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California Department of Housing and Community Development
Its Oversight of Housing Bond Funds Remains Inconsistent

Report Number: 2018-037

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HCD Continues to Monitor Its Housing Bond Programs Inconsistently

Key Points:

HCD Inadequately Monitors Some of Its Grant‑Based Programs

For this audit, we reviewed eight housing bond programs—totaling $3.4 billion of the nearly $4.4 billion in housing bond funds—and found that HCD adequately monitored four but did not adequately monitor the other four. Specifically, HCD generally provided adequate monitoring of its loan‑based programs by performing on‑site visits and reviewing required reports. However, it did not adequately monitor its grant‑based programs, including CalHome and BEGIN. As a result, it cannot be certain that award recipients for these programs used the funds to assist target populations with homeownership or home rehabilitation.

We found that HCD generally adequately monitored the four loan‑based multifamily housing programs we reviewed, which received $1.7 billion of the housing bond funds. For its multifamily housing programs, HCD makes loans to recipients, such as sponsors with experience in owning and developing affordable rental housing, to build or rehabilitate apartment buildings with a certain number of the units designated for lower‑income individuals and families. The rental rates for these units are set based on the income levels of the occupants, the unit types, and locations. HCD generally monitors these programs by performing on‑site visits and collecting and reviewing required reports to ensure that the award recipients are upholding their 55‑year commitment to designate specific units as low‑income, that they are charging appropriate rents, and that only the target populations are residing in the designated units. The required performance reports that HCD collects and reviews include schedules of rental income that identify each tenant's income, which HCD can use to ensure that the recipients are renting the designated units only to those who qualify. We reviewed a total of $49 million that the four multifamily housing bond programs—which include the general program and three related multifamily programs—awarded. As Table 2 shows, we found that HCD generally performed sufficient monitoring to ensure that qualified families and individuals occupied the designated units.

Table 2
HCD's Monitoring Practices Raise Questions About Whether Bond Funds Benefited Target Populations
From 2014 Through March 2018
Housing Bond Program Assistance Type Program Allocation Total Awards We Reviewed Total Awarded for Items We Reviewed Number of Required Reports Number of Required Reports Received Compliance Percentage Did HCD Use Risk Assessments to Identify Sites to Visit? Did HCD Perform Site Visits?
Multifamily Housing Program—General Loans $1,199,381,274 3 $20,602,594 46 46 100% Yes Yes
Infill Incentive Grant (IIG) Program Grants 790,000,000 3 44,929,120 The IIG program does not have processes and procedures for monitoring.
CalHome Program Grants* 505,471,081 5 5,250,000 57 30 53 No No
Multifamily Housing Program—Supportive Housing Program Loans 435,472,610 2 13,061,606 36 36 100 Yes Yes
Joe Serna, Jr., Farmworker Housing Grant Program (farmworker housing program)—General Grants and Loans 290,000,000 Multifamily
2		 4,445,000 18 18 100 Yes Yes
Single-Family
1		 1,500,000 The farmworker housing program does not have effective processes and procedures to monitor grants made directly to farmworkers for homeownership assistance.
BEGIN Program Grants 106,067,619 1 2,790,000 4 2 50 NA NA
Multifamily Housing Program—Homeless Youth Loans 39,733,906 2 9,390,138 19 16 84 Yes Yes
Multifamily Housing Program—Governor's Homeless Initiative Loans 38,336,950 1 6,404,461 17 17 100 Yes Yes

Source: Analysis of HCD program guidelines, rules and regulations, program files, and staff interviews.

NA = Not applicable because on-site monitoring is generally not required for the BEGIN program after the standard agreement has expired.

* The CalHome program can also provide loans, but HCD primarily provided grants.

