BILL ANALYSIS                                                                                                                                                                                                    ”






           SENATE TRANSPORTATION & HOUSING COMMITTEE       BILL NO: sb 450
          SENATOR MARK DESAULNIER, CHAIRMAN              AUTHOR:  Lowenthal
                                                         VERSION: 3/29/11
          Analysis by:  Mark Stivers                     FISCAL:  Yes
          Hearing date:  April 5, 2011



          SUBJECT:

          Redevelopment agencies housing expenditures

          DESCRIPTION:

          This bill reforms how redevelopment agencies spend their Low & 
          Moderate Income Housing Funds.  

          ANALYSIS:

          The Community Redevelopment Law allows a local government to 
          establish a redevelopment area and capture all of the increase 
          in property taxes that is generated within the area (referred to 
          as "tax increment") over a period of decades.  The law requires 
          redevelopment agencies to deposit 20 percent of tax increment 
          into a Low & Moderate Income Housing Fund (L&M fund) to be used 
          to increase, improve, and preserve the community's supply of low 
          and moderate income housing available at an affordable housing 
          cost.  The law further establishes various standards for 
          expenditure of these funds.

           Planning and administration expenditures
           
          Current law states the intent of the Legislature that 
          redevelopment agencies use L&M funds to the maximum extent 
          possible to defray the costs of production, improvement, and 
          preservation of low- and moderate-income housing and that the 
          amount of money spent for planning and general administrative 
          activities not be disproportionate to the amount actually spent 
          for such housing activities.  Agencies must determine annually 
          that the L&M planning and administrative expenses are necessary 
          for the production, improvement, or preservation of low- and 
          moderate-income housing.  Agencies generally make this 
          determination as part of the budget resolution.  Separately, 
          current law requires an agency to submit to its governing body 
          (typically the city council or board of supervisors) an annual 
          report.




          SB 450 (LOWENTHAL)                                     Page 2

                                                                       



          Current law limits planning and general administrative 
          expenditures from the L&M fund to the following costs which are 
          directly related to permissible housing activities:

           Salaries, wages, and related costs of the agency's staff or 
            the costs for services provided through interagency or outside 
            agreements.
           Costs incurred by a nonprofit corporation that are not 
            directly attributable to a specific project.

          Current law states that legal, architectural, and engineering 
          costs and other salaries, wages, and costs directly related to 
          the planning and execution of a specific project are not 
          planning and administrative costs for the purposes of this 
          section but instead project costs.

           This bill  replaces the current language on planning and 
          administration expenditures with a new definition and caps such 
          expenditures at 15% of the tax increment deposited into the L&M 
          fund in that fiscal year.  Specifically, the bill:

           Counts all of the following as planning and administration 
            expenditures:

                 Employee compensation costs and related non-personnel 
               costs, such as travel and training, paid to or on behalf of 
               any agency, city, or county employee whose duties include 
               permissible L&M housing activities (i.e., line staff). 
                 Employee compensation costs and related non-personnel 
               costs paid to or on behalf of any agency, city, or county 
               employee who supervises or manages line staff or who 
               provides general administrative services, such as finance, 
               legal, and human resources, that indirectly support 
               permissible L&M housing activities. 
                 Overhead costs, such as rent, equipment, and supplies. 
                 The total value of any contracts for agency planning or 
               administrative services that are related to permissible 
               housing activities and that are not associated with a 
               specific development project. 

           With respect to line staff costs, provides that if an employee 
            spends any time on matters other than permissible L&M 
            activities, the agency may only use L&M funds to pay for such 
            costs in proportion to the actual time that the employee 
            spends on permissible L&M activities.  




          SB 450 (LOWENTHAL)                                     Page 3

                                                                       


           With respect to supervisory and general administrative staff, 
            requires that employee compensation costs (i) be justified by 
            an independent cost allocation study no more than six years 
            old, and (ii) not represent a greater proportion of the 
            employee's total compensation than the proportion of employees 
            working directly and exclusively on permissible L&M housing 
            activities in comparison to the total number of employees 
            supervised, managed, or indirectly supported by that employee. 
             
