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State funding sources

This page provides an overview of the role states play in funding affordable housing. While cities, towns, and counties have an important role to play in the funding process for affordable housing, states have the power to establish their own funding streams, as well as administer the funds for several federal housing programs. The role of state funding sources is particularly important in smaller cities and counties that do not receive direct federal program funding. Learn how local resources can be used to augment state and federal funding for affordable housing.
state funding sources

State funding streams

States have the power to establish funding streams for affordable housing, including state housing trust funds, housing tax credits, and grant programs.

Housing trust funds

State housing trust funds are a flexible source of funding that can be used to support a variety of affordable housing activities. Ideally, funding for a state’s trust fund comes from a dedicated revenue source. States can pass enabling legislation to allow or encourage localities to create their own housing trust funds.

Housing tax credits

Like the federal Low Income Housing Tax Credit (LIHTC) program, states can create tax credits to generate private investment in affordable housing by providing a credit on taxes owed to investors in affordable housing. For example, the State of Nebraska adopted a state low-income housing tax credit for owners of qualified affordable housing developments that receive the federal LIHTC. The non-refundable state tax credit is intended to help close the gap between revenue available through the LIHTC and actual project expenses and is awarded over a six-year period in an amount up to the federal LIHTC awarded to the property.

Grant programs

States can also develop specific grant programs to preserve, rehabilitate and create new affordable housing units. For example, the California Department of Housing and Community Development has established the Farmworker Housing Grant program which supports the development or rehabilitation of rental and owner-occupied housing for agricultural workers with priority for lower-income households.

Programs that bypass local authorities

Some states may also offer housing programs that provide assistance directly to local projects, bypassing local authorities altogether. Localities can encourage local developers and property owners to apply for those state funds.

State administration of federal housing funds

In addition to using state-generated funding for affordable housing, states exert control over a large amount of federal housing funds through their administration of the LIHTC program, private activity bonds, and the three HUD block grants: HOMEFederal program established by Congress in 1990 that is designed to increasing decent affordable housing for low- and very low-income families and individuals. State and localities receive HOME fund from HUD each year, and spend it on things such as: rental assistance, assistance to homebuyers, new construction, rehabilitation, improvements, demlition, relocation, and administrative costs., Community Development Block Grants (CDBG), and ESG. Because LIHTC is administered entirely at the state level in most states, the decisions that states make in allocating LIHTC credits have a particularly large and systemic impact on the availability of funds for local affordable housing development. By contrast, the states’ administration of HUD block grants generally impacts only the “balance of state” that does not receive their own direct allocation of HUD block grant funding. In some states, localities must request access to block grant funding from the state while in others the state might distribute their dollars to localities based on predetermined formulas. These application processes and funding formulas can allow states to encourage localities to use their federal dollars for specific goals, such as “green housing” or affordable housing targeted for specific populations.

Low-Income Housing Tax Credits

The Low-Income Housing Tax Credit (LIHTC) is the largest government program in the U.S. dedicated to the creation and rehabilitation of dedicated affordable rental housing. LIHTC credits are allocated to states based on their population size. In most states, LIHTC credits are administered by the state housing finance agency; few states sub-allocate LIHTC credits to local housing finance agencies. The award of LIHTC credits is governed by a policy document called a Qualified Allocation Plan (QAP), which describes the agency’s criteria for selecting projects, such as project location, population served, project characteristics, and developer capacity. The regular updates that state (and in some cases local) housing finance agencies make to their QAPs typically attract a significant amount of interest and attention from developers, advocates, local governments, and others, as the terms of the QAP determine which affordable housing developments get the coveted 9 percent credits.

Tax-exempt private activity bonds

Each state receives an annual allocation of tax-exempt private activity bonds that it can use to fund private activities that have a public benefit. States can choose from a variety of eligible uses for these bonds such as upgrades to infrastructure, construction of multifamily affordable rental developments, and home mortgages for first-time homebuyers. The bond is repaid with income generated from the activities financed. While private activity bonds can be used for multiple purposes, they are especially valuable when used to finance qualifying affordable rental housing, as this financing automatically triggers the receipt of federal 4 percent LIHTC credits. Many states also use private activity bonds to support homeownership for first-time homebuyers.

Some states fully utilize their full allotment of tax-exempt bonds, while others use less than the full allotment and carry funds forward from year to year. In states where there is excess bond capacity, localities may be able to draw down additional financing for affordable housing by helping to facilitate more rental development that uses private activity tax-exempt bonds. Even in states that use their full bond cap each year, it may be possible to convince the state to reallocate more of their bond capacity to affordable rental housing given the added value of the 4 percent credits. These issues are discussed more fully here.

When states issue private activity bonds for affordable rental housing, a housing finance agency (HFA) typically issues the bonds. In most cases, the HFA is a state-level agency, but some larger localities also have their own HFA or redevelopment authority authorized to issue private activity bonds for housing purposes. Multifamily bond transactions can be complicated and expensive so are generally reserved for larger affordable developments (or combinations of smaller properties bundled into a larger project).