In contrast, we found continuing problems with HCD's oversight of two of its grant‑based programs—CalHome and BEGIN. We also noted these problems in our 2009, 2012, and 2014 housing bond audit reports. These two programs—which total about $505 million and $106 million, respectively, of the housing bond funds—generally help moderate‑income, lower‑income, and very low‑income households to become first‑time homebuyers or to remain homeowners. Specifically, through these two programs, HCD provides grants to local government agencies and nonprofits that subsequently provide individual households with loans. Although the local government agencies and nonprofits do not pay back the funds to HCD, the individual households repay the principal and interest to the agencies and nonprofits. The agencies and nonprofits that participate in these two programs must deposit all repayments in an account known as a reuse account and use those funds only for program‑eligible activities. However, HCD did not always perform the monitoring required to ensure that recipients used the funds to assist target populations with homeownership or home rehabilitation. We reviewed five CalHome awards, which totaled nearly $5.3 million, and found that HCD did not collect or review all required reports, perform risk assessments, or conduct on‑site visits. We also reviewed one BEGIN award of $2.8 million and found similar problems related to the collection and review of required reports.

CalHome and BEGIN
Reporting Requirements

Quarterly Status Reports

  1. Recipients must provide HCD with quarterly status reports no later than 30 days following the end of each calendar quarter during the term of the standard agreement, which expires 36 months from the award date.
  2. The reports are to include a summary of program activities during the quarter, such as the number of units assisted, any planned activities for the next quarter, a financial summary including the original grant amount, all drawdowns, and the remaining balance.

Annual Status Reports

  1. Recipients must provide reports to HCD annually, due no later than 30 days after June 30 during the term of the standard agreement, which expires 36 months from the award date.
  2. The reports are to include the number of units assisted under the program requirements, a financial summary including the original grant amount, total funds drawn during the fiscal year, and the remaining balance.

Reuse Account Reports

  1. Recipients must report annually on their reuse accounts for the length of the monitoring agreement, 17 years after the end of the standard agreement.
  2. The reports are due no later than 30 days after June 30.
  3. The reports must specify how the recipients are using loan repayments for CalHome and BEGIN activities.

Source: HCD's CalHome regulations and desk manual and BEGIN operations handbook.

From 2014 through March 2018, HCD collected only 32 of 61 required reports—which detail how the award recipients used the money to provide mortgage or home rehabilitation assistance—for CalHome and BEGIN; thus, nearly half were missing. HCD's CalHome regulations and BEGIN policies require recipients to submit certain reports to HCD quarterly and annually, as the text box shows. In one example, HCD did not collect or review 16 of the 18 required CalHome reports from 2014 through March 2018 for the city of Pico Rivera. In response to a recommendation from our 2014 audit report, HCD added a policy to the CalHome and BEGIN manuals stating that it would not process disbursements if recipients had any delinquent or missing required reports. However, in this instance, HCD violated its own policy. According to a staff member in the grant management section, high staff turnover resulted in contract responsibility moving from one staff member to another staff member. He stated that he did not begin monitoring Pico Rivera until January 2017, one month before it requested HCD to disburse funds. Although the staff member asserted that he reviewed Pico Rivera's expenses to ensure that they were allowable and that he reconciled the award balance before approving the disbursement, HCD should have been monitoring the city's use of funds over the four‑year period. Instead, HCD still disbursed more than $850,000 to that city despite its missing reports.

When we asked a manager within the grant management section why HCD did not collect the required performance reports for the CalHome and BEGIN programs, he indicated that HCD management failed to ensure that staff knew their responsibilities. Specifically, HCD experienced significant turnover in program staff, which led to a lack of awareness of responsibilities and of expectations for properly monitoring program award recipients. He also indicated that staff did not receive proper training on the monitoring requirements when they assumed new program responsibilities. Further, he stated that monitoring grant programs has been a low priority for HCD. Consequently, the level of monitoring HCD provided to CalHome and BEGIN is inadequate given that these programs are responsible for over $600 million in housing bond funds.

