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STATE OF CALIFORNIA ·BUSINESS TRANSPORTATION AND HOI ISING AGENCY

GRAY DAVIS Gayecooc

DEPARTMENT OF HOUSING AND COMMUNITY DEVELOPMENT AUDIT DIVISION

1800 Third Street. Suite 310

P. O. Box 952050

Sacramento, CA 94252·2050

(916) 324·9763

FAX (916) 445·2229

August 4, 2003

Jose Sanchez

Finance Director

City of Baldwin Park 14403 E. Pacific A venue Baldwin Park, CA 91706

Dear Mr. Sanchez:

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

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

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

Sincerely,

Eric Pfost

Chief, Audit Division

Enclosure

STATE OF CALIFORNIA -BUSINESS TRANSPORTATION AND HOUSING 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

August 4, 2003

Mr. Matthew O. Franklin, 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 Baldwin Park Redevelopment Agency's (Agency) compliance with statutory housing requirements including administration and use of the Low and Moderate Income Housing Fund (LMllIF) for fiscal years 1998/1999, 1999/2000 and 2000/2001. 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 Agency/City representatives:

Melecio B. Picazo, Interim Community Development Director Jose R. Sanchez, Finance Director

Hennie E. Apodaca, Accounting Supervisor Lori Vilano, Accountant

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

During our audit fieldwork, we found much of what the Agency reported in annual reports filed with the Department for the audit period to be incomplete and inaccurate. We therefore requested that the Agency revise its reporting forms and provide other documentation necessary to complete tests within the Department's audit program. At the time the draft audit report was issued, the Agency had not provided the requested information or responded to other inquiries

regarding its accounting system. Several of the draft findings reflect these deficiencies in the Agency's LMIHF accounting system.

In its response to the draft report, the Agency provided much of the requested documentation, including revised annual reports forthe audit period, bond official statements, and other documents and analyses concerning questioned revenue and expenditure transactions. (See Attachment A.)

Some of the documentation and responses from the Agency, however, exposed other areas of concern, which are addressed in revised audit recommendations as part ofthe Auditor's Conclusion to various findings. Since it was necessary to significantly modify audit recommendations for certain findings (Findings 1 and 4 in particular), we requested a formal Agency response to the revised audit recommendations. The Agency provided responses to our revised audit recommendations for Findings 1 and 4 on June 5,2003. The Agency's responses to the revised audit recommendations are incorporated into this. final audit report (See Attachment B.).

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

If you have any questions concerning the contents of this report, please call me at (916) 324- . 9763.

Sincerely,

Eric Pfost

Chief, Audit Division

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Finding Number One: The Agency is unable to accurately account for debt proceed deposits, or repayment expenses, leveraged by the LMIHF.

Condition: The Agency issued tax allocation bonds in June 1994, May 1998, and June 2000.

The LMTIIF was pledged toward the repayment of the Housing Loan component of those bonds. A review of the Agency's annual reports filed with the Department for the audit period revealed a debt service expenditure of $5,063,644 ($4,700,000 principal and $363,644 interest) for fiscal year 1999/00. Surprisingly, no debt service expenses were reported for fiscal years 1998/99 or 2000/01.

Since the LMTIIF was reportedly used to service debt, we asked the Agency to document the sources, amounts, and uses of debt proceeds added to the LMllIF in order to support the reported

debt service payments. The Agency has failed to provide this information. .

The Agency's Reports for fiscal years 1993/94 - 1997/98 were reviewed to research the history of debt proceed deposits to, and debt service payments from, the LMrnF. The review revealed that the Agency has not consistently reported the receipt/deposit of bond proceeds into the LMllIF, or related debt service payments for this period.

Although it appears proceeds added to the LMrnF from the 1994 bond issue were accurately' disclosed in the report filed for fiscal year 1993/94, proceeds from the the1998 bond are not: disclosed, but may have been included in the "total resources balance" of the report filed for fiscal year 1997/98. It is not clear whether additional bond proceeds were added to the LMIHF as a result of the 2000 refunding bond issuance; no debt proceed deposit is disclosed in the 'annual report filed for fiscal year 1999/00.

