Arctic Planning: Navy Report to Congress Aligns with Current Assessments of Arctic Threat Levels and Capabilities Required to Execute DOD's Strategy

The Navy is responsible for providing ready forces for current operations and contingency response in the Arctic Ocean. According to data from the National Snow and Ice Data Center, the coverage of sea ice in the Arctic has diminished significantly since 1981. This could potentially increase maritime activities there, leading to a need for a greater U.S. military and homeland security presence in the region.

Public Law 115-91 required the Navy to report to Congress on the Navy's capabilities in the Arctic, including any capability gaps and requirements for ice-hardened vessels. It also included a provision for GAO to review the Navy's report. This report (1) assesses the extent to which the Navy's report aligns with current assessments of Arctic threat levels and capabilities required to execute DOD's 2016 Arctic Strategy and (2) describes any current requirements for ice-hardened vessels and DOD's approach for evaluating the capabilities needed as Arctic requirements evolve.

GAO reviewed the Navy's report along with DOD's assessments of Arctic threats and naval capabilities. GAO also reviewed the 2016 DOD Arctic Strategy— the most current strategy, DOD and Department of State information on the freedom of navigation program as well as DOD's processes for developing capabilities and assessing Arctic capability gaps.

GAO is not making any recommendations in this report. DOD provided written technical comments which were incorporated as appropriate.

The Navy's June 2018 report aligns with Department of Defense (DOD) assessments that the Arctic is at low risk for conflict and that DOD has the capabilities to execute the 2016 DOD Arctic Strategy . The June 2018 report also aligns with assessments of Arctic capabilities and gaps in the Navy's 2014 roadmap for implementing the strategy. The June 2018 report states that the Navy can execute the strategy with subsurface, aviation, and surface assets. The report notes the significant limitations for operating surface ships in the Arctic, but states that the Navy has the capabilities required for executing the strategy , and so has no plan to design ice-hardened surface ships. In addition, DOD officials stated that the United States has options other than Navy surface ships for demonstrating the U.S. right to operate in the Arctic, including using Coast Guard vessels, Navy submarines, or military aircraft.

Navy officials said that the Navy does not have a specific requirement for ice-hardening existing vessels or constructing new ones. The Navy plans to continue to use DOD's established process, the Joint Capabilities Integration and Development System to reassess Arctic-related requirements as conditions evolve (see fig.). In October 2017, the Joint Requirements Oversight Council validated U.S. Northern Command's initial capabilities document identifying three gaps in the ability to exercise/deploy, position, and conduct deterrence/decisive operations in ice-diminished Arctic waters. At the time of GAO's review, the Joint Staff had validated the capability gaps, which will now compete for resources with other issues designated for further study. Officials said additional study may identify alternative solutions such as adding capabilities to Coast Guard ships or partnering with allies to achieve common strategic goals in the Arctic.

According to data from the National Snow and Ice Data Center, the  coverage of sea ice in the Arctic has diminished significantly since 1981.  This change could potentially increase commercial and other maritime  activities there and, combined with competing sovereignty claims, lead to  a need for a greater U.S. military and homeland security presence in the  Arctic. The United States, along with Canada, Denmark, Norway, and  Russia, borders the Arctic Ocean. In 2018, the Department of Defense  (DOD) updated its National Defense Strategy emphasizing the need to  deter aggression from Russia or China, both of which have expressed  interest in the Arctic.

DOD’s last Arctic Strategy was published in 2016 and defines the desired  end-state for the Arctic: a secure and stable region where U.S. national  interests are safeguarded, the U.S. homeland is defended, and nations  work cooperatively to address challenges. Multiple DOD entities are  involved in supporting Arctic operations. DOD’s 2016 Arctic Strategy  states that the Commander of the U.S. Northern Command is to advocate  for the DOD capabilities required to operate in the Arctic environment,  supporting DOD Arctic stakeholders in identifying capability requirements  and shortfalls. According to the Navy’s Arctic Roadmap for 2014 to 2030,  the Navy has global leadership responsibilities to provide ready forces for  current operations and contingency response that include the Arctic  Ocean. The Naval Sea Systems Command’s mission includes, among  other things, providing materiel support to the Navy, such as ships and  shipboard combat systems and components; coordinating shipbuilding  and repair; and performing research, development, and test and  evaluation for submarines and other undersea warfare. The Coast Guard  stated in its 2013 Arctic Strategy that, to advance the U.S. interests in the  Arctic region, the Coast Guard must work with stakeholders to promote  maritime safety, security, and environmental responsibility in the region.

The National Defense Authorization Act for Fiscal Year 2018 included a  provision for the Navy to report on its Arctic capabilities. The act also  included a provision that we review the Navy’s report, which we refer to  as the June 2018 report, within 90 days of the report’s issuance. This  report (1) assesses the extent to which the Navy’s June 2018 report  aligns with current Arctic threat level assessments and the capabilities  required to execute DOD’s 2016 Arctic Strategy and (2) describes any  current requirements for ice-hardened vessels and DOD’s approach for  evaluating the capabilities needed as Arctic requirements evolve.

We focused our review on the naval capabilities needed to execute  DOD’s 2016 Arctic Strategy, with a focus on surface capabilities. For  objective one, two analysts independently assessed the June 2018 report  against the capabilities needed to execute DOD’s 2016 Arctic Strategy  and the five elements required by the National Defense Authorization Act  for Fiscal Year 2018. A third analyst reviewed these assessments and  reconciled any discrepancies. We conducted interviews with DOD and  Navy officials to identify current naval capabilities used to meet Arctic  requirements and attended threat briefings and conducted interviews at  the U.S. Northern Command and at the Office of Naval Intelligence to  identify the current threat status in the Arctic region. We assessed the  June 2018 report against the current naval capabilities and threat status  identified in those interviews and briefings. We reviewed The United  States Navy Arctic Roadmap for 2014 to 2030 that the Office of the Chief  of Naval Operations issued in 2014 to provide guidance to prepare the  Navy to respond effectively to future Arctic region contingencies,  delineate the Navy’s leadership role, and articulate the Navy’s support to  achieve national priorities in the Arctic. We reviewed information from  DOD and the Department of State about the freedom of navigation  program established in 1979 to maintain the global mobility of U.S. forces  and unimpeded commerce. We also interviewed officials about the need  for that program in the Arctic and about the program’s benefits and risks.  We reviewed a Navy technical document on operating ships in polar  environments, and interviewed Naval Sea Systems Command and Coast  Guard officials on what is known about the cost and feasibility of “ice- hardening” existing ships for Arctic operations.

For objective two, to determine how DOD identifies its evolving  capabilities and the requirements of the Arctic, we reviewed the Chairman  of the Joint Chiefs of Staff Instruction 3170.01I, Joint Capabilities  Integration and Development System (JCIDS), which establishes the  process for identifying, assessing, validating, and prioritizing joint military  capability requirements. We also reviewed the U.S. Northern  Command’s fiscal year 2017 assessment of capability gaps related to the  Arctic and discussed with U.S. Northern Command officials the capability  gaps identified using this process. We did not validate the underlying data  or assess the methodologies used in DOD’s models and predictions. For  a list of organizations we contacted for this review, see appendix I.

