" §Jf.lT"; OF CAliFORNIA -BI ISINESS TRANSPORTATION AND HOI IS IN.G...

AGEN CY

DEPARTMENT OF HOUSING AND COMMUNITY DEVELOPMENT AUDIT DIVISION

1800 Third Street. Suite 310 P. O. Box 952050 Sacramento. CA 94252-2050 (916) 324-9763

FAX (916) 445-2229

GRAY DAVIS Goyernor

August 27, 2002

Mr. Duane Solomon

Housing Development Manager City of Burbank

Community Development Department 275 E. Olive Avenue

P.O. Box 6459

Burbank, CA 91510-6459

Dear Mr. Solomon:

Enclosed, please find our final audit report regarding the Burbank Redevelopment Agency's compliance with statutory housing and housing fund requirements. We have incorporated your responses to the draft report into the final report and are included in Attachment A.

We are enclosing a questionnaire, and return envelope, concerning the quality and effectiveness of the completed audit. We hope you will complete and return the questionnaire to assist our efforts to monitor and improve our audit performance.

We appreciate the cooperation you and other City staff provided during the course of the audit. If you have any questions concerning the final report, please feel free to contact me at (916) 324-9763 or by email atepfost@hcd.ca.gov.

Sincerely,

. Eric Pfost

Chief, Audit Division

Enclosure

STATE OF CAliFORNIA .BUSINESS TRANSPORTATION AND HOUSING AGENCY

GRAY DAVIS Goyernor

DEPARTMENT OF HOUSING AND COMMUNITY DEVELOPMENT AUDIT DIVISION

1800 Third Street, Suite 310 P. O. Box 952050 Sacramento, CA 94252·2050 (916) 324·9763

FAX (916) 445·2229

August 27, 2002

Ms. Julie Bornstein, 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 theState Controller's Office (SCO) for the review of redevelopment agencies.

Scope: The purpose of our review was toevaluate the Burbank Redevelopment Agency's (Agencyjcompliance 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:

Craig Wood, Senior Accountant Joan Michaels, Budget Manager

Duane Solomon, Housing Development Manager Joel Bryant, Redevelopment Project Analyst

We reviewed the following records and materials during the course of the audit: annual reports submitted to the Department; LMIHF financial statements audited by their independent certified public accounting firm; trial balances and the supporting general ledgers; cash receipts and cash disbursements registers; revenue and expenditurejournals; adopted findings of the Agency; loan and development agreements; county property tax remittance statements; Agency budgets; and the housing component of the redevelopment implementation plan.

We completed our audit fieldwork in Burbank on March 12,2002 and issued a draft report to the Agency dated May 30, 2002. The Agency responded on July 5,2002. We have incorporated the Agency's responses to the draft audit into this report and have attached their response letter (see Attachment A).

This report is solely intended for the use of the Department and the Burbank Redevelopment Agency's management. However, this is not intended to limit distribution of this report which, when final, is amatter of public record.

Sincerely,

Eric Pfost

Chief, Audit Division

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Finding Number One: The Agency's accounting system fails to ensure that accrued interest is allocated to the LMIHF.

Condition: The Agency deposits all tax increment funds into four specific debt service funds upon receipt. At the end of each fiscal year, 20 percent of the tax increment is transferred from the debt service funds into a single LMlliF (Fund 305). The Agency, however, does not ensure that the interest accruing upon the tax increment owed to the LMllIF (while deposited in the debt service funds) 'is also transferred to the LMlliF.

Criteria: Health and Safety Code Section 33080.8(i)(5) provides that failure to accrue earned interest to the LMlliF constitutes a "major vio!ation" of the Community Redevelopment Law.

Health & Safety Code Section 33334.2 states that not less than 20 percent of all taxes which are allocated to the agency pursuant to Section 33670 shall be used by the agency for the purposes of increasing, improving, and preserving the community's supply of low- and moderate-income housing available at affordable housing cost.

Health and Safety Code Section 33334.3(a) provides that the funds required by Sections 33334.2 and 33334.6 are to be held in a separate low- and moderate-income housing fund until used ..

. Health and Safety Code Section 33334.3(b) requires any interestearned by the Low and .

. Moderate Income Housing Fund shall accrue to and be deposited in the fund and may only be used in the manner prescribed for the Low and Moderate Income Housing Fund.

