')F CAliFORNIA -BIJSINESS TRANSPORTATION AND HOUSING AGENCY Department of Housing and Community Development AUDIT DIVISION Ms. Debbie Rich Administrati ve Officer Signal Hill redevelopment AGENCY's compliance with statutory housing and housing fund requirements.
')F CAliFORNIA -BIJSINESS TRANSPORTATION AND HOUSING AGENCY Department of Housing and Community Development AUDIT DIVISION Ms. Debbie Rich Administrati ve Officer Signal Hill redevelopment AGENCY's compliance with statutory housing and housing fund requirements.
')F CAliFORNIA -BIJSINESS TRANSPORTATION AND HOUSING AGENCY Department of Housing and Community Development AUDIT DIVISION Ms. Debbie Rich Administrati ve Officer Signal Hill redevelopment AGENCY's compliance with statutory housing and housing fund requirements.
+ STATEDNECALIFOANA BUSINESS, TRANSPORTATION, AND HOUSING AGEN _ GRAY DAMIS, Gavemnor
DEPARTMENT OF HOUSING AND COMMUNITY DEVELOPMENT
AUDIT DIVISION
1800 Thi Stet Sle S10
2.0, Box osen80 i
‘Sacamont, CA 842522050
(eigazeaies
Fae a1) aas-22ee ms
September 4, 2001
Ms, Debbie Rich
Administrative Officer
Signal Hill Redevelopment Agency
2175 Cherry Avenue
Signal Hill, CA 90806
Dear Ms. Rich:
Enclosed, please find our final audit report regarding the Signal Hill Redevelopment
‘Agency's compliance with statutory housing and housing fund requirements. We have included
‘your responses to our draft report in the final audit report; a copy of your response letter is also
enclosed.
‘We appreciate the cooperation and assistance you, and other staff, provided during the
course of the audit. If you have any questions concerning the report, please feel free to contact
me at (916) 324-9763 or by email at epfost@hed.ca.gov.
Sincerely,
Eric Pfost
Chief, Audit Division
EnclosureDEPARTMENT OF HOUSING AND COMMUNITY DEVELOPMENT
AUDIT DIVISION
4200 Tir Steet, Gute 310 Peo
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axe) 445-2200 3a
September 4, 2001
Ms. Julie Bomstein, Director
Department of Housing and Community Development
Background: California Health and Safety Code Section 50464 states that the Department of
Housing and Community Development (Department) may make investigations of housing and
community development, may study the operation and enforcement of redevelopment programs,
and may examine the records of redevelopment agencies and secure copies of their records at any
time. The Department has elected to initiate a program to review the housing assistance
activities of various redevelopment agencies. The following report documents our findings and
recommendations based upon our field work in accordance with audit guidelines promulgated by
the State Controller's Office (SCO) for the review of redevelopment agencies.
Scope: The purpose of our review was to evaluate the Signal Hill Redevelopment Agency's
(Agency) compliance with statutory housing requirements including administration and use of
the Low and Moderate Income Housing Fund (LMIHF) for fiscal years 1997/1998, 1998/1999,
and 1999/2000. Certain issues required the review of information and records outside this audit
period. Our review was conducted in accordance with Generally Accepted Governmental
‘Auditing Standards as published by the Comptroller General of the United States. We used the
Guidelines for Compliance Audits of California Redevelopment Agencies as issued by the SCO.
During our audit we interviewed the following Agency/City representatives:
Debbie Rich, Director of Economi¢ Development
Dennis MacArthur, Director of Finance
We reviewed the following records and materials during the course of the audit: annual reports
submitted t6 the Department; LMIHF financial statements audited by their independent certified
public accounting firth; trial balances and the supporting general ledgers; cash receipts and cash
disbursements registers; revenue and expenditure journals; adopted findings of the Agency; loan
and development agreements; county property tax remittance statements; and the housing
component of the redevelopment implementation plan.
‘We completed our audit fieldwork in Signal Hill on March 6, 2001 and issued a draft report to
the Agency dated May 15, 2001. The Agency responded on July 17, 2001, We have
incorporated their responses into our final audit report and attached their response letter (see
“Attachment A”).‘This report is solely intended for the use of the Department and the Signal Hill Redevelopment
‘Agency's management. However, this is not intended to limit distribution of this report which,
‘when final, is a matter of public record.