We conducted this performance audit from January 2018 to November  2018 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.

Scientific research on and projections of the changes taking place in the  Arctic vary, but there is a general consensus that the Arctic is warming  and that its sea ice is diminishing. For example, scientists at the  National Snow and Ice Data Center reported that for 2018 the minimum  amount of sea ice coverage in the Arctic—typically occurring in  September each year—was the sixth lowest in the satellite record and  656,000 square miles fewer than the mean for the 1981 through 2010  time frame. Further, the scientists found that the 12 lowest recordings of  September ice coverage on satellite record have all occurred in the past  12 years. Figure 1 shows the sea ice coverage (i.e., extent) in the Arctic  for September 2018 compared with the median ice edge for 1981 through  2010.

While much of the Arctic Ocean remains ice-covered for the majority of  the year, most scientific estimates predict there will be a continued  decrease in sea ice coverage in the Arctic Ocean in the summer  sometime in the next 20 to 40 years. According to the Navy’s Arctic  Roadmap for 2014 to 2030, while there may be less sea ice there in the  future, the ice that remains will continue to be a challenge to those  operating in the area.

Most commercial ship activity in the Arctic is regional—shipping into or  out of the Arctic, mainly in support of commercial activity—not trans- Arctic. However, according to the official Navy estimate from 2013, the  decreasing coverage of sea ice will result in more open water allowing  increased maritime activity along three trans-Arctic routes from 2012  through 2030: the Northern Sea Route, the Northwest Passage, and the  Trans-Polar Route (see fig. 2). This development could, for example,  reduce by thousands of miles and by several days of travel the shipping  of goods between countries in Asia and North America.

Increased economic activity in the Arctic could potentially increase the  need for military capabilities there to safeguard U.S. interests. For  example, estimates of significant oil, gas, and mineral deposits in the  Arctic have increased the interest in exploration opportunities in the  region. These resources include an estimated 13 percent of the world’s  undiscovered oil; 30 percent of the world’s undiscovered gas; and  approximately $1 trillion of minerals including gold, zinc, nickel, and  platinum. According to information provided by the Department of State,  the vast majority of these resources are within the undisputed continental  shelf of the respective coastal states. Officials from the Department of  State stated that disputed claims related to the small remaining portions  of the Arctic seabed may be addressed within the international framework  established by the United Nations Convention on the Law of the Sea.

However, as we reported in 2015, even with the changing climate and  growing interest in the region, several enduring characteristics will  continue to provide challenges to surface navigation in the Arctic for the  foreseeable future. These include large amounts of winter ice and  increased movement of ice from spring to fall. Increased movement of  sea ice makes its location less predictable, a situation that increases the  risk that ships can become trapped or damaged by ice impacts. In  addition, the lack of infrastructure in the Arctic region affects the reliability  of shipping through the area. Economic factors such as risk costs, as well  as changes in the shipping market resulting from the Panama Canal  expansion may also affect the amount of shipping along these routes. As  figure 3 shows, even as the seasonal ice decreases over time, the Navy  has projected that the Arctic will remain impassable for most commercial  ships for most of the year from 2012 through 2030. These factors  combined are likely to affect the pace at which commercial activity will  increase.

We have previously examined emerging issues and challenges for the  United States in the Arctic. See figure 4 for a timeline of our prior reports  related to Arctic issues. We also include a list of our prior work related to  the Arctic at the end of this report.

The Navy’s Report Aligns with Current Assessments of Arctic Threat Levels and Capabilities Required to Execute DOD’s Arctic Strategy

The Navy’s June 2018 report aligns with DOD’s assessments that the  Arctic threat level remains low and that DOD has the capabilities required  to execute its 2016 DOD Arctic Strategy. Specifically, the June 2018  report and the information it provides for each of the reporting elements  discusses how the department can execute the 2016 DOD Arctic  Strategy.

The strategy contains two overarching objectives: to (1) ensure security,  support safety, and promote defense cooperation and (2) prepare to  respond to a wide range of challenges and contingencies to maintain  stability in the region. These objectives reflect DOD’s assessment that  there is a low level of military threat in the Arctic, as well as the stated  commitment of the Arctic nations to work within a common framework of  diplomatic engagement. In the strategy, DOD identifies the types of  investments that will need to be made over time as activity in the region  increases; however, DOD also discusses the importance of assessing the  needs in the Arctic and of balancing potential Arctic-specific capabilities  investments against other national security priorities and fiscal realities.  The Arctic threat assessment briefings we received from officials at the  U.S. Northern Command and the Office of Naval Intelligence also  reflected the low risk for conflict in the Arctic referenced in the Navy’s  June 2018 report. Below, we summarize the Navy’s response to each  reporting element, and our evaluation of whether the response aligns with  current assessments of Arctic threat levels and capabilities required to  execute DOD’s 2016 Arctic Strategy.

Report Provides Information on Current Naval Capabilities in the Arctic That Align with DOD’s Strategy

Reporting Element One: The Navy was required to report on the current naval  capabilities of the Department of Defense in the Arctic region, with a particular  emphasis on surface capabilities.

The June 2018 report provides information on this required element, with  the Navy stating that it relies on the submarine force as well as on  aviation assets and surface operations when necessary to operate in the  Arctic. These capabilities in the Arctic region are consistent with those  identified in The United States Navy Arctic Roadmap for 2014 to 2030 to  execute the 2016 DOD Arctic Strategy, and as corroborated in our  discussions with U.S. Northern Command and Navy officials.

In addition, the Navy discusses the significant limitations of its surface  ships for Arctic operations in the June 2018 report. The limitations  identified are consistent with information contained in the U.S. Navy Cold  Weather Handbook for Surface Ships and with information we discussed  with Naval Sea Systems Command officials who oversee modifications to  the fleet and the acquisition of new ships. For example, Navy officials told  us that top-side icing has detrimental effects on ships. As sea spray  accumulates on a ship deck and freezes, a ship can lose some of the  capabilities of its external sensors and radars and a ship’s stability in the  water decreases as the ship’s center of gravity becomes top heavy. Navy  and Coast Guard officials told us that while the Coast Guard regularly  operates in the Arctic given its ice-breaking and maritime safety missions,  among others, Navy surface ships have not been designed to maneuver  and operate in icy waters. Although some of the Navy’s T-class ships  have some capability to operate in light or broken first-year ice due to the  inherent strength of their hulls, traditional surface combatant ships (e.g.,  Cruisers, Destroyers, or Frigates) are not designed to operate in icy  waters.

Report Provides Information on the Gaps between Current Naval Capabilities and the Ability to Execute DOD’s Strategy

Reporting Element Two: The Navy was required to report on any gaps that exist  between the current naval capabilities and the ability of the department to fully execute  its updated strategy for the Arctic region.

