BILL ANALYSIS �
Senate Appropriations Committee Fiscal Summary
Senator Christine Kehoe, Chair
SB 450 (Lowenthal)
Hearing Date: 05/02/2011 Amended: 04/11/2011
Consultant: Mark McKenzie Policy Vote: T&H 9-0
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BILL SUMMARY: SB 450 would reform and restrict how a
redevelopment agency (RDA) spends tax increment funds deposited
into its low- and moderate-income housing (L&M) fund, requires
the Department of Housing and Community Development (HCD) to
conduct audits of RDAs, and expands the oversight of RDA audits.
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Fiscal Impact (in thousands)
Major Provisions 2011-12 2012-13 2013-14 Fund
Diversion of L&M increment transfer of approximately $540
annually Special*
from RDAs to new state special fund
HCD audits staffing costs covered by RDA L&M
fundsSpecial*
SCO audit reviews up to $370 up to $281General
DOJ investigation/prosecution unknown, likely minor
costsGeneral
Board of Accountancy unknown staffing pressures
Special**
Investigations/auditor appeals
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* Redevelopment Agency Accountability Fund
** Accountancy Fund
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STAFF COMMENTS: This bill meets the criteria for referral to the
Suspense File.
This bill is intended to address a number of issues related to
how redevelopment agencies account for expenditures from L&M
funds. The Senate Office of Oversight and Outcomes (SOOO)
recently released a report, Where Does the Affordable Housing
Money Go: Administrative Spending by Redevelopment Agencies
Lacks Accountability (September 30, 2010), that identifies
numerous findings of mismanagement of L&M funds, including
unreliable audits, poor record keeping, questionable spending of
housing funds, and a lack of assurance that the funds are being
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used for direct expenditures related to affordable housing. SB
450 implements many of the SOOO recommendations identified in
the report.
Specifically, this bill would:
Cap RDA expenditures on planning and administrative duties at
15% of the tax increment deposited into the L&M fund in a
given fiscal year, as specified, and require additional
information on these expenditures in the RDA's annual report.
Require an RDA to reimburse the L&M fund 150% of amounts used
to acquire or maintain land purchased with excess surplus
revenues if the RDA has failed to initiate affordable housing
development activities within 5 years.
Requires at least 75% of RDA expenditures from the L&M fund
over a 10-year period, exclusive of debt service, to be used
for housing for persons of extremely low-, very low-, low-, or
moderate-income, as specified.
Revises and clarifies and RDA's obligations relative to
replacement of affordable housing units removed or destroyed
as a result of redevelopment activities.
Repeal a requirement that L&M funds that have not been
committed for housing within 6 years be offered to a local
housing authority, as specified.
Require RDA's to annually deposit .05% of L&M tax increment to
the Redevelopment Agency Accountability Fund (created by this
bill). These funds would be available to the Department of
Housing and Community Development (HCD), upon appropriation by
the Legislature, as specified.
Require HCD to conduct audits of RDAs to ensure compliance
with the housing provisions of the Community Redevelopment
Law.
Require HCD to forward its audits or investigations of RDAs to
the Attorney General (AG) and State Controller (SCO), and
specifies procedures for investigating and prosecuting RDAs
that fail to correct major audit violations within certain
timeframes.
Prohibit RDAs, with good cause that an uncorrected violation
remains, from encumbering or spending funds, except to pay
existing debts, adopting or amending redevelopment plans,
except to correct a major audit violation, or selling bonds or
creating new debts, until the violation is corrected.
Authorize the SCO to perform quality control reviews of RDAs'
financial audit reports, and require the SCO, if a review
uncovers unprofessional conduct, to refer the case to the
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State Board of Accountancy for investigation.
Require the SCO to report an independent auditor that fails to
perform consecutive audits in conformity with specified
guidelines to the Board of Accountancy.
Prohibit an independent auditor from performing RDA audits for
three years if the Board of Accountancy discovers
unprofessional conduct or agrees with the SCO's determination
that consecutive audits were not conducted according to
guidelines.