Lastly, we note that the Signal Hill Redevelopment Agency has acknowledged an oversight that
reduced available funding for housing by approximately $4 million and has agreed to repay the
shortfall as soon as possible. We believe the Agency should be commended for their responsible
and cooperative spirit in making the repayment.
Sincerely,
Bric Pfost
Chief, Audit DivisionFinding Number One: Ineligible units were credited as replacement housing.
Condition: ‘The Replacement Housing Plan prepared for Phase Iof the Pacific Coast Highway
‘Affordable Housing Project (February 1998) relies upon 31 affordable units previously
developed as a result of agency assistance as “advance” replacement units for most of the 42
units affordable to lower- and moderate-income households planned for removal.
‘However, there is no information in the replacement housing plan, or the implementation plan, to
indicate that any of the advance replacement units were made available to the households
subsequently displaced. To count as advance replacement units, there must be a clear nexus
between the replacement units and the nature of the units lost and their households.
‘There are other logistical problems with the eligibility of the reported advance replacement units.
For example, occupancy of the 24 very low-income units in the Seabreeze Manor project is
specifically limited to physically disabled individuals or households. The seven lower- and
moderate-income units credited from the Agency's first-time homebuyer program do not contain
recorded covenants running with the land for at least the life of the redevelopment plan as
required for replacement units. Additionally, it’s unclear how agency loans to first-time
homebuyers effectuated the development, construction or rehabilitation of units as required for
replacement units.
Criteria: Health and Safety Code Section 33413.5 requires adoption of a replacement-housing
plan not less than 30 days prior to agreements involving destruction or removal of dwelling units,
including notice and hearing to the general public. Specific information about the units to be lost
‘must be included, as well as information regarding the replacement housing
Health and Safety Code Section 33411.1 prohibits displacement until there are suitable housing
units available and ready for occupancy by displaced persons.
Health and Safety Code Section 3341 1.3 requires that whenever a project area is developed with
Jow- or moderate-income housing units the Agency shall require by contract or other appropriate
‘means that such housing be made available to the persons and families displaced by the
redevelopment project. Such displaced persons and families shall be given priority in renting or
buying such housing.
Health and Safety Code Section 33413(a) requires, in part, that whenever dwelling units housing
persons and families of low- or moderate-income are destroyed or removed from the low- and
‘moderate-income housing market, as a result of agency-sponsored activities, the agency shall
cause the development or rehabilitation of an equal number of replacement units, with an equal
or greater number of bedrooms, within four years. For units removed after September 1, 1989, at
least 75 percent of the replacement units shall be replaced at the same-affordable housing cost
relative to the income level of the households displaced from the removed or destroyed units.Health and Safety Code Section 33413(c) provides the agency shall require that replacement
dwelling units and other units rehabilitated, developed, constructed, or price-restricted pursuant
to this subdivision shall remain affordable to lower- and moderate-income households for the
longest feasible time but not less than the land use controls of the redevelopment plan.
Health and Safety Code Section 33413(c)(2)(A) provides that an agency may permit sales of
owner-occupied units prior to expiration of the land use controls established by the agency for a
price exceeding that permitted under this subdivision pursuant to a program which protects the
agency's housing fund investment including, but not limited to, an equity sharing program.
Health and Safety Code Section 33413(c)(2)(B) provides that the requirements of this
subdivision shall be made enforceable in the same manner as provided in subdivision (f) of
Section 33334.3.
Health and Safety Code Section 33413(4)(1) provides that subdivision (a) of Section 33413 shall
apply to any redevelopment project where dwelling units are-destroyed or removed from the low-
and moderate-income housing market on or after January 1, 1996 irrespective of the adoption
date of the final redevelopment plan.
Health and Safety Code Séction 33413(f) provides that the agency may replace destroyed or
removed units with a fewer number of replacement units if: (1) the total number of bedrooms in
the replacement units equals or exceeds the number of bedrooms in the destroyed units; and (2)
all of the units are replaced at the same affordable housing cost relative to the income level of the
persons displaced.