When HCD did collect required reports, it is unclear whether staff used them in their decision making, and its lax oversight may have prevented individuals and families in need from obtaining timely assistance. For example, HCD collected all 16 required performance reports for one CalHome award to the Coachella Valley Housing Coalition (coalition). However, HCD twice provided one‑year extensions to the award's original term, which expired 36 months from the award date, even though the coalition repeatedly stated in its reports that it was still searching for recipients for the loans and had not yet issued any. Based on these reports, HCD should not have granted the extensions. Doing so could cause HCD to violate its regulations, which require that if it does not expend all awarded funds within 36 months, it must make those unused funds available for other program purposes.

When it granted the coalition's extensions, HCD prevented the funds in question from being available to other potential recipients, perhaps in a different region with greater and more immediate need. HCD eventually cancelled the full amount of the award, but only after it had extended the award contract for two years beyond the original term. Further, at the time it originally issued the coalition's award, HCD reported that it had about 50 other applicants that had not received awards. If HCD allows recipients to keep funds rather than making loans, those funds are not available to help address California's housing needs. According to the CalHome program manager at that time, HCD often granted extensions when requested because of the limited CalHome funds left to award. Further, the manager explained that HCD wanted to allow recipients adequate time to use the funds. However, HCD violated its regulations when it did not expend the funds it awarded to the coalition within 36 months and instead granted extensions.

In addition to its failure to collect and review required reports, HCD's asset management compliance branch chief stated that HCD did not conduct any on‑site monitoring or use its risk assessment tool to monitor CalHome awards from 2014 through March 2018. HCD's desk manual requires risk assessments to identify recipients for on‑site visits. The risk assessment considers factors such as whether a recipient has requested an extension to the standard agreement or failed to submit performance reports, as well as the dollar amount of the award and the recipient's number of open awards. In response to a recommendation from our 2014 audit report, HCD updated its risk assessment tool and its CalHome desk manual to require its staff to conduct on‑site visits based on the risk assessment tool. HCD designed its procedures for on‑site visits to allow staff to evaluate whether the award recipient provided homeownership or home rehabilitation assistance to only qualifying individuals or families. However, HCD did not perform any on‑site visits for CalHome awards from 2014 through March 2018, nor did it perform any risk assessments. Thus, it was unable to confirm whether recipients provided assistance only to those who qualified.

The deputy director of HCD's division of financial assistance (financial assistance deputy director)—who oversees the housing bond programs—stated that after HCD updated its risk assessment tool in 2014, it did not follow through with implementing its stated processes to perform on‑site monitoring of CalHome award recipients. Instead, it tasked CalHome staff and managers with other priorities, such as reviewing the portfolio of awards to identify which awards it needed to cancel or extend. In response to our current audit, HCD completed risk assessments for active CalHome recipients in August 2018 and stated it would perform on‑site monitoring starting in late August 2018. Even so, we are concerned that HCD will not follow through on its assertions given that we made similar recommendations in each of our 2009, 2012, and 2014 housing bond audit reports.

We also reviewed the IIG program and the farmworker housing program, with funding of $790 million and $290 million, respectively. The IIG program provides financial assistance for the infrastructure improvements necessary to facilitate new infill housing developments through affordability covenants, agreements that require that a certain number of units in these developments remain designated for low‑income families and individuals for 55 years.1 The farmworker housing program provides loans or grants for multifamily housing developments and for single‑family homes. The single‑family farmworker housing program provides grants directly to agricultural employees and their families for home‑buying assistance, among other things. If the program awards a grant directly to a family, the family must own and occupy the home paid for by the grant. According to the program managers, HCD has not implemented formal or specific policies or procedures that require it to collect status reports or to perform on‑site monitoring for either of these programs, nor has it developed effective processes to ensure that the award recipients or their renters are living in the homes as the programs require.

