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Friday, December 30, 2011

The limits of procurement law

"If you only have a hammer, you tend to see every problem as a nail."
Abraham Maslow


This post concerns a controversy over the allocation of Low Income Housing Tax Credits ("LIHTCs"), specifically whether that controversy is cognizable under the procurement law. The basics of the story are reported in this online news item:

VIDEO: OPA Confirms Protest Halts GHURA Tax Credit Award; Cruz Concerned About Conflict of Interest.

The same news source, Pacificnewscenter.com, has a copy of the protest filed at http://www.pacificnewscenter.com/images/pdf/medallionprotestletter.pdf.

The article quotes the Guam Public Auditor as saying, "The form of tax credits is really a form of payment which is after the fact after a procurement has been made so the process is still a procurement issue”. As a consequence of the procurement characterization, she indicated that an automatic stay has been placed on the allocation of tax credits.

I want to speak to one element of the controversy, the procurement angle.

First, my disclosure. I am General Counsel for Jones & Guerrero Co., Inc., which is one of the principles behind the GREAT Homes, LLC, LIHTC application. I have not had much to do with this project, however, since specialized and experienced consultants and advisors have been retained to assist the application package. I am aware that the applicant has spent considerable time and money in the application process, however, my knowledge of the LIHTC program in general is rudimentary and I have had no direct participation in the planning or completion of this particular project application.

As reported in the media, Medallion Guam, LLC, has “protested” GHURA’s allocation of LIHTCs. Its attorneys, and others who should know better, have made the unsubstantiated claim that the allocation process is subject to the Procurement Act. I disagree, but, unlike the persons claiming such coverage, I will specifically detail why.

The Federal government has seen fit to grant federal income tax concessions to developers of certain low income housing developments to encourage such developments when profit is insufficient to the task. In no way does the procurement law apply to the process of qualifying for income tax breaks. That is a matter of tax law, US tax law.

If there is a dispute over the amount, timing or eligibility of the use of a tax credit, is that determined under the procurement code (see, 5 GCA § 5427 re contract controversies), or is it determined by the taxing authorities under the tax laws? It is a tax matter, not a procurement matter.

The procurement act applies to “procurement”, defined as “buying, purchasing, renting, leasing or otherwise acquiring any supplies, services or construction” (5 GCA § 5030(o)). The Government of Guam does not “acquire” anything under the LIHTC program. The project is designed, built, owned and managed by the developer. It is never bought, purchased, rented, leased or acquired by GovGuam.

The protest letter claims the procurement act is applicable because “[t]he Guam Procurement Code is meant to be construed broadly and cover territorial acts that include "federal assistance." 5 GCA §5004(b ).” This is not quite even half a truth. Yes, the procurement code is meant to be construed broadly, but only “to promote its underlying purposes and policies” (5 GCA § 5001(a)), and low income housing policy is not one of its purposes or policies. Yes, the procurement code does “cover” certain federal assistance, but it does not cover all “territorial acts”; it only covers certain local government “contracts”.

And it is at this point that the protest artfully fails to describe the whole truth, which contracts are covered by the procurement law? The unmentioned part of 5 GCA 5004(b) states, the procurement law “shall apply to every expenditure of public funds ... under any contract....” The scope of the procurement law is limited to expenditures of public funds under contract.

The award of tax credits is not an “expenditure”, and tax credits are not “public funds” (and it can be noted, the Public Auditor’s duty and authority extends to settling “the accounts of Disbursing Officers and Certifying Officers”, but “[t]his authority shall not extend to the collection of income taxes....” (1 GCA § 1909(b)).

Procurement law does not define what is meant by the term “expenditure” (in the phrase “expenditure of public funds”), but the funds management provisions of Guam law do. “Expenditures means all amounts of money, other than refunds authorized by law, paid out or encumbered for payment by a Territorial agency other than for investment securities or as agent or trustee for other governmental entities or private persons.” (5 GCA § 4117(g).)

Tax credits are not money. They are not the functional equivalent of money; you cannot pay your dinner tab with a tax credit. Tax credits are not money paid out by the government. They are conditional offsets of tax liabilities owed by a taxpayer to the government.

Likewise, the term “public funds” (in the phrase “expenditure of public funds”) is not defined in the procurement law, but it is a term used in the fiscal management provisions of Guam law.