Health and Safety Code Section 33334.3(6)(2) provides that the agency shall require the
recording in the office of the county recorder covenants or restrictions for each unit of real
property subject to this subdivision. ‘The covenants or restrictions shall run with the land and be
enforceable against the owner by the agency or the community.
Recommendation: The Agency should modify the replacement housing plan for the Pacific
Coast Highway Housing Project to include only replacement housing units which meet statutory
requirements and expedite efforts to accommodate the balance of its replacement housing needs
within the statutory timeframe (ie., within four years of removal).
‘Agency Response: In August 2000, the City Council and Redevelopment Agency approved the
Las Brisas Comprehensive Improvement Project, to include the substantial rehabilitation of 95
rental units to be covenanted for low-income and very low-income families. A Disposition and
Development Agreement (DA) is being prepared with the Los Angeles Community Design
Center to implement this project. At the time the DDA is approved (anticipated this fall), this
project shall be designated as a replacement housing project for the units removed as part of the
Pacific Coast Highway (PCH) Affordable Housing Project. As recommended by the audit, the
PCH replacement-housing plan shall be revised at that time.Auditor's Conclusion: We appreciate the Agency's recognition that alternative replacement
housing efforts are needed to replace units previously destroyed as part of the Pacific Coast
Highway Affordable Housing Project. The Agency should be advised, however, that only
housing rehabilitation efforts involving the rehabilitation of housing that is presently
uninhabitable, or otherwise unavailable for residential occupancy, would create an eligible
replacement housing opportunity. ‘The rehabilitation of housing that is already occupied, or
available for residential occupancy, would not serve to replace the net supply of housing,
available to lower- and moderate-income households, previously destroyed by the Agency. Nor
would it provide an opportunity for the households previously displaced by the Agency to find
suitable and affordable replacement housing in the Community.
If the 95 units proposed for substantial rehabilitation as part of the Las Brisas project do not meet
these qualifications, the Agency should ensure that altemative replacement housing opportunities
are made available within statutory timelines.
Finding Number Two: The Agency is unable to account for deferred assets of the LMIHF.
Condition: In 1986 the Agency adopted a resolution to defer depositing tax increment revenue
into the LMIHF due to documented existing obligations upon existing and future tax revenue
allocated to the Agency. ‘The resolution indicates the deferral would only occur during fiscal year
1985/86 in an estimated amount of $733,000. It seems evident the Agency deferred depositing
tax increment revenue through fiscal year 1989/90, In addition, it appears the Agency did not,
adopt a plan to repay the deferred tax increment as required.
‘The Agency's annual report submitted to the Department for fiscal year 1989/90 shows a
cumulative deferred fund total in the amount of $4,162,864. The Agency's annual report for
fiscal year 1990/91 does not report a deferred fund total or report repayment of any portion of the
deferred funds. Subsequent annual reports also do not report a deferred fund total or any
repayment of the deferred funds.
‘The Agency has been unable to verify, through its records, that any portion of the cumulative
amount of deferred tax increment owed to the LMIHF was repaid.
Criteria: Health and Safety Code Section 33334.6(4) provides that in any fiscal year the agency
‘may deposit less than the amount required by subdivision (c) into the LMIHF if the agency finds
that the difference between the amount deposited and the amount required by subdivision (c) is
necessary to make payments under existing obligations of amounts due or required to be
committed, set aside, or reserved by the agency during that fiscal year and which are used by the
agency for that purpose.Health and Safety Code Section 33334.6(g) provides that if, pursuant to subdivision (4) or (€),
the agency deposits less than 20 percent of the taxes allocated to the agency pursuant to Section
33670 in the 1985-86 fiscal year or any subsequent fiscal year in the Low and Moderate Income
Housing Fund, the amount equal to the difference between 20 percent of the taxes allocated to
the agency pursuant to Section 33670 for each affected project and the amount deposited that
year shall constitute a deficit of the project. The agency shall adopt a plan to eliminate the deficit
in subsequent years as determined by the agency.
Health and Safety Code Section 33334.6(h) provides the obligations imposed by this section,
including deficits created under this section, are to be an indebtedness of the redevelopment
project to which they relate, payable from taxes allocated to the agency pursuant to Section
33670, and shall constitute an indebtedness of the agency with respect to the redevelopment
project until paid in full.