Due to the reporting discrepancies, and the Agency's failure to document the sources, amount, and uses of debt proceeds added to the LMrnF, the Agency has failed to demonstrate (and we were unable to confirm) that debt service payments from the LMIHF are authorized and accurate.

Criteria: Section 33080 requires each redevelopment agency to file a copy of the annual report required pursuant to Section 33080.1 with the Department and that the "reports shall be made in the time, format, and manner prescribed by the Controller after consultation with the Department. "

Schedule HCD-A of the Department's reporting forms request detail of all revenue, including debt proceeds, which accrued to each project area LMlliF for each reporting year.

Section 33080.4(a)(6) requires that the annual report document the "status and use" of the housing fund for each project area and for the agency overall.

Poway Decision, Craig v. City of Poway, 28 Cal. App. 4th 319,33 Cal Rptr. 2d 528. "Viewing the statutory scheme as a whole and given the Legislature's historical emphasis on the importance of creating affordable housing opportunities in redevelopment projects, we conclude that when an agency capitalizes its future income stream attributable to the LMrnF, it is required

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to deposit the corresponding bond revenues into the Fund in addition to 20 per cent of the annual tax increment. The Fund is then responsible for debt service for those bonds."

"Whenever a redevelopment agency pledges 100 per cent of its future increment stream to pay debt service on bond proceeds, the LMI Housing.Fund is entitled to (1) 20 percent of the net bond proceeds plus (2) 20 percent of the annual tax increment minus (3) debt service on the deposited bond proceeds."

Recommendations:

1. Within 30 days of the date of the draft report, the Agency should provide a complete description of the sources, amounts, and uses of debt proceeds (from bonds, City loans, or other sources) added to the LMIHF. In addition, the Agency should provide a complete

. itemization of debt service charges to the LMlliF paid toward each source. It appears this information need not extend beyond 1993, since the Agency had been making exemption findings prior to this period.

2. Future annual reports filed with the Department should accurately disclose the deposit of any additional debt proceeds and related debt service payments from the LMIHF.

Agency Response: BCD found that the Agency did not clearly account for all debt: proceeds deposited to the LMllIF and the subsequent debt service payments made from the LMIHF\ The information requested by BCD has been summarized into four basic debt issues:

• An "Agreement for Reimbursement of Certain Costs Between the Baldwin Park Redevelopment Agency and the City of Baldwin Park" (See copy of Agreement at Attachment 1 and a summary of debt service payments from LMIHF at Attachment 2.)

• 1994 Tax Allocation Bonds

• 1998 Tax Allocation Bonds

• 2000 Tax Allocation Refunding Bonds

(See Attachment 3 for a Summary of Debt proceeds on the above tax allocation bonds, and subsequent debt service payments from the LMIHF.)

Auditor's Conclusion: Attachment 3 provided with the Agency's Response details the amount of proceeds deposited into the LMIHF from the 1994 and 1998 bonds ($4,925,000) and the amount of debt service paid by the LMlliF towards the bonds ($1,361,300), as requested in our draft

recommendation. .

According to the Agency's contract accountant, however, the proceeds leveraged by and initially deposited into the LMIHF were transferred to a Capital Improvement Fund and used for purposes other than affordable housing. The State's Community Redevelopment Law provides no . authorization for revenue leveraged by the LMIHF to be used for purposes other than developing, improving, or preserving the community's supply of low- or moderate-income housing.

The Agency subsequently reimbursed the LMIHF by depositing an equivalent amount of proceeds from a 2000 tax allocation bond (which apparently was not collateralized by the

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LMllIF). However, this action failed to fully reimburse the losses incurred by the LMIHF from the inappropriate transfer of proceeds from the 1994 and 1998 bonds. In particular, the LMIHF did not benefit from the interest earnings that would have accrued during the period of time between the transfer out and subsequent reimbursement. In addition, the LMIHF incurred significant debt service costs towards the 1994 and 1998 bonds, prior to their transfer, but received no benefit from the transferred funds.

