•.

STATE,bF CAl IFOBNIA -BI ISINESS TRANSPORTATION AND HOI ISING AGENCY

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

December 16, 2002

Mr. John Reekstin Executi ve Director Santa Ana Community Redevelopment Agency P.O. Box 1988 M-25 Santa Ana, CA 92702

Dear Mr. Reekstin:

Enclosed, please find our final audit report regarding the Santa Ana Redevelopment Agency's compliance with statutory housing and housing fund requirements. We have incorporated your responses to the draft audit report into the final report and attached your response letter-see Attachment A.

We are also 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 of Agency and City staffs 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 .BlISINESS TRANSPORTATION AND HOlJSING AGENCY

GRAY DAVIS Governor

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

December 16, 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 the State Controller's Office (SCO) for the review of redevelopment agencies.

Scope: The purpose of our review was to evaluate the Santa Ana 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 SCQ.

During our audit we interviewed the following Agency/City representatives:

Nancy Edwards, Administrative Services Manager Faye Wong, Senior Accountant

Patricia Whitaker, Housing and Neighborhood Development Manager Shelly Landry-Bayle, Housing Programs Coordinator

Rebecca Leifkes, Housing Programs Analyst

We reviewed the following records and materials during the course of the audit: annual reports submitted to the Department; LMlliF 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 expenditure journals; bond documents; adopted findings of the Agency; loan and development agreerrients; county property tax remittance statements; Agency budgets and budget resolutions; real property inventories, and the housing component of the redevelopment implementation plan.

We finished our audit fieldwork in Santa Ana on May 21,2002 and issued a draft report to the Agency dated August 27,2002. The Agency responded to the draft report November 15, 2002. We have incorporated their responses 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 Santa Ana Redevelopment Agency's management. However, this is not intended to limit distribution of this report which,

when final, is a matter of public record.

Sincerely,

Eric Pfost

Chief, Audit Division

2

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 a debt service fund upon receipt. At the end of each fiscal year, 20 percent of the tax increment is transferred from the debt service fund into the LMlliF. The Agency, however, does not ensure that the interest accruing upon the tax increment owed to the LMllIF (while deposited in the debt service fund) is also transferred to theLMIHF .

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

Health and Safety Code Section 33334.2(a) 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 oflow- and moderateincome 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(b) requires any interest earned 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 compounded 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 LMlliF. In the future, the Agency should deposit at least 20 percent of the tax increment allocated to the Agency into the LMIHF immediately upon receipt.

Agency Response: The Agency agrees with this finding and has reimbursed the LMlliF with the compounded accrued interest for the audit period. The Agency has also amended its practices to insure the timely deposit of the LMIHF. (According to Agency staff, $695,000 was reimbursed to the LMIHF.)

Auditor's Conclusion: Tlie response satisfies our finding recommendation. We appreciate the Agency's cooperation.:

3

Finding Number Two: Annual planning and administrative determinations were not made and certain costs may be ineligible.

Condition: The Agency did not make or adopt annual determinations, which consider the necessity and proportionality of LMlliF expenditures for planning and administrative activities during the audit period. Expenditures from the L!vllHF for planning and administrative costs,

. relative to total expenses, during fiscal years 1997/98, 1998/99 and 1999/00 were 50%, 42% and 46%, respectively.

From the Agency's budget documents it appears some of the planning and administrative expenditures from the LMlliF cover the overhead costs of other City Departments (e.g., the

. Housing Authority and Public Works Agency). We requested that the Agency provide documentation (e.g., contractual agreements, cost allocation plan, or timecard billing records) to demonstrate the nexus between the overhead costs of other City Departments and the Agency's affordable housing program. To date, the Agency has not provided the requested documentation. Without such information, it's not possible for an auditor to test the amount charged and the validity of the expenditure relative to the-Agency's housing program.

Criteria: Health and Safety Code Section 33334.3(d)(1) and (2) express the Legislature's intent that LMlliF 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 LMlliF.

Health and Safety Code Section 33334.3(e)(1) and (2) provide that the planning and general administrative costs which may be paid from the LMlliF are those expenses incurred by the Agency and are directly related to the programs and activities authorized under Section 33334.2(e) and are limited to the following:

(A) Costs incurred for salaries, wages, and related costs of the Agency's staff or for services provided through interagency agreements, and agreements with contractors, including usual indirect costs related thereto.

(B) Costs incurred by anonprofit corporation not directly attributable to a specific project.

