SC delays affordable housing votes amid criticism of new tax credit
By Nick Reynolds (nreynolds@postandcourier.com) | The Post and Courier | November 20, 2021
COLUMBIA — They don’t build ’em like Gonzalez Gardens anymore.
Literally, they don’t. While it stood, the two facilities that made up the city’s Gonzales Gardens development served not only as housing for more than 230 Columbia families but also as a memorial to the most radical action against poverty ever taken by the United States government: President Franklin Roosevelt’s sweeping anti-poverty agenda, the New Deal.
Gonzalez Gardens today is nothing more than an open field, with the former Head Start the only structure remaining. However, when the dozens of utilitarian, plain-faced complexes of row houses — one for Black families, called Allen-Benedict Court, and one for White families — were completed in 1940, the facilities would not only become Columbia’s first public housing facility but also one of the first in the nation, as well as one of the first to set monthly rents based on what its residents could afford to pay. But it meant something more: access to electricity, clean and running water, heat in the winter, and community.
“It has a long history for residents in the city of Columbia,” Lucinda Herrera, city Housing Authority senior vice president of development, told The Post and Courier. “You know, the community building in the center of the complex was where family life took place. People were married, their graduations were held there. It was all about life in a time when many Black families couldn’t go to other venues.”
Gonzalez Gardens was also a relic of long-gone domestic policy. Amid an exodus of affordable housing developers from Section 8 programs in the late 1980s, the federal practice of directly funding new, affordable public housing — the same mechanism that funded Gonzalez Gardens — came to an end. Arriving in its place: a complicated system of grants, incentives and tax credits that can often leave projects with as many as a dozen different funding streams behind them.
Affordable housing advocates say the money their organizations can cobble together from those various sources is rarely enough to make projects viable. And to this day, demand for affordable housing remains profound. A state-sponsored study in 2019 found that one-third of South Carolina families struggled to afford housing despite high levels of economic growth. Data compiled by the National Low income Housing Coalition show the state counts just 44 affordable housing units for every 100 low-income South Carolinians statewide. Meanwhile, rent prices keep rising. Over the past half decade, the average fair- market rent for a one-bedroom apartment in South Carolina rose by more than 17 percent, nearly double the rate of inflation over that time.
South Carolina, lawmakers decided, needed to take care of the problem on its own. In the 2019-20 legislative session, the S.C. Legislature overwhelmingly voted to pass the Workforce and Senior Affordable Housing Act, a piece of legislation designed to provide a first-of-its-kind, state-level affordable housing tax credit that would match federal housing tax credits to help get affordable housing proposals to viability.
Lawmakers saw it as a bargain. According to a fiscal impact statement associated with the bill, state analysts anticipated the credit would cost the state roughly $16 million in annual revenue by the 10th year of the program, all while filling a significant hole in the state’s housing stock.
Those estimates, based off of historical demands for state affordable housing credits, were well off the mark.
With few limitations to qualify, the passage of South Carolina’s affordable housing tax credit unleashed a feeding frenzy. According to an Oct. 27 memo from Frank Rainwater, executive director of the S.C. Revenue and Fiscal Affairs Office, the state treasury is currently on pace to issue more than $50 million in tax credits in 2021 alone, with an anticipated impact of $5.16 billion to the state’s general fund over the next 20 years. And nobody, top officials say, saw it coming.
“This is a how this is a major housing program that nobody in the entire state says they understood,” State Treasurer Curt Loftis, a major critic of the program, said in an interview. “And yet we’re obligated to pay for it all.”
Effective and expensive
There is no cap on the amount of tax credits the state can issue every year. However, there is a limit on the amount of tax-exempt bonds the state can issue, $570 million.
Some are concerned that a program anticipated to have a relatively small impact on the state budget could soon grow out of control and eat up that limit. South Carolina, which is already behind on developing affordable housing, had significant pent-up demand for affordable housing, resulting in applications for roughly three times as many tax credits as they planned to issue in the first year of the program.
The unanticipated influx in demand was the result of a miscalculation by fiscal analysts. Initial estimates for the cost of the program were based upon historical demands for affordable housing developments. What it didn’t take into account, however, was that the tax credit allowed dozens of projects that would have been impossible to build in 2019 to become viable.
Factors out of the state’s control also played a hand. Six months after the state tax credit was signed into law, the federal government passed legislation to raise the rates of the federal income tax credit (which the state was now legally obligated to match) at 4 percent, increasing the amount of available capital for housing projects by 25 percent.
Too many developers, critics say, are seizing on that opportunity.
“There’s always been a shortfall,” said Kevin Connelly, a Lexington County-based developer who specializes in affordable housing. “There just wasn’t quite enough money to make a lot of these deals work. So that’s where the state tax credit comes in to fill that gap. It’s kind of the last piece of the puzzle to make those bond transactions work. And that that’s why there’s been such a demand.”
According to the S.C. Housing agency, the state is currently on track to receive over 4,000 affordable housing units in the coming years based on allocations made under the new tax credit in 2020 and 2021, with proposals ranging from large-scale developments in the state’s largest cities to dozens of smaller developments in rural counties around the state. “It is one of the most potentially impactful affordable housing bills ever passed by the S.C. Legislature,” S.C. Housing spokesman Chris Winston said, with the potential to create more affordable housing in the Palmetto State than any time in decades.