The June 2018 report provides information on this required element, with  the Navy stating that the department can execute the 2016 DOD Arctic  Strategy with current naval capabilities. The June 2018 report is similarly  aligned with Navy assessments of Arctic capabilities and gaps contained  in its plan, The United States Navy Arctic Roadmap for 2014 to 2030 that  the Office of the Chief of Naval Operations issued in February 2014. This  plan provides guidance to prepare the Navy to respond effectively to  future Arctic Region contingencies, delineates the Navy’s leadership role,  and articulates the Navy’s support to achieve national priorities in the  region. At the time of our review, DOD was in the process of drafting  another report—on DOD arctic capability and resource gaps—as required  by section 1054 of the National Defense Authorization Act for Fiscal Year  2018. In addition, according to Navy officials, the Navy was also drafting  its Arctic Strategic Outlook, which is a follow-up to The United States  Navy Arctic Roadmap for 2014 to 2030. According to DOD and Navy  officials, both forthcoming reports will focus on contextualizing Arctic  needs within the framework of the 2018 National Defense Strategy.  Because these efforts were not complete at the time of our review, we  were unable to determine whether the Navy’s June 2018 report aligns  with these assessments.

Report Provides Information on Any Gaps in Naval Capabilities Requiring the Ice- Hardening of Existing Vessels or the Construction of New Vessels to Achieve DOD’s Strategy

Reporting Element Three: The Navy was required to report on any gaps in the current  naval capabilities that require ice-hardening of existing vessels or the construction of  new vessels to preserve freedom of navigation in the Arctic region whenever and  wherever necessary.

The June 2018 report provides information on this required element, with  the Navy stating that there are currently no validated capability gaps that  require the Navy to ice-harden existing vessels or construct new ice- capable vessels to preserve freedom of navigation in the Arctic.  Furthermore, the Navy stated that its current assets are sufficient to  execute the 2016 DOD Arctic Strategy. As noted above, freedom of  navigation operations are undertaken to, among other things, promote  maritime stability and to challenge excessive sovereignty claims. In  addition, DOD officials stated that the United States already has options  other than Navy surface ships for demonstrating the United States’  freedom to operate in the Arctic, including using Coast Guard vessels,  Navy submarines, or military aircraft.

Report Provides Information on Navy’s Analysis and Recommendation for Ice- Hardening Vessels to Achieve DOD’s Strategy

Reporting Elements Four and Five: The Navy was required to provide an analysis and  recommendation of which Navy vessels could be ice-hardened to effectively preserve  freedom of navigation in the Arctic region when and where necessary, in all seasons  and weather conditions, and an analysis of any cost increases or schedule adjustments  that may result from ice-hardening existing or new Navy vessels.

The June 2018 report provides some information on these required  elements, with the Navy stating that it is not pursuing ice-hardening or the  winterization of surface ships. According to the Navy, because there is no  specific capability requirement for the Navy to ice-harden ships, the report  does not list or name potential ice-hardening candidates among existing  vessels or provide cost or schedule estimates for ice-hardening vessels.  Officials with the Naval Sea Systems Command, which develops cost and  schedule estimates for ship modifications and new construction, told us  that they had not conducted life-cycle cost studies for ice-hardening  existing ships because there is no capability requirement for an ice- hardened ship and, therefore, no ship design on which to base such a  study or estimate.

Furthermore, the June 2018 report states that the Navy is leveraging  cooperative research with international partner-nations such as Canada,  Denmark, Finland, and Norway, to better understand how other Arctic  nations are meeting additional requirements for Arctic operations. Navy  officials from the Naval Sea Systems Command stated that ships built to  operate in ice and extreme cold environments have unique features,  including stronger, thicker construction of all portions of the hull that  would come into contact with ice; different hull form design; redesigned  propellers constructed of higher than traditional strength material;  increased strength ship parts, such as rudders and seawater intakes and  discharges designed to resist the formation or accumulation of ice; and  more powerful heating and ventilation to accommodate sustained  operations in extreme cold environments, among other things. They also  noted that research completed to date has advanced the Navy’s  knowledge in several of these areas including hull form and propeller  design.

Navy officials estimated that a new ship design might require 20 years to  reach initial operational capability. They noted the process might take  only 10 years if the Navy can leverage an ongoing program, such as the  DDG-51 Class program. Navy officials cautioned that the combination of  features that enable ice-capable ships to sustain operating in extreme  cold environments could compromise other performance areas such as  speed, range, and ship motion. Officials told us that this would add to the  Navy’s already strained efforts to maintain existing global naval presence  requirements.

Although the June 2018 report did not discuss any cost and schedule  adjustments that might arise from ice-hardening or new ship construction,  we have previously reported that the Navy has faced challenges meeting  its shipbuilding cost, schedule, and performance goals over the past  decade. Specifically, we found that the 11 lead ships most recently  delivered to the Navy cost $8 billion more to construct than initially  budgeted for. Navy officials stated that the Navy contractor construction  yards currently lack expertise in the design for construction of winterized,  ice-capable surface combatant and amphibious warfare ships.  Accordingly ice-hardening and winterization design practices could  introduce cost and schedule risk, challenging the execution of an ice- hardened new construction ship building program for an ice-capable ship.  If the Navy executes this potential program without the requisite  knowledge at key points it could be at risk of cost and schedule growth  that we have seen in recent Navy shipbuilding programs. The Navy has  faced these challenges in part because the department has proceeded  with construction prior to completing technology development and ship  design. We have found that successful ship building programs are based  on sound business cases, starting with the lead ship, and on the  attainment of critical levels of knowledge at key points in the process prior  to making significant investments.

The Navy Does Not Have a Capability Requirement to Ice- Harden Existing Vessels or Construct New Ones and Is Evaluating Arctic- Related Capabilities Using the Established DOD Process

Navy officials said that the Navy does not currently have a specific  capability requirement for ice-hardening existing vessels or for the  construction of new ones, and stated that the Navy or Joint Force is  unlikely to produce such a requirement in the near term. Navy officials  told us that the Navy will continue to use DOD’s established process, the  Joint Capabilities Integration and Development System (JCIDS), which  governs the department’s requirements process, to assess Arctic-related  capability requirements in the near and long term (see fig. 5). All DOD  components use the JCIDS process or variations of the process within  their organizations to identify, assess, validate, and prioritize joint military  requirements.

Before starting the JCIDS process, the military services, combatant  commanders, and other DOD components conduct capabilities-based  assessments or other studies to assess capability requirements and  associated capability gaps and the associated risks. In October 2017, the  Joint Requirements Oversight Council (JROC) validated U.S. Northern  Command’s initial capabilities document identifying three gaps in the  ability to exercise/deploy, position, and conduct deterrence/decisive  operations in ice-diminished Arctic waters. At the time of our review, the  JROC had reviewed and validated the U.S. Northern Command’s Arctic  initial capabilities document and designated it for further study by the  Navy. The validation of an initial capabilities document by the JROC is  an early part of the JCIDS process, and informs updates to capability  requirement documents related to specific materiel and nonmateriel  capability solutions to be pursued.

