On Wed., April 21, we proudly hosted several state legislators, community leaders and Finance Fund project partners at the Capital Club in downtown Columbus. It was an excellent opportunity to share how Finance Fund has positively impacted some of the state’s most distressed communities.

We highlighted four partnership “success stories,” including Ohio Basic Minerals in Jackson; Save-a-Lot grocery store in Columbus; Noble Learning Center in Caldwell; and Miami Valley Child Development Centers (MVCDC) in Dayton. Each project touted key Finance Fund goals – job creation, safe childcare access and neighborhood revitalization.

We shared important information about the New Markets Tax Credits (NMTC) program. Last October, we were awarded $50 million in NMTC funding, with $30 million designated specifically for non-metropolitan, rural areas in Ohio. Funding is still available for qualifying projects – we strongly urge those interested to contact us for more information on a possible partnership with us.

We thank our distinguished guests for their presence, and look forward to new partnerships that will lead to more jobs, revitalized communities and safer access to care.

House Bill 1 (the Governor’s proposed budget) contains language establishing an Ohio NMTC. The intent of the bill is to mirror the federal NMTC program thereby enhancing Ohio’s ability to attract new investors and additional investment capital. The bill is fairly well conceived and presented in HB 1 but has a few items that should be addressed before passage. This is a relatively small program at $25.6 million ($10 million in foregone public tax revenue) which makes it increasingly important to design it in a way that will be as effective as possible.

First, the bill creates a program that defines “applicable percentage” or the amount of tax credit that can be taken as 0% for the first two credit years (January 1, 2010 & 2011), 7% for the third and 8% for the last four. This means that the program wants to solicit investment and not give return for two years. Though I understand the desire to conserve capital in tight budget years, it is my opinion that investors will not invest for those first two years, which in the current capital market is an eternity. Investors invest to obtain yield or return on capital. No return = no investment. [HB 1, Section (2)]

Second, the bill seems to get prescriptive about the types of investors being solicited. It specifically discusses holders of “qualified equity investment” or investment that triggers tax credit as insurance companies, foreign insurance companies, and financial institutions. Though there is significant investment potential from these investor groups, if the purpose is to solicit “new investment” from taxpaying entities it seems counterproductive to frame a statute that limits who can play. The 2007 Government Accounting Office report on NMTC showed that the major federal NMTC investors were corporations and individuals. [HB 1, Sections 5725.33 (7), c, (B); 5729.16 (B); 5733.58 (B)]

Third, the definition of “qualified active low-income community business” or businesses eligible to get loans or other investments from tax credit proceeds as “any business that derives or projects to derive 15% or more of annual revenue from the rental or sale of real property.” It would seem the rationale here is to do business investment and not fund office buildings, condominiums, or lease-able commercial space. The result will be, depending on the specificity of the regulations and interpretation of reviewer, the exclusion of businesses that as a matter of course in low-income communities use real estate to stimulate economic revitalization. For example a local non-profit development corporation could not build a community facility such as a health center, child care center, or community service space. These dollars could not fund a business incubator or a share business space common in rural areas of the state. Restricting the program to non-real estate projects will severely affect its usefulness. [HB 1, Section 5725.33 (5)]

The efficacy of the NMTC has been documented by numerous public and private sources. For example, a 2007 report from the Government Accounting Office (GAO) suggests that NMTC increases financial involvement by investors in low-income communities. The NMTC Coalition’s 2008 Progress Report indicates investment, deployment, and demand are trending upward. A few examples of the efficacy of NMTC and its proven ability to spur economic growth in distressed communities include:
•    88% of investors say that they would not have made the same investments in low income communities without NMTC
•    At the beginning of 2007 with $12 billion in allocation, it has attracted $4.4 billion in investment with investment growth annually in the first 3 years of the program
•    Every $1 of federal tax revenue forgone as a result of the credit induces $8.90  in investments in low-income communities
•    Financed businesses that created or maintained more than 14,000 full-time equivalent jobs
•    Financed the construction or rehabilitation of nearly 27,000 affordable housing units