Recommendation: The Agency should determine the amount of accrued interest owed to the LMIHF for the audit period (fiscal years 1997/98, 1998/99 and 1999/00) and transfer this amount to the LMIHF. In the future, the Agency should deposit at least 20 percent of the tax increment allocated to the Agency Into the LMlliF immediately upon receipt.

Agency Response: The Agency agrees with the first finding, related to interest on current-year low/moderate income deposits. The Agency will compute interest as amounts are received beginning with the 2001/02 fiscal year, and will transfer additional dollars related to prior fiscal years1997/98 through 2000/01. We estimate $500,000 will be transferred during the current year to address all years from the beginning of the audit, through the current fiscal year.

Auditor's Conclusion: The Agency's response satisfies our audit recommendation. We appreciate the Agency's cooperation.

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Finding Number Two: The Agency is unable to separately account for the housing fund revenues of its project areas.

Condition: The Agency deposits 20 percent of the tax increment generated within its four redevelopment project areas, and other housing fund revenues, into a single LMIHF. With the exception of tax increment deposits, the Agency does not maintain a separate accounting system for each project area's revenues, including accrued interest and revolving income from repaid loans, property sales, deferred tax increment, etc.

This creates a number of accounting and reporting problems:

• The Agency is unable to separately account for and report project area revenue (other than tax increment) as required by Schedule A of the Department's reporting forms. Instead, other project area revenues are combined and reported in Schedule C of the reporting forms.

• When revenue from the LMIHF is expended outside the project area in which it was generated, an Agency must adopt a finding to show how the expenditure benefits the project area. Since revenue in the Agency's four project area LMllIFs are commingled, the Agency is unable to accurately determine which project area benefits from the· transfer.

• The Agency is unable to ensure that the repayment of tax increment previously deferred from its Golden State project area is repaid to, and used for the benefit of, the project area.

Criteria: Health and Safety Code Section 33334.3(a) provides that the funds required by Section 33334.2 or 33334.6 are to be used for the purposes of increasing and improving the community's supply of low- and moderate-income housing and shall be held in a separate Low and Moderate Income Housing Fund until used.

Health and Safety Code Section 33334.3(b) requires that any interest earned by the Low and Moderate Income Housing Fund and any repayments or other income to the agency for loans, advances or grants, of any kind from the Low and Moderate Income Housing Fund, shall accrue to and be deposited in, the fund and may only be used in the manner prescribed for the Low and

Moderate Income Housing Fund. .

Health and Safety Code Section 33334.2(g) provides that an agency m~y only use the funds required to be deposited in the LMIHF outside the project area upon a resolution of the agency and the legislative body that the use will be of benefit to the project.

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State Controller's Office, Guidelines for Compliance Audits of California Redevelopment Agencies, November, 1998, requires independent auditors to test for a justifying finding to demonstrate that any expenditure of housing fund revenues for improvements outside a project area directly benefited the project area which generated th~ revenues.

Health and Safety Code Section 33080 requires every redevelopment agency to file a copy of the annual report required by Section 33080.1 with the State Controller and Department within six months of the end of the fiscal year. In addition, each agency shall file a copy of the audit report required by subdivision (a) of Section 33080.1. The reports shall be made in the time, format, and manner prescribed by the Controller after consultation with the Department.

Health and Safety Code Sections 33080.4 and 33080.7 describe the kind of information to be included in the annual reports prepared pursuant to Section 33080.1.

Health and Safety Code Section 33334.6(d) allows deferral of tax increment deposits and Section 33334.6(h) identifies the deferral as indebtedness of the agency 'with respect to the redevelopment project until paid in full.

Recommendation: The Agency should revise its accounting system to maintain either a separate LMlliF or a separate account within the LMIHF for each project area. In the future, the Agency should identify and report all revenues by project area as required by the Department's reporting forms.

Agency Response: Refer to "Attachment A" for the Agency's detailed response to this Finding.

Auditor's Conclusion: The Agency's interpretation of the meaning of Schedules A and C of the Department's reporting forms (and requirements for separate accounting by project area) is incorrect. The instructions for Schedule A clearly require agencies to "Report all revenues and other sources of funds from this project area which accrued to the Agency's Housing Fund this reporting year;" The Agency's inability to account separately for the revenue accruing to each project area violates the annual reporting requirements prescribed by the State Controller, in consultation with the Department; as set forth in Health and Safety Code Section 33080.

