Report 97101 Summary - March 1998

Community Redevelopment Agencies: Surplus Balances in Lower-Income Housing Funds Are Overstated, Suggesting a Need for More Statewide Oversight and Direction

Results in Brief

The Community Redevelopment Act gives California cities and counties the authority to establish community redevelopment agencies to revitalize their deteriorating and blighted areas. State law requires that a redevelopment agency set aside a designated amount of its property tax revenue to adequately supply affordable low- and moderate-income housing. The California Department of Housing and Community Development (department) must report each year on the status of the redevelopment agencies' low- and moderate-income housing funds. As of June 30, 1995, the department reported that 44 agencies had accumulated excess balances in their low- and moderate-income housing funds, totaling approximately $51.7 million, that were subject to a mandated January 1, 1997, spending deadline.

Our audit finds that actual low- and moderate-income housing funds excess balances are far less than reported and there are problems with the administration of community redevelopment. Due to the lack of oversight, redevelopment agencies fail to provide accurate and consistent information on the mandated amount of property tax dollars they allocate and spend on low- and moderate-income housing. As a result, the department has no way of knowing how much mandated money has not been spent. Specifically, we found the following:

• The department reported 21 redevelopment agencies had excess balances in their low- and moderate-income housing funds greater than $500,000. Of the 21 balances, 17 balances were overstated and one balance was understated.

• Only 12 of these 21 agencies actually accumulated excess balances with a combined total of approximately $13.7 million.

• Inconsistency in how agencies report the availability of their funds is partly due to vague instructions in the law for calculating excess balances.

State law does not provide for the oversight of redevelopment by a state agency that has authority to enforce compliance with statewide policies regarding low- and moderate-income housing activities. Compliance depends on local legislative bodies' interpretations of the legal and regulatory requirements. However, our review of practices used by 51 redevelopment agencies shows that some do not comply with laws and regulations governing redevelopment activities. Specifically, we found the following:

• The redevelopment agencies of the cities of Hollister and Loma Linda do not ensure that their respective funds receive the designated amount of property tax dollars to provide housing for low- and moderate-income households.

• The Redevelopment Agency of the City of Fremont has not developed and implemented a system to properly allocate planning and administrative costs to its fund. The redevelopment agency could not support $25,000 in costs for salary and benefits it charged to its fund in fiscal year 1995-96.

• The Culver City Redevelopment Agency did not follow the narrow restrictions of the law for spending designated low- and moderate-income housing funds outside an agency's territorial jurisdiction when it spent $750,000 for housing outside its city limits.

Finally, the State Controller's Office guidelines for compliance audits of redevelopment agencies do not contain sufficient audit procedures to determine whether agencies use redevelopment funds to provide affordable housing as required by law.

Recommendations

The Legislature should do the following:

• Clarify its intent for the treatment of the proceeds of bonds and other debt deposited in the low- and moderate-income housing funds when calculating excess surplus and amend the law to provide complete and specific requirements to the redevelopment agencies.

• Consider amending the California Government Code, Section 53895, which imposes fines on redevelopment agencies that do not file reports, to also include penalties for deficient or noncompliant reports.

• Consider amending the Health and Safety Code, Section 33080.1, to require the calculation for excess surplus low- and moderate-income housing funds to be included in agencies' audit reports and to be covered under the independent auditor's opinion on compliance with the laws and regulations governing redevelopment activities.

• Continue its efforts to require county auditors to provide redevelopment agencies the amount of property tax revenue allocated to the agencies and payments to other taxing-collecting entities deducted from the allocated taxes.

• Determine the extent of monitoring necessary to ensure satisfactory compliance with state policies to provide affordable housing through community redevelopment efforts, consider designating a state agency to oversee these efforts, and provide the authority to enforce the laws and regulations governing redevelopment activities.

The State Controller's Office should revise its Guidelines For Compliance Audits of California Redevelopment Agencies to include the critical tests and other audit procedures needed to determine whether a redevelopment agency complies with state policies regarding the production, improvement, or preservation of housing affordable to low- and moderate-income households.

After the law regarding the calculation of excess surplus is clarified, the State Controller's Office and the Department of Housing and Community Development should consider taking steps to further educate the redevelopment agencies about the law's intent and requirements.

Agency Comments

We received comments from the Department of Housing and Community Development, the State Controller, and the 11 community redevelopment agencies for which we gave specific mention in the body of our report. The Department of Housing and Community Development and the State Controller agreed with our findings and recommendations. In addition, the agencies generally agreed with our findings. However, 6 of the redevelopment agencies disagreed with our conclusions regarding their compliance with the law that governs community redevelopment activities, and our conclusions on the adequacy of their internal accounting controls over their agency's assets. We provide our comments to these and other concerns raised by the agencies after their respective responses.

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