BILL ANALYSIS                                                                                                                                                                                                    Ó




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          |SENATE RULES COMMITTEE            |                        AB 723|
          |Office of Senate Floor Analyses   |                              |
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                                   THIRD READING 


          Bill No:  AB 723
          Author:   Chiu (D) and Thurmond (D)
          Amended:  8/18/16 in Senate
          Vote:     27 - Urgency

           PRIOR VOTES NOT RELEVANT

           SENATE TRANS. & HOUSING COMMITTEE:  11-0, 8/9/16
           AYES:  Beall, Cannella, Allen, Bates, Gaines, Galgiani, Leyva,  
            McGuire, Mendoza, Roth, Wieckowski

           SENATE APPROPRIATIONS COMMITTEE:  7-0, 8/11/16
           AYES:  Lara, Bates, Beall, Hill, McGuire, Mendoza, Nielsen

           SUBJECT:   Housing:  finance


          SOURCE:    Author


          DIGEST:  This bill permits the Department of Housing and  
          Community Development (HCD) to allow an applicant with one or  
          more Community Development Block Grant (CDBG) agreements, signed  
          in 2012 or later, to apply for and receive an award of funds, at  
          the determination of the HCD director, without regard to whether  
          the applicant has expended at least 50% of their existing  
          awards, and makes changes to California Housing Finance Agency  
          (CalHFA) statutes.
           
           Senate Floor Amendments of 8/18/16 clarify that CalHFA's option  
          to utilize occupancy assumptions for financing shall not be  
          interpreted to modify the terms of any regulatory agreement on  
          or before August 31, 2016, and makes other technical changes. 

          ANALYSIS:  








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          Existing law:
          
          1)Establishes the CDBG Program in HCD.  Funds allocated to the  
            state pursuant to the federal CDBG program and administered by  
            HCD shall meet the housing and economic development needs of  
            persons and families of low or moderate income.

          2)Prohibits, pursuant to HCD regulations and beginning in 2013,  
            an applicant with one or more current CDBG grant agreements  
            signed in 2012 or later, for which the expenditure deadline  
            established in the grant agreement(s) has not yet passed, from  
            being eligible to apply for any additional CDBG funds, unless  
            the applicant has expended at least 50% of CDBG funds awarded.

          3)Prohibits rental payments on units required for occupancy by  
            very low-income households paid by persons occupying the units  
            from exceeding 30% to 50% of area median income (AMI), and  
            sets forth occupancy assumptions for adjusting rents for  
            household size, as specified.  

          4)Provides that the financing for multifamily rental housing  
            developments through CalHFA may be financed from the proceeds  
            of the sale of tax-exempt bonds. 

          5)Requires that in a multifamily rental housing development  
            located within a federally targeted area, not less than 15% of  
            the units financed by CalHFA shall be occupied by lower income  
            households.  Not less than 50% shall be occupied by very  
            low-income households.

          This bill:

          1)Permits HCD to allow an applicant with one or more CDBG  
            agreements, signed in 2012 or later, to apply for and receive  
            an award of funds without regard to whether the applicant has  
            expended at least 50% of their existing awards.  The awarding  
            of funds under these circumstances shall be determined by the  
            HCD director and evaluated on the basis of eligibility, need,  
            benefit, or readiness. 

          2)Adds that CalHFA shall, in adjusting rents for household size,  








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            have the option to utilize occupancy assumptions that it  
            determines to be appropriate and commercially reasonable for  
            financing. 

          3)Removes existing references to the use of the sale of bond  
            proceeds to finance CalHFA programs. 

          Comments

          1)Purpose.  According to the author, HCD has approximately $114  
            million in CDBG funding that can be used at the local level  
            for infrastructure projects and housing construction.  This  
            backlog of unspent funds is a result of a regulation adopted  
            by HCD requiring that a city or county spend 50% of its  
            program funds before drawing down new funds.  Since some  
            projects take longer than others, this has become a barrier.   
            To expedite the release of these funds to worthy projects,  
            this bill allows HCD to make grants to cities and counties  
            that have not spent down 50% of an existing grant before  
            receiving new funding without making a regulatory change.   