In addition, the 2007 GAO report showed that the total dollar amount of investments, number of investors participating, and efficiency of the NMTC program are all increasing at a rapid rate. It placed Ohio as third behind California and New York in dollars deployed and first in number of projects.
Emblematic of Ohio’s demand and capacity, with $75 million received, Finance Fund’s NMTC investments have:
•    Helped create 1,249 full-time equivalent jobs
•    Invested in projects creating 1,467 construction jobs
•    Invested in projects creating 536 child care slots
•    Helped to create 431 units of for-sale housing
•    Invested a total of $44,593,153 leveraging $221,159,679 in other funding.
One example of NMTC investment is in Caldwell, Ohio. Before 2005, if you were a parent in Noble County or one of its surrounding counties and were looking for child care, you would face a continual battle. Availability, cost, safety, quality, and accessibility all added to the frustration of finding the right place, the comforting place to care for your children.

It wasn’t much better for caregivers. Noble Learning Center had been in business for years — always addressing the space issues of high rent, low quality, no availability, poor fit, and no option to renew lease. Driven from location to location, Noble Learning Center operated out of rented apartments on the second floor of a senior center in rural Ohio. Then came the unfortunate news that they would not be able to renew their lease.

Unsure about the future of the Center at all, Center director LaShona
DeVolld made the call to Finance Fund that turned her dreams into reality. Her passion to provide for the community’s children and Finance Fund’s commitment to help them succeed by providing necessary access to capital, allowed the children of this very rural area to have a quality facility to plant the seeds of learning that will help them grow and develop into successful individuals.

LaShona discovered an old abandoned National Guard Armory with an open floor plan and a solid brick structure. She thought she had found her new home. After much patience and perseverance, LaShona purchased the former armory building and began major renovations. Funds received from multiple investors, including Finance Fund’s New Market Tax Credit Program, were used for these renovations, as well as furniture, equipment and supplies. Thanks to this program the center can continue its legacy of being the only licensed child care center in a four-county region and providing opportunity not only for children to learn and grow but for parents to gain peace of mind and economic flexibility.

The resulting child care center not only provides service for 135 children, it supported 20 construction jobs, 15 full time jobs, the productive reuse of an abandoned 14,880 square foot building and has become an economic engine in the local economy.

It is proposed that the State of Ohio create an Ohio NMTC program modeled after the federal program. Ohio has felt the backlash of a faltering economy perhaps even more so than the majority of other states in the nation. According to the Bureau of Labor Statistics, in February 2009, the Ohio unemployment rate was up to 9.4% compared to the national average of 8.1%. According to ODJFS, Ohio’s nonfarm wage and salary employment dropped 7,600 over the month, from 5,208,000 in January to 5,200,400 in February, with manufacturing and construction industries seeing a significant effect. Finally, Ohio’s 29 Appalachian Counties have been hit particularly hard, with a poverty rate of approximately 20% as compared to the rest of the state’s rate of 13%. This program would add targeted value to the Ohio economy by stimulating investments in Ohio’s low-income communities. The demand for the federal NMTC is extremely strong and has been since its inception in 2000; i.e. $11 in request for each $1 in allocation authority. A state NMTC program will supplement the federal program by incenting investment, attracting additional investors, and provide more opportunities for Ohioans. The economic impact of an Ohio NMTC program would assume an annual tax credit allocation of $25.6 million for a seven-year program. It would include the following:
•    Annual costs $10 million  in public funding or $70 million over 7 years
•    Leverages $25.6 million in direct investment annually or $179 million over 7 years
•    Leverages an additional $164 million annually ($6.40/credit financing $1)  or $1.1 billion over 7 years
•    $190 million  in projects annually or $1.3 billion over 7 years
•    Increases tax revenue through business, property, income, and other tax structures
•    In times of economic stress investors tend to be more conservative creating gaps in traditional financing as well as NMTC projects. If a state program mirrors the federal model it would easily fill that gap by adding additional  incentive to invest or invest more
•    Create jobs for Ohioans

The Ohio NMTC would be one of just a handful of its kind in the nation—placing Ohio on the map as a leader in this cutting edge initiative. Other successful programs include:
•    In 2007 Louisiana enacted a 35%, 3-year tax credit that supplements the federal program
•    Also in 2007 Missouri approved a $15 million tax credit program for investments in projects in distressed municipalities
•    In 2007 Mississippi enacted the Credit for Equity investments in Community Development entities
•    Texas enacted a state insurance premium tax credit for investment of certified capital in a certified capital company (also based off of the NMTC model) that began in the 2008 tax year
•    Connecticut created a $500 million tax credit program for investments in projects in distressed communities
•    The Michigan legislature is currently considering a state NMTC as well

