STATE OF CAt tFORNJA.=BliSlbIESS TRANS.E.

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",DEPARTMENT OF I-lOUSING AND COMMUNITY DEVELOPMENT A VDIT DIVISION

'1, 1800 \Third Street, Suite 310 P. O. Box 952050 Sacramento, CA 94252-2050 (916) 324-9763

FAX (916) 445-1497

December 2, 2004

Susan Bergeron-Vance

Director, Finance and Administrative'

Services

City of Santa Fe. Springs 11710 Telegraph Road

Santa Fe Springs, CA 90670

Dear Ms. Bergeron-Vance:

Enclosed please find our final audit report regarding the Santa Fe Springs Community Development Commission's compliance with statutory housing and housing fund requirements. We have incorporated your responses to the draft report into the final report and attachedyour

response letter -See Exhibit 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 staff during the course of the audit. If you have any questions concerning the final report, please feel free to contact me at (916) 322- 3457 or by email atkjung@hcd.ca.gov.

Sincerely,

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Keith Jung

Chief, Audit Division

Enclosure

STATE OF CALIFORNIA ·BUSINESS TRANSPORTATION AI)/D.HQliSJW1AGENCY

ARNQLD SCHWARZE~EGGEB_GQv.emQ{

"DEPARTMENT OF HOUSING AND COMMUNITY DEVELOPMENT

A UDIT DIVISION

(1 1800 Third Sireel, Suile 310 P. O. Box 952050

Sacra menlo, CA 94252·2050 (916) 327·2042

FAX (916) 445·1497

Lucetta Dunn, 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 City of Santa Fe Springs Community Development Commission (Agency) compliance with statutory housing requirements including administration and use of the Low and Moderate Income Housing Fund (LMIHF) for fiscal years 1999/00',2000101 and 2001102. Certain issues required the review of information and records outside this audit period. We used the Guidelines for Compliance Audits of California Redevelopment Agencies as issued by the SCO.

During our audit we interviewed the following AgencylCity representatives:

Susan Bergeron- Vance, Director of Finance and Administrative Services Paul Ashworth, Assistant to the Director of Planning and Development Terri Bui, Accounting Manager

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; chart of accounts; revenue and expenditure summary reports; expenditure detail reports; county property tax remittance statements; the Agency budgets; adopted findings of the Agency; loan, grant and development agreements; Agency correspondence; and the housing component of the redevelopment implementation plans.

We completed our audit fieldwork in Santa Fe Springs on February 25, 2004 and issued a draft report to the Agency dated September 14,2004. The Agency responded to the draft report on

October 14, 2004. We have incorporated their responses into this report and have attached their response letter. (See "Exhibit A".)

This report is solely intended for the use of the Department and the City of Santa Fe Springs. Community Development Commission's management. However, this is not intended to limit distribution of this report which, when final, is a matter of public record.

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Keith lung

Chief, Audit Division

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Finding Number One: The Agency used LMIHF revenues toward ineligible costs.

Condition: The Agency expended LMIHF revenues to assist a homeless shelter and a child care facility in the amounts of $140,516 and $797,683, respectively, during the audit period.

Criteria: Health and Safety Code Section 33334.2(e)(l-I1) prescribes the permissible uses of the LMIHF.

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.

The Department has expressed a legal opinion (Attachment A) that the LMIHF should not be used to develop and operate homeless shelters.

Recommendati ons:

1. The Agency should reimburse the LMIHF the amount of $938,199, plus interest which would have accrued during the audit period.

2. The Agency should abstain from using the LMIHF for the development of homeless shelters and child care facilities in the future and ensure that funded activities comply with prescribed uses and purposes of the fund.

Agency Response:

• Child Care facility assistance $797,683

The City's history of providing comprehensive housing and social services to its residents might better explain why Section 33334.2(e) (1-11) was interpreted as an opportunity to provide additional services to low- and moderate-income families, albeit in an indirect manner. We consider Child Care a fundamental need for working parents. If parents cannot work because they lack adequate, affordable child care, then they cannot meet basic needs. By utilizing LMIH funds to subsidize the child care program, the City was able to maintain fees at a lower rate since approximately 75% of the families participating in this program are low- or moderate-income households.

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Section 33334.2(e) (1-11) allows forsubsidies to low- and moderate-income households. The

utilization of Low and Moderate Income Housing (LMIH) funds to subsidize low- and moderateincome households in this community assists these households by making quality child care available at subsidized rates and in turn making housing more affordable.

LMlli funds are to be expended for the purpose of increasing, maintaining and preserving the community's supply of low- and moderate-income housing available at affordable housing costs. We believe the use of LMIH funds to offset chi Id care program costs meets two of these goals by both maintaining and preserving the supply of affordable housing for low- and moderate-income

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families. These two goals are accomplished when these households have more disposal income available to maintain and improve their homes. This in tum instills pride in one's house, throughout the neighborhood and community. The City has been fortunate that it has sufficient LMIH funds available to fund the child care subsidies as a component of its comprehensive housing preservation program and maintain what is a well-kept 1950's era residential community where working-class families can afford to live and raisetheir families in a healthy and safe environment.