14 GCA 14104(c) says, “ 'Fund' shall mean as used in this Chapter the General Fund and all special and trust funds. This includes impress fund cash held at personal risk.” Fund would not include tax credits.

14 GCA § 14105 says of “public funds”, “All public funds of the government of Guam shall not be disbursed, except ... by the persons designated or delegated....” This again speaks to the notion that public funds are amounts paid out by the Government. Tax credits are not public funds to be disbursed, paid or expended by the persons charged with the care and accounting of government money, as more fully detailed in Chapter 14, Title 4, GCA.

The expenditure of public funds must begin with budgets and approvals. The Governor must prepare “a financial plan which shall cover estimated receipts ... and expenditures of the government of Guam for the General Fund and all special funds....” (5 GCA § 4103.) 5 GCA § 4107(b)(4) requires the Governor to annually “present the proposed comprehensive program and financial plan “, to include a “summary of expenditures during the last fiscal year, those estimated for the current fiscal year and those recommended by the Governor for the succeeding fiscal year....”

Neither these plans nor reports discuss tax credits allowed under the tax laws, even though such credits do impact monies received. Why? Because tax credits are not “expenditures”.

How much does the Guam Legislature budget for these LIHTCs? Zero.

Why? Two reasons. First, the tax credits are discounted and syndicated to investors in the US and applied to tax liabilities to the US Treasury, not to the Government of Guam. Second, Gov
Guam does not "spend" any money on the LIHTCs. In the highly unlikely case that any of the credits are ever applied to a GovGuam tax liability, the credits act just like any other tax credit and simply reduce the liability; it does not require GovGuam to pay anything.

GHURA has never certified funds for these LIHTC allocations, because there are no funds to be spent. The Department of Administration has never certified funds for these allocations, because there are no funds to be spent. The Government of Guam has never cut a check for these allocations, because there are no funds to be spent.

The leading case to analyze whether the allocation of LIHTCs constitutes an “expenditure of public funds” is the California Court of Appeals case, State Building and Construction Trades Council of California v. Duncan (2008) 76 Cal.Rptr.3d 507, 162 Cal.App.4th 289.

Under California and federal Prevailing Wage Law, the prevailing wage must be paid to workers if the project on which they are employed is ‘paid for in whole or in part out of public funds’." The developer in that case argued the project was a private project, thus payment of prevailing wage was not required.

The issue in that case was whether the award of tax credits under a LIHTC program constituted an “expenditure of public funds”. The trial court ruled it did; the Court of Appeals reversed and ruled it did not. The Court held,
“Tax credits are, at best, intangible inducements offered from government, but they are not actual or de facto expenditures by government.” [Emphasis added.]
The Court of Appeals looked, in part, to tax decisions to describe the nature of LIHTCs.
“There is, moreover, an impressive body of authority, much of which was cited by the Director in his coverage decision, that excludes tax credits from the category of goods and services that amount to public assets or are treated as the equivalent of money. For example, within the context of California's personal income tax system, a credit is treated as something that "involves no expenditure of public moneys received or held ... but merely reduces the taxpayer's liability" at a future point in time. (Center for Public Interest Law v. Fair Political Practices Com, supra, 210 Cal.App.3d 1476, 1486, 259 Ca.Rptr. 21.) Federal tax law is to the same effect: it likewise does not recognize receipt of a tax credit as a taxable event, on the theory that the taxpayer "has received no money or other `income' within the meaning of the Internal Revenue Code." (Randall v. Loftsgaarden (1986),478 U.S. 647, 106 S.Ct. 3143, 92 L.Ed.2d 525 (Randall).) [Footnote omitted; emphasis added.] The credits "have no value in themselves," only the contingent benefit "to reduce the taxes otherwise payable." (Id. at pp. 656-657, 106 S.Ct. 3143; see also id., at pp. 657-659, 106 S.Ct. 3143 [credits have "economic value" only indirectly to extent they reduce tax liability].)”
The Court rejected the claim that convertibility of credits to cash made them an “equivalent of money”.
“The fact that LIHTCs may indeed be marketable by others, after they have been allocated by the state, does not establish that they have a realizable monetary worth to the state before they are allocated. (See Griffin, supra, 324 F.3d 330, 355 ["the only property interest the State has in the tax credits is purely abstract or theoretical, even after ... [the project] is completed"].)”
The Court rejected the argument that the State acquired or exchanged anything of value as a result of the tax allocation.
“[T]the operative point is that the purchase price is not paid to the state. The value for which would-be buyers pay accrues when the LIHTCs come within the disposition of the developer for the project, not the state. It is from the developer, not the state, that "persons or entities with tax liabilities" purchase an ownership interest in the underlying project. The buyer realizes the value of the tax credit only when – and if – the project is completed in a timely fashion, becomes operational, and remains so for a number of years.”
The Court acknowledged, as being beside the point, “that tax credits are an important mechanism for achieving objectives the Legislature deems in the public interest.” It said,
“But their undoubted importance and utility is not at issue here. Tax credits operate to reduce future tax liability, and cannot be used until the low-income project is built and operating. (26 U.S.C. § 42, subd. (f)(1); Cal.Code Regs., tit. 4, § 10328, subd. (a).) Further, any worth the credits may have is obviously predicated on the taxpayer having tax liabilities to offset. In other words, the worth of LIHTCS is, at the time they are allocated by the CTCAC, speculative and contingent upon future conditions. [Footnote omitted.]