Recommendation: Unless the Agency can demonstrate that the deferred funds have been repaid,
the Agency should develop and adopt a plan for repayment of the cumulative deferral in the
amount of $4,162,864, plus the interest which would have accrued on this amount since 1990,
when accountability for these assets was lost.
‘Agency Response: We agree with the recommendation. An examination of our audits relating to
the period 1986 to 1990 could not find any indication that the Agency had deposited monies into
the LMIHE. I did find evidence that the Agency did defer payment into the LMIHF when I
examined the Official Statement to the 1990 Tax Allocation Bonds Series A. In that document a
letter from the Agency's consultant, Katz Hollis, stated that the Agency adopted a “Statement of
Existing Obligations”. Section 33334.6 allows the deferral of the annual housing set-aside so
that an agency may meet existing obligations and may continue existing programs which were
underway prior to January 1, 1986.
‘A cumulative deferral amount totaling $4,162,864 was reported to the Department for fiscal year
1989/90. No entry was made either on the Agency's books or in the Agency's financial
statements recognizing the obligation.
To correct the situation, we will recognize the liability when we issue our financial statements for
fiscal year 2000/01. Additionally, we will adopt a plan to repay the stated amount plus any
interest accrued since 1990 when accountability was lost
‘The Agency expects to repay the deferred amounts to the Low and Moderate Income Housing
Fund from any available Tax Increment Revenues of the Agency's Project Area One after the
payment of debt service on the Agency's bonded indebtedness and completion of its housing
projects. If such amounts are insufficient for this purpose, the Agency expects to collect
additional Tax Increment Revenues over and above the limitation contained in the
Redevelopment Plan for the Housing Fund by amending the Redevelopment Plan for this
purpose as allowed by Section 33333.4(c) and 33333.6(g) of the California Health and Safety
Code.‘Auditor's Conclusion: We applaud the Agency’s commitment to adopt a repayment plan and
begin repayment of the deferred funds, with interest, as soon as possible. The repayment process
outlined in the Agency's response appears reasonable and appropriate. ‘The statute gives high
priority to the repayment of funds previously deferred from the LMIHP. Therefore, the Agency
should avoid entering into any new debt obligations until the deferred seta-side has been fully
repaid.
Finding Number Three: LMIHF resources were used inefficiently.
Condition: According to the September 15, 1998 staff report concerning the Housing
Development Agreement between the Agency and East Village Homes (Developer), the Agency
contributed $2,038,925 from the LMIHF to acquire and clear a development site for the
subsequent construction of 15 homes, five of which were reserved for sale to moderate-income
households.
‘According to the staff report and development agreement, the Developer’s purchase price for the
site was $75,000 plus four percent of the gross sale proceeds generated by the project, estimated
to be $94,000. The Agency's LMIHF contribution, less the Developer's purchase price and sale
proceeds contribution, for the development of five units for moderate-income households
amounted to $1,872,925. The Agency's per unit participation, to date, amounts to $374,585.
‘The Agency's acquisition and clearance of the site caused the displacement of some 33
households and destruction of 42 housing units. The Agency's LMIHF will incur significant
additional costs associated with replacing the destroyed units, most of which has yet to occur—
see Finding Number One, above,
Criteria: Health and Safety Code Section 33334,3(d) expresses the Legislature's intent that the
IMIHF be used to the maximum extent possible to defray the costs of production, improvement,
and preservation of low- and moderate-income housing, including amounts expended for
planning and administrative costs.
Recommendation: The Agency should avoid participating in projects that result in inefficient use
of its housing fund resources.
‘Agency Response: The use of LMIHF for the Pacific Coast Highway Affordable Housing
Project was a legitimate and allowable use of funds in pursuing this neighborhood revitalization
effort, Further, the use of LMIHF was within the bounds and goals identified in both the City’s
Housing Element and Agency's Five-Year Implementation Plan to revitalize the Pacific Coast
Highway Corridor and expand home-ownership opportunities in the City, particularly in the
southeast area of the City which was a high ratio of absentee owners.The audit should recognize that the development of new affordable housing within urban areas is
costly undertaking, Areas identified for affordable housing development are often targeted
precisely because the existing land uses are substandard or underutilized. However, this means
that the Agency often ends up acquiring occupied properties, necessitating the need to pay not
only for the land, but also relocation to occupants.