4

Recommendations:

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 proposed planning and administrative expenditures from the Uv.illIF, 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. '

2. The Agency should stop using the LMlliF to fund any portion of the administrative activities of other City Departments unless specific contractual agreements are executed and measurable records are maintained (e.g., timecard billing records). Formal agreements and .records are necessary to demonstrate how such services are linked to the Agency's affordable housing program.

Agency Response: The Agency agrees with this finding and will make the required written determination as part of the annual budget process. In the future, the Agency will enter into specific contractual agreements with regard to administrative costs.

Auditor's Conclusion: The response generally appears to satisfy the finding recommendation. As noted in recoinmendation number 2, the Agency should ensure that measurable records are maintained in the future to document administrative charges to the LMIHF.

5

Finding Number Three. The Implementation Plan does not accurately reflect project area production requirements.

Condition: The Agency's Implementation Plan does not identify the number of units rehabilitated in the five project areas subject to Section 33413(b) prior to January 1, 1994, or the Agency's progress in meeting this component of the production requirement. From Exhibit 6 pages 7 through 10 of the 1994 Implementation Plan, it appears only newly constructed units were considered to determine past (prior to January 1, 1994) production requirements. (See Findings Four, Five and Six for other production estimate errors.)

Prior to January 1, 1994, new and rehabilitated units developed within a project area triggered project area production requirements and certain new and rehabilitated units (including substantial rehabilitation) were eligible to meet these production requirements. After this date, and through December 31, 2006, new and substantially-rehabilitated units developed within a project area trigger production requirements and certain new, substantially-rehabilitated, or acquired units are eligible to meet these production requirements.

Criteria: Health and Safety Code Section 33413(b)(2) specifies project area production requirements for three periods .: Thefirst period is prior to January 1, 1994. The second is the interim period from January 1, 1994 through December 31,2006, initiated by AB 1290 in 1993 and most recently extended byAB 637 in 2001. The third period is operative after expiration of the interim AB 637 legislation in 2006.

Prior to January 1, 1994 at least 15 percent of all new and rehabilitated units developed within a project area by public or private persons or entities other than the agency are required to be affordable to lower- and moderate-income households.

Between January 1, 1994 and December 31,2006 at least 15 percent of all new and substantiallyrehabilitated units developed within a project area by public or private persons or entities other than the agency are required to beaffordable to lower- and moderate-income households.

After January 1, 2006 at least 15 percent of all new and rehabilitated units developed within a project area by public or private persons or entities other than the agency are required to be affordable to lower- and moderate-income households.

Health and Safety Code Section 33413(b)(4) requires the Implementation Plan, adopted pursuant to Section 33490, to ensure that project area production requirements are met every ten years.

Health and Safety Code Section 33490(a)(2)(B)(iii) requires that the implementation plan identify the number of lower- and moderate-income units that have been developed within one or more project areas that meet the requirements of Section 33413(b)(2).

6

Recommendation: The Agency should revise the Implementation Plan to clearly identify the number of un its rehabilitated in the project area prior to January 1,1994 the affordable rehabilitation need generated, and the Agency's progress in meeting this component of the project area production requirement.

Agency Response: The 1994 Implementation Plan did accurately reflect project area production . requirements: However, it did not clearly differentiate between new and substantiallyrehabilitated units.

Upon reviewing the Agency's production requirements we found that seven new and one substantially-rehabilitated unit identified in the 1994 Implementation Plan as being in a project area were not actually in the project area. Therefore, the number of units triggering a production requirement is correspondingly reduced. This error was found since the Agency has access to improved maps of project areas utilizing GIS mapping. In addition, project areas in Santa Ana are predominantly comprised of industrial/commercial.

In the mid-term update to the 1999 Implementation Plan, the Agency is clearly identifying new and substantially-rehabilitated units, and has removed units which are outside project areas.

Auditor's Conclusion: The response fails to satisfy our audit recommendation that the

. Implementation Plan be revised to identify the Agency's production obligations on the basis of units rehabilitated (rather than substantially rehabilitated) in the project area prior to January 1, 1994. As a result, our recommendation remains the same.

Finding Number Four: Reportedproduction progress includes ineligible housing units:

Condition: The 1994 Implementation Plan identifies the affordable housing developments that had been completed to date and credits the Agency with having completed 212 affordable production units--see Exhibit 6, pages 5 and 11 of the Plan. The 199-unit Flower Park Development, however, does not appear to meet statutory requirements for production units. In particular, it does not appear the Agency caused, by regulation or agreement, the project to be available at affordable housing cost nor are the units secured by recorded covenants or restrictions enforceable by the Agency or City.

