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+ 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 Enclosure DEPARTMENT OF HOUSING AND COMMUNITY DEVELOPMENT AUDIT DIVISION 4200 Tir Steet, Gute 310 Peo FO. Bon sb sees : sexs soos OS t 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 Division Finding 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 Director Response 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).

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