Therefore, the Department's revised audit recommendation is as follows:

1. The Agency should determine, and deposit into the LMIHF, the appropriate amount of interest that would have accrued from the 1994 and 1998 bond proceeds between the period of transfer and subsequent reimbursement.

2. The Agency should reimburse the LMIf.Il" no less than $1,361,300 for the debt service paid towards the 1994 and 1998 bonds prior to their transfer.

Agency Revised Response: Response to Audit Conclusion Number One: The Agency agrees with the HCD audit finding with respect to the appropriate amount of interest that would have accrued from the LMIHF on $4,875,664 that was transferred between the period of transfer and subsequent reimbursement. The Agency will calculate the amount of interest that would.have been earned during that period between the transfer and subsequent reimbursement and transfer that amount to the LMlliF. All Agency available cash is placed with the State Local Agency Investment Fund (LAIF). The calculation of interest will be based on the LAIF interest rate in effect during the period of time between the transfer and subsequent reimbursement.

Response to Audit Conclusion Number Two: The Agency issued bonds in 1994, and 1998. A portion of the bond proceeds [was] to be used for the Low Moderate Housing related projects. The appropriate debt service amounts were established for the repayment of the bonds in the LMlliF. Bond proceeds were available and used for housing projects. The principal and interest payments are considered to be a LMIHF obligation. Funds were transferred from the LMIHF in 1999 and reimbursed in 2000 making these funds available for future housing related projects. The Agency will be seeking a legal opinion from the Agency counsel as to the intent and use of the bond proceeds.

Auditor's Revised Conclusion: The Agency's response to item Number Two of our recommendation indicates that some of the debt proceeds deposited into the LMIHF was used for eligible housing projects prior to the 1999 transfer of proceeds to the Capital Improvement Fund. The Agency's summary of bond proceeds and debt service (Attachment 3), however, reveals that expenditures were used exclusively for debt service principal and interest. There is no evidence in Attachment 3 (or in other records provided by the Agency) that support the Agency' s contention that some of the proceeds were used for eligible housing projects prior to their transfer to the Capital Improvement Fund.

Our audit recommendation for item Number Two, therefore, remains the same.

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

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

This creates the following accounting and reporting problems:

• The Agency is unable to separately account for and report project area revenue (other than tax increment) as required by Schedule A of the Department's reporting forms. Indeed, otherproject area revenues were not reported anywhere on the Agency's reporting forms. As a result, the reporting forms filed with the Department do not accurately reflect the Agency's housing fund balance.

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

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

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

Health and Safety Code Section 33334.2(g) provides that an agency may only use the funds required to be deposited in the Uv1IHF outside the project area upon a resolution of the agency and the legislative body that the use will be of benefit to the project.

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.

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Recommendations:

1. The Agency should immediately establish and maintain either: (1) a separate LMIHF for each project area; or (2) a separate account within the LMIHF for each project area to enable the Agency to separately account for all revenue accruing to the L:rvmIF by project area.

2. In the future, the Agency should report all revenues by project area as required by the HCD Annual Report Schedule A.

3. The Agency should assure that specific benefit findings are adopted whenever project area revenue is expended outside the project area in which it was generated.

Agency Response: HCD found that the Agency accounts for its Low and Moderate Income Housing Fund (LMllIF) in a single fund, and that information by project area within the LMllIF has not been properly accounted for.

Mr. Morgan of Diehl, Evans & Company, LLP has discussed this issue with Mr. Glen Campora, Manager of Housing Policy with HCD. Based on the comments of Mr. Campara, the Agency . intends to adopt the following procedures on a going-forward basis:

1. In order to track the gross revenues in the LMllIF for each project area, the Agency will utilize an excel spreadsheet to account for the following gross revenues by project area:

• 20% of gross tax increment revenues allocated to the LMIHF.

• 20% of any bond proceeds pledged to advance fund the LMIHF.

• Any proceeds from the sale of land acquired for low and moderate income housing purposes with low/mod funds.

• Any other revenues deposited in the LMllIF.