           Provides that if overhead costs are shared with departments or 
            employees whose duties include activities other than 
            permissible L&M housing activities, the proportion of the 
            overhead costs paid from the L&M fund shall not exceed the 
            proportion of employees working directly and exclusively on 
            permissible L&M housing activities in comparison to the total 
            number of employees sharing the space, equipment, or office 
            supplies.  
           Requires the agency, in any legal challenge related to the 
            proportionality of costs, to bear the burden of proof to 
            demonstrate that the costs are proportionate.
           Establishes a hard cap on planning and administration expenses 
            of 15% of L&M tax increment, except during the first five 
            years of a new redevelopment project area that has a 
            project-specific L&M fund.
           As part of the agency's annual budget, requires a separate 
            resolution that accounts for, itemizes, and justifies planning 
            and administration expenditures.  The resolution must include 
            the following:

                   The percentage of tax increment that is budgeted for 
                planning and administration in the fiscal year.  
                   Consistent with the categories described above, an 
                itemization of each category of planning and 
                administration expenditures and a description of how the 
                expenditures are necessary for the production, 
                improvement, or preservation of low- and moderate-income 
                housing.  
                   A listing of the title of any agency, city, or county 
                employees for whom any portion of compensation and 
                non-personnel costs are paid from the L&F fund, the nature 
                of the employee's activities eligible to be paid from the 
                L&M fund, the percentage of time the employees spends on 
                such activities, and the percentage of the employee's 
                compensation and non-personnel costs paid from the L&M 
                fund.  
                   An itemization of any overhead costs paid from the L&M 




          SB 450 (LOWENTHAL)                                     Page 4

                                                                       


                fund and an accounting of shared overhead costs.

           Requires an agency's annual report to include a statement of 
            the amount and percentage of tax increment expended from the 
            L&M fund for planning and administration in each of the 
            preceding five fiscal years that begin after December 31, 
            2011, broken down by the categories described above.
           Prohibits spending of L&M funds on code enforcement, general 
            land use planning, lobbying, and the administration of 
            non-redevelopment programs unrelated to L&M eligible 
            activities.

           Excess surplus and land purchased with L&M funds
           
          Current law, with a few exceptions, defines as "excess surplus" 
          any unexpended and unencumbered amount in an agency's L&M fund 
          that is greater than $1 million or the sum of the last four 
          years' worth of L&M tax increment.  Once funds are considered 
          excess surplus, the agency must disburse the funds to the local 
          housing authority or a local housing development agency within 
          one year or expend the funds itself in three years.  Until the 
          agency expends or disburses the excess surplus plus 50 percent 
          of the amount of the excess surplus that remains at the end of 
          the three-year period, it may not encumber or expend any other 
          funds (i.e., the 80% non-housing redevelopment funds) except to 
          pay debt service, contractual obligations, and operating costs 
          of no more than 75% of the previous year's similar expenditures. 
           

          Current law also establishes requirements for the use of real 
          property purchased with L&M funds.  Within five years of 
          acquisition, the agency must "initiate activities consistent 
          with the development of the property for ›the purpose of 
          developing affordable housing]."  These activities may include, 
          but are not limited to, zoning changes and disposition and 
          development agreements.  The agency may, by resolution, extend 
          the deadline by up to an additional five years.  If the agency 
          fails to meet these requirements, the agency must sell the 
          property and deposit the proceeds back into the L&M fund.  

          This bill  :
            
           Specifies that an agency within five years of acquisition must 
            either enter into a disposition and development agreement 
            (DDA) with a third party for the development of affordable 
            housing or obtain final land use entitlements and secure full 