A Navy official stated that the capability gaps identified in the U.S.  Northern Command’s validated initial capabilities document will now  compete for resources with other issues designated for study across the  Navy. According to a Navy official, whenever the Navy initiates a study,  this triggers the analysis of alternatives phase of the JCIDS process.  Under this process, each alternative would need to be specifically  evaluated for its costs and benefits. DOD officials noted that there are  several analytical steps in the JCIDS process during which potential  solutions for any identified gaps are analyzed. They told us that potential  solutions might also include alternatives other than ice-hardening or new  ship construction, such as adding capabilities to Coast Guard ships or  partnering with allies to achieve common strategic goals in the Arctic.

Even as the seasonal ice decreases over time, according to Navy  officials, the Arctic will remain impassable for most commercial ships for  most of the year. For these reasons, projections of increased Arctic sea  activity remain uncertain. DOD, U.S. Northern Command, Navy, and  Coast Guard officials told us that even as Arctic maritime activity is  expected to increase, several enduring characteristics will continue to  provide challenges to surface navigation in the Arctic for the foreseeable  future. These challenges include large amounts of winter ice and  increased movement of ice from spring to fall. As mentioned earlier, the  increased movement of sea ice makes its location less predictable, a  situation that is likely to increase the risk that ships can become trapped  or damaged by ice impacts. Coast Guard officials noted that a  challenging environment like the Arctic may result in a higher likelihood of  incidents occurring. Further, responding to incidents with search and  rescue operations are riskier to execute than in non-polar environments.  In addition, the lack of infrastructure and logistical support in the Arctic  affects maritime activities through that region.

We are not making any recommendations in this report. We provided a  draft of our report to DOD, Department of Homeland Security, and the  Department of State for comment. DOD, Department of Homeland  Security, and Department of State provided technical comments, which  we incorporated into this report as appropriate.

We are sending copies of this report to the appropriate congressional  committees. We are also sending copies to the Secretary of Defense,  Secretary of State, and the Secretary of Homeland Security. In addition,  this report will be available at no charge on our website at  http://www.gao.gov.

If you or your staff have questions about this report, please contact me at  (202) 512-3489 or pendletonj@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. GAO staff who made key contributions to this report are  listed in appendix II.

Appendix I: Organizations We Interviewed

Appendix II: GAO Contact and Staff Acknowledgments

In addition to the contact named above, Suzanne Wren (Assistant  Director), Delia Zee (Analyst-in-Charge), John Beauchamp, Mae Jones,  Amie Lesser, Ned Malone, and Shahrzad Nikoo made key contributions  to this report.

Coast Guard Acquisitions: Polar Icebreaker Program Needs to Address  Risks before Committing Resources. GAO-18-600. Washington, D.C.:  September 4, 2018.

Navy Shipbuilding: Past Performance Provides Valuable Lessons for  Future Investments. GAO-18-238SP. Washington, D.C.: June 6, 2018.

Coast Guard Acquisitions: Status of Coast Guard’s Heavy Polar  Icebreaker Acquisition. GAO-18-385R. Washington, D.C.: April 13, 2018.

Coast Guard: Status of Polar Icebreaking Fleet Capability and  Recapitalization Plan. GAO-17-698R. Washington, D.C.: September 25,  2017.

High-Risk Series: Progress on Many High-Risk Areas, While Substantial  Efforts Needed on Others. GAO-17-317. Washington, D.C.: February 15,  2017.

Arctic Planning: DOD Expects to Play a Supporting Role to Other Federal  Agencies and Has Efforts Under Way to Address Capability Needs and  Update Plans. GAO-15-566. Washington, D.C.: June 19, 2015.

Climate Change Adaptation: DOD Can Improve Infrastructure Planning  and Processes to Better Account for Potential Impacts. GAO-14-446.  Washington, D.C.: May 30, 2014.

Arctic Issues: Better Direction and Management of Voluntary  Recommendations Could Enhance U.S. Arctic Council Participation.  GAO-14-435. Washington, D.C.: May 16, 2014.

Maritime Infrastructure: Key Issues Related to Commercial Activity in the  U.S. Arctic over the Next Decade. GAO-14-299. Washington, D.C.: March  19, 2014.

Managing for Results: Implementation Approaches Used to Enhance  Collaboration in Interagency Groups. GAO-14-220. Washington, D.C.:  February 14, 2014.

Managing for Results: Key Considerations for Implementing Interagency  Collaborative Mechanisms. GAO-12-1022. Washington, D.C.: September  27, 2012.

Arctic Capabilities: DOD Addressed Many Specified Reporting Elements  in Its 2011 Arctic Report but Should Take Steps to Meet Near- and Long- term Needs. GAO-12-180. Washington, D.C.: January 13, 2012.

Coast Guard: Efforts to Identify Arctic Requirements Are Ongoing, but  More Communication about Agency Planning Efforts Would Be  Beneficial. GAO-10-870. Washington, D.C.: September 15, 2010.

Alaska Native Villages: Limited Progress Has Been Made on Relocating  Villages Threatened by Flooding and Erosion. GAO-09-551. Washington,  D.C.: June 3, 2009.


Low-Income Housing Tax Credit: Actions Needed to Strengthen Oversight and Accountability

The LIHTC program, established under the Tax Reform Act of 1986, is the largest source of federal assistance for developing affordable rental housing and will represent an estimated $8.5 billion in forgone revenue in 2017. LIHTC encourages private-equity investment in low-income rental housing through tax credits. The program is administered by IRS and allocating agencies, which are typically state or local housing finance agencies established to meet affordable housing needs of their jurisdictions. Responsibilities of allocating agencies (in Section 42 of the Internal Revenue Code and regulations of the Department of the Treasury) encompass awarding credits, assessing the reasonableness of project costs, and monitoring projects.

In this testimony, GAO discusses (1) how allocating agencies implement federal requirements for awarding LIHTCs, assess reasonableness of property costs, and monitor properties' ongoing compliance; and (2) IRS oversight of the LIHTC program. This statement is based primarily on three reports GAO issued in July 2015 ( GAO-15-330 ), May 2016 ( GAO-16-360 ), and February 2017 ( GAO-17-285R ). GAO also updated the status of recommendations made in these reports by reviewing new or revised IRS policies, procedures, and reports and interviewing IRS officials.

In its May 2016 report on the Low-Income Housing Tax Credit (LIHTC) program of the Internal Revenue Service (IRS), GAO found that state and local housing finance agencies (allocating agencies) implemented requirements for allocating credits, reviewing costs, and monitoring projects in varying ways. Moreover, some allocating agencies' day-to-day practices to administer LIHTCs also raised concerns. For example,

qualified allocation plans (developed by 58 allocating agencies) that GAO analyzed did not always mention all selection criteria and preferences that Section 42 of the Internal Revenue Code requires; and

allocating agencies could increase (boost) the eligible basis used to determine allocation amounts for certain buildings if needed for financial feasibility. However, they were not required to document the justification for the increases. The criteria used to award boosts varied, with some allocating agencies allowing boosts for specific types of projects and one allowing boosts for all projects in its state.