The City respectfully requests that HCD reconsider this finding. Although we have discontinued the use of LMIH funds for child care programs effective July 1, 2004, we request your

affirmation that this program be recognized as an eligible program for the comniunity of Santa Fe Springs and request that HCD reverse the requirement to reimburse these funds for the audit period. '

• Homeless Assistance $140,516

The Rio Hondo Temporary Home (RHTH) is a homeless shelter that began operating in June, 1988. RI-ITH is one of only two family shelters in southeast Los Angeles County and the only shelter in our area that accepts unmarried couples, men, and large families. It is also, the only shelter that accepts infants, children and boys and girls up to age 17. The shelter provides homeless families temporary housing from six months to a year with the eventual goal of permanent housing. The shelter also provides a comprehensive range of services (i.e. counseling, child care, employment assistance, etc.) designed to rehabilitate and help families progress to independent living.

It was our interpretation that byproviding the homeless shelter subsidy we were assisting very low-income families and providing them the opportunity to eventually transition into permanent housing.

When the City became aware that use of the LMIH funds for the RHTR might not qualify as a justifiable expenditure, the City immediately stopped allocation of these funds to this activity. This change took place a year and a half before the audit. Please note that the City's interpretation of Section 33334.2(e) (1-11) to assist the RHTH was done without malice. On the contrary, it was done in good faith to assist low- and moderate-income families. As a result, we respectfully appeal yourrequirernent for the reimbursement of these funds to the LMIH fund and hope that you take this explanation into consideration.

Auditor's Conclusion: We applaud the Agency for discontinuing the expenditure of LMTI-IF revenues for ineligible uses. At the same time, we take exception to the Agency's points it proposes to support the expenditure of LMIHF revenues for ineligible uses during the audit period.

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Childcare Facility Expenditures-

Contrary to the Agency's position, Health and Safety Code Section 33071 states the Legislature finds and declares that a fundamental purpose of redevelopment is to expand the supply of low- and moderate-income housing. Therefore, the Agency should be providing direct housing subsidies to low- and moderate-income households, not indirect subsidies presuming the assisted families would then have more disposable income for housing costs.

Per statute, in addition to expanding and increasing the supply of low- and moderateincome housing, LMIHF revenues are to be expended for the purpose of improving (not maintaining) and preserving the community's supply of low- and moderate-income housing at affordable housing costs. The child care subsidy did not improve affordable housing; your response does not evidence the child care subsidy recipients' housing was rehabilitated nor did housing benefit from off-site improvements. The child care subsidy did not preserve affordable housing; preservation of affordable units per H&S Code Section 33334.2(e)(l1) refers to housing developments which are assisted or subsidized by public entities and which are threatened with imminent conversion to market rates.

Homeless Shelter Expenditures -

The Agency characterizes the services provided by the homeless shelter as additional support to reconsider the shelter as a reasonable expense of the LMIHF, but in fact evidences other ineligible costs to the LMIHF in the form of counseling, child care and employment assistance.

In conclusion, allowing subsidies for purposes other than housing assistance is not consistent with statute. Therefore, our finding remains the same and we recommend LMIHF revenues used for purposes other than housing be reimbursed.

Finding Number Two: The Agency used LMIHF revenues outside the community for expenditure.

Condition: The Agency used the LMIHF in the amount of $312,762 under its Home Repair Program to assist low- and moderate-income households outside the territorial jurisdiction of the City during the audit period.

Criteria: Health & Safety Code Section 33334.3(c) requires the moneys in the LMIHF to be used to increase, improve, and preserve the supply of low- and moderate-income housing within the territorial jurisdiction of the agency.

Health & Safety Code Section 33120 states the territorial jurisdiction of a city is the territory within its limits.

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Health & Safety Code Section 33334.2(a) specifies that the LMIHF is to be used for the purpose of increasing, improving, and preserving the community's supply of low- and moderate-income housing available at affordable housing cost to persons and families of low or moderate income.

A Legislative Counsel May 6, 1988 Opinion, concerning Senate Bill No. 1719, concludes that the expenditure of LMIHFs outside the community would violate Article 16 of the State

Constitution.

Recommendations:

1. The Agency should reimburse the LMIHF the amount of $312,762, plus interest which would have accrued during the audit period.

2. The Agency should cease to expend LMIHF revenues outside the corporate boundaries of the City of Santa Fe Springs.

Agency Response: During the audit reporting period, the City of Santa Fe Springs used Community Development Block Grant funds issued under contract with the County of Los Angeles to perform "Handyworker" home improvement work. It is noted thatthis handyworker home improvement work benefited eligible very-low and low-income homeowners living in the County unincorporated area situated contiguous to Santa Fe Springs and within the City's' designated Sphere of Influence. This home rehabilitation work primarily corrected Building Code violations posing a health and safety risk hazard.

The City respectfully offers three important points for consideration: 1.) Prior to Sec. 33334.17 being repealed in October 2001, the use of LMIHF outside the jurisdiction was both allowed and encouraged to increase the supply of affordable housing in the State; accordingly, the Handyworker program repaired approximately 25 homes per year in the County unincorporated area, and 2.) The Handyworker program did not involve the transfer of LMIHF funds from Santa Fe Springs to another agency; rather, the LMIHF were used to supplement the salary and benefit costs of City employees that provided the handyworker services to the very-low and low-income households in the County unincorporated area, and 3.) The use ofLMIHFdid not limit the scope or restrict the depth of the housing services provided within the agency's boundaries that are also funded with LMIHF. Due to the agency's multi-faceted housing programs and the generous amount of LMIHF available, Santa Fe Springs was able to fully fund both its own housing programs and the Handy worker program conducted outside its jurisdictional boundary.