• All interest and earnings on cash and investment balances in the LMIFH.

2. The Agency will not separately account for expenditures in the LMIHF. However, whenever revenues from the LMIHF are expended outside the project area from which the revenues were generated, the Agency will prepare a written report or memorandum documenting its findings that the expenditures is a given project area will be of benefit to the project area or areas from which the gross revenues are generated. Further, under the provisions of Health and Safety Code Section 33334.2(g), the Agency Board will pass a resolution, prior to expenditures of LMIHF monies, that the use of funds from one or more project areas, will benefit another project area where the funds will be expended.

Auditor's Conclusion: As previously noted, separate accounting of Agency revenue by project area (including LMllIF revenue) is required and a common practice among many agency practitioners. It is required, among other reasons, to assure that revenue accruing to the LMIHF is used within the generating project area and, if not, that an appropriate benefit finding was adopted to support use of the funds outside ~he project area.

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It does not appear that the Agency plans to make the proposed excel spreadsheet part of its official accounting system, subject to an annual independent audit. As such, the Agency would not have adequate financial control over housing fund revenues by project area. The Department, therefore, cannot support the Agency's proposal; the audit recommendation remains the same.

Finding Number Three: Inaccurate information filed with the Department.

Condition: Annual Reports (Reports) filed with the Department for fiscal years 1998/99; 1999/00, and 2000/01 do not include complete and accurate information. (See Findings One and Two for other accounting and reporting violations.) Total revenues, expenditures, and other housing assets in the Reports do not agree with the Agency's LMllIF financial records. It appears the revenues are underreported and expenditures are overstated, as follows:

Revenues -

• The 1998/99 Report shows $1,031,789 total tax increment deposited, but the LMTIIF general ledger and revenue account detail indicate $1,269,100 was transferred into the fund. This is a $237,311 shortfall in reporting revenues.

• The LMIHF general ledger indicates interest income in the amounts of $236,477, $10,221 and $9,317 (totaling $256,015) was received in fiscal years 1998/99, 1999/00 and 2000/01, respectively, but none of the Reports show those revenues.

Expenditures and Transfers Out-

• The 1998/99 Report shows $1,469,456 as total expenditures, but the LMllIF general ledger evidences only $1,031,889; this represents a $437,567 overstatement.

• The 1999/00 Report shows a $5,063,644 ($4,700,000 principal and $363,644 interest) bond debt service expense and the LMllIF general ledger shows a $4,712,217 transfer out of the LMllIF. This expense has not been supported by the Agency through identification of the bond issuance for which the debt service is being paid, nor has the Agency evidenced 20 . percent of the related bond proceeds deposited into the LMllIF.

• The 2000/01 Report includes a $497,950 expenditure for On/Off-Site Improvements, but the LMllIF general ledger does not support that expense.

Other Housing Fund Assets -

• Value of Land Heldfor Development - The 1998/99 Report indicates $550,000, but the general ledger shows $612,706; this is a $62,706 reporting shortfall. Neither the 1999/00 nor 2000/01 Reports include value of land held, but the LMIHF general ledger indicates $612,706 in each year.

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• Loans Receivable - The 1998/99 Report indicates $6,390,804, but the LMIHF general ledger shows $1,169,180; this is a $5,221,624 overstatement. Neither the 1999/00 nor 2000/01 Reports include loan receivable balances, but the LMrnF general ledger indicates $1,581,787 and $2,144,881, 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.

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Recommendation: The Agency should prepare revised HCP Annual Reports for the audit period

and submit them within 30 days of the date of this report.

Agency Response: HCD found that the Agency's Annual Reports filed on Scheduled HCD-C for the fiscal years 1989/1999, 1999/2000, and 2000/2001 did not include complete andaccurate information. Certain revenues, expenditures and balance sheet data on Schedules HCD-Cdid not agree with the Agency's financial records and/or financial data reported in the City's Comprehensive Annual Financial Report (CAFR) for the three fiscal years.

