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.