          SB 450 (LOWENTHAL)                                     Page 5

                                                                       


            financing for agency development of affordable housing.
           Requires an agency, if it has not initiated affordable housing 
            development activity on sites purchased with L&M funds within 
            five years or if less than 10% of the dwelling units or floor 
            area ratio of an affordable housing project is completed 
            within 10 years, to reimburse the L&M fund 150 percent of the 
            amount expended to acquire and maintain the property or 150 
            percent of the current fair market value of the property, 
            whichever is greater.  
           Requires an agency that at any time sells a property or uses 
            less than half of a property purchased with L&M funds for a 
            non-affordable housing purpose to reimburse the L&M fund the 
            proceeds of the sale plus 50 percent of the fair market value 
            of the property.
           Counts towards excess surplus the value of land purchased with 
            L&M funds and owned by the agency for more than three years if 
            the agency has not entered into a DDA or secured final 
            entitlements and full financing.
           Deletes the authority of an agency to disburse excess surplus 
            funds to the local housing authority.
           Requires an agency, in its annual report to its governing 
            body, to list properties acquired with L&M funds, the date of 
            acquisition, the amount of L&M funds used to acquire and 
            maintain the property, and the intended use of the property.

           Proportionality requirements
           
          Current law requires that each agency, over each 10-year period 
          of the agency's redevelopment implementation plan, expend the 
          moneys in the L&M fund to assist housing for persons of very 
          low- and low-income in at least the same proportion as those 
          income categories represent within the total number of very 
          low-, low-, and moderate-income housing units assigned to the 
          jurisdiction as part of the regional housing needs assessment 
          under housing element law.  This requirement is known as the 
          proportionality requirement.  The law also allows an agency to 
          adjust these proportions by subtracting from the appropriate 
          income category the number of units, except for replacement 
          units, newly constructed with other locally controlled 
          government assistance.

           This bill  :  

           Requires that at least 75 percent of each agency's 
            expenditures, exclusive of debt service payments, from the L&M 
            fund over a specified 10-year period directly assist the new 




          SB 450 (LOWENTHAL)                                     Page 6

                                                                       


            construction, acquisition and substantial rehabilitation, or 
            preservation of rental housing for persons of extremely low, 
            very low, or low-income.
           Further requires that 25 percent of each agency's expenditures 
            directly assist extremely-low income households and that an 
            additional 25 percent assist very-low income households.  
            These sub-requirements count towards an agency's 75 percent 
            requirement.  
           Deletes the ability of an agency to adjust the proportionality 
            requirements for units constructed with non-redevelopment 
            funds.

           Replacement and production housing obligations  

          Under current law, when dwelling units housing low- or 
          moderate-income households are destroyed or removed from the 
          market as a result of a redevelopment project subject to a 
          written financial or other agreement with the agency, the agency 
          within four years must rehabilitate, develop, or construct an 
          equal number of replacement units at the same affordability 
          level within the territorial jurisdiction of the agency.   

          In addition, current law requires an agency to ensure that 30 
          percent of all new and substantially rehabilitated housing units 
          developed by the agency and 15 percent of all new and 
          substantially rehabilitated housing units developed within a 
          project area are affordable to low- and moderate-income 
          households.  This is known as the production requirement.  

           This bill  :

           Requires replacement of housing units that were affordable to 
            low- or moderate-income households, whether or not they were 
            occupied, and that vacant units be replaced at the different 
            affordability levels in the same proportion as the occupied 
            units.
           Establishes the number of replacement units as the number of 
            affordable units at the time of initiation of negotiations of 
            a written financial or other agreement with the agency.
           Clarifies that the requirement to replace units at the same 
            affordability level includes extremely low-income units and 
            states that this is declaratory of existing law.
           Requires that replacement units generally be new construction, 
            with an exception that up to 25 percent of replacement units 
            may be qualified rehabilitated units, and that units be 
            replaced within the project area.




          SB 450 (LOWENTHAL)                                     Page 7

                                                                       


           Requires a court to prohibit the issuance of non-L&M debt for 
            an agency's failure to meet production and replacement housing 
            requirements until the obligations are met.  
           Requires and agency, in its replacement housing plan, to 
            describe the affordability restrictions that will be placed on 
            replacement units and make a finding that these restrictions 
            satisfy the law.
           Requires an agency, in its annual report to its governing 
            body, to list the projects that have triggered a replacement 
            or production obligation, the respective number of units the 
            agency is obligated to replace or produce as a result of each 
            project, and the location and status of the replacement and 
            production units.  
           Requires an agency implementation plan to include a complete 
            accounting of compliance with the agency's replacement and 
            production obligations over the life of the plan.

