Audit: Montana housing funds not targeting needs

Darrell Ehrlick

(Daily Montanan) Affordable housing has become one of the most pressing issues in Montana in the past couple of years — so important that Gov. Greg Gianforte has created two special task forces to examine the problem and propose solutions.

However, a new performance audit by the Montana Legislative Audit Division shows that the Montana Board of Housing, the state agency most responsible for doling out money and approving projects that could help develop more affordable housing for the neediest of Montanans, is out of step with national practice, lacks the data to understand where the housing needs are most acute, and lacks transparency that could undermine its decision.

The audit report, released Tuesday, also showed that a longstanding practice of dividing the money regionally between urban and rural projects could be exacerbating the housing problem because it doesn’t factor in where housing needs are most critical.

Auditors found that Montana has an estimated deficit of 37,000 affordable rental units for low-income residents. However, the board lacks data to pinpoint where those needs are the greatest, and the auditors found that the board also seems to lack the methodology that would help prioritize or even incentivize those projects. Instead, the auditors found that most decisions the board made seemed to be based on the preference of the board, driven by the overarching principle of spreading money equally between rural and urban areas.

Agencies typically do not respond to the audit finding until after they appear before the Legislative Audit Committee, but a response letter is often included as part of the report. In this case, Cheryl Cohen, the executive director of the Montana Board of Housing submitted a 18-page response, nearly as long as the audit itself. In the letter, the Board of Housing, appointed by the governor, said it only agreed with part of the four major recommendations in the report.

Low-income Housing Tax Credit program

The federal government gives money to address low-income housing, usually through tax credits in a program called Low-income Housing Tax Credit programs. That program gives each state the flexibility to develop housing programs to fit the needs of the state, and Montana runs the program through the Board of Housing, which is a quasi-governmental board run through the Department of Commerce.

The federal government’s top priority is funding projects that “give preference to projects that serve the lowest- income tenants and remain affordable for the longest period of time.”

“We also found that the board does not always give preference to projects serving the lowest-income Montanans and does not adequately consider specific housing needs, such as underserved populations,” auditors said.

The auditors criticized the board because while many of the projects meet the minimum requirements for federal funding, they do not always prioritize projects that would serve those most in need, nor does the board try to incentivize projects that would target underserved populations.

“The board lacks a full understanding of where affordable housing is most needed in Montana. Many members think any project meeting minimum requirements is worth supporting because there’s such a great need for housing across the state,” the audit said. “Some members focus mainly on spreading tax credits evenly across the state when voting for projects.”

Analysis developed and completed by the Legislative Audit Division shows that even among Montana’s urban areas, the need for affordable housing varies widely, and the Board of Housing does not take that into consideration, nor does it necessarily even have the data to see the differences.

“Billings, Bozeman, Butte, Great Falls, or Missoula: There is a concentration of high need in those cities. However, this is not the case for all major Montana cities. For example, Helena and Kalispell do not show the same level of need as some of the other major cities. This does not imply that Helena and Kalispell do not require affordable housing,” the report said.  “Instead, our model indicates that the need in those cities is lower compared to other major cities in Montana.”

However, the Board of Housing pushed back on the suggestion.

“The auditors plainly prefer a top-down approach in which the board conducts a statewide study and prioritizes areas based upon the boards determination of degree of need. The board has discussed and considered the approach previously, and while it may have some advantages, it also has disadvantages. Such a study would be costly and, by the time any study is completed, it is already outdated,” the response letter said.

Urban vs. rural

Auditors questioned the board’s policy of trying to spread the money equally among all parts of the state, saying that it tended to miss targeting those most in need. Furthermore, even when funding in rural areas, the money didn’t always target those areas that showed the greatest need.

“About two-thirds of proposed projects were in areas above the statewide average. However, the board funded more than half of the projects developers proposed in areas with below-average need,” the audit said. ”Some more needy areas, like Miles City and the Fort Belknap reservation, had no proposed projects. Staff explained that there are many challenges outside the board’s control in where developers choose to site projects, such as a lack of available land and high construction costs.”