In accordance with A.B.661 that repealed Sec. 33334.17 allowing the use ofLMIHF outside the territorial jurisdiction, the City will cease to expend LMIHF outside its boundaries. In. consideration of the effective date of A.B. 661, and giving due credit for performing home rehabilitation work for income eligible very-low and low-incorne households, the City requests that HCD not seek repayment of the $312,762. A demand to repay these funds would seem unduly punitive considering that income eligible households both inside and outside the agency continued to receive fully funded housing assistance during this period, no household was adversely affected. from the use of LMIHF outside the agency's boundaries, and the purpose and intent of the LMIHF was fulfilled.

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Auditor's Conclusion: Section 33334.17 details 23 Specific conditions, each of which were required to be met before a donor agency could transfer LMIHF revenues to a receiving agency for the development of affordable housing in the unincorporated areas of the receiving agency. The use of Santa Fe Springs LMIl-lF revenues outside its jurisdiction during the audit period did not meet the conditions of H&S Code Section 33334.17 as proposed by the Agency.

First, the contract between Los Angeles County and the Santa Fe Springs RDA addresses the use of Los Angeles County CDBO funds (not a transfer of LMIH funds). Also, the County was the donor agency and the City of Santa Fe Springs was the receiving agency (reverse relationship of that required by the statute). Additionally, not one of the 23 required conditions can be found within the contract. Finally, the contract specifically states: "CDBO funds will be used for staff salaries to administer and implement the projectandequipment and supplies for the rehabilitation services." (contrary to the Agency's decision to use LMIHF revenues for these expenses).

The Department does not have the authority to forgive the use of LMIHF revenues for ineligible. purposes. Therefore, our finding remains the same, including the recommendationof reimbursement of $312,762 and accrued interest to the LMIHF.

Finding Number Three: Real property held in excess of statutory limits and inappropriate use of property planned.

Condition: The Agency's record ·01' real properties acquired with LMIHF revenues disclosed that two properties have been held in excess of five years without approval of an extension and one of the two was held in excess of the ten-year statutory limit.

In addition, the Agency docs not plan to develop affordable housing on one of the properties (11045 Davenrich Street) purchased with LMIHF.

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 agencyshall, 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 legislativebody 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

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by Section 33334.16, constitutes a major violation of the State's Community Redevelopment Law.

Recommendations:

1. With regard to the property acquired with the LMIHF, but not planned to be developed as affordable housing, the Agency should reimburse the LMIHF $186,900 plus interest which would have accrued on thosefundssince the date of disbursement for acquisition of the property.

2. The Agency should develop, or dispose of, real property, held in excess of ten years as required by statute.

Agency Response:

• 11045 Davenrich Street: reimbursement of$186,900 plus interest

On July 29, 1992, the Agency acquired 11045 Davenrich Street. As evidenced by the attached appraisal report, the dwelling was determined to be in substandard condition and was demolished. While the Agency failed to adopt a Replacement Housing Plan within statutory timelines (see Observation No. One), the Agency did replace this demolished unit withnew homes built under the City's HARP program. Since 1992, approximately twenty-two (22) newly built single family homes have been constructed and sold to eligible low- and moderate-income families, more than compensatingfor the loss of the one substandard dwelling at 11045 Davenrich Street. The Agency will prepare and adopt the necessary Replacement Housing Plan in order to complete the record for this property. Considering the substantial number of replacement housing units since developed and the administrative correction available, it would appear unreasonable to require reimbursement of the $186,900 purchase price, with interest, particularly since the demolished unit has been replaced so many times over.

• 9252 Houghton Avenue: 10 year disposition

On September 16,1998, the Agency acquired 9252 Houghton Avenue from the U.S. Dept. of Housing and Urban Development. Since that time the house has been rehabilitated and rented to income eligible low-income families. While the Agency has retained the property beyond the disposition period set forth in Sec. 33334.16, this is partially due to the Agency's unsuccessful efforts to terminate an existing rental agreement and relocate the low-income family to other suitable housing. Despite these complications, the Agency has recently relocated the family and taken possession of the property. As a result, the Agency will very quickly undertake rehabilitation of the property for disposition to an eligible low- or moderate-income household under the City's Housing Acquisition and Rehabilitation Program (HARP), the City's first-time homebuyer program. It is anticipated that disposition of 9252 Houghton A venue will occur before March 30, 2005.

Auditor's Conclusion: With respect to the 9252 Houghton A venue property, we are pleased the Agency will develop the property as required by statute.

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As for the 11045 Davenrich Street property (Davenrich property), the Agency's response does not fully address this finding. There are two issues regarding the Davenrich property: (a) the requirement of a Replacement Housing Plan, including an identified replacement housing unit; and (b) the development of the property for affordable housing purposes. The Department appreciates the Agency's following through with the Replacement Housing Plan for the destroyed unit (Davenrich unit) as required by statute, however, the Agency must clearly identify one of the new HARP units as the specific replacement unit. Replacement housing units must be specifically identified for each dcstroyecllremoved affordable unit within a project urea, Replacement units may be identified in advance of planned removal or destruction of affordable housing units, but an agency may not arbitrarily identify newly-constructed or rehabilitated units as replacements units. (Also, the Agency must ensure the "Davenrich unit" replacement unit is not included in the Agency's productionlinclusionary unit total. As stated in Finding No. Four below, a separate accounting of production unit progress and replacement unit development must be maintained to ensure double-counting docs not occur.)