Vacant land is scarce, and in Signal Hill in particular, seemingly vacant land is encumbered with
abandoned oil facilities, ground leas¢s for drilling and exploration, and contamination from the
previous oil field operations. There is not a lot of available land that could be assembled and
made for affordable housing projects more cost effectively.
‘Auditor's Conclusion: ‘The Community Redevelopment Law provides that revenue deposited
into the LMIHF is to be used exclusively for purposes of increasing, improving and preserving
the community's supply of lower- and moderate-income housing. While neighborhood or
highway corridor revitalization may be a welcome side effect of housing assistance efforts,
revitalization in and of itself is not a permissible use of LMIHF resources. The revitalization
effort represented by the East Village Homes development agreement has resulted in a rather
significant net loss of Signal Hill’s supply of housing available to lower- and moderate-income
households.
Government Audit Standards requires auditors to ensure that public resources are handled
efficiently, economically, and effectively to achieve the purposes for which the resources were
fumished. As previously noted, the Legislature has also expressed its intent that the LMIHF be
used to the maximum extent possible to defray the costs of production, improvement, and
preservation of lower- and moderate-income housing,
While we recognize the somewhat unusual development constraints that exist in Signal Hill,
subsidies approximating $375,000 per unit, to facilitate the development of housing for
‘moderate-income households, would not represent effective, efficient, and economical use of
housing fund resources anywhere in California. The Agency, for example, might have invested
its LMIHE contribution towards acquiring and rehebilitating the 42 units and, thereby, avoiding a
net loss to the community's supply of affordable housing and triggering the need to invest
additional revenue into providing replacement housing.
Finding Number Four: Annual planning and administrative determinations were not
made.
Condition: While the amount expended for planning and administrative activities during the
audit period appears reasonable and appropriate, the Agency did not make or adopt annual
determinations, which consider the necessity and proportionality of LMIHF expenditures for
planning and administrative activities during this period.Criteria: Health and Safety Code Section 33334.3(d) expresses the Legislature's intent that
LMIMF expenditures for general planning and administrative activities not be disproportionate to
‘actual costs for housing production, improvement, and preservation; and requires agencies to
determine annually that planning and administrative expenses are necessary for the production,
improvement, or preservation of low- and moderate-income housing.
State Controller's Office, Guidelines for Compliance Audits of California Redevelopment
Agencies, November 1998, requires independent auditors to test for a written annual
determination concerning the necessity and appropriateness of any planning and administrative
expenditures from the LMIHF.
Recommendation: In the future, the Agency should annually determine in writing whether
proposed planning and administrative costs are necessary and proportionate to the amount
proposed for actual housing assistance activities during the year(s). The Agency files should
contain written documentation of the facts upon which the annual determination is based, the
determination itself, and an analysis that connects the facts to the Agency’s ultimate conclusion.
For example, to effectively evaluate the “proportionality” of proposed planning and
administrative activities, the adopted determination could identify and compare budgeted or
projected planning and administrative expenses with budgeted or projected expenses for actual
housing development, improvement and preservation activities. To effectively evaluate the
necessity of, or need for, proposed planning and administrative expenditures from the LMIHF,
the determination could itemize proposed planning and administrative expenses and relate them
to specific housing development, improvement, or preservation activities. The determination
could also describe and analyze the availability of other funding sources, which might be used to
finance proposed planning and administrative expenses.
‘Agency Response: We agree with the recommendation and will annually determine in writing
‘whether our proposed planning and administrative expenses in the LMIFIF are necessary for the
production, improvement, or preservation of low- and moderate-income housing as required by
the California Health and Safety Code Section 33334.3(d).
Auditor's Conclusion: We appreciate the Agency's commitment to make written annual
determinations in the future. :RECEIVED
JUL 1 9 2007
HCD AUDITS Dsroy
“Attachment A"
SIGNAL HILL REDEVELOPMENT AGENCY
2175 Cheny Avenue « Signal Hil, Caitfomic 90806 « (562) 989-7370 « FAX (562) 989-7391
July 17, 2001
Mr, Bric Pfost
Chief, Audit Division
Department of Housing and Community Development
1800 Third Street. Suite 310
P.O, Box 952050
Sacramento, CA 94252-2050
Dear Mr. Pfost:
Enclosed please find responses to the draft audit report regarding the Signal Hill
Redevelopment’ Agency's compliance with statutory housing and housing fund
requirements.