           Oversight
           
          Under current law, redevelopment agencies are required to hire 
          independent auditors each year to review their financial 
          statements.   The agencies must provide a copy of these audits 
          to the State Controller so that the Controller by April 1 of 
          each year can compile a list of agencies for which the 
          independent auditors have identified major audit violations.   
          Major audit violations are specifically listed in statute and 
          include:

           Failure to adopt an implementation plan.
           Failure to file an independent financial audit report.
           Failure to file a fiscal statement.
           Failure to establish project area time limits.
           Failure to establish an L&M fund.
           Failure to deposit all required tax increment revenues 
            directly into the L&M fund upon receipt.
           Failure to accrue interest earned by the L&M fund.
           Failure to determine that the planning and administrative 
            costs charged to the L&M fund are necessary for the 
            production, improvement, or preservation of low- and 
            moderate-income housing.
           Failure to initiate development of affordable housing on, or 
            sell, real property acquired with L&M funds.

          The Controller is required to determine by June 1 of each year 
          if the listed agencies have corrected the major audit violations 
          and, if not, refer the violations to the Attorney General (AG) 




          SB 450 (LOWENTHAL)                                     Page 8

                                                                       


          for action pursuant to a specified process.  Current law also 
          authorizes the Controller to conduct quality reviews of 
          independent audits conducted on behalf of school districts and 
          establishes remedies in the event that the Controller uncovers 
          unprofessional conduct or repeated irregularities.  

          In the past, the Department of Housing and Community Development 
          (HCD) under its general authority has also audited a small 
          number of redevelopment agencies each year to determine 
          compliance with various housing obligations.  In recent years, 
          HCD has been unable to conduct such audits due to insufficient 
          resources.

           This bill  : 
            
           Codifies the requirement for independent auditors to list 
            major audit violations.
           Requires a redevelopment agency, in its annual report to its 
            governing body, to list corrective measures taken to correct 
            major audit violations.
           Requires redevelopment agencies annually to remit .05% of L&M 
            tax increment to the HCD to conduct redevelopment audits.
           Requires HCD with these funds to conduct audits of 
            redevelopment agencies to ensure compliance with the housing 
            provisions of the Community Redevelopment Law. 
           Requires HCD to compile a list of uncorrected major audit 
            violations it has uncovered in its audits and forward this 
            list to the AG.
           Requires the AG, for major audit violation referrals from HCD, 
            to determine whether or not to file an enforcement action 
            according to a specified process.
           Prohibits HCD from settling litigation or resolving any HCD 
            audit findings in a manner contrary to law.  
           Allows the State Controller to conduct quality reviews of 
            independent redevelopment agency audits and establishes 
            remedies for unprofessional conduct or repeated irregularities 
            equal to those for school district auditors.

           Enforcement
           
          Current law generally establishes a three year statute of 
          limitations for enforcing agency violations.  Because many of 
          the obligations of redevelopment law are on-going, however, it 
          is not always clear when a statute of limitations is triggered.  






          SB 450 (LOWENTHAL)                                     Page 9

                                                                       


          Redevelopment law is specific with respect to one type of 
          violation.  If an agency fails to deposit the required 
          percentage of tax increment into the L&M fund or misspends L&M 
          funds, current law establishes a ten-year statute of limitations 
          to bring an enforcement action.  If a court finds that the 
          agency violated these requirements, the agency is required to 
          reimburse the L&M fund with interest.  

           This bill  :
          
           Provides that an agency failing to deposit L&M funds as 
            required or spending L&M money inappropriately must reimburse 
            the L&M fund 150% of the reimbursement amount and interest.   
           Applies the ten-year statute of limitations for failure to 
            deposit or expend L&M funds correctly to merged redevelopment 
            project areas and to any other moneys that any agency must 
            deposit into the L&M fund (i.e., interest, loan repayments), 
            in addition to tax increment.
           Provides that such reimbursements may not come from any fund 
            designated for affordable housing.
           Allows a person to bring an action within 6 years of the 
            redevelopment plan's effectiveness time limit or tax increment 
            limit for any of the following:

                     The deposit and expenditure requirements for the L&M 
                 fund.
                     The obligation to eliminate project deficits to the 
                 L&M fund.
                     The obligation to expend or encumber excess surplus 
                 funds.
                     The obligation to provide relocation assistance.
                     Replacement and production housing obligations.
                     The obligation to monitor and enforce affordability 
                 covenants.
                     The obligation to continue the project past the 
                 effectiveness date of the redevelopment plan in order to 
                 meet unfulfilled housing requirements.