The Agency's response did not acknowledge the requirements ofH&S Code Section 33334.16. That Section requires that if physical development of the property purchased using LMIHF revenues has not begun by the end of the maximum ten-year holding period, the property shall be sold and the moneys from the sale, less reimbursement for the cost of the sale, shall be deposited in the agency's LMIHF. Even though a replacement unit was developed to compensate for the Davenrich unit, the Davenrich property was purchased with LMIHF revenues and the vacant property should have been developed for affordable housing purposes; not as an access to, and parking for, a local park.

In summary, to fully resolve this finding the Agency must either develop the Davenrich property for affordable housing purposes, or sell it and deposit the sale proceeds into the LMIHF.

, Finding Number Four: Deficiencies in the Implementation Plans.

Condition: The Agency's 1994 Implementation Plan and 1999 Update do not include all information required by statute. The deficiencies are described below:

Plan Requirements -

1. The Implementation Plan is required (among other things) to include:

• estimates of the number of affordable units to be developed during the next ten years;

• estimates of the number of very low-, low- and moderate-income households required to be developed to meet the requirements of Section 33413(b)(2) during the next ten years; and

• identification of proposed locations suitable for development of replacement housing units required by Section 33413(a).

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The Agency's initial 1994 Implementation Plan and 1999 Update do not contain the abovedescribed information.

2. The Plans are also required to include:

• estimates of the number of agency developed units to be developed which will be govemed by 33413(b)(l) in. the next five years; and

• the number of agency-developed units for very low-, low-, and moderate-income households which will be developed to meet the requirements of 33413(b)( 1) in the next five years.

The1999 Update does not contain the aforementioned information.

Unit Production Progress -

1. The 1999 Update attempts to address the Agency's affordable housing production requirements, but erroneously bases the Agency's requirements on units developed prior to 1994 throughout the City (See page 32 of the Plan.). Only those units developed within the project areas prior to 1994 can be used to form the basis for production unit progress.

2. The 1999 Update also includes units developed outside the Agency's jurisdiction; that is, 87 units at Sundance and Laurel in the unincorporated area of Los Angeles County.

3. The 1999 Update credits numerous affordable housing projects (both inside and outside the project areas) towards meeting the Agency's affordable housing production requirements. However, it appears many of these units do, not meet statutory requirements for production units because the units are not secured by recorded covenants or restrictions enforceable by the Agency or City for at least the life of the applicable redevelopment plan.

Replacement Housing Progress -

The Agency develops affordable housing under its Housing Acquisition and Rehabilitation Program (HARP). It purchases property advertised for sale, rehabilitates the existing housing 'unit (often through demolition and reconstruction onsite) and sells the unit to a low- or moderate': income household. Housing developed through the above-described process does not trigger

replacement housing requirements. However, the Agency had treated housing developed under HARP as triggering replacement housing requirements.

[The Agency did destroy one unit (11045 Davenrich Street) under its HARP where an affordable unit will not be built onsite. The replacement housing requirements were triggered for this unit when the decision not.to rebuild was made. (See Observation No. One.)]

The Agency should separately account for destroyed or removed housing units and replacement housing progress which clearly demonstrates the Agency is in compliance with H&S Code Section 33413(a). To do so, the accounting should include the income levels of the displaced

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households, number of bedrooms of the destroyed or removed units and percentage of the total destroyed or removed units for each income level of the displaced households.

Inclusionary (Production) Requirements -

The determination whether the Agency is correctly calculating its production requirements and progress in meeting those requirements cannot be made due to the lack of:

1. clarity as to whether the Agency plans to meet production requirements for all project areas, or only those project areas adopted on or after 01/01176 (Washington Blvd.) and areaadded to a project area adopted on or after 01/01176 (area added to Consolidated);

2. accurate information regarding the total number of units developed within the project areas pre- and post- 1994; and

3. the number of units which qualify as production units (have recorded covenants restricting use for the longest feasible time).

Criteria: 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 requires every Agency to adopt an implementation plan on or before December 31, 1994, and each five years thereafter, which address all of the requirements of Section 33490(a)(2)(A) and (B), as applicable to each adopted redevelopment

plan. .

Health and Safety Code Section 33413(b)(1) requires, in part, that "At least 30 percent of ail new and substantially rehabilitated dwelling units developed by an agency shall be available at affordable housing cost to persons and families of low or moderate income."

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."

A 1988 Opinion of the Legislative Counsel, concerning Senate Bill No. 1719, concludes that the expenditure of LMIHFs outside the community would violate Article 16 of the State Constitution.

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 33413(a) states that whenever affordable housing is destroyed/removed as part of a redevelopment project which is subject to a written agreement

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with the agency or where financial assistance has been provided by the agency anywhere in the agency's jurisdiction, it must be replacedwithin 4 years.

Recommendations:

1. While the Agency is required to report housing activity, affordable unit development and its production unit progress within the Washington Blvd. Project Area and the area added to the Consolidated Project Area posl-1976 (CPA Amended Area), it appears the Agency is attempting to report all housing activity, affordable unit development and its production unit progress for all of its project areas. Whether the Agency chooses to report affordable unit development and its production unit progress for all project areas or just the Washington Blvd. Project Area and CPA Amended Area, it must ensure the next updated Implementation Plan (due 12/31104) does the following:

• Identifies the number of units constructed and rehabilitated in applicable project areas prior to January 1,1995, the affordable housing production need generated, and the Agency's progress in meeting production requirements generated prior to January 1, 1995.