Although other HCD programs, such as the multifamily housing programs, or local jurisdictions may monitor IIG awards, HCD does not track this monitoring. According to the IIG program manager, although HCD relies on these other sources for providing monitoring such as on‑site visits, it does not document whether visits occur, who performs them, or their outcomes. For example, IIG program staff do not obtain reports or other documentation to verify that multifamily housing programs or local jurisdictions have performed any on‑site visits of award recipients. As a result, HCD is unable to ensure that the housing units developed through the IIG program are affordable and will continue to be so for the duration the program requires. In response to the concerns we identified, HCD's IIG manager acknowledged the need for HCD to develop procedures to monitor IIG award recipients and provided us with draft monitoring procedures in May 2018. Notwithstanding, the draft monitoring procedures are inadequate because they do not describe how HCD will track awards monitored by other entities or those that do not fall under the oversight of another entity.

Although HCD recently developed procedures to monitor whether only qualified farmworkers are occupying housing funded through the single‑family farmworker housing program, these procedures are limited in their effectiveness. According to HCD's grant lien agreements for this program, the recipient must occupy the property and not rent, or otherwise lease, any part it. In 2018 HCD implemented an annual compliance letter process for this program requiring recipients to self‑certify that they have homeowners insurance, that their property taxes are current, and that they have not added any additional debt to the title, among other items. However, according to the HCD homeowner portfolio manager, HCD does not request or obtain any supporting documentation, such as proof of insurance or a current utility bill, to verify the recipients' assertions on the form and demonstrate that they are occupying the homes in question. Further, the HCD homeowner portfolio manager asserted that as of April 2018, HCD had received only a 33 percent response rate to the 650 self‑certification letters it had sent out, and it does not follow up on letters when the homeowners do not respond. As a result, it is difficult for HCD to determine the level of compliance with the program requirements. According to the homeowner portfolio manager, HCD does not have the staff and resources to follow up on the recipients who do not respond. In response to our audit, HCD did create policies for following up on these letters.

HCD Management Does Not Prioritize Monitoring Its Grant‑Based Programs

HCD's lax monitoring of its grant‑based programs may be due to its management's lack of emphasis on monitoring those programs. There is a stark difference between the thoroughness and level of documentation HCD staff use in monitoring its multifamily housing programs, which issue loans, and in monitoring its grant‑based programs, such as CalHome and BEGIN. According to the asset management compliance branch chief, HCD invested in resources and trainings for the multifamily housing programs because it believes these are the best programs to accomplish its mission of addressing California's housing issues. Further, with limited resources, HCD prioritized the multifamily housing programs as its core business. However, this does not absolve HCD of its responsibility to ensure that recipients of program grants use funds promptly and appropriately. Without adequate monitoring of its grant‑based programs, HCD may prevent households that are in need from receiving the limited funds available.

Further, addressing these chronic monitoring issues is important because HCD could receive an additional $900 million for the CalHome, IIG, and the farmworker housing programs under a new ballot measure going before voters in November 2018. Many of the problems we identified with CalHome have been ongoing for nearly a decade. Despite HCD's earlier assertions that it had implemented our recommendations to fix these problems, we found that it had not followed through on necessary changes. For example, we recommended to HCD in our 2009, 2012, and 2014 audit reports that it use a risk‑based approach to identify potential recipients for on‑site visits for CalHome. However, in our current audit, we found that nine years later, HCD still had not followed through on performing site visits or on using a risk‑based approach to identify recipients to visit. Because HCD has failed to follow through on our recommendations and because it may receive significant additional funding for these programs, additional oversight of HCD is necessary.

Recommendations

Legislature

Given HCD's long‑standing history of inadequate monitoring for some of its programs and the additional funds HCD could receive for CalHome under the November 2018 ballot measure, the Legislature should require HCD to disclose information about such monitoring in its annual report, which it should submit to the Assembly Committee on Housing and Community Development and the Senate Committee on Transportation and Housing. The report should identify all of the awards that HCD monitors for the CalHome and BEGIN programs and should include performance metrics such as the amount of funds awarded but not disbursed to recipients and therefore not issued to potential homeowners. The Legislature should also require HCD to disclose in its annual report—at a minimum—the following information for all awards that HCD is responsible for monitoring in the CalHome and BEGIN programs:

The Legislature should require the Business, Consumer Services and Housing Agency to monitor HCD's efforts and to submit a report annually to the Legislature demonstrating that HCD is continuing to implement our recommendations.