Criteria: Health and Safety Code Section 33413(b)(2) requires, in part, that "At least 15 percent of all new and substantially-rehabilitated dwelling units developed within a project area under the jurisdiction of an agency by public or private entities or persons other than the agency shall be available at affordable housing cost to persons and families of low- or moderate-income."

7

Health and Safety Code Section 33490(a)(2)(B)(iii) requires that the Implementation Plan identify the number of lower- and moderate-income units that have been developed within one or more project areas that meet the requirements of Section 33413(b)(2).

Health and Safety Code Section 33413(c) requires affordable production units to remain available at affordable housing cost for the longest feasible time, but for not less than the period of the land use controls established by the redevelopment plan.

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 33334.3(f)(2) requires the agency to record in the office of the county recorder covenants or restrictions running with the land, for each unit of real property, which are enforceable by the Agency or the community.

Health and Safety Code Section 33418 requires an agency to monitor, on an ongoing basis, any housing affordable to persons and families of low or moderate income made available pursuant to any provision of this part.

Recommendation: The Agency should revise the Implementation Plan to accurately reflect the

· number of units developed in Santa Anathat are eligible to meet the housing production requirements of Section 33413(b )(2).

· Agency Response: The Agency agrees that the 199-unit Flower Park does not have the statutory requirements to count towards production. ·This project is a low-income senior project with recorded State covenants since it is financed through the California Housing Finance Agency. However, upon reviewing documentation for this response, the Agency found additional units, not previously identified, with Agency/City enforceable covenants. The 1994 Implementation Plan identified a total of 226 units that meet the production requirement. In actuality, the Agency/City entered into covenants required under State Redevelopment Law for 614 units, which were provided through 1999.

The Agency identified the accurate number of production units and will list them in the mid-terin update to the 1999 Implementation Plan.

8

Auditor's Conclusion: The 226 affordable units listed on Page 11 of the 1994 Implementation Plan, include the 199 units in the Flower Park project. Twenty-seven of the other affordable units (Henninger Village, Adams and Raitt Street projects) are located outside adopted project areas. Therefore half, or a total of 13, of these units are eligible to meet production requirements.

The updated Implementation Plan identifies an additional 30 units in the Townsquare project and 21 additional production units in the Henninger Village project developed between 1994 and 1999.

Thus the total number of eligible, affordable production units identified in the Plans as having been developed prior to 1999 totals 64 units. According to the Agency then, this leaves 550 affordable production units that were not accounted for in either of the Implementation Plans.

We agree that the Agency should correct this substantial omission of affordable production units. To meet statutory production requirements, the Agency should ensure that these previously unidentified covenanted units are restricted at affordable housing cost for at least the life of the applicable redevelopment plan-See Section 33413(c).

Finding Number Five: The Implementation Plan underestimates project area production requirements.

Condition: The Implementation Plan underestimates the Agency's existing or current affordable housing production requirements. Pages 4 and 5 of Exhibit 6 of the 1994 Implementation Plan indicate that the Agency's existing affordable housing production requirement is 100, based upon the construction of 665 total units in the Agency's project areas since adoption and through January 1, 1994.

The calculation approach used by the Agency, multiplying the number of units developed in the project areas by 15% underestimates current production requirements and could result in the Agency's failure to ensure that at least 15% of all units developed in the project areas are affordable to lower- and moderate-income households. The Agency's approach will ensure that only 13% of all units developed (or rehabilitated) in the project areas are affordable:

-,

665(.15) = 100

665 + 100 = 775

1001775 = 13%

9

Using an appropriate calculation method, 665 units generate a need for 117 additional affordable production units:

665(.15) 0.85 117 + 665 117/782

=

117 782 15%

=

=

As a result, the Plan appears to underestimate the Agency's existing affordable housing production requirement by 17 units ..

Criteria: Health and Safety Code Section 33490(a)(2)(B) requires, in part, that the implementation plan identify the number of units affordable to lower- and moderate-income households that have been developed in 'one or more project areas to meet the requirements of Section 33413(b)(2), and estimate the number that will be needed over the life of the plan and during the next ten years to meet this requirement.

Health and Safety Code Section 33413(b)(2) requires, in part, that "At least 15 percent of all new and substantially-rehabilitated dwelling units developed within a project area under the jurisdiction of an agency by public or private entities or persons other than the agency shall be .available at affordable housing cost to persons and families of low- or moderate-income."

Recommendation: The Agency should correct the Implementation Plan to ensure that production requirements are accurately calculated, and production progress is accurately reported, to ensure that sufficient lower- and moderate-income production units are made available within statutory

deadlines. .