• Identifies the number of units constructed and substantially-rehabilitated in applicable project areas between 1995 and 2004, the affordable housing production need generated, and the Agency's progress in meeting production requirements generated between 1994 and 2004.

• Identifies the number of units that have been, and are anticipated to be constructed and substantially-rehabilitated in applicable project areas between 2005 and 2009, the affordable housing production need generated, and the Agency's progress to date in meeting production requirements generated during this period.

• Identifies the number of units anticipated to be constructed and substantiallyrehabilitated in applicable project areas between 2010 and the life of their redevelopment plans, and the Agency's plans for meeting these production requirements.

• Includes a clear accounting of its production unit requirements and progress in meeting those requirements.

• Reports only those destroyed/removed housing units that meet the requirements of Section 33413(a) and its progress in meeting those requirements.

Agency Response: The Agency did attempt to provide the information required by the Health & Safety Code. However, upon review of the findings of the HCn audit report, it is apparent that

. the information provided in the 1994 Implementation Plan and the 1999 Update did not present clearly enough the information required by statute.

Plan Requirements

The Agency is in the process of completing the 2004 Implementation Plan Update and will assure that the, following information is contained in the text of the document:

1. Estimates of the number of affordable units to be developed during the next ten years;

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2. Estimates of the number of affordable units required to be developed to meet the requirements of Section 33413(b)(2) during the next ten years;

3. Proposed locations suitable for development of replacement housing units required by Section 33413(a);

4. Estimates of the number of Agency developed units to be developed and subject to Section 33413{b)(l) in the next five years; and

5. Estimates of the number of affordable units required to be developed to meet the requirements of Section 33413(b)(I) during the next five years.

Unit Production Requirements

There is incomplete information in the 1999 Update concerning affordable housing production requirements. The 2004 Update will address this problem by including the following information:

1. Clarification on the number of units developed prior to 1994 within the project areas and not those developed throughout the City of Santa Fe Springs;

2. In the 1999 Update the Agency took credit for units developed outside the Agency's jurisdiction; such units will not be included in any future updates; and

3. Units that do not have recorded covenants or enforceable restrictions will not be

included in any future updates. '

Replacement Housing Progress

In the past the Agency mistakenly counted the properties acquired for Housing Acquisition and Rehabilitation Program (HARP) in the properties triggering replacement housing requirements, The HCD audit found properties acquired for the HARP homes do not trigger replacement housing requirements.

In the 2004 Update the Agency will separately account for destroyed or removed housing units and replacement housing progress which clearly demonstrates that the Agency is in compliance with H&S Code Section 33413(a).

Inclusionary (Production) Requirements

The "1995 Plan and the 1999 Update presented the so-called Inclusionary Requirements in a confusing and misleading way. To correct this, the 2004 Update will:

1. Apply the Inclusionary information only for those two project areas (Washington Blvd. and Consolidated Amendment III) that are impacted by the H&S Code requirements,and not for all project areas;

2. Present accurate information on the total number of units developed and when the development took place; and

3. Include the number of units that qualify as production units.

Auditor's Conclusion: The Agency's response satisfies our audit recommendation with the understanding the Agency will refer to H&S Code Section 33490 when updating its

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/l.

Implementation Plan. There have been revisions to Section 33490 effective as recently as January 1, 2003. We appreciate the Agency's cooperation.

Finding Number Five: The Agency did not comply with statutory requirements relative to enforcement of covenants on assisted units.

Condition: We reviewed the agreements for recorded affordability restriction terms, reporting and monitoring requirements, and provisions for Agency enforcement.

We discovered that units assisted under the first-time homebuyer program do not comply with covenant term requirements to qualify as production units. The term for their first-time homebuyer loans is less than the minimum 10 years required by statute.

Criteria: Section 33334.3(f)(l) provides that all new or substantially rehabilitated housing units developed or otherwise assisted by the LMlliF shall remain available at affordable housing cost for the longest feasible time but not less than 15 years for rental units and 10 years for owneroccupied units.

Section 33334.3(f)(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: In the future, the Agency should impose enforceable covenants for the longest feasible time, as applicable, upon developments assisted with the LMIHF.

Agency Response: Due to administrative misunderstandings, the Agency did not impose the propercovenants required by the Health & Safety Code. In the future, the Agency will impose enforceable covenants for the longest feasible time, as applicable, upon units assisted with LMIH funds.

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

Finding Number Six: The Agency filed inaccurate Annual Reports with the Department.

Condition: The HCD Annual Reports (Reports) filed with the Department for fiscal years 1999100,2000101, and 2001/02 do not include accurate information. Revenues are not reported separately for each project area and expenditures are not properly categorized.

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Revenues - The Washington Blvd. revenues (tax increment, interest, etc.) were not reported separately in the Annual Reports Schedule A as required.

Expenditures - Intergovernmental relation costs were reported as on/offsite improvement costs instead of administrative costs. These costs were in the amounts of $96,981, $109,837, and $130,528 forFYs 1999/00,2000/01, and 2001/02, respectively.

Criteria: 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.

Recommendation: The Agency should ensure that future annual reports filed with the Department accurately disclose all revenues and expenditures/uses appropriately, as requested in the Department's reporting forms.

Agency Response: The Agency will ensure that future annual reports filed with HCD will accurately disclose all revenues and expenditures/uses appropriately and consistent with the reporting forms provided by HCD.