Diehl, Evans & Company, LLP has compiled revised Schedules HCD-C for the three fiscal years. The schedules have been revised to agree with financial information of the agency, as reported in the CAFR for each fiscal year. The report of Diehl, Evans & Company, LLP, is being submitted to you under separate cover.

Auditor's Conclusion: The revised annual reports for the audit period appear to address some of the accounting discrepancies with the Agency's audited financial statements. The revised forms, however, still do not detail revenue by each project area as noted in Finding Two above.

In addition, the revised expenditure schedules for the three years (Schedules HCD-C) still do not contain the detail requested by the reporting forms. For example, expenditures described as "loans to developers" are reported for each year without itemizing the purpose or use of the loans as requested in Section 4 of the schedules. It also appears LMIHF revenue used as a match for HO:ME Program funds was mistakenly reported twice in the revised report for fiscal year 2000/01.

The above issues were discussed with the Agency's contract accountant. The Agency indicated it would ensure more specific revenue and expenditure detail is included in future reports.

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Finding Number Four: The Agency accounting system fails to ensure 20 % of gross tax increment and interest are allocated to the LMIHF in a timely manner.

Condition: The Agency deposits all project area tax increment funds into a separate debt service fund for each project area upon receipt. At the end of each fiscal year, 20% of the tax increment, and accrued interest, is transferred from the project area debt service funds into the LMllIF (Fund 281).

Criteria: Health &, Safety Code Section 33334.2 states that not less than 20 percent of all taxes which are allocated to the agency pursuant to Section 33670 shall be used by the agency for the purposes of increasing, improving, and preserving the community's supply of low- and moderate-income housing available at affordable housing cost, as defined by Section 50052.5, to persons and families of low or moderate income, as defined in Section 50093, and very low income households, as defined in Section 50105, unless an allowable finding as described in this section is made annually by resolution.

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

Health and Safety Code Section 33334.3(6) 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.

State Controller's Office, Guidelines for Compliance Audits of California Redevelopment Agencies, November 1998, requires independent auditors to verify that 20 percent of the gross tax increment allocated to the agency was deposited in the Housing Fund prior to any deduction for administrative fees, pass-through payments to taxing entities, negotiated fiscal agreements and waivers, or other transfers from the balance of the tax increment allocated to the agency.

Recommendation: In the future, the Agency should deposit at least 20 percent of tax increment allocated to the Agency into the LMllIF immediately upon receipt.

Agency Response: HCD found that 20% of gross tax increment, and accrued interest, is transferred by the Agency to the LMllIF at the end of each fiscal year. RCD has recommended that such funds be deposited to the LMIHF immediately upon receipt.

The Health and Safety Code .is silent regarding the timing of deposits to the LMllIF. Also, we feel that such a requirement would be impractical and difficult to monitor. Accordingly, we propose to transfer tax increment monies and related accrued interest to the LMllIF on a quarterly basis.

Auditor's Conclusion: The statute clearly indicates that not less than 20 percent of the funds allocated to an agency are required to be deposited into the LMIHF, held there until used, and all interest and other revenue earned by the LMIHF shall accrue to and be deposited in the LMlliF-see Health and Safety Code Section 33334.3. There is no statutory authority for an Agency to place revenue owed to the LMllIF anywhere other than directly into the LMllIF upon its receipt.

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The Agency's practice of depositingtax increment revenue owed to the LMIHF into debt service funds, and then transferring funds at year end, has caused of loss of interest earnings to the LMIHF for the audit period. The account details for Debt Service Funds 221 through 226 submitted with the Agency's response reveal that no interest earnings were transferred to the LMlliF while approximately $132,000 was owed. The share of interest which should have been transferred to the LMlliF during FYs 1998/99, 1999/00 and 2000101 was calculated as follows:

DIS Funds 20% of DIS
Interest Interest
6199 $248,935 $49,787
6/00 219,062 43,812
6/01 192,020 38,404
Total $132,003 Therefore, the Department's revised audit recommendation is as follows:

. 1. The Agency should immediately reimburse $132,003 in lost interest earnings owed to the LMllIF for the audit period.

