California Treasurer Bill Lockyer has expressed concerns that the recent guidance that federal officials have issued for implementing the low-income housing tax credit (LIHTC) exchange program will hurt the effectiveness of the program in his state.

The exchange program was one of the features of the American Recovery and Reinvestment Act of 2009. It allows housing credit allocating agencies to exchange up to 40 percent of their 2009 volume cap at the rate of $0.85 per credit. They may also trade in unused credits from prior years.

In a letter to federal officials, Lockyer said the Treasury Department is requiring the funds to be granted to project owners rather than to be loaned. This does not give states the flexibility that Congress intended and raises several problems, he said.

"A grant of federal funds by the state allocating agency would be taxable income to the recipient for California income tax purposes, where the tax rates are among the country's highest," Lockyer wrote in his letter. "The federal award's value would be significantly and unnecessarily reduced, whereas a loan would be devalued by state tax exposure."

He also pointed out that a loan makes state and federal requirements easier to enforce.

Lockyer also said he is concerned that a Dec. 31, 2010, deadline for disbursing the funds is more restrictive than the legislative language. Some housing finance officials thought they only had to have the dollars committed.

Cutting off disbursements on Dec. 31, 2010, effectively makes the placed-in-service date several months prior to that because states typically would withhold some funds until cost certification to ensure that the project is not over-funded. “Construction lenders would be unwilling to disburse their loan funds if there is any risk that the public funds may not be available due to the short deadline now being imposed,” Lockyer said in his letter.