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

Finding Number Seven: Annual planning and administrative determinations were not made.

Condition: The Agency expended LMIHF toward planning and administrative expenses. Those expenditures for FYs 1999/00,2000/01, and 2001/02 were $234,207, $240,357, and $278,778- representing 5.6%,6% and 4.6%, respectively, of the total expenses incurred.

Criteria: Health and Safety Code Section 33334.3(d) expresses 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 1988, requires independent auditors to test for a written annual

15

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 not only necessary, but 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 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: The Agency regrets the oversight that an official annual finding and determination for planning and administrative expenses was not conducted as required by Sec. 33334.3(d). To COITect this oversight, as evidenced by the attached staff reports, the Agency has recently instituted annual findings and determinations for planning and administrative expenses for both the Washington Boulevard Redevelopment Project and Consolidated Redevelopment Project. While acknowledging the finding and determination oversight noted above, the Agency is rightfully proud of the accomplishments achieved by our staff considering the relatively low ratio of P&A expenditures to total expenses incurred.

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

Observation Number One: A Replacement Housing Plan was not adopted, nor was a replacement unit identified, within statutory timelines.

Condition: Based on information provided by the Agency, property located at 11045 Davenrich Street was purchased in 1992 with LMIHF revenues. The housing unit on the property was destroyed. The Agency failed to adopt a replacement housing plan and identify a replacement housing unit as required by statute.

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,

16

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 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.

Recommendation: The Agency should adopt a replacement housing plan which identifies a unit developed within 4 years of destruction of the 11045 Davenrich Street unit as the replacement housing unit. The unit identified as the replacement housing unit should not be counted toward the Agency's production progress ..

Agency Response: As noted in Finding No. Three, while the Agency failed to adopt a Replacement Housing Plan within statutory timelines, the Agency did replace the demolished dwelling at 11045 Davenrich Street with new homes built under the City's HARP program.

Since 1992, twenty-two (22) newly built homes have been constructed and sold to eligible lowor moderate income households to compensate for the loss of the one substandard dwelling at 11045 Davenrich Street. The Agency will prepare and adopt the necessary Replacement Housing Plan in order to complete the record for this property.

Auditor's Conclusion: The Department appreciates the Agency's commitment to prepare and adopt a Replacement Housing Plan for the destroyed unit (Davenrich unit). This satisfies our audit recommendation. (Please refer to Finding No. Three with regard to the HARP replacement units as compensation for the destroyed Davcnrich unit.)

17

.slalR ot California

. Business, Transportation and Housing Agenc)

Memorandum

"ATTACHMENT A"

RECEIVED

To

Eric Pfost, Audits Division

Da~: April 14,200C

APR 1 4 2000

Thru Richard Friedman, Chief Counsel ft/--HCDAUDITS DIVISION

From

Ronald S. Javor, Senior Staff Counse Department of Housing and Commun ty Development

Legal Affairs Division .

Telephone: CALNET (8) 473-7288

. (916) 323-7288

Facsimile: (916) 323-2815

Subject:

Legal Advice: Use of Redevelopment Funds from the Low and Moderate Income Housing Fund for Emergency Shelters

You have asked whether a redevelopment agency may use funds from the-aqency's Low and Moderate Income Housing Fund to develop or operate emergency homeless shelters. The City in question has stated that it used funds for the development of three homeless shelters, and that most of its homeless shelters are combined with

transitional housing projects. We believe that it is not permissible to spend these funds for the development or operation of emergency shelters, whether they are stand-alone shelters or constructed and operated in conjunction with transitional or other housing.

'Statutory provisions strictly circumscribe the utilization of funds from a redevelopment agency Low and Moderate Income Housing Fund ("LMIHF") .. For example, section 33334.2 of the Health and Safety Code, subdivision (a), states that these funds "shall be used by the aqency for the purposes of increasing, improving, and preserving the community's supply of low- and moderate-income housing available at affordable housing cost to persons and families of low or moderate income .... " (Hereinafter, all references to statutes refer to the Health and Safety Code, unless otherwise noted.)

Additional' details identifying permissible and impermissible expenditures are set forth in subdivisions (e) through (g) of section 33334.2, section 33334.3, and additional sections of law. All generally refer to "housing", "dwelling units", "low and moderate income housing", and similar terms.

The plain language meaning of terms such as "housing" and "dwelling units" connotes permanent or long-term residential accommodations with private areas set aside for specific persons or families. An "emergency shelter", on the other hand, has a plain meaning which depicts transient use of an area during the duration of an emergencyhomelessness-and often is characterized by dormitory-style living in a structure with limited personal areas.

Eric Pfost April 14, 2000 Page 2

This different treatment is supported by other housing-related laws as well. Emergency shelters are not treated as residential structures for the purposes of the State Housing Law (Sections 17910, et seq.), and even are treated differently under the federal Fair Housing Act Amendments (US Code Title 42, §§ 3601 et seq., Fair Housing Regulations at 24 CFR Parts 100 through "125) with regard to disabled access requirements (they are treated more like public areas than private housing). "Housing" and "emergency shelters" are distinguished in the planning and zoning laws as we"; see, for example, Section 65008 of the Government Code related to discrimination against housing and emergency shelters, or Article 10.6 (commencing with Section 65580) of the Government Code, related to identification of adequate sites for affordable housing and emergency shelters.