If you have any questions, please feel free to contact either Dennis MacArthur, Finance
Director, at (562) 989-7319 or me at (562) 989-7375.
Sincerely,
Budo he lo
Debbie Rich
Director of Feonomic Development and Housing
Fel
Copy: Ken Farfsing, City Manager
Dennis MacArthur, Finance DirectorResponse to Finding Number One: Ineligible units were credited as replacement
housing
In August 2000, the City Council and Redevelopment Agency approved the Las Brisas
Comprehensive Improvement Project, to include the substantial rehabilitation of 95 rental
units to be covenanted for low-income and very low-income families. A Disposition and
Development Agreement (DDA) is being prepared with the Los Angeles Community
Design Center to implement this project. At the time the DDA is approved (anticipated
this fall), this project shall be designated as'a replacement housing project for the units
removed as part of the Pacific Coast Highway (PCH) Affordable Housing Project. As
recommended by the audit, the PCH replacement housing plan shall be revised: at that
time,Response to Finding Number Two: the Agency is unable to account for
deferred assets of the LMIHF
We agree with the recommendation. An examination of our audits relating to the
period 1986 to 1990 could not find any indication that the Agency had deposited
monies into the LMIHF. | did find evidence that the Agency did defer payment
into the LMIHF when | examined the Official Statement to the 1990Tax Allocation
Bonds Series A. In that document a letter from the Agenoy’s consultant, Katz
Hollis, stated that the Agency adopted a “Statement of Existing Obligations.”
Section 33334.6 allows the deferral of the annual housing set-aside so that an
agency may meet existing obligations and may continue existing programs which
were underway prior to January 1, 1986.
‘A cumulative deferral amount totaling $4,162,864 was reported to the
Department for fiscal year 1989/90. No entry was made either on the Agency's
books or in the Agency's financial statements recognizing the obligation.
To correct the situation, we will recognize the liability when we issue our financial
statements for fiscal year 2000/01. Additionally, we will adopt a plan to repay the
stated amount plus any accrued interest since 1990 when accountability was
lost.
The Agency expects to repay the deferred amounts to the Low and Moderate
Income Housing Fund from any available Tax Increment Revenues of the
Ageney's Project Area One after the payment of debt service on the Agency's
bonded indebtedness and completion of its housing projects. If such amounts
are insufficient for this purpose, the Agency expects to collect additional Tax
Increment Revenues over and above the limitation contained in the
Redevelopment Plan for the Housing Fund by amending the Redevelopment
Plan for this purpose as allowed by Section 33333.4(c) and 33333.6(g) of the
California Health and Safety Code.Response to Finding Number Three: LMIHF resources were used inefficiently
‘The use of LMIHF for the Pacific Coast Highway Affordable Housing Project was a
legitimate and allowable use of funds in pursuing this neighborhood revitalization effort.
Further, the use of LMIHF was within the bounds and goals identified in both the City’s
Housing Element and Agency’s Five-Year Implementation Plan to revitalize the Pacific
Coast Highway Corridor and expand home-ownership opportunities in the City,
particularly in the southeast area of the City which has a high ratio of absentee owners.
The audit should recognize that the development of new affordable housing within urban
areas is a costly undertaking. Areas identified for affordable housing development are
often targeted precisely because the existing land uses are substandard or underutilized
However, this means that the Agency often ends up acquiring occupied properties,
necessitating the need to’ pay not only for the land, but also relocation to occupants.
Vacant land is scarce, and in Signal Hill in particular, seemingly vacant land is
encumbered with abandoned oil facilities, ground leases for oil drilling and exploration,
and contamination from the previous oil field operations. There is not a lot of available
land that could be assembled and made ready for affordable housing projects more cost
effectively.Response to Finding Number Four: Annual planning and administrative
determinations were not made.
We agree with the recommendation and will annually determine in writing
whether our proposed planning and administrative expenditures in the LMIHF are
necessary for the production , improvement, or preservation of low-and
moderate-income housing as required by the California Health & Safety Code
Section 3334.3(d).