2. In the. future, the Agency should deposit at least 20 percent of tax increment allocated to the Agency into the LMlliF immediately upon receipt.

Agency Revised Response: The Agency agrees with the BCD audit finding to immediately reimburse $132,003 in lost interest earnings owed to the LMlliF for the audit period. Also, as of FY 02/03, the Agency started depositing at least 20 percent of tax increment allocated to the Agency into the LMIHF immediately upon receipt from the County of Los Angeles ..

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

Finding Number Five: The Agency is unable to document questionable charges to the LMIHF and provide other requested documents.

Condition: In reviewing the Agency's account detail for the LrvIIHF for fiscal year 1998/99, we noted several charges that appear to be unrelated to authorized uses of the LMIHF. We asked the Agency to describe and document how the charges itemized below relate to the Agency's affordable housing program. The Agency has failed to provide the requested information.

• Two separate payments in the amount of $2301004 to the City for "Comrn Cntr" issued 9/14/98 (Check No. 010198) and 9/22/98 (Check No. 010203).

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• The following apparent business relocation expenses:

Date Check No. Amount
12/21198 010270 $5,000
02/03/99 010315 5,000
02/16/99 010328 20,000
03/29/99 010398 4,750
03/29/99 010399 1,750
06/03/99 010518 22:955
Total $59,455 . The Department requested copies of the Agency's budget documents, and trial balances and account details for funds 222-228 (for the audit period) to complete the financial component of the audit. The Agency has failedto provide this information.

Criterion: Health and Safety Code Section 50464 provides that the Department may make investigations of the operation and enforcement of redevelopment programs and secure and examine the records of redevelopment agencies at any time. Incident to this authority is the obligation of redevelopment agencies to furnish the records upon reasonable notice.

Recommendations:

1. The Agency should provide a detailed description and documentation of how the above charges relate to the development, improvement or preservation of the community's supply of affordable housing within 30 days of the date of this draft report. If the Agency is unable to provide the requested documentation, it should immediately reimburse the total amount of the questionable charges ($519,463) to the iMIHF.

2. The Agency should provide the Department with a copy of the requested budgets and financial documentation within 30 days of the date of this draft report.

Agency Response: During HCD's fieldwork in Baldwin Park, Agency personnel could not locate certain documentation supporting expenditures from the LMIHF. The documents requested by HCD are attached to this letter at Attachment 4. Also included in Attachment 1 is an explanation of the nature and purpose of each expenditure.

Auditor's Conclusion: The Agency's response included the documentation requested and, according to the Agency's contract accountant, resulted in a LMIHF reimbursement of approximately $350,000 for certain unsupported expenses. We appreciate the Agency's cooperation and the diligence of its contract accountant in addressing this matter.

Detail of the City Advance included in the Agency's analysis of the questioned "community center" expenses should be officially recorded in the Agency's accounting records. In addition, future Annual Reports filed with the Department should reflect the project improvement costs the Advance represents, and account for annual Advance repayment costs.

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Finding Number Six: Replacement Housing Plan not adopted.

Condition: During fiscal year 1998/1999, the Agency adopted a relocation plan, but not a replacement housing plan, for the AutoNation Project (subsequently restructured as the Baldwin Park Marketplace Project) in its Sierra Vista Redevelopment Project Area. The plan calls for the relocation of 216 individuals residing in 68 housing units. It appears all 68 housing units, along with four motels with 116 rooms, and four other businesses will be demolished to make way for a commercial development project. (The relocation plan does not acknowledge whether any of the motels were used as permanent residences.) A total of 52 housing units were reported as having been demolished during the three-year audit period in annual reports filed with the Department.

The Agency's failure to adopt an adequate replacement housing plan for this project is especially critical since the replacement housing projects identified in the Implementation Plan are not suited to the replacement housing needs created by this project. According to the relocation plan (page 13) the 216 displacees include 108 adults and 108 children, none of whom is 62 years of age or older. The vast majority of "replacement units" identified in the Implementation Plan,

. however, are restricted to senior households and, absent a replacement housing plan, there is no evidence that alternative and suitable replacement housing was otherwise available to the displaced households.

