Report 2014-037 Summary - September 2014

California Department of Housing and Community Development: Inconsistent Oversight Has Resulted in the Questionable Use of Some Housing Bond Funds

HIGHLIGHTS

Our review of the activities related to the Housing and Emergency Shelter Trust Fund Acts of 2002 and 2006, which provide housing bonds for use in financing affordable housing, highlighted the following:

RESULTS IN BRIEF

California voters passed the Housing and Emergency Shelter Trust Fund Acts of 2002 and 2006 (Proposition 46 and Proposition 1C, respectively) to provide nearly $5 billion in bonds (housing bonds) for financing affordable housing for low- to moderate-income Californians. The California Department of Housing and Community Development (HCD), the California Housing Finance Agency (CalHFA), and the California Pollution Control Financing Authority are responsible for administering the housing bond funds through various programs. As of March 2014 HCD and CalHFA had awarded almost all of the initial housing bond funds to recipients, who are typically either individuals purchasing their first homes or local entities and nonprofit corporations that construct or rehabilitate housing developments. However, weaknesses in awarding funds for some of the programs HCD administers have resulted in certain recipients' questionable use of the funds.

For example, we found that HCD's awarding processes for two programs need improvement. According to state law, the costs for Multifamily Housing Program projects must be reasonable compared to the costs of comparable projects. However, HCD does not have an adequate process for determining whether the costs of proposed projects are reasonable. As a result, it awarded funds to projects with costs well above the averages for their geographical areas without determining whether the projects' higher costs were reasonable. In one instance, HCD awarded funds to one project with a cost per housing unit of more than $411,000 even though its own data identified comparable projects in the area as costing only $264,000 per housing unit, and HCD did not determine whether the increased cost was justified. Moreover, HCD awarded funds to a project for the Catalyst Communities Grant Program (Catalyst Program) that did not meet the program's purpose of increasing affordable housing. Instead the recipient used the funds to build an outdoor green space.

HCD also failed to adequately monitor four of the seven housing bond programs that we reviewed. Monitoring of housing bond programs typically involves receiving reports on the status of projects and conducting on-site visits. This sort of monitoring is critical to ensuring that recipients use funds as state law intends. However, HCD failed to regularly obtain many status reports from recipients. For example, HCD did not obtain more than half of the reports that two of the programs' recipients should have submitted in the past two years. Consequently, HCD does not know whether recipients are using housing bond funds in accordance with award requirements to achieve the programs' various goals.

In addition, despite acknowledging the importance of on-site monitoring, HCD has not developed an adequate, risk-based process for determining which recipients warrant on-site visits for the CalHome Program (CalHome). Instead, HCD has allowed staff to judgmentally decide which of its projects to visit. The lack of a risk-based system could help explain why one recipient has never received an on-site visit even though the recipient, which has received $1 million from HCD, has not submitted any of the required status reports since 2007.

Because it does not provide an adequate level of monitoring, HCD often does not know if recipients used funds in accordance with program requirements or if programs benefited targeted populations. In fact, for two of the programs we reviewed, HCD advanced funds to several recipients that for years did not provide evidence to HCD of how they spent those funds. When HCD finally asked one of these recipients to return a portion of an advance six years after HCD disbursed it, the recipient no longer had the funds and had to enter into a payment plan with HCD. If HCD had properly monitored the recipient and had not allowed it to hold the advanced funds for nearly six years, HCD likely would have avoided a situation in which the recipient used funds for potentially unauthorized purposes.

HCD's failure to monitor appropriately its housing bond programs may be due in part to weaknesses in its housing bond database, which it implemented in 2007 to monitor and manage its loans and grants. Although HCD has thus far spent more than $5 million on the database, the system still has a limited ability to generate reports, and it requires that users perform complex steps to access information. Because the system still lacks the functionality its users need, many HCD program managers rely on other, informal methods to monitor their programs. Considering that HCD has dealt with system issues since the database's implementation and that HCD anticipates the additions of needed functionality will require years of work, HCD needs to develop a strategic plan that contains timelines and measureable goals to ensure that the system will meet its needs.

Finally, although the Legislature placed statutory limits on the amount HCD can spend to administer many of the housing bond programs, HCD does not have adequate policies in place to ensure that it does not exceed those limits. For 11 of the 21 housing bond programs HCD manages, state law restricts the amount HCD may charge for administrative costs to 5 percent of funds available. Recently, HCD revised the tool it uses to track its administrative costs to account for these statutory limits. However, according to its tracking tool, HCD projects that it will exceed these limits for two of its programs, but it has yet to develop the steps it should take to avoid exceeding the administrative cost limits.

RECOMMENDATIONS

To ensure that it complies with state law and maximizes the public benefits that its Multifamily Housing Program provides, HCD should improve its current process for awarding program funds by documenting its determinations about whether the costs of proposed projects are reasonable.

To meet the intent of state law, HCD should approve and fund only Catalyst Program projects that more directly create or preserve affordable housing opportunities.

To ensure that recipients spend promptly program funds that HCD has advanced to them and that it has accurate information about outstanding advanced funds, HCD should do the following:

To maximize the benefits of its on-site reviews for CalHome, HCD should revise its current risk assessment tool or develop a new tool to identify the recipients that are at high risk of noncompliance with program requirements. For example, HCD could identify as high risk those recipients that have received large amounts of funds but that have not submitted required status reports for six months.

To ensure that its housing bond database is an effective tool for managing its housing bond programs, HCD should revise its strategy documents to clearly outline the steps it will take to address the database's current weaknesses. HCD should include specific timelines and activities within its strategy documents.

Before July 2015 HCD should adopt policies identifying the steps it will take to ensure that it does not exceed statutory limits for administrative costs and that it follows those policies when warranted.

AGENCY COMMENTS

HCD has no issues with our recommendations but indicated that the audit report title and several of the report's subtitles mischaracterize issues in the report and HCD's overall administration of the housing bond programs. It also disagreed with our conclusions that it violated state law when funding one project for the Catalyst Program.