The Guru Is In

The Guru is In: “They’ll write a check for something they won’t vote for”

By David A. Smith
May 2, 2016 5 min read

Share

When soliloquized by megalomaniacal president Frank Underwood in House of Cards, our title quote sought to prove his opponents’ hypocrisy. But it actually reveals quite the opposite: a profound divide between two philosophies that affects almost every part of the affordable housing business.

Despite Frank Underwood, writing a check for something you’d vote against isn’t hypocrisy: it’s rejection of the direct-government mode of delivery as failing its lofty purpose. It’s not anti-poor, it’s anti-failure, because when you write a check to charity, you are making the choice, not handing it off. Those who are pro-poor might prefer charity over legislation for any of seven reasons:

1. Agency. With pro-poor legislation inevitably come taxes, which all of us pay whether or not we endorse the intervention. With charity, you are the agent of your sympathy: you choose where your money goes.
2. Transparency. Send in your taxes, and off they go, never to be seen again. With charity, you perceive your check helping dedicated Nigerian farmer Ezekiel Igbinoba buy another dairy cow. You feel better seeing how your money traveled to its destination … and that it got there.
3. The fog of mega-numbers. Numbers of epic scale are inherently distancing. When we hear ‘billion,’ we think federal budget deficits, plutocrats, galaxies – decisions and beings and places far, far away from us. We cannot relate billions to any scale of our localized comprehension, and in feeling small and distant, we feel our contribution is meaningless, a drop in the ocean, a rounding error. (Do you glaze over at Medicaid budget numbers?) When we sign a check at a fundraiser to help send deserving young Desiree Gonzalez to college, we see her clearly and that emotionally rewards our giving. (When did you last feel good about paying your taxes?)
4. Efficiency. With transparency – enforced by Forms 990, GuideStar, and intermediary evaluators, like Charity Navigator – we quantify administrative cost, so we can compare it and efficiency across entities and interventions. When was the last time you saw a budget reckoning (for HUD) that showed how much of the money that went into a national or state-level program was overhead and how much went out to program beneficiaries?
5. Optionality. With charity, every year’s donation is a new decision, a change to evaluate performance or to change priorities. With legislation, that takes an Act of Congress – literally.
6. Experimentation. The personal link between donor and charity encourages charities to ask for, and donors to fund, things labeled experiments. Committee-based funding decisions devolve back to safety, and government is the ultimate lead-from-the-rear committee.
7. Accountability. A charity that misuses donor funds sees the funding dry up, often very rapidly. With legislation, um, not so much.

While these principles explain the impressive scale and diversity of US non-profit organizations, including those with housing at their center, they also help explain the continuing appeal of tax credits, especially LIHTC, which by design or serendipity replicate those benefits of the charitable rather than governmental approach to social problems:

1. Agency. Investors choose which properties their money will fund.
2. Transparency. From the comprehensive pre-investment disclosure through the annual audits, access to the books and records, and even to resident files, the entire transaction is fully transparent throughout its entire lifespan.
3. Anti-fog. All those millions in sources of funds can be traced like radioactive isotopes back to rents, apartments, and people. The linkages are clear and that builds confidence.
4. Efficiency. With the tax credit now older than 30, intermediary costs have been commoditized, squeezed and scrutinized and competed for, the more so because intermediaries have few barriers to entry.
5. Optionality. Investors enter and exit the market all the time; indeed, some resell their positions after a few years or when the company’s tax appetite changes. Optionality = competition = efficiency.
6. Experimentation. The hunt for attractive yields coupled with the ingenuity of QAP designers has led LIHTC into dozens of different sub-populations, building typologies, and service packages – and has played a catalytic role in the remarkable revitalization of public housing properties via RAD.
7. Accountability. From time to time, syndicators disappear; so do developers. That is a good thing because it encourages true market accountability.

When you think about it, in terms of pro-poor activity overall, tax credits represent a kind of donor-advised fund, where individual corporations are able to redirect, dollar-for-dollar, a portion of total federal expenditures on housing into targeted investments. And the government benefits from the additionality; not only does it transfer risk, outsource compliance, and having collectable recapture, in today’s market the government gets more than a dollar of funds per dollar of tax expenditure.

Financial institutions that invest in tax credit properties aren’t simply making a CFO decision; by their actions, they’re affirming a piece of affordable housing policy. They write checks for things their CFOs might not vote for, but in so doing they deliver better policy outcomes.