In its 2015 and 2016 reports, GAO found IRS oversight of the LIHTC program was minimal. Additionally, IRS collected little data on or performed limited analysis of compliance in the program. Specifically, GAO found that

Since 1986, IRS conducted seven audits of the 58 allocating agencies we reviewed. Reasons for the minimal oversight may include LIHTC being viewed as a peripheral program in IRS in terms of its mission and priorities for resources and staffing.

IRS had not reviewed the criteria allocating agencies used to award discretionary basis “boosts,” which raised concerns about oversubsidizing projects (and reducing the number of projects funded).

IRS guidance to allocating agencies on reporting noncompliance was conflicting. As a result, allocating agencies' reporting of property noncompliance was inconsistent.

IRS had not participated in and leveraged the work of the physical inspection initiative of the Rental Policy Working Group—established to better align the operations of federal rental assistance programs—to augment its databases with physical inspection data on LIHTC properties that the Department of Housing and Urban Development (HUD) maintains.

In its prior reports, GAO made a total of four recommendations to IRS. As of July 2017, IRS had implemented one recommendation to include relevant IRS staff in the working group. IRS has not implemented the remaining three recommendations, including improving the data quality of its LIHTC database, clarifying guidance to agencies on reporting noncompliance, and evaluating how the information HUD collects could be used for identifying noncompliance issues. In addition, because of the limited oversight of LIHTC, in its 2015 report GAO asked that Congress consider designating certain oversight responsibilities to HUD because the agency has experience working with allocating agencies and has processes in place to oversee the agencies. As of July 2017, Congress had not enacted legislation to give HUD an oversight role for LIHTC.

I am pleased to be here today to discuss our work on the Low-Income  Housing Tax Credit (LIHTC) program administered by the Internal  Revenue Service (IRS) and allocating agencies, which typically are state  or local authorities established to meet the affordable housing needs of  the residents of their states. LIHTC, established under the Tax Reform  Act of 1986, is the largest source of federal assistance for developing  affordable rental housing. Each state receives an annual allocation of  LIHTCs, determined by statutory formula. Allocating agencies then  competitively award the tax credits to owners of qualified rental housing  projects that reserve all or a portion of their units for low-income tenants.  In 2017, LIHTC will represent an estimated $8.5 billion in forgone revenue  to the federal government.

My statement today will focus on (1) how allocating agencies implement  federal requirements for awarding LIHTCs, assess reasonableness of  property costs, and monitor properties’ ongoing compliance; and (2) IRS’s  oversight of the LIHTC program. This statement is based primarily on  three reports we issued in July 2015, May 2016, and February 2017. To  conduct the work for the three reports, among other methodologies, we  reviewed IRS regulations and guidance, including how allocating  agencies and taxpayers are selected for review. We also conducted a  structured analysis of 58 Qualified Allocation Plans (QAP), which outline  processes for awarding LIHTCs and compliance monitoring  responsibilities. We selected a nonprobability, nongeneralizable sample  of nine allocating agencies for site visits, and during these visits, we  reviewed files for randomly selected housing developments to determine  how each agency addressed federal requirements for awarding LIHTCs,  assessed the reasonableness of development costs, and monitored  properties’ compliance with program requirements. We also interviewed officials from IRS, the Department of the Treasury (Treasury), the  Department of Housing and Urban Development (HUD), the National  Council of State Housing Agencies (NCSHA), and selected allocating  agencies. For our 2017 report, we gathered data for 32 syndicators in  total—31 through a no-cost contract with CohnReznick, a national  accounting firm—and one survey response directly from a syndicator.  More detailed information on our scope and methodology can be found in  each of the reports cited throughout this testimony. To update the status  of recommendations from our 2015 and 2016 reports, we reviewed new  or revised IRS policies, procedures, and reports and interviewed IRS  officials.

We performed the work on which this statement is based in accordance  with generally accepted government auditing standards. Those standards  require that we plan and perform the audit to obtain sufficient, appropriate  evidence to provide a reasonable basis for our findings and conclusions  based on our audit objectives. We believe that the evidence obtained  provides a reasonable basis for our findings and conclusions based on  our audit objectives.

Overview of IRS Administration of LIHTC Program

IRS administration of the LIHTC program involves overseeing compliance  on the part of allocating agencies and taxpayers and developing and  publishing regulations and guidance. IRS is responsible for reviewing  LIHTC information on three IRS forms that are the basis of LIHTC  program reporting and then determining whether program requirements  have been met. Taxpayer noncompliance with LIHTC requirements may  result in IRS denying claims for the credit in the current year or  recapturing—taking back—credits claimed in prior years.

Published guidance may include revenue rulings and procedures, notices,  and announcements. Other guidance for the program includes an Audit  Technique Guide for Completing Form 8823 that includes specific  instructions for allocating agencies, including when site visits and file  reviews are to be performed, and guidelines for determining  noncompliance in areas such as health and safety standards, rent  ceilings, income limits, and tenant qualifications.

State and local allocating agencies are responsible for day-to-day  administration of the LIHTC program based on Section 42 of the Internal  Revenue Code and Treasury regulations. More specifically, allocating  agencies are responsible for  Awarding tax credits. Each state receives an annual allocation of  LIHTCs, determined by statutory formula. Allocating agencies then  competitively award the tax credits to owners of qualified rental housing  projects that reserve all or a portion of their units for low-income tenants,  consistent with the agencies’ QAPs. Developers typically attempt to  obtain funding for their projects by attracting third-party investors willing to  contribute equity to the projects; the project investors then can claim the  tax credits.

Monitoring costs. Section 42 states that allocating agencies must  consider the reasonableness of costs and their uses for proposed LIHTC  projects, allows for agency discretion in making this determination, and  also states that credits allocated to a project may not exceed the amount  necessary to assure its feasibility and its viability as a low-income housing  project. However, Section 42 does not provide a definition or offer  guidance on determining how to calculate these amounts.

Monitoring compliance. After credits are awarded, Treasury regulations  state that allocating agencies must conduct regular site visits to physically  inspect units and review tenant files for eligibility information. The  agencies also have reporting and notification requirements. For example,  allocating agencies must notify IRS of any noncompliance found during  inspections and ensure that owners of LIHTC properties annually certify  they met certain requirements for the preceding 12-month period.

Developers of awarded projects typically attempt to obtain funding for  their projects by attracting third-parties willing to invest in the project in  exchange for the ability to claim tax credits. The developer sells an  ownership interest in the project to one or more investors, or in many  instances, to a fund managed by a syndicator who acts as an  intermediary between the developer and investors.

Investors and syndicators play several roles in the LIHTC market. For  example, syndicators help initially connect investors and developers and  oversee acquisition of projects. Once a project is acquired, syndicators  perform ongoing monitoring and asset management to help ensure the  project complies with LIHTC requirements and is financially sound.  Syndicators attempt to identify potential problems and intercede if  necessary, such as replacing under- or nonperforming general partners,  and may use their own reserves to help resolve problems. In exchange  for these services, syndicators typically are compensated through an  initial acquisition fee—usually a percentage of the gross equity raised— and an annual asset management fee.