Perhaps too effective.
On Oct. 12, the State Fiscal Accountability Authority — the oversight body made up of Gov. Henry McMaster, Loftis, and other top officials responsible for approving major projects funded by the new tax credit — postponed a vote on more than a dozen affordable housing projects in cities like Charleston, Greenville, Spartanburg and Columbia due to the unexpected surge in demand it created.
Following the death of Florence Sen. Hugh Leatherman (a key vote on the committee), a Nov. 16 vote on the projects was canceled. Now, many affordable housing projects, including the anticipated Dec. 1 groundbreaking for the redevelopment of Gonzales Gardens, have been put on hold, despite the fact all of the developers have already committed large sums of money to get to where they are today.
Loftis, the lone holdout on the committee, said he believes the projects will ultimately pass the SFAA because of this reality. But he thinks the Legislature should contemplate reforms to the program before the costs become unmanageable.
“(Developers) will say, ‘Hey, the state is obligated to help us out,’ and we’re not,” Loftis said. “We’re the state of South Carolina. We decide who gets that ceiling allegation. We don’t have to give them a nickel. And my proposal was that we should put this whole thing on hold until the General Assembly comes back in January.”
Delayed gratification
In Columbia, many of the city’s affordable housing developments, many of which were built with federal dollars, are no longer livable, and lack funding mechanisms to replace them beyond the state’s affordable housing credit. Some have begun ambitious plans to replace their housing stock using a mix of public tax credits, grants and private equity, with the new state housing credit right at their center.
Housing advocates believe that efforts to reform the credit before they’ve had a chance to work is misguided.
“I think that’s a big disconnect as well, that they simply don’t understand that when we have to tear down a public housing property because it’s no longer physically viable,” Herrera said. “We don’t have any way to build back without going to the private market.”
Affordable housing advocates say fears for the program are overblown. While states do see lost revenues by issuing tax credits to affordable housing, studies in states like Oklahoma and Georgia have shown that issuing affordable housing subsidies can actually result in increased levels of economic development, despite early concerns their programs would result in a net negative economic benefit. Other states have recognized those benefits as well: While just over a dozen states had affordable housing tax credits at the time of Missouri’s audits, today 21 states have implemented similar programs, with four others contemplating similar legislation.
“The state’s return on that money is a multiplier of what it actually cost the state to develop,” Connelly said. “And I think that’s the part that people are overlooking.”
That’s not to say they’re perfect: While successful in other states, almost identical tax credits in Missouri and Georgia fell under heavy scrutiny from state officials due to the excessive costs of their programs, which ultimately yielded fewer benefits than that of other states with similar tax credits. Some are concerned a similar problem could take root in South Carolina where developers “stack” tax credits on top of one another to maximize profitability while, simultaneously, diverting the windfalls away from construction costs to investors, syndication firms and the payment of federal taxes — just like they were in Missouri.
“The taxpayers are the ones who are paying for these, and the developers are taking them to the bank,” Comptroller General Richard Eckstrom said during that Oct. 12 meeting in Columbia.
Developers contest this characterization. Connelly said there are numerous layers of oversight involved in evaluating the finances of any project S.C. Housing evaluates to ensure no dollar goes to waste. And if a project is “oversold” — that is, if a project receives more subsidies than it requires — there is a formula already in place to remove any excess subsidy. Projects also need to satisfy the banks helping to finance the projects: a high bar for facilities where profit is not the primary focus.
It’s the lack of a limit on how much money ultimately goes out the door that is the main problem with the program, Loftis said.
“The only way to create fiscal transparency is to put a cap on this program, so you’ll know what the cost is on the upfront,” he said.
A policy decision
Ultimately, advocates say the decision to create a mechanism to subsidize affordable housing where it’s needed, in higher-demand areas with adequate transportation, places of employment and amenities, is a policy of inclusion that is not only worth the cost, but will yield unanticipated fiscal and social benefits. It’s a reprise of policies just like those that led to the development of communities like Gonzalez Gardens three quarters of a century ago, resulting in housing stock that has helped bolster the working class in communities from Greenville to service industry-dominated communities on the coast.
“There is significant negative economic impact to the community if these projects do not move forward,” said Ivory Mathews, chief executive officer of the Columbia Housing Authority. “There are restaurants in Beaufort County who have had to change their hours because they don’t have enough affordable housing to actually house the folks who work in the restaurants and the service sector.”
“If we move these projects forward,” she added, “We will give people an opportunity to live in an affordable place near where they work and fill those jobs.”
Loftis said his lack of support for the program is not a sign he opposes affordable housing. Just concern the program won’t accomplish all they hoped.
While a significant share of those dollars would go to bolster developments like Gonzalez Gardens, critics say large sums of those tax credits are going to line the pockets of out-of-state developers while competing for the same funding other mechanisms for affordable housing, like homeownership programs, rely on. Without intervention, the state also faces the risk of too many units coming online that overaccommodate the need, potentially causing some affordable housing developments to lose tenants and put their funding streams in jeopardy.
“The rich folks from around this country are lined up to take advantage of this thing,” Loftis said. “They’ve got their wallets open in their hands out. And I’m insulted by the whole thing. The people of South Carolina deserve better.”