HCD

To ensure that it appropriately monitors CalHome as required by statute, regulation, and program guidelines, HCD should perform the following:

To ensure that HCD appropriately monitors BEGIN as required by statute, regulations, and program guidelines, HCD should immediately collect and review all required reports, and it should follow up with recipients to obtain any missing reports. If the reports reveal a problematic trend, such as a recipient not disbursing funds, HCD should take appropriate corrective action with the recipient.

To ensure that the IIG program award funds benefit the target population, HCD should develop and use a tool by December 1, 2018, to track which awards are monitored by local jurisdictions or by other HCD programs and which are not monitored at all. HCD should then immediately obtain monitoring reports from the local jurisdictions and other HCD programs to verify monitoring and review the results of such monitoring. HCD should follow up on any noted deficiencies. Further, HCD should, by January 1, 2019, develop a plan to perform on‑site visits for those recipients that do not receive adequate monitoring from another source, and it should perform the planned on‑site monitoring.

To ensure that single‑family farmworker housing program recipients continue to qualify for housing, HCD should implement policies and procedures by December 1, 2018, to ensure that the information the recipients provide in the self‑certification letters is accurate and complete by requiring that they include documentation as proof. HCD should also follow up to ensure that it receives responses to its annual compliance letters from all recipients.



HCD Is Unable to Fully Use Its Housing Bond Database, Impeding Its Ability to Ensure That Staff Adequately Monitor Award Recipients

Key Point:

Although CAPES has been in service since 2007, HCD still cannot fully use the system for its intended purposes. As Figure 4 shows, HCD's implementation and continued development of CAPES has cost millions of dollars over almost 13 years. One of CAPES's objectives was to provide HCD with centralized and accurate management reporting that tracked, for example, employee workload and monitoring progress. However, HCD initially put CAPES into service in 2007 with reduced functional capabilities relative to the system's initial objectives, including a lack of reporting ability, because it underestimated the workload and resources required to complete the system. In 2018 HCD is still working on CAPES to achieve the desired functionality. According to the financial assistance deputy director, CAPES has improved in both functionality and usability since 2007, but HCD still cannot effectively use it to track and monitor program work for all housing bond programs. Although CAPES does not currently provide the level of functionality that HCD needs, the system does have basic capacity for collecting some data, such as the dates HCD receives reports for the CalHome program. Nonetheless, our review found that HCD staff have not used CAPES for this basic purpose.

According to the financial assistance deputy director, HCD management has not formally directed all HCD staff and programs to use CAPES because of its limited functionality; instead, it allows each program to determine what data tools to use. For example, we found that HCD's multifamily housing programs have used CAPES to track their long‑term monitoring activities but that its CalHome and BEGIN programs have not. Instead, staff in the CalHome program have inconsistently used spreadsheets to track monitoring. If HCD's programs consistently used CAPES for basic data collection, HCD management could run reports from the system to assess whether staff collect and review the required reports for monitoring. However, when staff do not consistently use the system for monitoring all awards, HCD cannot use CAPES to produce meaningful reports. The financial assistance deputy director asserted that she plans to start using reports to the extent that CAPES can generate them for administrative purposes by December 2018, with the expectation of holding management accountable for completing program monitoring requirements.

Figure 4
HCD's Attempts to Implement a Central Housing Bond Database Have Been Costly and Mired in Technical Challenges

A graphical timeline demonstrating that HCD's attempts to implement a central housing bond database have been costly and mired in technical challenges.

Source: Analysis of HCD's contracts and internal system cost information and California State Auditor reports 2007-037, 2009-037, 2012-037, and 2014-037.

