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Targeting State and Local Funding: Key Decisions

The following are some of the key decisions that communities will need to make in determining how to target state and local resources:

Eligible activities: What activities will be eligible for funding?

The first question to consider is whether to provide funds in the form of "demand-side" or "supply-side" assistance. Demand-side assistance helps individual families to afford the costs of buying or renting a home. Examples include down payment assistance, assistance with security deposits or first-month's rent, and ongoing rental subsidies similar to Section 8 Housing Choice Vouchers. Supply-side assistance provides funds to developers to stimulate the production of specific homes affordable to families at a target income range.

Communities can decide to fund one or the other type of assistance, or to devote funds to each. Within each category, there are also choices to be made. It may be useful to consider these categories within a matrix that also includes renting and homeownership:

	Promote Homeownership	Help Renters
Demand-side	Common forms include grants or loans for downpayment assistance or home repair. When providing larger amounts, consider recycling downpayment assistance. Low-interest mortgages also fall in this category, as does assistance to help homeowners in danger of foreclosure, including emergency home loans, special refinancing products, etc.	Some state and localities provide ongoing rent subsidies similar to Section 8 vouchers, but these are very expensive. Other forms include assistance with security deposits and first month's rent - often to help recipients of vouchers use them more effectively - and back rent to help renters avoid eviction.
Supply-side	These are usually grants or loans to developers that agree to build homes and sell them for an affordable price. When making large permanent investments, consider shared equity models that preserve affordability over time. Revolving loans for predevelopment and acquisition can be helpful for both homeownership and rental developments.	These are usually grants or loans to developers that agree to build or rehabilitate homes and rent them for an affordable price. When making large investments, consider requiring long-term or permanent affordability. Often, a relatively small investment of state or local funds can leverage significant federal funding in the form of low-income housing tax credits. Many communities have found preservation of existing affordable rental housing to be a cost-effective and desirable approach.

For demand-side programs, this question is often determined by the income limits established for the program (see below). In some cases, other factors are used as well. For example, some home repair programs are established specifically for elderly homeowners.

For supply-side programs, most communities use a "request for proposals" process to solicit funding proposals from qualified developers and then judge them according to specific criteria set out in the proposal document. Some communities give a preference to non-profit organizations, arguing that they are more likely to be committed to the long-term well-being of the residents. Other communities establish competitions open to both for-profit and nonprofit developers and report good experiences and results working with for-profit developers.

Many communities have established capacity-building programs – either alone or in partnership with an intermediary such as Enterprise or LISC – to help small nonprofits build the capacity to meet special needs or work in particular communities where there is little private-sector interest. While there is sometimes tension between non-profit and for-profit developers, in some communities, partnerships between non-profit and for-profit developers have proven very fruitful. For example, a community development corporation with deep roots in a neighborhood can help pave the way for community acceptance of a new development and work to help prepare buyers while a for-profit developer does the actual building and development.

Photo courtesy of McCormack Baron Salazar

Income eligibility -- The income limits established for eligibility in many state and local programs track federal requirements because they are funded in part or entirely with federal funds. Depending on the source of funding, this may place income eligibility at 50, 60 or 80 percent of the area median income. When purely state or local funds are used, communities have more flexibility to determine if the federal guidelines make sense or whether to use income limits that are higher or lower. In recognition of the severe housing affordability challenges faced by poor and near-poor families, many communities have used housing trust fund dollars to reduce the rents in low-income housing tax credit developments to levels affordable to these families.

For example, the Chicago Low Income Housing Trust Fund Rental Subsidy Program reduces rents to levels affordable to very low-income families by providing annual subsidies to owners of qualified rental buildings. Participating property owners agree to reserve a specified number of units for income-eligible tenants. At least 50 percent of program resources must be used to reduce rents for households that earn less than 15 percent of the AMI; the balance can be used to assist households earning between 16 and 30 percent of AMI.

On the other hand, some particularly high-cost communities have chosen to establish housing assistance programs for moderate-income families whose incomes may be too high to qualify for federal housing funds but do not benefit from the homeownership deduction – either because they are renters or are homeowners that do not itemize their deductions. For example, New York City's Middle Class Housing Initiative is one component of the Mayor's New Housing Marketplace, a 10-year plan that aims to generate 92,000 new units of affordable housing. The Middle Class portion of the plan focuses on the creation of 22,000 units affordable to households earning 81-120 percent of the AMI, and includes proposals to create a new housing development entity responsible for building large-scale projects; broaden income eligibility limits for current affordable housing programs; and implement a cross-subsidy financing model in which middle-income units are subsidized by market-rate development.

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Geographic targeting: where can funds be used?

In some communities, a major question of discussion is where to target the funds. Here are some of the considerations:

Focused or Dispersed -- Some communities choose to target housing funds on distressed neighborhoods that need substantial reinvestment. The goal here is often to lay the groundwork for market-rate activity by creating a high-quality housing stock through new construction or rehabilitation. To be successful, it is helpful to intervene at scale – perhaps by targeting one or two neighborhoods at a time – and to pair this strategy with community and economic development initiatives to improve residents’ access to jobs and other amenities. In Richmond, Virginia, the Neighborhoods in Bloom program focuses intensive community revitalization and code enforcement on just a few neighborhoods to achieve a greater effect. After five years, home prices in the targeted neighborhoods rose more than the city average and over half of the code violations were resolved. Click here to leave this site and learn more.

On the other hand, some advocates and policymakers urge that housing investments be widely dispersed, with a particular emphasis on low-poverty areas with good access to jobs and public transit. By dispersing affordable housing, one avoids creating or aggravating the concentration of poverty. Targeting affordable housing construction and spending in lower-poverty areas can help create new affordable homes (or help families afford the costs of existing homes) where few affordable options exist, giving families the opportunity to access neighborhood amenities and schools that might otherwise have been unavailable. The City of Eugene, Oregon, uses land banking to disperse affordable homes throughout the city. Since 1979, Eugene's land bank has facilitated the creation of over 500 units of affordable housing throughout the city. More than 200 additional homes are in progress. Click here to leave this site and learn more.

Balancing urban and rural needs -- In some states, affordable housing shortages may be more significant in rural areas than in urban areas (or vice versa). Housing programs may exist in cities but not in more rural sections of some states, leaving rural areas with comparatively fewer resources for addressing their affordable housing needs. Rules requiring the administrators of state-level housing programs to spend a certain share of funding in urban or rural areas can help alleviate these imbalances. For example, when the Oklahoma State Legislature established the Oklahoma Housing Trust Fund in 1988, it placed a special emphasis on the creation of affordable housing in rural areas. In order to accomplish that goal, the State's trust fund legislation mandates that the fund use between 65 and 75 percent of its funding for activities in counties with populations below 490,000 people. Click here to leave this site and learn more.

Special "zones" or "districts" -- City and county policymakers may choose to target affordable housing investment to particular areas that have been designated as special reinvestment zones, combining housing efforts with other kinds of resources as part of a larger revitalization effort. Cities and counties can target spending by creating special zones or districts or by limiting spending to those which were previously created for other purposes, such as Empowerment Zones or Enterprise Zones.

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