            This bill also modernizes CalHFA's occupancy standards to make  
            them consistent with other state housing programs, including  
            the low-income housing tax credit program.  Finally, this bill  
            gives CalHFA the flexibility to participate in the funding of  
            projects that reserve at least 20% of their units for  
            households between 60% and 80% of the area median income  
            (AMI).  This change allows CalHFA to participate in the  
            financing of more mixed-income projects.  The subsidies needed  
            for these projects will not be as deep as those needed for  
            lower income housing, and will also contain a percentage of  
            market-rate units that do not need subsidy.  This subset of  
            low-income households is almost always excluded from projects  
            that also receive funding from tax credits or other state  
            subsidies, as those programs are limited to the financing of  
            very low- and low-income housing units at or below 60% AMI.

          2)CDBG changes.  The CDBG program was established by the United  
            States Housing & Community Development Act of 1974 (HCD Act)  
            and is administered at the federal level by the U.S.  
            Department of Housing and Urban Development (HUD).  Among the  
            many uses of CDBG funds are infrastructure improvements and  








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            activities in support of the construction of housing for  
            persons of low and moderate income.

            Congress amended the HCD Act in 1981 to give each state the  
            opportunity to administer CDBG funds for small cities and  
            counties, called "non-entitlement areas."  Eligible applicants  
            in non-entitlement areas include counties with fewer than  
            200,000 residents in unincorporated areas and cities with  
            fewer than 50,000 residents that do not participate in the HUD  
            CDBG entitlement program.  Since 1983, HCD has administered  
            the state CDBG program in California, and releases a notice of  
            funding availability each year, including CDBG-eligible  
            activities.  The state program awards grants to  
            non-entitlement areas to develop and preserve decent  
            affordable housing.  

            According to HUD, California currently has five times its most  
            recent grant amount (i.e., $114 million) in balance in the  
            state's CDBG line of credit, which HUD calls "unprecedented."   
            HCD attributes this backlog of unspent funds to the "50%  
            rule."  The rule, a state regulation, states that a  
            jurisdiction has to have spent 50% of its program funds before  
            drawing down new funds.  This rule was put in place to prevent  
            some local jurisdictions from "sitting on their funds" rather  
            than expending them.  

            Despite best efforts, some jurisdictions have been unable to  
            expend their awards below the 50% requirement, precluding them  
            from even applying for new funds.  HCD believes that the  
            build-up of state funds has occurred for a number of reasons,  
            including the recession; that some projects take longer than  
            others; and that some delayed projects may make up a large  
            share of the funds held by a jurisdiction. While there is no  
            federal rule which requires HCD to expend its grant amount,  
            federal funds are dispensed on a needs basis; if these funds  
            are not expended, California runs the risk of losing future  
            federal funds.  

            This bill provides that jurisdictions that do not meet the  
            requirements of the 50% rule may apply for additional CDBG  
            funds.  These jurisdictions would be eligible to apply for and  
            draw down from the $114 million balance of funds.  These  








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            applications would be evaluated based upon eligibility, need,  
            benefit, and readiness and would be determined by the HCD  
            director.  This bill does not guarantee an award, but merely  
            provides jurisdictions the opportunity to apply for additional  
            funds. 

            It should be noted that while this change could be made in  
            state regulations, a regulatory change would take at least a  
            year to adopt through the Administrative Procedures Act.   
            Given the real needs at the local level for these funds and  
            potential risk of loss of future federal funds, the change in  
            statute would permit this change to occur more quickly so that  
            the existing funds may be dispersed.   

          3)Gut-and-amend.  This bill was gut-and-amended on August 2 in  
            the Senate Appropriations Committee from a bill dealing with  
            the replacement of plumbing in rental properties, so the votes  
            in the Assembly do not apply to this bill.   


          FISCAL EFFECT:   Appropriation:    No          Fiscal  
          Com.:YesLocal:   No


          According to the Senate Appropriations Committee:


           Accelerated expenditure of CDBG funds, likely in the tens of  
            millions annually over several years (federal funds).  Staff  
            notes that current regulations appear to be preventing the  
            expenditure of current available federal funds.  Absent the  
            bill, future allocations of federal funding may be at risk.

           Minor and absorbable administrative costs to HCD (General  
            Fund) and CalHFA (special funds).


          SUPPORT:   (Verified 8/11/16)


          City of Santa Monica
          League of California Cities








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          OPPOSITION:   (Verified8/11/16)


          None received

          Prepared by:Alison Dinmore / T. & H. / (916) 651-4121
          8/22/16 9:42:11


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