We are concerned that if voters approve the additional $3 billion for housing programs, HCD could be unprepared to effectively monitor certain programs' recipients. Our previous four audits, beginning in 2007, noted a number of problems with CAPES, including that HCD has not ensured that it contains complete and accurate data. Figure 4 shows some of the issues we identified related to CAPES during these audits. For example, in our 2014 report, we noted that HCD lacked an effective system for its program managers to use to track each aspect of their programs and that some staff relied on informal methods, like electronic spreadsheets. When we asked why HCD has not addressed these issues, the financial assistance deputy director stated that although HCD has completed several of its software enhancements for CAPES, it has a backlog of additional enhancements to make and limited staff to make them. Further, HCD has diverted resources to implement FI$Cal—the State's new single financial management system. However, as we discuss in the previous section (here and here), HCD has not adequately monitored some of its housing bond programs, including failing to collect required reports that demonstrate whether recipients are providing housing to target populations. If HCD wants to use CAPES as a tool to effectively monitor its housing bond programs, it needs to address CAPES's deficiencies and direct all staff to use the system.

Recommendations

HCD

To ensure that it maximizes the benefit of the funds it has invested in CAPES's development and to support its ongoing efforts to improve CAPES's usability, HCD should do the following by January 1, 2019:

In conjunction with the planning efforts outlined above and to ensure that it can most efficiently manage its limited resources related to IT, HCD should develop a cost‑benefit analysis by March 1, 2019, that addresses the costs of continuing to maintain and enhance CAPES in the long term versus the acquisition and maintenance costs of an off‑the‑shelf database product. At a minimum, it should include the following:



HCD Risks Exceeding Some Statutory Administrative Spending Limits, Which Could Threaten Its Ability to Meet Its Monitoring Requirements

Key Point:

As we discuss in the Introduction, state law imposes administrative spending limits of 5 percent on certain housing bond programs. According to its administrative cost‑tracking tool and its bond fiscal manager, HCD has exceeded these administrative spending limits for at least two of its programs: BEGIN and the Code Enforcement Incentive Program. In addition, HCD projects that it will exceed the required 5 percent limit for CalHome before it can complete its monitoring obligations. HCD currently estimates that performing administrative activities, such as monitoring, will ultimately cause it to spend 6 percent of the almost $630 million allocated to the three programs—or nearly $6.5 million over the limit. Not only could HCD potentially violate state law by exceeding the administrative cost limits, it also risks not being able to monitor recipients as required, the consequences of which we discussed (here, here, and here) in the first section of this report. Nonetheless, HCD has not taken steps to avoid these outcomes. Specifically, HCD had already projected it would exceed the administrative costs limit for one of those programs, when we performed our 2012 and 2014 housing bond audits, but it did not take sufficient action to address the impending problem.

HCD continues to lack an effective mechanism to prevent it from exceeding statutory spending limits. In our 2014 housing bond audit, we reported that HCD did not have sufficient policies to ensure that it does not exceed these limits. Although HCD developed a policy to address this finding that includes an annual management review of administrative cost information, it still does not have a control in place to prevent it from spending funds on administrative activities that it could otherwise award to recipients. Instead, the policy states that HCD will annually review a summary report, which is a reactive approach rather than a preventive one. The policy essentially establishes a process for HCD to monitor how much it has spent over the administrative cap, but it does not provide a mechanism to prevent HCD from exceeding that limit. According to HCD's deputy director of administration, HCD has demonstrated its effectiveness in mitigating the risk of overspending as HCD has exceeded the administrative limit on only four occasions while administering the propositions 1C and 46 bond funds and programs. Nevertheless, HCD has not effectively mitigated the risk of overspending, as those four occasions demonstrated.