           Allows an entity, in order to enforce the requirement to 
            monitor and fulfill affordability covenants, to bring an 
            action within six years of the expiration of affordability 
            covenants.
             
          COMMENTS:

           1.Purpose of the bill  .  According to the author, while many 




          SB 450 (LOWENTHAL)                                     Page 10

                                                                       


            redevelopment agencies spend their L&M funds in a timely and 
            effective way to maximize affordable housing production, 
            recent government and press reports have exposed a number of 
            agencies that spend L&M funds in inappropriate ways, including 
            excessive planning and administrations costs, underwriting 
            salaries of city staff, and buying property that is never used 
            for affordable housing.  Moreover, oversight of redevelopment 
            agencies is lax.  Auditors hired by the agencies themselves do 
            not always check for or report violations, statutes of 
            limitations are unnecessarily short, and court remedies are 
            weak.  This bill is intended to present a comprehensive 
            package of reforms relating to how redevelopment agencies 
            expend their housing funds and to how the state and others 
            oversee agency compliance.  The goal of these reforms is to 
            enact clear requirements and establish robust oversight 
            mechanisms to ensure that all agencies maximize the use of 
            their L&M funds to produce affordable housing for all income 
            groups.

           2.Recent reports  .  A recent report by the Senate Office of 
            Oversight and Outcomes (SOOO) looked at the housing 
            expenditures from twelve redevelopment agencies, seven of 
                                                            which had showed consistently high planning and administration 
            expenditures and five chosen at random.   As a result of its 
            studies, SOOO made seven findings, including the following:

                 No assurance.  Current laws and oversight give the 
               Legislature and public no assurance that redevelopment 
               agencies are using at least 20 percent of revenues to 
               efficiently create affordable housing.

                 Lax records.  Many redevelopment agencies use their low- 
               and moderate-income housing funds to cover costs in other 
               city departments - such as public works, finance, and 
               personnel - without documenting that the resources are 
               directly related to an affordable housing project. 

                 Loose law.  Each year redevelopment agencies must 
               "determine" the need to spend any housing set-aside money 
               on planning and administration.  In an unpublished portion 
               of its opinion, an appellate court found that the law 
               limiting planning and administrative costs gives so much 
               discretion to redevelopment agencies that they are largely 
               shielded from lawsuits - even those agencies that make 
               assertions unsupported by facts.  Furthermore, many 
               redevelopment agency officials do not know about the law, 




          SB 450 (LOWENTHAL)                                     Page 11

                                                                       


               ignore it, or comply by passing a pro forma resolution.

                 Questionable spending.  Some redevelopment agencies use 
               their housing set-aside funds in what appear to be 
               impermissible ways, such as hiring a Sacramento lobbyist, 
               funding a public relations campaign, and paying a 
               non-profit housing rights center to offer residents legal 
               advice.

                 Unreliable audits. Each redevelopment agency must get an 
               annual independent financial audit, yet these audits are of 
               inconsistent quality.  Many Certified Public Accountants 
               fail to test or make note of compliance with housing 
               set-aside fund laws.

                 Code enforcement.  Some redevelopment agencies use their 
               housing set-aside funds to pay for code enforcement, which 
               is permitted only when the code enforcement work is 
               directly linked to efforts to develop, improve, or preserve 
               affordable housing.

            In October 2010, the Los Angeles Times also reported a number 
            of irregularities in the spending of L&M funds.  The article 
            cited examples of agencies that spent "most of their 
            affordable housing money over the decade on 'planning and 
            administration' - but never built a single unit."  The article 
            also cited examples of agencies that used L&M funds to buy 
            properties that were never used for affordable housing.  