State allocation of HUD block grants

In addition to administering the LIHTC program and private activity bonds, states play an important role in allocating three HUD block grants: CDBG, HOME, and ESG. This function is particularly relevant to smaller cities and counties that do not receive their own direct block grants from HUD.

HUD allocates block grant funding directly to entitlement communities (usually, large cities or counties) and to state agencies to distribute to non-entitlement communities. States must develop a Consolidated Plan every five years that lays out the state’s priorities for how it will spend HUD block grant funds as well as annual action plans that describe spending plans for each year.

The block funds that states distribute to local governments can be very helpful in supporting the activities included in local housing strategies, such as the development of new or rehabilitated dedicated affordable rental housing or the promotion of homeownership. One of these funding streams (CDBG) can also be used to help fund the development of a comprehensive local housing strategy.

Community Development Block Grants

Through the federally administered CDBG program, states receive a formula-based allocation of funds. These funds are distributed, often by competition, to those localities that do not receive CDBG funds directly from HUD. The CDBG grants awarded to states can be used for housing and community development activities that meet the states’ goals as described in their Consolidated Plan. Federal CDBG funds generally must provide assistance to people with low- and moderate incomes, defined as less than or equal to 80 percent of the AMI. States generally award funds to non-entitlement communities through a competitive process. States have the latitude to design their own programs and set their priorities in their Consolidated Plans as long as they fall within the parameters of the federal regulations.

CDBG-DR is a federal disaster recovery program that allocates funds to states and localities following a Presidentially declared disaster. These funds generally follow the CDBG program rules and can be used for similar types of activities, with some exceptions. Localities and states must outline their needs in an Action Plan for approval by HUD. The development of an Action Plan includes a process for public input and feedback.

Home Investment Partnerships Program (HOME)

HUD allocates HOME funds directly to participating jurisdictions, which include consortiums (groups of municipalities working together) and participating jurisdictions, and to states for distribution to the balance of states. HOME funds are used primarily to support the development of dedicated affordable rental housing and homeownership for low-income households. Tenant-based rental assistance is another eligible activity. Homeowners assisted through HOME must have incomes below 80 percent of AMI, while 90 percent of households assisted through affordable rental housing development may have incomes below 60 percent of AMI. So long as their plans are summarized in their Consolidated Plan, states can set their own priorities for use of HOME funds and design their own programs for direct funding of housing development. For example, states could prioritize projects that serve special/specific populations (e.g., at-risk youth or the elderly), projects that rehabilitate older naturally occurring affordable housing, or projects that require only a one-time infusion of funds.

Emergency Solutions Grant (ESG)

The ESG program is designed to help people who are experiencing a housing crisis or homelessness secure stable and affordable housing. ESG funds can be used for four primary activities: street outreach, rapid re-housing assistance, emergency shelter, and homelessness prevention. Like CDBG, ESG funds are allocated either directly to entitlement communities or to states for distribution to non-entitlement communities. States can set priorities for use of ESG funds in their Consolidated Plan and Annual Action Plan. For example, states can identify criteria and priorities for funding, including:

  • the capacity of the organization requesting funding,
  • proposals that add low-barrier shelter beds in areas with high rates of unsheltered homelessness, or,
  • proposals that use a Housing First model that emphasizes rapid placement and stabilization into permanent housing.

State role in federal incentive programs for investment in distressed areas

States also play a role in administering federal incentive programs to encourage investment in distressed neighborhoods, such as Empowerment and Enterprise Zones (discontinued in 2014) and the more recent Opportunity Zones program, which is still in operation as of February 2021. Opportunity Zones offer reductions in capital gains taxes for those who invest in designated distressed areas. Under this program, states designate up to 25 percent of their eligible census tracts as Opportunity Zones, then create an Opportunity Plan that identifies broad goals for the Opportunity Zones that are aligned with state priorities. By offering deferral of capital gains taxes and stepped-up equity investment, the Opportunity Zone program can help close the financing and funding gap for some qualifying affordable housing projects. State housing agencies have a role to play in assisting developers and local housing agencies in using these incentive programs to finance their local housing strategies.

Coordinating various funding streams

In developing their local housing strategies, cities, towns, and counties will need to determine how best to coordinate all of the different federally funded housing activities, as well as any initiatives funded at the state or local level. With many of these programs being implemented by different agencies, this can be a challenging task, but it is nonetheless an important one for ensuring the jurisdictions’ housing needs are addressed in a comprehensive and strategic manner. Cities, towns, and counties will also want to consider state funding availability and requirements to identify gaps that could benefit from locally funded initiatives. Click here for a discussion of how a review of available funding resources can be helpful in determining the income levels to target through locally funded housing programs.
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