by Mike Smith Charles Burbank works two jobs because he says it’s a necessity in order to make ends meet in Vermont. He wears the clothes of a laborer: loose fitting, worn, and of rugged material. His job: installing carpets and flooring, but he also cuts and sells firewood. He has the weathered face of a man that has seen both good times and bad. He speaks in rapid and unfiltered bursts, with words that may be threatening or intimidating to some. Because of his appearance and some of his mannerisms, he can easily be dismissed or ignored, and often is. Many interpret his passion as nothing more than an obsession run amok. But if you look past the persona, and the sometimes oft-putting antics, he has a public policy point that may have merit.
For nearly 20 years, Mr. Burbank has been highly critical about the operations of the Vermont Housing and Conservation Board. VHCB is a statewide nonprofit organization dedicated to financing affordable housing, as well as land and water conservation projects. It gets a hefty annual multi-million-dollar appropriation from state coffers to disperse funds for such projects. On the housing side, VHCB provides loans to other state housing agencies and local nonprofits to build more affordable housing. According to its 2015 audited financials, VHCB has approximately $191.5 million of outstanding loans and interest due back to it when these loans mature.
But here’s Mr. Burbank’s point: Much of the money will never be paid back to VHCB over the course of the normal 30-year loan. And he contends there is little effort to demand repayment for the bulk of the loans. In fact, there is no effort to require borrowers to have a reserve for loan repayments. Instead, when loans come due, they are simply “rolled over” for another 30 years or so. So VHCB’s “trust fund” is seldom repaid to support future projects. Instead, the organization relies mostly on annual state appropriations to fund new projects. Burbank contends that VHCB loans have the look and feel of a grant. If true, then VHCB’s $191.5 million in loans listed as assets in reality have little or no value. If these loans were paid back on a timely basis as outlined in the original loan documents, then a portion of the annual VHCB appropriations could be used elsewhere — for example, cleaning up our waterways — or used to fund more VHCB-qualified housing projects. This year, the governor is proposing $32 million in new state money going to VHCB.
Gustave Seelig, the executive director of VHCB, wrote in a memorandum to the Vermont House Committee on General, Housing and Military Affairs in 2016 that these projects serve low-income Vermonters and “there is limited ability to increase rents to cover debt service.” Because income has not kept up with living expense over the years and the cost of construction and maintenance (to increase energy efficiency in properties and to build to higher standards) is more expensive than for other housing projects, the repayment of debt isn’t practical in many circumstances. Extending a loan, when certain conditions are meant, “allows the board to provide an additional 15-30 years of affordability. It is generally far less expensive than the cost of replacement housing,” according to Seelig.
Yet, a report produced in 2009 by the Agency of Adminstraion entitled “Enhancing Investments in Affordable Housing” reviewed the operations of Vermont’s entire nonprofit housing sector and wrote that income data provided by VHCB indicates material growth in the cumulative incomes of affordable housing occupants, thus seemingly contradicting VHCB’s assertion. Although the report was limited because of the number of loans they had access to and the time period of the loans, in the sample case that the authors selected, incomes grew at an annual rate of 6.58 percent, indicating that higher rents could be applied to some renters. A portion of the increased rent money could be used to offset expenses or build a debt service reserve fund.
The report also highlighted that total expenditures grew substantially for most state and nonprofit housing entities between the years 2005 and 2008, with personal services increasing at a compounded annual rate of 5.82 percent for state housing organizations and 11.28 percent for local nonprofit housing entities. The report indicates there’s financial capacity to repay debt, but rather than repay loans or contribute to a reserve fund, money was expended elsewhere, especially in personnel costs.
Another key question is whether these loan extensions — that can be up to another 30 years (60 years total) — qualify as a loan under the Internal Revenue Service definition of a “bona fide” loan. This question is important because federal tax credits are also used in conjunction with these loans to fund housing projects. According to the IRS, their test for a bona fide loan is this: “The key inquiry is not whether certain indicators of a bona fide loan exist or do not exist, but whether the parties actually intended and regarded the transaction to be a loan. An essential element of bona fide debt is whether there exists a good-faith intent on the part of the recipient of the funds to make repayment and a good-faith intent on the part of the person advancing the funds to enforce repayment.”
VCHB is relying, in part, on opinions from its own legal counsel as well as outside bond counsel to say that their loans are bona fide, even though they are refinanced for extended periods with no principal or interest repaid or loan reserves created. Kutak Rock LLP is a well-known legal firm in the area of debt financing. It opined in 2010 for the Vermont Housing Finance Agency that “our experience nationally is that state housing agencies and nonprofit lending organizations will routinely review the status of a loan at or near its maturity with a view to facilitating the continuation of a project as an ‘affordable housing project.’ Decisions made at that time by a state agency or nonprofit corporation with respect to such a loan (e.g. enforcing payment at maturity, refinancing, extending the maturity or even forgiving all or a part of the principal or interest thereon) will not adversely affect the determination made at the time of making the loan as to whether the loan is truly a loan for federal tax proposes.”
In the end, only the IRS can be the sole determinant of what qualifies as a bona fide loan, but VHCB says it places faith and trust in its legal opinions.
What Mr. Burbank has done is to raise public policy questions that should be either dismissed or pursued by the governor or Legislature based on its merits and not solely on the appearance of the person presenting them. Perhaps Mr. Burbank’s information will prove to be meritless, or perhaps a public policy decision will override his concerns, but nonetheless his concerns warrant serious inquiry.
Mike Smith is the host of the radio program, “Open Mike with Mike Smith,” on WDEV 550 AM and 96.1, 96.5, 98.3 and 101.9 FM. He is also a political analyst for WCAX-TV and WVMT radio and is a regular contributor to Vermont Business Magazine, the Times Argus and Rutland Herald. He was the secretary of administration and secretary of human services under former Gov. Jim Douglas.