The Agency's "blanket" benefit finding that the expenditure of LMlliF revenue outside the project area in which it was generated benefits each of the Agency's project areas sidesteps the singular benefit finding requirements of Health and Safety Code Section 33334.2(g). The determination finding by the Agency and Legislativebody is deemed final and conclusive only when it has been adopted in accordance with statutory requirements.

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Finding Number Three: Annual determinations of the necessity and proportionality of planning arid administrative expenses are not made and certain expenses appear ineligible.

Condition: The Agency did not adopt annual determinations, which consider the necessity and proportionality ofLMlliF expenditures for planning and administrative activities during the audit period. Expenditures from the LMIHF for planning and administrative costs, relative to total expenses, during fiscal years 1997/98, 1998/99 and 1999/00 were 34%,29% and 35%, respectively.

A significant portion of the planning and administrative expenditures covered the annual overhead costs of a number of City departments (e.g., planning, building, city clerk, personnel, etc.). The amount of fundirrgexpended for this purpose was $300,000, $552,733 and $593,443 forfiscal years 1997/98, 1998/99 and 1999/00, respectively, totaling $1,446,176. The Agency and City rely upon a cost allocation plan to reimburse various City Departments for their indirect costs related to the housing activities of the Agency.

The statute limits planning and administrative expenditures from the LMlliF to costs incurred by Agency staff, costs for services provided through interagency agreements with contractors (including usual indirect costs), and specified costs, which must be directly related to the programs and activities implemented by the Agency. The City's cost allocation plan does not appearto meet statutory requirements for Agency staff services, services provided by an interagency agreement, or specified costs directly related to the programs and activities of the Agency. Therefore, the allocation and related expenditures appear to be an invalid use of the LMlliF because there is inadequate detail supporting either the nature or purpose of the claimed allocation or expenditure.

Criteria: Health and Safety Code Section 33334.3(d) expresses the Legislature's intent that LMIHF expenditures for generalplanning 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.

Health and Safety Code Section 33334.3(e) provides that the planning and administrative costs that may be paidby the LMIHF are those expenses incurred by the agency which are directly related to the programs and activities authorized by Section 33334.2(e) and are limited to: (A) costs incurred for salaries, wages, and related costs of the Agency's staff or forservices provided through interagency agreements and agreements with contractors; and (B) costs incurred by a nonprofit organization not directly attributable to a specific project.

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Recommendation:

1. 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.

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 that might be used to finance proposed planning andadministrative expenses.

2. The Agency should stop using the LMIHFto fund any portion of the administrative activities of various City departments unless specific contractual agreements are executed which demonstrate how various City services are directly linked to specific programs or activities implemented by the Agency to increase, improve, or preserve the community'S supply of affordable housing. The Agency should reimburse the LMllIF for the total amount ($1,446,176) that was inappropriately expended for the overhead costs of other City departments during the audit period.

Agency Response: Refer to "Attachment A" for the Agency's detailed response to this Finding.

Auditor's Conclusion: The first part of the Agency's response indicates that it will begin adopting annual resolutions, as part of the budget process, which support the necessity of planning and administrative expenses from the LMllIF and includes sample language from a recent budget resolution. As noted in our draft report, the statute also requires the annual determination to consider or evaluate the proportionality of planning and administrative expenses relative to actual housing production, improvement and preservation costs. The sample language provided by the Agency fails to do this.

The second part of the Agency's response generally indicates the salaries and related costs of Agency/City staff covered by the LMlliF are for services provided by way of executed agreements between the City of Burbank and the Agency, and City-wide administrative costs paid by the LMllIF are allocated in accordance with cost-allocation practices administered by a cost-allocation consultant.

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The second component of our audit finding is concerned with using the LMIHF to pay the administrative costs (mostly indirect) of other City Departments absent a specific contractual agreement, which demonstrates the nexus between their overhead costs and the Agency's housing program. Although not provided during our audit fieldwork, or with the Agency's response, we cannot conclude that the referenced City/Agency agreement (last amended in 1985), or the unseen "cost allocation practices", amount to a contractual agreement, which demonstrate this nexus for the audit period.

In addition, any expenditure or transfer of revenue from the LMIHF to City Departments that is not supported by a measurable work product susceptible to an audit (e.g., timecard billing records) violates Generally Accepted Accounting Principles. Absent measurable evidence of this manner, it's not possible for an auditor to test the validity of the amount charged. Our audit finding, therefore, remains the same.

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