Syndicators that we surveyed for our 2017 report were nonprofit or for- profit entities, generally had multistate operations, and averaged more  than 20 years of experience with the LIHTC program. Of the 32  syndicators we surveyed, the syndicators collectively had raised more  than $100 billion in LIHTC equity since 1986, helping to fund more than  20,000 properties and about 1.4 million units placed-in-service through  2014. Projects for which these syndicators raised equity in 2005–2014  represented an estimated 75 percent of all LIHTC properties placed-in- service in that period.

Selected Allocating Agencies Implemented Differing Practices for Key LIHTC Requirements

As we reported in 2016, allocating agencies implemented requirements  for QAPs in varying ways and had processes in place to meet  requirements for credit awards. Allocating agencies also had procedures  to assess costs, but determined award amounts for projects differently,  used various cost limits and benchmarks to determine reasonableness of  costs, and used widely varying criteria for basis boosts. Agencies also  had processes in place to monitor compliance. However, some of these  practices raised concerns.

Agencies Implemented Requirements for Allocation Plans and Award Credits in Varying Ways

In our 2016 report, we generally found that allocating agencies  implemented requirements for QAPs in varying ways and had processes  in place to meet requirements for awarding the tax credit.

Based on our 2016 review of 58 QAPs and our nine site visits, we  found the QAPs did not always contain, address, or mention  preferences and selection criteria required in Section 42. Rather,  some allocating agencies incorporated the information into other  LIHTC program documents, or implemented the requirements in  practice.

While Section 42 specifies some selection criteria (such as project  location or tenant populations with special housing needs), it also  more broadly states that a QAP set forth selection criteria “appropriate  to local conditions.” As a result, allocating agencies have the flexibility  to create their own methods and rating systems for evaluating  applicants. We found that nearly all the allocating agencies that we  reviewed used points or a threshold system for evaluating applicants.  They used criteria such as qualifications of the development team,  cost effectiveness, or leveraging of funds from other federal or state  programs.

According to Section 42, allocating agencies must notify the chief  executive officer (or the equivalent) of the local jurisdiction in which  the project is to be located. However, some agencies imposed an  additional requirement of letters of support from local officials.  Specifically, as of 2013, we found that of the 58 agencies in our  review,12 agencies noted that their review or approval of applications  was contingent on letters of support, and another 10 agencies  awarded points for letters of local support. HUD officials have cited  fair housing concerns in relation to any preferences or requirements  for local approval or support because of the discriminatory influence  these factors could have on where affordable housing is built. In  December 2016, IRS issued a revenue ruling that clarified that  Section 42 neither requires nor encourages allocating agencies to  reject all proposals that do not obtain the approval of the locality  where the project developer proposes to place the project.

Allocating agencies we visited for our 2016 report had processes in place  to meet other Section 42 requirements, including awarding credit to  nonprofits and long-term affordability of projects. Allocating agencies  must allocate at least 10 percent of the state housing credit ceiling to  projects involving qualified nonprofit organizations. All nine allocating  agencies we visited had a set-aside of at least 10 percent of credits to be  awarded to projects involving nonprofits. Section 42 also requires  allocating agencies to execute an extended low-income housing  commitment of at least 30 years before a building can receive credits. For  example, one allocating agency we visited required developers to sign  agreements for longer extended-use periods, while some agencies  awarded points to applications whose developers elect longer periods.

Agencies We Reviewed Had Procedures to Assess Costs and Used Widely Varying Criteria for Basis Boosts

Allocating agencies we reviewed for our 2016 report had procedures to  assess costs, but determined award amounts for projects differently and  used various cost limits and benchmarks to determine reasonableness of  costs. All nine allocating agencies we visited required applicants to submit  detailed cost and funding estimates, an explanation of sources and uses,  and expected revenues as part of their applications. These costs were  then evaluated to determine a project’s eligible basis (total allowable  costs associated with depreciable costs in the project), which in turn  determined the qualified basis and ultimately the amount of tax credits to  be awarded.

Reasonableness of costs. We found that allocating agencies had  different ways for determining the reasonableness of project costs. Based  on our analysis of 58 QAPs and our nine site visits, agencies had  established various limits against which to evaluate the reasonableness  of submitted costs, such as applying limits on development costs, total  credit awards, developer fees, and builder’s fees. Section 42 does not  provide a definition of reasonableness of costs, giving allocating agencies  discretion on how best to determine what costs are appropriate for their  respective localities.

Discretionary basis boosts. Allocating agencies commonly “boosted”  the basis for projects, but used widely varying criteria for doing so.  Section 42 notes that an increase or “boost” of up to 130 percent in the  eligible basis can be awarded by an allocating agency to a housing  development in a qualified census tract or difficult development area.

According to our QAP analysis, 44 of 58 plans we reviewed included  criteria for awarding discretionary basis boosts, with 16 plans explicitly  specifying the use of basis boosts for projects as needed for financial or  economic feasibility. The discretionary boosts were applied to different  types of projects and on different scales (for example, statewide or  citywide).

For example, we found one development that received a boost to the  eligible basis for having received certain green building certifications,  although the applicant did not demonstrate financial need or request  the boost. The allocating agency told us that all projects with specified  green building certifications received the boost automatically, as laid  out in its QAP. At the time of our review, agency officials said that the  agency had changed its practices to prevent automatic basis boosts  from being applied and required additional checks for financial need.

In another QAP we reviewed, one agency described an automatic 130  percent statewide boost for all LIHTC developments. According to the  officials, the automatic statewide boost remained in effect because  officials made the determination that nearly all projects would need it  for financial feasibility.

Section 42 requires that allocating agencies determine that “discretionary  basis boosts” were necessary for buildings to be financially feasible  before granting them to developers. Section 42 does not require  allocating agencies to document their analysis for financial feasibility (with  or without the basis boost). However, legislative history for the Housing  and Economic Recovery Act of 2008 included expectations that allocating  agencies would set standards in their QAPs for which projects would be  allocated additional credits, communicate the reasons for designating  such criteria, and publicly express the basis for allocating additional  credits to a project. In addition, NCSHA (a nonprofit advocating for state  allocating agencies) recommends that allocating agencies set standards  in their QAPs to determine eligibility for discretionary basis boosts and  make the determinations publicly available.

Agencies We Visited Had Processes for Monitoring Compliance

In our 2016 report we found that the allocating agencies we visited had  processes for and conducted compliance monitoring of projects  consistent with Section 42 and Treasury regulations. Treasury regulations  require allocating agencies to conduct on-site physical inspections for at  least 20 percent of the project’s low-income units and file reviews for the  tenants in these units at least once every 3 years. In addition, allocating  agencies must annually review owner certifications that affirm that  properties continue to meet LIHTC program requirements.

Allocating agencies we visited followed regulatory requirements on  when to conduct physical inspections and tenant file reviews.

Allocating agencies we visited generally used electronic databases to  track the frequency of inspections, file reviews, and certifications,  although most of these agencies documented these reviews on paper.

All the allocating agencies we visited had inspection and review  processes in place to monitor projects following the 15-year  compliance period, as required under Section 42. Allocating agencies  must execute an extended low-income housing commitment to remain  affordable for a minimum of 30 years before a tax credit project can  receive credits. After the compliance period is over, the obligation for  allocating agencies to report to IRS on compliance issues ends and  investors are no longer at risk for tax credit recapture.