Criteria: Health & Safety Code Section 33413.5 requires that a replacement housing plan be adopted not less than 30 days prior to the execution of an agreement for the acquisition, or disposition and development of real property, or the execution of an owner participation agreement, which leads to the destruction or removal of dwelling units from the low and moderate income housing market. The Agency shall make a draft of the replacement-housing plan available, for review and comment, to the project area committee, other public agencies and the general public prior to adoption.

The plan shall include (1) the general location of replacement housing required pursuant to Section 33413(a), (2) describe an adequate means for financing the replacement housing, (3) include a finding that the replacement housing is exempt from Article 34 of the State Constitution or that such approval has been obtained, (4) identify the number and affordability of planned replacement housing units, and (5) include a timetable for meeting the plan's relocation and replacement housing objectives -.

Health and Safety Code Section 33413(a) requires that whenever dwelling units housing persons and families of low- or moderate income are destroyed or removed from the low- and moderateincome housing market as part of a redevelopment project which is subject to a written agreement with the agency, or where financial assistance has been provided by the agency, the agency shall develop, construct, or rehabilitate an equal number of replacement units, with an equal or. greater number of bedrooms, within four years. When destroyed or removed after September 1, 1989, 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 destroyed units (100 percent income level replacement required for units removed after January 1,2002).

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Health and Safety Code-Section 33411.3 provides that whenever any portion of a redevelopment. project is developed with low- or moderate-income housing units, the agency shall require by . contract or other appropriate means that such housing be made available for rent or purchase to the displaced lower- or moderate-income households. Such persons and families shall be given priority in renting or buying such housing.

Recommendation: The Agency should prepare and adopt a replacement housing plan, with all of the required components, for this project within 60 days of the date of the draft audit report.

Agency Response: HCD found that the Agency failed to adopt an adequate replacement housing plan. Agency staff is currently working on this plan. The plan should be completed and submitted to HCD by September 30,2003.

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

Finding Number Seven. 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 project area prior to January 1, 1994, or the Agency's progress in meeting this component of the production requirement. For example, from pages 30 and 31 of the updated plan, it appears only newly constructed and substantially-rehabilitated units were considered to determine past (prior to January 1, 1994) production requiremerits.

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. The first 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 by AB 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.

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Between January 1, 1994 and December 31,2006 atIeast 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 be affordable to lower- and moderate-income households.

After December 31, 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).

Recommendation: The Agency should revise the Implementation Plan to clearly identify the number of units rehabilitated in the project areas 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: HCD found that the Agency's Implementation Plan did not identify the number of housing units rehabilitated in the project areas prior to January 1, 1994, nor has the Agency adequately described how it is meeting its production housing requirements.

RCD cites pages 30 and 31 of the updated plan (2000 - 2004) and states that it appears only newly constructed and substantially-rehabilitated units were considered to determine past (prior to January 1, 1994) production requirements.

The Baldwin Park Redevelopment Agency's initial Redevelopment and Housing Implementation Plan, 1995 - 1999, as prepared by CottoniBelandJAssociates, Inc., indicates that the Agency did not create any inclusionary housing obligations under the provision for rehabilitated units prior to 1994. It is our understanding that the term "substantial rehabilitation" which was applied to units rehabilitated prior to AB 1290 was defined, not by AB 1290, but by several workable, reasonable

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definitions of rehabilitation which were provided by RCD in April 1993 by Thomas B. Cook,

Deputy Director, Division of Housing Policy Development in a memorandum to redevelopment agencies regarding Housing Affordability Compliance Plans (Health and Safety Code Section 33413 (b) (4).

Regarding the question as to how "rehabilitation" is defined for purposesof an AB 315 Plan, RCD gave the following answer.

There is no standard definition of "rehabilitation." For the purposes of Section 33413 (b), two special cases should be considered:

• Rehabilitation that creates new housing units from previously nonresidential structures can be considered "new units. "

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• Rehabilitation that increases rents or costs and removes units from an affordable category should not be counted for purposes of an AB 315 plan, since it triggers an obligation to provide replacement units under Section 33413 (a). The agency should be tracking a replacement obligation for such units.