While the statutes governing the LMIHF do not explicitly prohibit use of LMIHF funds for emergency shelters in a city or a county, an explicit prohibition exists with regard to a city and county (the City and County of San Francisco); Section 33021.1 states,

In a city and county, redevelopment includes improving, increasing or preserving emergency shelters for homeless persons or households. Those shelters may be located within or outside of established redevelopment project areas. Notwithstanding any other provision of law, only redevelopment funds other than those available pursuant to Section 33334.3 may be used to finance these activities. (emphasis added)

Based on the explicit legislative findings related to the enactment of this measure '. this provision must be construed to apply only to the City and County of San Francisco and only to clarify existing law in that regard rather than have any impact on the interpretation of the redevelopment laws and the LMIHF statutes as they apply to other

1 Stats. 1991, ch. 1192 (S.B. 1026), Sec. 3, provides:

"The Legislature finds and declares that with regard to [the enactment of section 33021.1], a special law is necessary and that a general law cannot be made applicable within the meaning of Section 16 of Article IV of the California Constitution because of the unique circumstances of the City and County of San Francisco. Thefacts constituting these .unique circumstances are as follows:

"The Redevelopment Agency of the city and county of San Francisco has determined that an

" essential step toward the elimination of blight is improving, increasing, or preserving emergency shelters for homeless persons or households. Because of the serious impact of hornelessness in San Francisco, it is essential that the law clarify that for the City and County of San Francisco, funds other than those available pursuant to Section 33334.3 of the Health and Safety Code

can be used to accomplish these goals. In the City and County of San Francisco, the provision of emergency shelters for homeless persons or households is essential to the elimination of blight within established project areas.

"However, nothing in this act or Section 33201.1 of the Health and Safety Code shall be deemed to authorize or limit, or in any way modify any authority of a redevelopment agency, other than a redevelopment agency in a city and county, to improve, increase, or preserve emergency shelters for homeless persons or households, either inside or outside a'project area, from funds available pursuant to Section 33334.3 of the Health and Safety Code or any other source.

r i •

Eric Pfost April 14, 2000 Page 3

redevelopment agencies in the state. Therefore, the provisions of this statute are not dispositive of any interpretation of whether LMIHF funds can be used for emergency shelters with respect to other agencies.

Other portions of the redevelopment law address emergency shelters in an analogous manner. For example, in Section 33492.131, dealing with "rehabilitated dwelling units" made available atthe Alameda Naval Air Station to the Homeless Collaborative, the term "dwelling units" is defined in subdivision (b) to mean "permanent or transitional residential units, and does not mean "studen!dormitory rooms or overnight emergency shelter beds". (emphasis added)

Section 33136 authorizes agencies to finance insurance for certain entities providing "housing ... including rental properties, emergency shelters, transitional housing, or special residential care facilities." The series of terms following "housing" should not be interpreted to be equivalent to "housing" or definitions of "housing". For example, if "rental properties" were deemed to be equivalent to or included in the meaning of "housing", then "housing" would include rental commercial, retail, and industrial properties as well as residential properties; it's doubtful that the Legislature could have intended that result. The same logic would apply to asserting that an emergency shelter was a form of ".housing" rather than merely a permissible beneficiary of

insurance subsidies inartfully grouped under the term "housing". .

Given these interpretations of statutes in the redevelopment law, we believe that in a city and county, or in any city orcounty, LMIHF funds cannot be used to assist with the development or operation of emergency shelters.

As a factual matter, however, in auditing a jurisdiction's use of LMIHF, the auditor should distinguish between types of activities operated by shelter providers. Many such providers not only operate emergency shelters, but also develop, acquire and operate "transitional housing", conventional housing units or group homes for longer-term occupancy by formerly homeless persons and households. Sometimes, projects or structures will include both transitional housing and emergency shelters, so that sponsors can efficiently provide services needed by residents of both types of accommodations.

Transitional housing can be deemed to be "housing" based on the statutes cited above, as well as federal statutes such as those governing the Low Income Housing Tax Credit. However, for the purposes of expenditures from the LMIHF, it is necessary to disaggregate expenditures to distinquish between activities related to emergency shelters and those related to transitional housing. This disaggregation may be accomplished in any manner consistent with general accounting procedures, and must address capital costs as well as operating subsidies.

Please let me know if I can provide further assistance.

"EXHIBIT A"

o

Fe

Springs

11710 Telegraph Road • CA • 90670-3679 • ('i()2) H(lH-O'i11 • Fax ('io2) Hol)-7112 • \\w\\·.sant;lfcsprings.org

October 14,2004

Keith Jung

Chief, Audit Division

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

P.O. Box 952050

Sacramento, CA 94252-2050

RECEIVED OCT 1 .. 2004

HCDAUOiTS DIWSION

Dear Mr. lung:

RE: Agency Responses To Audit Findings

Enclosed please find responses to findings resulting from the recent audit conducted by your office involving fiscal years 1999/00,2000/01 and 2001102.

The City of Santa Fe Springs is committed to administering its Community Development Commission in compliance with statutory requirements; accordingly, it has already instituted changes necessary to correct identified infractions. In a few instances, however, the City feels that the requirement to reimburse the Low and Moderate Income Housing Fund (LMIHF) is unduly harsh, particularly considering that those benefiting from the expenditure of LMIHF were low- or moderate-income households. Essentially, the City believes that its various LMIH-funded activities have satisfied both the purpose and intent of the law by providing needed assistance to income-eligible households and improving the quality and quantity of housing in and outside the community.