In conclusion, the Federal NMTC program is proven to be one of the most effective tools in improving low-income communities. An Ohio NMTC program mirroring federal credits would effectively raise private capital, offer flexible financing products not otherwise available, increase Ohio’s competitiveness for investment dollars, invest in businesses and development projects in Ohio’s distressed communities creating jobs and building wealth for low income people, and enhance tax revenue. This program could be a life line for Ohio’s poorest communities. I want to thank you for the opportunity to address the Committee and for your time and attention on this matter. At this time I will be happy to answer any questions you might have.

Sources:
1.    Miara, Jim, The New Markets Tax Credit Program, A CDOs for Cities Briefing Paper: How This New Incentive Can Strengthen America’s Cities, CEOs for Cities, Boston MA, 2004
2.    The New Markets Tax Credit, Progress Report 2008, A Report by the New Markets Tax Credit Coalition, May 2008
3.    United States Government Accounting Office, Report to Congressional Committees, Tax Policy, January 2007
4.    National and State Corporate Income Tax Rates, U.S. States and OECD Countries, 2008, Tax Foundation, 2009, http://www.taxfoundation.org/taxdata/show/23034.html
5.    State Individual Income Tax Rates, 2000-2009, Tax Foundation, 2009, http://www.taxfoundation.org/taxdata/show/228.html
6.    Community Development Finance Institution Fund, New Markets Tax Credit, Compliance and Monitoring Frequently Asked Question, November 2006
7.    Promoting Investment in Distressed Communities: The New Markets Tax Credit Program, Community Development Finance Institution Fund, U.S. Department of the Treasury, October 2008
8.    Ohio Department of Job and Family Services News Release, March 2009
9.    Economy at a Glance, US Bureau of Labor, http://stats.bls.gov/eag/eag.OH.htm

To steer this effort, a comprehensive, bipartisan group with adequate representation from individuals/groups that have some knowledge in tax credit financing supplemented by a resource group of experts; i.e. accountants, attorneys, practitioners, investors. I am not suggesting commissioning a study of the feasibility of the proposal. The steering committee should have the authority to make recommendations, craft the model, draft legislation, identify and solicit champions and sponsors. It should, as a goal, solicit the full endorsement of the administration and General Assembly.

The majority of NMTC projects solicit two types of investment; i.e. equity and debt. NMTC investments are directed to economically distressed communities where deal structuring is always difficult. In a normal economy it is common to have multiple sources in a project and still end up with a gap. The current economic climate has precipitated some distinctive stress on the NMTC model. In this market credit is tight and what we are seeing is that debt investment is becoming more difficult to obtain. The knee jerk response is, “get more equity.” The issue with increasing equity is that it also decreases return/yield and by doing so diminishes the attractiveness of equity investment. The issue in both environments is how to fill the gap.

What is needed in is a model that will specifically address the gap in good and bad economies. A state base NMTC program could do that. It would have to be structured to mirror the federal NMTC program while providing state tax credit. If it were similar to the federal program a state NMTC program would be ideal for addressing the gaps. State credits are substantially more valuable if they can be applied to state taxes that aren’t deductable from federal taxes. because of its, use of state resources to entice additional investment, potential for getting new investors, and its congruence with NMTC and other tax credits and not tax credit sources to move capital into distress urban and rural markets.

NMTC can be applied to equity investments in certified Community Development Entities (CDE). They must have a primary mission of community development through capital investment. Qualified CDEs must ensure accountability to residents of low-income communities by including community representation on a governing or advisory board. CDEs are expected to make loans and investments in businesses located in low-income communities. The Community Development Finance Institution (CDFI) Fund in the U.S. Treasury Department certifies CDEs.

CDFI Fund publishes a Notice of Allocation Availability annually for which CDEs apply for a tax credit allocation. When allocations are awarded CDEs solicit private taxpaying investors, including an individual, company or investment fund. Proceeds of the investments are used to invest in specifically defined businesses in specifically defined low income communities (LIC). A LIC is defined by census tract. Almost any business in the LIC is eligible for loans or equity investments.