           1.Filling the gaps in audits  .  Current law essentially relies on 
            auditors hired by redevelopment agencies themselves to police 
            the agencies.  These auditors in turn report on major audit 
            violations to the Controller, who works with agencies to 
            correct such violations and who refers uncorrected findings to 
            the AG for enforcement action.  If the contract auditors do 
            not find or fail to report violations, however, the system 
            breaks down.  In the years that HCD conducted its own audits 
            of the housing operations of redevelopment agencies, it found 
            a number of major audit violations that agency-hired auditors 
            had not reported.  To seal this gap, the bill uses a portion 
            of L&M income to fund a renewed HCD audit program and further 
            requires HCD to refer uncorrected violations to the AG.  
            Because an agency-hired auditor reviews all of an agency's 
            operations, not just the agency's housing activities, the bill 
            keeps the contract auditor infrastructure in place.  The bill 
            seeks to improve contract auditor performance as well, 




          SB 450 (LOWENTHAL)                                     Page 12

                                                                       


            however, by authorizing the Controller to conduct quality 
            control reviews of independent auditors and suspend auditors 
            from doing redevelopment work if the reviews find 
            unprofessional conduct or repeated failures to follow audit 
            guidelines.

           2.Creating greater disincentives  .  As with all laws, one of the 
            keys to achieving compliance is having sufficient deterrents 
            to non-compliance.  Remedies for failure to comply with 
            redevelopment housing obligations are especially weak.  For 
            example, if a court finds that an agency has failed to deposit 
            the required amounts in its L&M funds or has misspent those 
            funds, the court may only require the agency to repay the 
            amount plus interest.  Likewise, if an agency uses L&M funds 
            to purchase property for affordable housing and later sells 
            the property for some other purpose, it must only repay the 
            amount of L&M funds used for the acquisition, regardless of 
            the current value of the property.  As a result, there is no 
            disincentive for agencies to comply.  At worst, they just have 
            to correct the wrong.  There is no penalty.  This bill seeks 
            to deter non-compliance by establishing financial and other 
            penalties for non-compliance.

           3.Technical amendments  .

                 On page 5, line 15 after "agency" insert "and purchased 
               with funds from the Low and Moderate Income Housing Fund"
                 On page 20, line 36 after "with" insert "the"
                 On page 20, line 38 strike "the actual date of"
                 On page 31, line 10 strike "25" and insert "50"
                 On page 36 after line 15 insert "(h) Notwithstanding 
               subdivision (a), any agency that had funds that became 
               excess surplus on July 1, 1994, and did not transfer the 
               funds to a housing authority or other public agency by 
               January 1, 1997, to expend or encumber those funds, is 
               subject to sanctions pursuant to subdivision (e)."
                 On page 36, line 28 after "or" insert "of"
                 On page 37, line 29 strike "rehabilitate, develop, or"
                 On page 41, line 16 strike "either the housing element 
               cycle or"
                 On page 47, strike lines 4-13 and reletter the 
               subsequent subdivision
                 On page 54, line 8 strike "or"
                 On page 54, line 11 after "33333.4" insert a comma.
                 On page 54, line 20 strike "transfer" and insert 
               "encumber"




          SB 450 (LOWENTHAL)                                     Page 13

                                                                       


                 On page 54, line 29 strike "provide inclusionary housing 
               pursuant to" and insert "produce housing pursuant to 
               subdivision (b) of"
                 On page 54, line 38 after "subdivision" insert "(f) of 
               Section 33334.3 and subdivision"
          
          RELATED LEGISLATION

          AB 330 (Norby) contains the provisions of this bill requiring 
          HCD to refer uncorrected major audit violations to the AG and 
          authorizing the Controller to conduct quality control reviews of 
          redevelopment audits.  In the Assembly Housing and Community 
          Development Committee.
          
          POSITIONS:  (Communicated to the Committee before noon on 
          Wednesday,                                             March 30, 
          2011)

               SUPPORT:  State Controller John Chiang (co-sponsor)
                         Western Center on Law and Poverty (co-sponsor)
                         California Rural Legal Assistance Foundation 
          (co-sponsor)
                         California Coalition for Rural Housing


               OPPOSED:  None received.