Agency Response: The Agency's understanding and calculation of our production requirement is in accordance with Health and Safety Code Section 33413(b)(2) which requires in part that "at least 15 percent of all new and substantially rehabilitated dwelling units developed within a project area ... " be affordable to low- or moderate-income households. Based on the 1994 Implementation Plan the total number of new and substantially rehabilitated units in the project areas totaled 665. This numberalso includes units that have afford ability covenants. The "appropriate calculation" suggested assumes that (1) none of the dwelling units developed or rehabilitated within the project areas were restricted as affordable units meeting the requirements of Section 33413, and (2) that all of the required affordable units will be developed within the project areas. Based on the "appropriate calculation" stated in the draft audit finding, it assumes a production of 782 units in project areas not 665. This is stating a requirement of 17.5% not 15% as required by HS&C 33413(b)(2). This substantially misstates the actual production needed in the project areas.

10

As stated in the response to finding number three, upon review of units that triggered an obligation, the Agency has found some of the units were not in a project area; thereby reducing the number identified in the 1994 Implementation Plan. The total production requirement is 628. The Agency will reflect this change in the mid-term update to the Implementation Plan.

Auditor's Conclusion: We agree that the calculation method suggested in the draft audit report "assumed" that none of the 665 dwelling units were restricted affordable units. We assumed this because this is what. the Plan specifically indicates. Pages 7-10 of the Plan identify units within buildings (developed between 1976 and 1992) totaling 665 for the four project areas. The number of "units with possible affordability covenants" in the listed buildings is zero.

Pages 11-12 identify the number of affordable units developed in other housing projects (between 1976 and 1994) inside and outside project areas that are affordable-a total of 13 units when the Flower Park project is subtracted.

The Agency's ability to meet part of its production requirements outside. adopted project areas

. does not prevent it from accurately calculating the minimum number of production units required in accordance with Section 33490(2)(B)(ii). The minimum number will double for each unit ultimately developed outside adopted project areas.

Since the Flower Park project is not eligible to meet production requirements, the 199 units in this development should be added to the total number of non-affordable units developed and

. rehabilitated in the project area for purposes of determining the minimum number of affordable production units required by 2004.

Finding Number Six: Units are "double counted" to meet replacement housing and project area production requirements.

Condition: Based upon our review of the 1994 Implementation Plan, it appears the Agency is inappropriately counting the same units used to meet project area production requirements pursuant to Section 33413(b) to also meet replacement-housing needs pursuant to Section 33413(a). For example, Page 5 of Exhibit 6 of the Implementation Plan indicates:

The Santa Ana Redevelopment Agency has structured its affordable housing program strategies so that affordable units produced pursuant to its replacement housing requirement also meet its inclusionary requirement.

11

Criteria: Health and Safety Code Section 33413(b)(3) states that "the requirements of this subdivision shall apply independently of the requirements of subdivision (a)."

The Department's 1993, Compliance Plan Advisory memorandum indicates that units used to meet replacement housing needs pursuant to Section 33413(a) may not also be used to meet project area production requirements pursuant to Section 33413(b). The Department's Legal Affairs division issued an updated opinion on this matter in April of 2000 (see the attached memorandum).

Recommendation: The Agency should revise and correct the Implementation Plan and replacement housing report to identify which of the units assisted by the Agency, or otherwise caused to be available at affordable housing cost, are eligible to meet a replacement housing need pursuant to Section 33413(a) versus project area production requirements pursuant to Section 33413(b).

The Implementation Plan should also be revised to ensure the Agency would be able to meet current project area production requirements within the ten-year timeframe of the Plan (i.e., by December 31,2004);

Agency Response: Although the 1994 Implementation Plan stated that "The Santa Ana

. .. Redevelopment Agency has structured its affordable housing program strategies so that affordable units produced pursuant to its replacement housing requirement also meet its inc1usionary requirement", in fact, there are no units "double counted". The Agency does count replacement units that are required under federal law , but not redevelopment law (because the replacement units are replacing units that were not located in the redevelopment project areas), to also meet Agency production. The Agency is fulfilling a federal obligation not a state obligation; therefore, it is allowable and is not statutorily prohibited. To the extent that units are counted toward production, each unit does have state mandated covenants. The Agency will clearly identify replacement and production units in the mid-term update to the Implementation Plan.

Auditor's Conc1usion:We are unable to comprehend how the Agency could accrue a replacement housing obligation under federal law but not State redevelopment law (for units destroyed or removed outside adopted project areas). If the Agency provided financial assistance pursuant to a written agreement (regardless of the funding source) or otherwise caused the units to be removed or destroyed, it would be subject to the replacement housing requirements of Section 33413(a). Such replacement housing units would be ineligible to also meet p~oject area

production requirements. .