Our prior reports found IRS conducted few reviews of allocating agencies  and had not reviewed how agencies determined basis boosts. Data on  noncompliance were not reliable and IRS used little of the reported  program information. IRS had not directly participated in an interagency  initiative to augment HUD’s databases with LIHTC property inspection  data. Both our 2015 and 2016 reports concluded that opportunities  existed to enhance oversight of the LIHTC program, specifically by  leveraging the knowledge and experience of HUD.

IRS Conducted Few Reviews of Allocating Agencies and Had Not Reviewed How Agencies Determined Basis Boosts

Few reviews of allocating agencies. In our 2015 report, we found that  IRS had conducted seven audits (reviews) of allocating agencies from  1986 (inception of the program) through May 2015. In the audits, IRS  found issues related to QAPs, including missing preferences and  selection criteria.

But in both our 2015 and 2016 reports, IRS officials stated that they did  not regard a regular review of QAPs as part of their responsibilities as  outlined in Section 42 and therefore did not regularly review the plans.  IRS officials said that allocating agencies have primary responsibility to  ensure that the plans meet Section 42 preferences and selection criteria.  IRS officials noted that review of a QAP to determine if the plan  incorporated the elements specified in Section 42 could occur if IRS were  to audit an allocating agency.

No review of agencies’ discretionary basis boosts. In our 2016 report,  we found IRS had not reviewed the criteria allocating agencies used to  award discretionary basis boosts. The use of basis boosts has  implications for LIHTC housing production because of the risk of  oversubsidizing projects, which would reduce the amount of the  remaining allocable subsidies and yield fewer LIHTC projects overall  within a state.

IRS also had not provided guidance to agencies on how to determine the  need for the additional basis to make projects financially feasible. IRS  officials told us that Section 42 gives allocating agencies the discretion to  determine if projects receive a basis boost and does not require  documentation of financial feasibility. Additionally, IRS officials explained  that because the overall amount of subsidies allocated to a state is  limited, the inherent structure of the program discourages states from  oversubsidizing projects. However, during our 2016 review, we observed  a range of practices for awarding discretionary basis boosts, including a  blanket basis boost that could result in fewer projects being subsidized  and provide more credits than necessary for financial feasibility. We  concluded that because IRS did not regularly review QAPs, many of  which list criteria for discretionary basis boosts, IRS was unable to  determine the extent to which agency policies could result in  oversubsidizing of projects.

Some Program Data Were Not Reliable and IRS Used Little of Reported Program Information

Unreliable data. We reported in 2015 that IRS had not comprehensively  captured information reported for the program in its Low-Income Housing  Credit database and the existing data were not complete and reliable. IRS  guidance requires the collection of data on the LIHTC program in an IRS  database, which records information submitted by allocating agencies  and taxpayers on three forms. The forms include

Credit allocation and certification (Form 8609). The two-part form  is completed by the allocating agency and the taxpayer. Agencies  report the allocated amount of tax credits available over a 10-year  period for each building in a project. The taxpayer reports the date on  which the building was placed-in-service (suitable for occupancy).

Noncompliance or building disposition (Form 8823). Allocating  agencies must complete and submit this form to IRS if an on-site  physical inspection of a LIHTC project finds any noncompliance. The  form records any findings (and corrections of previous findings) based  on the inspection of units and review of the low-income tenant  certifications.

Annual report (Form 8610). IRS staff review the reports to ensure  allocations do not exceed a statutorily prescribed ceiling for that year.

Based on our analysis of the information in the database, we found in  2015 that the data on credit allocation and certification information were  not sufficiently reliable to determine if basic requirements for the LIHTC  program were being achieved. For example, we could not determine how  often LIHTC projects were placed-in-service within required time frames.  We concluded that without improvements to the data quality of credit  allocation and certification information, it was difficult to determine if credit  allocation and placed-in-service requirements had been met by allocating  agencies and taxpayers, respectively. Thus, we recommended that IRS  should address weaknesses identified in data entry and programming  controls to ensure reliable data are collected on credit allocations.

At the time of our 2015 report, IRS acknowledged the need for  improvements in its controls and procedures (including data entry and  quality reviews). IRS officials agreed that these problems should be  corrected and data quality reviews should be conducted on an ongoing  basis. As of March 2017, in response to our recommendation, IRS  officials said that they had explored possibilities to improve the database,  which not only houses credit allocation information, but also data from  noncompliance and building disposition forms. Specifically, IRS is working  to move the database to a new and updated server, which will address  weaknesses identified in data entry and programming controls. IRS  expects to complete the data migration step by early fall of 2017. Until  IRS implements its plan to improve the data, this recommendation will  remain open.

Limited noncompliance data, analysis, and guidance on reporting.  We found in our 2015 and 2016 reports that IRS had done little with the  information it collects on noncompliance. IRS had captured little  information from the Form 8823 submissions in its database and had not  tracked the resolution of noncompliance issues or analyzed trends in  noncompliance. As of April 2016, the database included information from  about 4,200 of the nearly 214,000 Form 8823s IRS received since 2009  (less than 2 percent of forms received).

For our 2015 report, officials told us the decision was made during the  2008–2009 timeframe to input information only from forms that indicated  a change in building disposition, such as a foreclosure. IRS focused on  forms indicating this change for reasons including the serious nature of  the occurrence for the program and impacts on taxpayers’ ability to  receive credit. Officials also stated it was not cost effective to input all the  form information and trend analysis on all types of noncompliance was  not useful for purposes of ensuring compliance with the tax code.

In addition, as we reported in both 2015 and 2016, IRS had assessed  little of the noncompliance information collected on the Form 8823 or  routinely used it to determine trends in noncompliance. Because little  information was captured in the Low-Income Housing Credit database,  IRS was unable to provide us with program-wide information on the most  common types of noncompliance. Furthermore, IRS had no method to  determine if issues reported as uncorrected had been resolved or if  properties had recurring noncompliance issues.

In our 2016 report, we also found inconsistent reporting on the  noncompliance forms, the reasons for which included conflicting IRS  guidance, different interpretations of the guidance by allocating agencies,  and lack of IRS feedback about agency submissions.

IRS developed guidelines for allocating agencies to use when  completing the Form 8823, the “fundamental purpose” of which was  identified as providing standardized operational definitions for the  noncompliance categories listed on the form. The IRS guide adds that  it is important that noncompliance be consistently identified,  categorized, and reported and notes that the benefits of consistency  included enhanced program administration by IRS.

Allocating agencies we visited had various practices for submitting  Form 8823 to IRS, including different timing of submissions, reporting  on all violations (whether minor or corrected during inspections) or  not, and amounts of additional detail provided. Partly because of  these different practices, the number of forms each of the nine  agencies told us they sent to IRS in 2013 varied from 1 to more than  1,700.