“The United States Supreme Court has held that the mere receipt of a tax credit confers no economic benefit because the credits "have no value in themselves." (Randall, supra, 478 U.S. 647, 656-657, 106 S.Ct. 3143, 92 L.Ed.2d 525.)”
It concluded,
“LIHTCs are not property. Allocated LIHTCs represent only the possibility of future benefit that may be realized after construction or rehabilitation of the proposed project. (See Randall, supra, 478 U.S. 647, 656-657, 106 S.Ct. 3143, 92 L.Ed.2d 525; Griffin, supra, 324 F.3d 330, 355.) We therefore hold that they do not amount to either the "payment of money or the equivalent of money" within the scope of subdivision (b)(1) or the transfer of "an asset of value for less than fair market value" within the scope of subdivision (b)(3).” [Code references are to California Prevailing wage law; footnote omitted.]
The LIHTC program is part of the US Internal Tax Code, and is described by the US Department of Housing and Urban as an "an indirect Federal subsidy" underwritten by tax credits.

HUD further explains, "Each year, the IRS allocates housing tax credits to designated state agencies - typically state housing finance agencies - which in turn award the credits to developers of qualified projects. ... The state allocating agency must develop a plan for allocating the credits [a "QAP"] consistent with the state's Consolidated Plan. Federal law requires that the allocation plan give priority to projects that (a) serve the lowest income families; and (b) are structured to remain affordable for the longest period of time." (http://www.hud.gov/offices/cpd/affordablehousing/training/web/lihtc/basics/ )

One thing that stands out in the implementation of the LIHTC program is the lack of uniformity of application and implementation among and within the states and territories, due entirely to the broad discretion allowed to the administering agencies to tailor housing programs to address particular circumstances and answer different policies and needs.

The Guam QAP underscores that discretion:
• "The executive director shall have the right to defer the consideration of any application if, in his sole discretion, such deferral is deemed in the best interests of meeting housing needs."

• "The amount of tax credits reserved or allocated to a particular project will be limited to the amount GHURA, in its sole discretion, deems necessary to make the project feasible."

• "GHURA reserves the right to disapprove any application or project for any tax credit reservation or allocation, regardless of ranking under the criteria and point system as contained in section III of this allocation plan."

• "GHURA reserves the right, in its sole discretion, to (i) hold back a portion of the annual state and federal housing credit ceiling for use during later reservation cycles, (ii) carryover a portion of the current year's housing credit ceiling for allocation to a project which has not yet been placed in service, and (iii) under certain conditions, issue a reservation for the next year's housing credit ceiling."
I have to admit that these broad discretions do not sit comfortably with my sense of order under the procurement law. But the LIHTC program is not a procurement program, and we cannot judge it as such. It is simply a tax incentive, offered under limited conditions, to achieve a socially desired policy objective, like so many other tax credits, deductions and allowances.

The procurement law is not some over-arching paradigm against which other government activity must be governed. As broad as is its relevance in day-to-day government operation, it is nevertheless proscribed by application solely to contracts made by the government, involving the expenditure of public funds, to acquire for itself supplies, services and construction. It is to tax law, and here specifically US tax law, that parties must look to their rights and remedies as regards LIHTCs, not the procurement process.

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