If, in fact, the replacement housing units were solely an obligation of an entity other than the Agency (e.g., the City of Santa Ana) and were developed within a redevelopment project area, then the units would probably be eligible to meet production requirements provided they meet the afford ability covenant and land use control requirements of Section 33413(c).

12

Finding Number Seven: Real property held in excess of statutory limits.

Condition: The Agency's record of real properties acquired with LMIHF revenue reveals that three properties have been held in excess of five years without approval of an extension and two of these were held in excess of the ten-year statutory limit.

Criteria: Health and Safety Code Section 33334.16 states that for each interest in real property acquired using moneys from the Low and Moderate Income Housing Fund, the agency shall, within five years from the date it first acquires the property interest for the development of housing affordable to persons and families of low- and moderate- income, initiate activities consistent with the development of the property for that purpose.

If these activities have not been initiated within this period, the legislative body may, by resolution, extend the period during which the agency may retain the property for one additional period not to exceed five years. In the event that physical development of the property for this .purpose has not begun by the end of the extended period, or if the agency does not comply with this requirement, the property shall be sold and the moneys from the sale, less reimbursement to the agency for the cost of sale, shall be deposited in the agency's Low and Moderate Income Housing Fund.

Health and Safety Code Section 33080.8(i)(6) provides that failure to initiate development of housing on real property acquired using moneys from the LMIHF or sell the property, as required by Section 33334.16, constitutes a major violation of the State's Community Redevelopment Law.

Recommendation: The Agency should adopt extensions for real properties currently held in excess of five years and assure that development activities are initiated prior to expiration of the extended period. The Agency should begin developing or attempting to dispose of all real property (in accordance with statutory requirements) held in excess of ten years,

Agency Response: The Agency agrees that real property has been held more than the statutory

. limits. The Agency is in the process of disposing all real property held more than 10 years. The Agency has adopted extensions for those properties held for more than 5 years but less than 10.

Auditor's Conclusion: The Agency's response satisfies our finding recommendation.

13

Observation Number One: The Agency is failing to efficiently, effectively, and economically use its LMIHF resources to increase, improve, and preserve the community's

supply of affordable housing. .

Condition: The majority of the Agency's LMlliF expenditures for the three-year audit period were for planning and administrative costs (approximately $8 million dollars, representing 47% of total expenditures) and street and sidewalk improvements (approximately $6 million dollars, representing 35 % of total expenditures).

Fewer than 10 households were directly assisted by the Agency's affordable housing program, in the form of down payment assistance or rehabilitation improvements, during the three-year audit period. The total amount reportedly expended for housing rehabilitation and property acquisition

during the audit period totals some $2.7 million, representing about 16% of total expenditures. .

(Down payment assistance is not itemized in the Agency's annual reports but is believed to be a subset of reported property acquisition costs.)

Criteria: Health and Safety Code Section 33334.3(d) expresses the Legislature's intent that the LMlliF be used to the rriaximum 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 reorganize its affordable housing program to ensure that future LMTIIF expenditures are more effectively, efficiently, and economically used to address the community's urgent housing needs.

Agency Response: The Agency takes exception to this observation. This observation is much too simplistic as ittakes into account only a three year window in time when a broader view is needed as well as a more realistic assessment of the Agency's commitment to providing low and moderate income housing. Low/moderate income housing projects take years to implement, with much time required up front in the strategizing and planning stages. The Agency has had major production years, however, the years reviewed in this audit period were basically the strategizing and planning stages for large scale low/moderate housing projects that have since followed. Further, the numbers do not take into account failed projects that were reviewed and planned during the audit period which did not come to fruition due to lack of interest or outside funding and/or backing.

Your recommendation for the Agency to "reorganize its affordable housing program" is offensive and misdirected as this Agency has complied with the intent and spirit of Health and Safety Code Section 33334.3 and has strived to use the LMIHF efficiently to defray the costs of production, improvement, and preservation of low and moderate income housing, including amounts expended for planning and administrative costs.

14

Auditor's Conclusion: Weagree that, in some cases, a three-year time span may be insufficient to accurately judge an Agency's housing program. We therefore reviewed the Agency's annual reports filed with the Department for the three-year period prior to the audit (fiscal years 1994/95, 1995/96 and 1996/97), and the report filed for fiscal year 2000/01 (the most recent

reporting year available) to have a more representative record. .

We did not find that the amount and proportion of expenditures for planning and administrative costs, off-site improvements, and land acquisition, relative to actual housing production, improvement, and preservation activities, to be significantly different. Significantly more units were assisted, however, during the three-years preceding the audit period.