Further, HCD may have engaged in inappropriate practices when it faced deficiencies in administrative funding. Because HCD estimates it has exceeded or will exceed its allowable administrative cost limits for CalHome and BEGIN, it may be unable to complete its long‑term monitoring obligations. According to HCD's 2016–17 Bond Baseline Adjustment Report, HCD has resolved this issue by using CalHome funds to pay for the remaining 20‑year monitoring costs for the BEGIN contracts. Yet, HCD could not identify the legal authority that allows it to use CalHome funds to monitor BEGIN. In addition, HCD should have been more efficient in operating its programs and used a risk‑based approach for monitoring, as we have recommended, thus increasing the possibility that it could monitor both programs for the required period using the programs' own funds. In fact, the Legislative Analyst's Office opined that 5 percent for administrative costs is a reasonable target for each housing bond program. HCD could lack the statutory authority to continue to administer a given program when it reaches the limit on administrative spending and therefore may need to cease its monitoring activities for that program. If this occurs, HCD may be unable to ensure that recipients use program funds for appropriate purposes.

Furthermore, HCD may be imprudently retaining more funds for administrative purposes than warranted. When the housing bonds provide funds to some programs, HCD sets aside 5 percent for its administrative costs, which includes making the awards and monitoring the recipients. However, according to HCD documents, when HCD does not disburse all funds to a recipient and it subsequently awards those funds to another recipient, HCD retains 5 percent from the original award and 5 percent from the subsequent award for its administrative costs. We believe that it is unnecessary for HCD to retain the full 5 percent for administering the original award because its only costs should have been for making the award and for any limited monitoring it performed.

HCD management also lacks a long‑term plan for addressing administrative spending overages. According to the deputy director of administration, HCD management meets annually with its bond fiscal manager to discuss administrative costs, staffing needs, and available resources for the current fiscal year. However, HCD management does not review the bond fiscal manager's administrative cost projections, nor does it document its discussions of the long‑term effects of exceeding the spending limits. The deputy director of administration indicated that HCD is developing plans to either increase program efficiencies or reduce staffing levels to stay within the 5 percent administrative spending limit. However, until it does so, HCD cannot be certain that it is prepared to use its limited resources to more efficiently monitor programs or that it has addressed the risk of having to cease administering a program.

HCD's ability to efficiently monitor its programs is additionally limited by the fact that its administrative cost‑tracking tool lacks a clear methodology for its calculations and does not contain documented support for the underlying data that HCD uses to create its administrative cost estimates. The deputy director of administration asserted that the tool uses data from its accounting system and that HCD reconciles to the accounting system semiannually; however, it does not record in the tool either the source of the data or the results of any reconciliation. Because the administrative cost‑tracking tool is the sole method HCD uses to track its administrative spending, HCD staff should establish a clear methodology for its calculations with documented support and provide it to management for review.

Recommendations

HCD

To ensure that it is able to meet its administrative monitoring obligations and that it uses housing bond funds in compliance with state law, regulations, and program guidelines, HCD should develop a long-term plan by January 1, 2019, for how it will avoid exceeding the administrative cost limits of those programs in the most immediate danger of overage and for how it will address instances when it has exceeded administrative cost limits. The plan should identify the programs at risk of exceeding the limit; the actions HCD will take for each program to gain efficiencies; its plan for moving staff between programs; a request for more money or legislative changes such as modifying the statutory limit on administrative spending, if necessary; and an evaluation of the consequences of not fulfilling its monitoring obligations.

To ensure that it complies with state law, prudently uses administrative funding, and promotes transparency, HCD should do the following:

To ensure that it does not exceed administrative cost restrictions and that it maximizes the funds intended to address target populations' housing needs, HCD should estimate when it will run out of administrative funds for any specific program, document its projection methodology, and provide underlying data and support for its estimates. The projections should include, but not be limited to, actual staff time spent on the program, the number of awards being monitored, and the length of monitoring. Staff should provide these projections and methodologies to management for review and approval by December 1, 2018, and then at least biannually thereafter.



