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.
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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.
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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
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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
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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
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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.
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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)
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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.
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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
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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,
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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,
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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"
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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.