For the 1994/95 through 1996/97 period combined, we found that approximately $9.3 million was spent for off-site improvements costs (48% of all expenditures); $6 million for planning and administrative costs (31 % of all expenditures); $2.4 million for housing assistance (12% of all expenditures); and$1.7 million farland purchases (9% of all expenditures). A total of 149

housing unitslhouseholds were assisted during this period, mostly with rehabilitation .

improvements and down-payment subsidies.

For the 2000/01 period, we found that approximately $2.7 million was spent for planning and administrative costs (43% of all expenditures); $1.7 million farland acquisition (27% of all. expenditures); $1.5 million for off-site improvements (24% of all expenditures); and $340,000 for housing rehabilitation (5% ofall expenditures). No units were reported as having been assisted (i.e., completed) during the reporting year.

Based upon this seven-year record, we stand by our audit observation and recommend that appropriate steps are taken to ensure that future LNIIHF expenditures are more effectively, efficiently, and economically used to address the community's urgent housing needs.

15

Business, Transportation and Housing Agency

Memorandum

To

Eric Pfost, Audits Manager .

Richard Friedman, Chief Counsel R".

Date: April 14, 2000

Thru

From

Ronald S. Javor, Senior Staff co:~:-?-Department of Housing and Community Development Legal Affairs Division

Telephone: CALNET (8) 473-7288 (916) 323-7288

Facsimile: (916) 323-2815

Subject:

Redevelopment Law: Counting Replacement Housing as Production Housing

You have asked whether it is still the Department's opinion, as expressed inQuestion 13 ofthe "1994 Redevelopment Housing Law Advisory" memorandum that units reportedly used to meet project area production requirements pursuant to section 33413(b) of the Health and Safety Code (hereinafter, all references to section numbers refertothe Health and Safety Code), may not also be used to meet replacement

housing needs pursuant to section 33413(a). .

It is our opinion that there have been no changes in the redevelopment law, or cases interpreting that law, which would cause us to change our opinion that inclusionary/production housing developed pursuant to section 33413(b) may not be used to meet replacement housing requirements under section 33413(a).

Redevelopment Housing Law Advisory Memorandum

Question 13 of the Memorandum provides the following:

"Q: Can affordable replacement units provided pursuant to Section 33413(a) be counted toward the affordability mix requirements of Section 33413(b)?

"A: No. An affordable housing unit developed within the project area or developed

by the agency should not be counted as meeting both a replacement housing obligation pursuant to Section 33413(a) and an affordable percentage requirementpursuant to Section 33413(b ). The following factors support this interpretation:

U*· It is consistent with the plain meaning of Section 33413(b )(3) which says,

in part, "The requirements of this subdivision [Le., 33413(b), regarding affordability percentages] shall apply independently of the requirements of subdivision (a)," regarding replacement units. AB 1290 changed this language from a clause to a separate sentence, which further distinguishes it from the following language and emphasizes this plain meaning.

Eric Pfost April 17 , 2000 Page 2

"Replacement housing requirements are subject to their own unique affordability requirements (Sections 33334.5 and 33413(a)), and their own unit planning provisions (Section 33413.5). After January 1, 1996, replacement housing requirements will apply to all project areas regardless of adoption date (Section 33413(d)(1)). The existence of these differences between requirements applying to Section 33413(a) and those applying to 33413(b) supports the plain meaning

· interpretation of Section 33413(b)(3) ..

"* It is consistent with housing element review criteria. Regional housing

needs figures for new units needed to accommodate expected population growth include an allowance of additional units to replace normal market removals through fire, demolition, or other causes. The Department of Finance, when developing its annual estimates of the state's housing stock, seeks data from local governments regarding removals as well as new construction. In both these procedures, numbers of "new" units are developed as net numbers; units which replace losses are not considered to be net additions to the housing stock. It would be a departure from this longstanding principle to count units which replace units lost from the housing stock in a category representing "new" units.

U* It is consistent with available information regarding legislative intent to

increase production of affordable housing. The interpretation given here is more consistent with this goal than is the view that new units can be double-counted as meeting both 33413(a) and (b).

"An agency should therefore plan to meet its Section 33413(b) obligations independently from its replacement housing obligations." (emphasis in original)

Analysis

· A number of changes to section 33413 have been enacted since the enactment of AB 1290 (Ch. 942, Stats. of 1993, Sec. 24), which was the version of section 33413 upon which the memorandum was based. However, none have made changes which would

cause us to modify our opinion. .