SCOPE AND METHODOLOGY

The Health and Safety Code requires the California State Auditor (State Auditor) to conduct periodic audits of housing bond activities to ensure that agencies that administer housing bond programs have awarded proceeds in a timely manner that is consistent with legal requirements and that recipients have used the funds in compliance with the law. Table 3 lists the audit objectives and the methods we used to address them. The State Auditor previously issued audit reports on this subject in September 2007, November 2009, October 2012, and September 2014.

Table 3
Audit Objectives and the Methods Used to Address Them
Audit Objective Method
1 Determine whether awards of housing bond funds were timely. In our 2014 housing bond audit, we determined that HCD had awarded nearly all funds available and found that HCD generally awarded funds in a timely manner. Therefore, we did not perform work in this area during the current audit.
2 Determine whether HCD awards bond funds in compliance with applicable statutory requirements. In our 2014 housing bond audit, we found that HCD did not meet some of the requirements we reviewed. However, in that audit, we determined that HCD had awarded nearly all funds available, and therefore we did not perform work in this area during the current audit.
3 Determine whether HCD is ensuring that recipients are using funds in compliance with applicable statutes.
  •  We reviewed relevant laws, regulations, program guidelines, and policies, and we interviewed key staff to determine whether HCD adequately monitored recipients from 2014 through March 2018.
  •  We judgmentally selected 20 awards from the eight HCD-administered programs to assess whether HCD implemented processes that would allow it to ensure that recipients used housing bond funds in compliance with the law. Further, we tested whether HCD followed those processes.
  •  To follow up on concerns from our 2014 audit, we ensured that HCD performed adequate monitoring for one Catalyst program award.
  •  We interviewed staff and reviewed HCD's administrative cost-tracking tool to determine how HCD plans to continue its monitoring efforts without exceeding administrative spending restrictions.
4 Determine whether CAPES can adequately perform key functions necessary for HCD to appropriately administer bond awards and comply with statute and program regulations.
  •  We interviewed HCD management to determine the overall status of CAPES.
  •  We identified the total cost of CAPES since its inception.
  •  We interviewed staff and reviewed reports and program processes to determine whether programs were consistently using CAPES.

Source: Analysis of state law and information and documentation identified in the table column titled Method.

Assessment of Data Reliability

In performing this audit, we obtained electronic data from the sources listed in Table 4. Table 4 describes the analyses we conducted using data from these sources, our methods for testing, and the results of our assessments.

Table 4
Methods of Assessing Data Reliability
Information Source Purpose Method and Result Conclusion

HCD

Cumulative Propositions 46 and 1C Bond Awards

 To identify the funds available for each HCD program as of December 31, 2017
  •  We performed data-set verification procedures and electronic testing of key data elements and found no significant issues.
  •  To test the accuracy of the Cumulative Proposition 1C bond awards, we traced key data elements from a random selection of 29 Proposition 1C awards to supporting documentation and found no errors.
  •  To test the completeness of the data, we traced a haphazard selection of 29 Proposition 1C awards to the data and found no errors.
  •  We found no significant difference between the current cumulative Proposition 46 source information and the information we reviewed and tested in the 2014 housing bond audit. Therefore, we relied on the accuracy and completeness testing from our 2014 assessment, finding the information to be complete and accurate.
 Sufficiently reliable for the purposes of this audit.

Source: Analysis of various documents, interviews, and data listed in this table.

We conducted this audit under the authority vested in the California State Auditor by Section 8543 et seq. of the California Government Code and according to generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives specified in the Scope and Methodology section of the report. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Respectfully submitted,

ELAINE M. HOWLE, CPA
State Auditor


Date:
September 20, 2018

Staff:
Nicholas Kolitsos, CPA, Audit Principal
Michelle J. Sanders
Kevin Wedman
Sean Wiedeman

Legal Counsel:
Joseph L. Porche, Staff Counsel

For questions regarding the contents of this report, please contact
Margarita Fernández, Chief of Public Affairs, at 916.445.0255.



Footnote

1 An infill housing development is a site that is at least 10 years old and is being redeveloped for urban uses. Go back to text



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