• Rehabilitation that maintains rents (not necessarily affordable rents) should be counted under Section 33413 (b) (1) and (Z]:

Aside from the special cases above, there are several workable, reasonable definitions of rehabilitation which an agency could use, together or separately. HCD's California Housing Rehabilitation Program-Rental (CHRP=,R) defines rehab as repairs and improvements to substandard housing (substandard being defined as violating at least one provision of State Housing Law standards) necessary to return it to standard condition.

For another example, Health and Safety Code Section 50097 allow "rehabilitation" to include, for purposes of certain programs, room additions to prevent overcrowding of low-income or moderate-income households, and changes in grade, drainage facilities or other improvements necessary for continued operation of affordable housing (in this particular case mobilehome parks) in flood conditions.

See Attachment 5 for a copy of the Agency's Redevelopment and Housing Implementation Plan 1995 -1999 .

. Auditor's Conclusion: Like the updated Plan, the Agency's initial Implementation Plan (adopted December 1994), indicates the Agency's existing project area production requirements (i.e., requirements generated prior to adoption of the Implementation Plan) were based upon an assessment of "substantial rehabilitation" activity and not all "rehabilitation" activity that had occurred within the project areas. While the Plan uses the title "Rehabilitated Units" for this section of the Plan, it is clear from the contents of the section that "substantial rehabilitation as defined by AB 1290" was applied to determine the Agency's existing production requirementssee page III-12 of the December 1994 Implementation Plan.

The Agency appears to misinterpret the Department's 1993 memo referenced in its response.

The Agency correctly notes that the memo provides several workable and reasonable definitions of "rehabilitation" that could be used to determine the amount of "rehabilitation" activity that had occurred within a redevelopment project area for purposes of AB 315 planning requirements. However, the Agency appears to misconstrue the memo as attempting to define "substantial rehabilitation". To the contrary, the memo is attempting to provide workable definitions of what constitutes "rehabilitation". Our audit recommendation, therefore, remains the same.

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

Condition: The Agency did not make or adopt annual determinations that consider the necessity and proportionality of LMIHF expenditures for planning and administrative activities during this audit period.

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 LMIHF.

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 a nonprofit corporation not directly attributable to a specific project.

Recommendation: In the future, the Agency should annually determine in writing whether proposed planning arid 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 LMllIF, 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.

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Agency Response: HCD found that the Agency did not make or adopt annual determinations that the amounts of Planning and Administrative costs (P&A) allocated to the LMlliF are "proportional" in relation to the lowlmoderate expenditures.

The Agency will take the following actions regarding this matter:

1. On or before July 1,2003, when the Agency adopts its annual budget resolution for fiscal year 2003/2004, the following wording will be added to the budget resolution:

"The Agency hereby finds and determines that the planning and administrative expenses to be paid from the Low and Moderate Income Housing Fund for each redevelopment project are necessary for the production, improvement or preservation of low and moderate income housing and are not disproportionate to the amounts budgeted for the costs of production, improvement or preservation of that housing".

2. When the Agency finalizes its budgeted expenditures for 2003/2004, including P&A, it will take the following amounts into consideration:

• The budgeted expenditures of the Redevelopment Agency for 2003/2004.

• The budgeted expenditures of the LMIHF to produce, improve or preserve low income housing for 2003/2004.

• 'Projected planning and administrative activities of Agency during 2003/2004' related to housing, even if expenditures for low income housing may occur in future fiscal years. For example, during 2003/2004, Agency staff may spend a substantial amount of hours in the planning and design of future projects, sending RFP's to developers, etc. for a project that will be constructed in 2004/2005. The Agency would reasonably budget P&A for such activities in 2003/2004.

3. We will establish a system to estimate the actual time and overhead of Agency staff of P&A that is allocated to the LMlliF.

All these factors will be considered in determining that P&A allocated to the LMrnF is "proporti onal" .

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

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