We respectfully request that HCD favorably consider the responses contained herein. Should you have any questions, please call me at (562) 868-0511, ext. 7321.

Sincerely, ' .

. -tfo~./ ~"-<h - J"i~ _J/

Susan Bergeron-Vance ..

Director of Finance and Administrative Services

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Finding No. One: The Agency Used LMIHF revenues toward. ineligible costs.

Condition: Child Care facility assistance $797,683

Agency Response:

The City's history of providing comprehensive housing and social services to its residents might better explain why Section 33334.2(e) (1-1 I) was interpreted as an opportunity to provide additional services to low- and moderate-income families, albeit in an indirect manner. We consider Child Care a fundamental need for working parents. If parents cannot work because they lack adequate, affordable child care, then they cannot meet basic needs. By utilizing LMIH funds 'to subsidize the child care program, the City was able to maintain fees at a lower rate since approximately 75% of the families participating in this program are low- or moderate-income households.

Section 33334.2( e) (1-11) allows for subsidies to low- and moderate-income households. The utilization of Low arid Moderate Income Housing (LMIH) funds to subsidize lowand moderate-income households in this community assists these households by making quality. child care available at subsidized rates and in tum making housing more affordable.

LMIH funds are to be expended for the purpose of increasing, maintaining and preserving the community'S supply of low- and moderate-income housing available at affordable housing costs. We believe the use of LMIH funds to offset child care program costs meets two of these goals by both maintaining and preserving the supply of affordable ' housing for low- and moderate-income families. These two goals eire accomplished when these households have more disposal income available to maintain and improve their homes. This in turn instills pride in one's house, throughout the neighborhood and community. The City has been fortunate that it has sufficient LMIH funds available to fund the child care subsidies as a component of its comprehensive housing preservation program and maintain what is a well-kept 1950's era residential community where working-class families can afford to live and raise their families in a healthy and safe

environment.

The City respectfully requests that HCD reconsider this finding. Although we have discontinued the use of LMIH funds for child care programs effective July 1, 2004, we request your affirmation that this program be recognized as an eligible program for the. community of Santa Fe Springs and request that HCD reverse the requirement to reimburse these funds for the audit period.

Condition: Homeless Assistance $140,516

Agency Response:

The Rio Hondo Temporary Home (RHTH) is a homeless shelter that began operating in June, 1988. RHTH is one of only two family shelters in southeast Los Angeles County and the only shelter in our area that accepts unmarried couples, men, and large families. It is also the only shelter that accepts infants, children and boys and girls up to age 17. The shelter provides homeless families temporary housing from six months to a year with the eventual goal of permanent housing. The shelter also provides a comprehensive range of services (i,e. counseling, child care, employment assistance, etc.) designed to rehabilitate and help families progress to independent living.

It was our interpretation that by providing the homeless shelter subsidy we were assisting very low-income families and providing them the opportunity to eventually transition into permanent housing.

When the City became aware that use of LMIH funds for the RHTH might not qualify as a justifiable expenditure, the City immediately stopped allocation of these funds to this activity. This change took place a year and a half before the audit. Please note that the City'S interpretation of Section 33334.2(e)(I-II) to assist the RHTH was done without malice. On the contrary, it was done in good faith to assist low- and moderate-income families. As a result, we respectfully appeal your requirement for the reimbursement of these funds to the LMIH fund and hope that you take this explanation into consideration.

Finding No. Two: The Agency Used LMIHF revenues outside the community for expenditure.

Condition: County Handyworker Pro gram: $312,762

Agency Response:

During the audit reporting period, the City of Santa Fe Springs used Community Development Block Grant funds issued under contract with the County of Los Angeles to perform "Handyworker" home improvement work. It is noted that this handyworker home improvement work benefited eligible very-low and low-income homeowners living in the County unincorporated area situated contiguous to Santa Fe Springs and within the City's designated Sphere ofInfluence. This home rehabilitation work primarily corrected Building Code violations posing a health and safety risk hazard.

The City respectfully offers three important points for consideration: 1.) Prior to Sec. 33334.17 being repealed in October 2001, the use of LMIHF.outside the jurisdiction was both allowed and encouraged to increase the supply of affordable housing in the State; accordingly, the Handyworker program repaired approximately 25 homes per year in the County unincorporated area, and 2.) The Handyworker program did not involve the transfer of LMIHF funds from Santa Fe Springs to, another agency; rather, LMIHF were used to supplement the salary and benefit costs of City employees that provided the handyworker services to the very-low and low-income households in the County unincorporated area, and 3.) The use of LMIHF did not limit the scope or restrict the depth of the housing services provided within the agency's boundaries that are also funded with LMIHF. Due to the agency's multi-faceted housing programs and the generous amount of LMIHF available, Santa Fe Springs was able to fully fund both its own housing programs and the Handyworker program conducted outside its jurisdictional boundary.

In accordance with A.B. 661 that repealed Sec. 33334.17 allowing the use of LMIHF outside the territorial jurisdiction, the City will cease to expend LMIHF outside its boundaries. In consideration of the effective date of A.B. 661, and giving due credit for performing home rehabilitation work for income eligible very-low and low-income households, the City requests tha(HCD not seek repayment of the $312,762. A demand to repay these funds would seem unduly punitive considering that income eligible households both inside and outside the agency continued to receive fuIly funded housing assistance during this period, no household was adversely affected from the use of LMIHF outside the agency's boundaries, and the purpose and intent of the LMIHF was fulfilled.

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