Auditors suggested the board develop specific criteria for projects that would incentivize those projects to make them more attractive to developers.

Based on federal data, the auditors showed that Montana scored among the lowest in the nation when it comes to funding projects that targeted residents with the lowest income, and it scored considerably lower when compared to neighboring states.

“The board emphasizes the geographic distribution of tax credits, regardless of where in Montana or which populations have the most acute need. The main reasons for this are a lack of understanding of the LIHTC program and Montana’s affordable housing needs along with a lack of formal policy incentives and outreach efforts,” the audit said.

But the Montana Board of Housing defended itself in the response letter saying that its current approach to the state’s housing needs allows it to meet emerging demands and challenges.

“By determining areas of greatest need and dictating project type or location based upon the board study or determination, the board would risk incentivizing less feasible, lower quality, more expensive and lower capacity projects. This would undermine obtaining the maximum leverage from the housing credit,” said the reply letter.

Transparency

Auditors also compared Montana’s procedures to other states and found that it’s nearly impossible to determine how funding decisions are made in the Treasure State. The auditors recommended the Montana Board of Housing develop objective criteria that would help the public understand how projects are prioritized and funded.

”Within certain federal requirements, states have considerable flexibility in what they prioritize and how they award tax credits. In Montana, LIHTC projects must meet minimum criteria to be considered by the board. However, final award decisions are made based only on board discretion, contrary to standard practice across the country,” the auditors said.

"The lack of structure in the board’s tax credit award decisions reduces transparency and increases the risk of favoritism by board members. During meetings, some board members asked relatively few questions about projects and provided little or no reasoning for voting for the projects they did. It was unclear whether and how targeted income and other criteria affected the likelihood of a tax credit award. Many board members prioritized the geographic distribution of tax credits over other factors like project type or whom a project serves. Some board members specifically favored projects proposed in their own communities.”

The decisions by the Montana Board of Housing not only created a lack of transparency and set Montana apart from other states, but it also appears to have a discouraging affect on the number of projects the board receives. The auditors report that many developers who could bring low-income housing projects to the board may not because they do not understand how projects are prioritized. Auditors said that challenges staff members.

While some developers spoke positively about the board, others expressed concerns about transparency and board engagement in our survey and interviews. For example, developers described the board’s decisions as based ‘entirely on their own personal criteria’ and that they were ‘subjective,’” the audit said. “Many developers perceived a desire by the board to spread tax credits throughout the state and board members’ personal preferences to be most meaningful to the board’s decision-making process. Additionally, when award decisions are made solely at board discretion, it is difficult for staff to advise unsuccessful applicants on how to improve in the future.”

The Montana Board of Housing pushed back on the auditors, saying that auditors did not fully understand the process.

“While transparency and decisions is desirable, it is not the only goal,” the board responded. “Each board member reviews and considers hundred pages of information and data regarding the characteristics of and need for proposed projects. Under the circumstances, board members have not always fully articulated their reasoning but that does not mean that there has been favoritism.”

Board governance

The audit also examined the operation of the Montana Board of Housing, and said that it lacks some of the policies and education that other boards receive. For example, it was unclear to auditors how much work had been done on conflict-of-interest policies. Many who were interviewed by auditors said that they believed board members had a connection to certain projects, or showed favoritism to their own areas, at the expense of other proposals.

But the Montana Board of Housing pushed back on that comment too, saying that more transparency in its decision making process, including scoring projects, could open the board and the programs to costly litigation.

“The board strongly disagrees with any approach that eliminates board discretion and subjects the program, the process and the board to an award of tax credits through litigation procedures and encourages legal challenges and award determination by courts or administrative law judges rather than the board,” the response letter said. “The board understands the desire to assign scores or numbers to projects. Scoring creates an appearance of greater objectivity. The highest score wins. It does not transform in overwhelmingly objective determination into an objective one; rather, it simply hides the inherent ‘objective’ veil.”