We concluded that without IRS clarification of when to send in the Form  8823, allocating agencies will continue to submit inconsistent  noncompliance data to IRS, which will make it difficult for IRS to efficiently  distinguish between minor violations and severe noncompliance, such as  properties with health and safety issues. We recommended that IRS  should clarify what to submit and when—in collaboration with the  allocating agencies and Treasury—to help IRS improve the quality of the  noncompliance information it receives and help ensure that any new  guidance is consistent with Treasury regulations.

In August 2016, IRS stated it would review the Form 8823 Audit  Technique Guide to determine whether additional guidance and  clarification were needed for allocating agencies to report noncompliance  information on the form. If published legal guidance is required, IRS  stated that it will submit a proposal for such guidance for prioritization.  IRS indicated an expected implementation date by November 2017. In  addition, in March 2017, officials stated that IRS Counsel attended an  industry conference with allocating agencies at which issues related to  the Form 8823 were discussed.

Lack of participation in data initiative. Moreover, in our 2016 report we  found IRS had not taken advantage of the important progress HUD made  through the Rental Policy Working Group (working group)—which was  established to better align the operation of federal rental policies across  the administration—to augment its databases with LIHTC property  inspection data. This data collection effort created opportunities for HUD  to share inspection data with IRS that could improve the effectiveness of  reviews for LIHTC noncompliance. However, the IRS Small  Business/Self-Employed Division managing the LIHTC program had not  been involved in the working group. We concluded that such involvement  would allow IRS to leverage existing resources, augment its information  on noncompliance, and better understand the prevalence of  noncompliance.

We recommended that staff from the division participate in the physical  inspection initiative of the working group and also recommended that the  IRS Commissioner evaluate how IRS could use HUD’s real estate  database, including how the information might be used to reassess  reporting categories on Form 8823 and reassess which categories of  noncompliance information to review for audit potential. As of March  2017, IRS had implemented our recommendation to include the  appropriate staff at the working group meetings. However, IRS officials  stated that since HUD’s database with property inspection data was not  complete as of March 2017 and contained data from 30 states, it was  unclear how the database could be used. IRS officials said they would  continue exploring the HUD database if the data for all LIHTC properties  were included and it was possible to isolate the LIHTC property data from  other rental properties in the HUD database.

Leveraging Experience of HUD May Augment IRS’s Capacity to Oversee Program

Both our 2015 and 2016 reports found that opportunities existed to  enhance oversight of the LIHTC program, specifically by leveraging the  knowledge and experience of HUD. We found in 2015 that while LIHTC is  the largest federal program for increasing the supply of affordable rental  housing, LIHTC is a peripheral program in IRS in terms of resources and  mission. Oversight responsibilities for the program include monitoring  allocating agencies and taxpayer compliance. However, as we have  discussed previously, IRS oversight has been minimal and IRS has  captured and used little program information. As we previously stated,  such information could help program managers and congressional  decision makers assess the program’s effectiveness.

HUD─which has a housing mission─collects and analyzes information on  low-income rental housing, including LIHTC-funded projects. As we  reported in 2015, HUD’s role in the LIHTC program is generally limited to  the collection of information on tenant characteristics (mandated by the  Housing and Economic Recovery Act of 2008). However, it has voluntarily  collected project-level information on the program since 1996 because of  the importance of LIHTC as a source of funding for affordable housing.  HUD also has sponsored studies of the LIHTC program that use these  data. HUD’s LIHTC databases, the largest federal source of information  on the LIHTC program, aggregates project-level data that allocating  agencies voluntarily submit and information on tenant characteristics that  HUD must collect. Since 2014, HUD also has published annual reports  analyzing data it must collect on tenants residing in LIHTC properties. As  part of this report, HUD compares property information in its tenant  database to the information in its property database to help assess the  completeness of both databases.

In our 2015 report, we also discussed HUD’s experience in working with  allocating agencies. While multiple federal agencies administer housing- related programs, HUD is the lead federal agency for providing affordable  rental housing. Much like LIHTC, HUD’s rental housing programs rely on  state and local agencies to implement programs. HUD is responsible for  overseeing these agencies, including reviewing state and local  consolidated plans for the HOME Investment Partnership and Community  Development Block Grant programs—large grant programs that also are  used to fund LIHTC projects. HUD also has experience in directly  overseeing allocating agencies in their roles as contract administrators for  project-based Section 8 rental assistance. HUD has processes,  procedures, and staff in place for program evaluation and oversight of  state and local agencies that could be built upon and strengthened.

In our 2015 report, we concluded that significant resource constraints  affected IRS’s ability to oversee taxpayer compliance and precluded  wide-ranging improvement to such functions, but that IRS still had an  opportunity to enhance oversight of LIHTC. We also concluded that  leveraging the experience and expertise of another agency with a housing  mission, such as HUD, might help offset some of IRS’s limitations in  relation to program oversight. HUD’s existing processes and procedures  for overseeing allocating agencies could constitute a framework on which  further changes and improvements in LIHTC could be effected. However,  enhancing HUD’s role could involve additional staff and other resources.  An estimate of potential costs and funding options for financing enhanced  federal oversight of the LIHTC program would be integral to determining  an appropriate funding mechanism.

We asked that Congress consider designating HUD as a joint  administrator of the program responsible for oversight. As part of the  deliberation, we suggested that Congress direct HUD to estimate the  costs to monitor and perform the additional oversight responsibilities,  including a discussion of funding options. Treasury agreed that it would  be useful for HUD to receive ongoing responsibility for, and resources to  perform, research and analysis on the effectiveness of LIHTCs in  increasing the availability of affordable rental housing. Treasury noted  that such research and analysis are not part of IRS’s responsibilities or  consistent with its expertise in interpreting and enforcing tax laws.  However, Treasury stated that responsibility for interpreting and enforcing  the code should remain entirely with IRS. Our report noted that if program  administration were changed, IRS could retain certain key responsibilities  consistent with its tax administration mission.

In our 2016 report, we concluded that IRS oversight of allocating  agencies continued to be minimal, particularly in reviewing QAPs and  allocating agencies’ practices for awarding discretionary basis boosts. As  a result, we reiterated the recommendation from our 2015 report that  Congress should consider designating HUD as a joint administrator of the  program responsible for oversight due to its experience and expertise as  an agency with a housing mission.

In response to our 2016 report, HUD stated it remains supportive of  mechanisms to use its significant expertise and experience administering  housing programs for enhanced effectiveness of LIHTC. HUD also stated  that enhanced interagency coordination could better ensure compliance  with fair housing requirements and improve alignment of LIHTC with  national housing priorities. As of July 2017, Congress had not enacted  legislation to give HUD an oversight role for LIHTC.

Chairman Hatch, Ranking Member Wyden, and Members of the  Committee, this concludes my prepared statement. I would be happy to  respond to any questions that you may have at this time.

For further information about this testimony, please contact me at   202-512-8678 or garciadiazd@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this statement. Individuals making key contributions to this testimony  include Nadine Garrick Raidbard, Assistant Director; Anar N. Jessani,  Analyst in Charge; William R. Chatlos; Farrah Graham; Daniel Newman;  John McGrail; Barbara Roesmann; and MaryLynn Sergent.

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