In terms of differences between the requirements for the two types of housing, it is significant to note that subdivision (b)(4) of section 33413 allows 10 years to meet inclusionary and production requirements, whereas the replacement housing units must

· be met within 4 years of displacement. This has been modified since 1994 to require meeting inclusionary and production goals annually if they are not met during the prior 10 years, or allowing excess from a prior ten-year period to count during the next ten years. Both of these are inconsistent with the spirit and letter of subdivision (a)'s replacement housing provisions, since the statute allows (and mandates) replacement within 4 years, and under section 33411.1, prohibits displacement unless units are available. On the other hand, it is difficult to imagine that replacement units could be

Eric Pfost April 17, 2000 Page 3

built 10 years or more in advance of the destruction of units, and be tied to them as "replacement" .

In addition, double-counting replacement and production units would be inconsistent with the statutory provisions of subdivision (d)(2) of section 33413. That section provides that an agency may "elect" to replace lost dwelling units with up to "three replacement dwelling units pursuant to subdivision (a)". It is difficult to understand why the Legislature would allow an agency to .meet its production and inclusionary requirements with units which the agency "elected" to designate as replacement units, when both are specific requirements emanating from the authority to utilize tax increment funds and both were enacted to eliminate or reduce perceived abuses of

redevelopment authority. .

Finally, the "implementation plan" requirement of Section 33490 has been significantly amended since its enactment in 1994. Much of the detail which has been added, ' particularly in subdivision (a)(2), now imposes specific reporting requirements distinguishing between housing provided pursuant to ·section 33413(b) [inclusionary/production housing] and that required pursuant to section 33413(a) [replacement housing]. If the Legislature had intended the blurring of these categories, it would not have increased the disaggregated reporting requirements.

In conclusion, there have been no amendments to the Redevelopment Law which would indicate an intent of the Legislature to explicitly or implicitly overrule this Department's 1994 opinion that agencies may not count units reportedly used to meet project area production requirements pursuant to Section 33413(b) may not also be used to meet replacement housing needs pursuant to section 33413(a).

MAYOR

Miguel A. Pulido MAYOR PRO TEM Patricia A. McGuigan

COUNCILMEMBERS Claudia C. Alvarez Lisa Bist

Alberta D. Christy Brett Franklin

Jose Solorio

CITY MANAGER

David N. Ream

CITY ATTORNEY

Joseph W. Fletcher CLERK OF THE COUNCIL Patricia E. Healy

CITY OF SANTA ANA

20 CIVIC CENTER PLAZA· P.O. BOX 1988 SANTA ANA, CALIFORNIA 92702

November 15, 2002

VIAF ACSIMILE AND U.S. MAIL

Mr. Eric Pfost, Chief Audit Division

Department of Housing and Community Development . 1800 Third Street, Suite 310

PO Box 952050

Sacramento, CA 94252-2050

Dear Mr. Pfost:

Thank you for allowing our Agency the opportunity to respond to the draft report of your audit findings of the .Agency's activities and expenditures from its Low and Moderate Income Housing Fund (LMIHF). We particularly appreciate your granting Lisa Storck's request for an extension in the time to respond. The findings of your letter will be addressed in their respective order.

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

Agency Response: .

The Agency agrees with this finding and has reimbursed the LMIHF with the compounded accrued interest for the audit period. The Agency has also amended its practices to insure the timely deposit of the LMIHF.

Finding Number Two: Annual planning and administrative determinations were not made and certain costs may be ineligible.

Agency Response:·

The Agency agrees with this finding and will make the required written determination as part of the annual budget process. In the future, the Agency will enter into specific contractual agreements with regard to administrative costs.

cs. )~J

Mr. Eric Pfost, Chief Audit Division

Department of Housing and Community Development November 15, 2002

Page 2

Finding Number Three: The Implementation Plan does not accurately reflect project area production requirements.

Agencyl~esponse: The 1994 Implementation Plan did accurately reflect project area production requirements. However, it did not clearly differentiate between new and substantially rehabilitated units.

Upon reviewing the Agency's production requirements we found that seven new and one substantially rehabilitated unit identified in the 1994 Implementation Plan as being in a project area were not actually in a project area. Therefore, the number of units triggering a production requirement is correspondingly reduced. This error was found since the Agency has access to improved maps of project areas utilizing GIS mapping. In addition, project areas in Santa Ana are predominately comprised of industrial/commercial.

In the mid-term update to the 1999 Implementation Plan, the Agency is clearly identifying new and substantially rehabilitated units, and has removed units which are outside project areas.

Finding Number Four: Reported production progress includes ineligible housing units.

