI Fund financing

Streamline the application process

Modify the scoring and approval process
· Increase the tax credit for the qualified active low income community business(QALICB)
· Increase the tax credit for the QALICB’s located in very low income areas
· Increase the tax credit for equity investments in QALICBs.

Posting by: Jui-Kai Li[1], Intern, Creative Investment Research, Inc.
[1] Master of Science in Finance candidate, May, 2010, George Washington University.