Agency Response: The Agency agrees that the 199-unit Flower Park does not have the .

statutory requirements to count toward production. This project is a low-income senior project with recorded State covenants. since it is financed through the California Housing Finance Agency. However, upon reviewing documentation for this response, the Agency found additional units, not previously identified, with Agency/City enforceable covenants. The 1994 Implementation Plan identified a total of 226 units that meet the production requirement. In actuality, the Agency/City entered into covenants required under State Redevelopment Law for 614 units, which were provided through 1999.

The Agency identified the accurate number of production units and wi11list them in the mid-term update to the 1999 Implementation Plan.

Finding Number Five: The Implementation Plan underestimates project area production requirements.

Agency Response: The Agency's understanding and calculation of our production requirement is in accordance with Health and Safety Code Section (HS&C) 33413(b)(2) which requires in part that "at least 15 percent of all new and substantially rehabilitated dwelling units developed within a project area ... " be affordable to low- or moderate-income households. Based on the 1994 Implementation Plan the total number of new and substantially rehabilitated

Mr. Eric Pfost, Chief Audit Division

Department of Housing and Community Development November 15, 2002

Page 3

units in the project areas totaled 665. This number also includes units that have affordability covenants. The "appropriate calculation" suggested assumes that (1) none of the dwelling units developed or rehabilitated within the' project areas were restricted as affordable units meeting the requirements of Section 33413, and (2) that all of the required affordable units will be developed within the project areas. Based on the "appropriate calculation" stated in the draft audit finding, it assumes a production of 782 units in project areas not 665. This is stating a requirement of 17.5% not 15% as required by HS&C 33413(b)(2). This substantially misstates the actual production needed in the project areas.

As. stated in the response to finding number three, upon review of units that triggered an obligation, the Agency has found some of the units were not in a project area; thereby reducing the number identified in the 1994 Implementation Plan. The total production requirement is'628. The Agency will reflect this change in the mid-term update to the Implementation Plan.

Finding Number Six: Units are "double counted". to meet replacement housing and project area production requirements.

Agency Response: Although .the 1994 Implementation Plan stated that "The Santa Ana Redevelopment Agency has structured its affordable housing program strategies so, that affordable units produced pursuant to it replacement housing requirement also meet its inclusionary requirement", in fact, there are no units "double counted". There is no additional information that indicated that the Agency had indeed "double counted'.'. The Agency does count replacement units that are required under federal law, but not redevelopment law (because, the replacement units are replacing units that were not located in the redevelopment project areas), to also meet Agency production. The Agency is fulfilling a federal obligation, not a state obligation; therefore, it is allowable and is not statutorily prohibited. To the extent that units are counted toward production, each unit does have state mandated covenants. The Agency will clearly identify replacement and production units in the mid-term update to the Implementation Plan.

Finding Number Seven: Real property held in excess of statutory limits.

Agency Response: The Agency agrees that real property has been held more than the statutory limits. The Agency is in the process of disposing all real property held more than 1 0 years. The Agency has adopted extensions for those properties held for more than 5 years but less than 10.

Mr. Eric Pfost, Chief Audit Division

Department of Housing and Community Development November 15,2002

Page 4

Observation Number One: The Agency is failing to efficiently, effectively, and economically use its LMIHF resources to increase, improve, and preserve the community's supply of affordable housing.

Agency Response: The Agency takes exception to this observation. This observation is much too simplistic as it takes into account only a three year window in time when a broader view is needed as well as a more realistic assessment of the Agency's commitment to providing low and moderate income housing. Low/moderate income housing projects take years to implement, with much time required up front in the: strategizing and planning stages. The Agency has had major production years, however the years reviewed in this audit period were basically the strategizing and planning stages for large scale low/moderate housing projects that have since followed. Further, the numbers do not take into account failed projects that were reviewed and planned during the audit period which did not come to fruition due to lack of interest or outside funding and/or backing.

Your recommendation for the Agency to "reorganize its affordable housing program" is offensive and misdirected as this Agency has complied with the intent and spirit of Health and Safety code section 33334.3 and has strived to use the LMlliF efficiently to defray the costs of production, improvement, and preservation of low and moderate income housing, including amounts expended for planning and administrative costs.

Thank you for your patience in our response.' Please feel free to call me at (714) 647-5360 if you have any further questions.

Very truly yours,

!JII-

J l :. Reekstin Executive Director

Community Development Agency

C: Joseph W. Fletcher, City Attorney

Lynn Hutchins, Esq., Goldfarb & Lipman

Sign up to vote on this title
UsefulNot useful