There are 395 active redevelopment agencies in the state. Each
RDA is required to annually report its activities to its city
council (or county board of supervisors), including an
independent financial audit report which reviews "the agency's
compliance with laws, regulations, and administrative
requirements." If the redevelopment agency's annual report
identifies one of nine major audit violations, the agency must
tell its city council. RDAs also send copies of their annual
reports to HCD and the SCO. Existing law prescribes a procedure
for review of RDAs' independent financial audits by the SCO for
major violations and referral to the AG and the courts for
prosecution for failure of the auditor to correct the
violations. Existing law provides HCD with the authority to
audit RDAs' housing programs and activities, but HCD does not
have the authority to refer major audit violations to the AG and
the courts. From 1998 to 2007, HCD conducted 42 audits of
redevelopment agencies, which resulted in findings of major
audit violations and ultimately resulted in the redirection of
several million dollars back into local L&M funds. HCD was
forced to suspend RDA audit activities after 2007 due to budget
constraints.
SB 450 would resume this program by requiring HCD to conduct
audits of RDAs to ensure compliance with the housing provisions
of the Community Redevelopment Law. The bill would require RDAs
to deposit one-half of one-tenth of a percent (.05%) of all new
L&M funds into a new state special fund to cover HCD's costs
associated with these requirements. This redirection of RDA L&M
funds is expected to generate approximately $540,000 annually.
HCD indicates that it would be able to hire 2-3 new staff (1-2
auditor positions and one housing specialist) with these new
resources. Staff notes that there may be some General Fund cost
pressures initially to hire new staff before the RDA
Accountability Fund revenues are available. Based on the number
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of audits that HCD conducted in the 9 year period up to 2007
with one auditor position, staff estimates that HCD would likely
conduct 7-10 audits per year under the authority provided in
this bill.
This bill would also require HCD to forward its redevelopment
audits and investigations to both the AG and the SCO. HCD would
also be required to determine whether identified major audit
violations have been corrected and specifies procedures for
investigating and prosecuting RDAs that fail to correct major
audit violations within certain timeframes. This process
mirrors existing law with respect to SCO determinations of audit
violations and referrals to the AG and the courts. HCD
indicates that costs for reviewing, monitoring, and reporting
RDAs would depend upon the number of audit violations identified
each year. If 12 cases were reviewed in a year, which
represents the highest number of investigations in the period
between 1998 and 2005, costs would be absorbable. If more
investigations are required, HCD could conduct fewer audits to
the extent that additional staff time is needed for assessment
of audit violations.
This bill would also authorize, but not require, the SCO to
perform quality control reviews of RDAs' financial audit
reports, and require the SCO, if a review uncovers
unprofessional conduct, to refer the case to the State Board of
Accountancy for investigation. The SCO would also be required
to report an independent auditor that fails to perform
consecutive audits in conformity with specified guidelines to
the Board of Accountancy. The Board would prohibit auditors to
perform RDA audits for three years if the determinations are
verified.
For the 2005-06 fiscal year reporting period, the SCO identified
134 compliance findings citied in the audit reports received
from RDAs. Of this amount, 61 were major audit violations from
33 RDAs; 15 of these findings were referred to the Attorney
General. While the SCO provisions in SB 450 are permissive, the
SCO may perform the additional reviews to the extent that staff
is available or when there is a demonstration of some likelihood
of success on the merit of the claim that an RDA has a major
audit violation, or their auditor has engaged in unprofessional
conduct. To the extent that the SCO determined that quality
control reviews would be performed on all independent financial
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audit reports received from HCD, SCO would need up to 2 PY of
Accounting and Reporting staff in 2012-13 and 1 PY thereafter
(Associate Accounting Analyst positions), and up to 2 PY of
permanent Staff Management Auditor positions for a total
estimated cost of up to $370,000 in 2012-13 and up to $281 in
subsequent years. The additional workload, if it were
performed, would be for updating guidelines, developing a review
checklist and database, performing the reviews, communicating
review results to auditors and RDAs, and referring those with
violations to the Board of Accountancy.
The Board of Accountancy could experience an increased workload
as a result of the requirements of this bill, and staffing
pressures due to the timeframes prescribed in the bill. Actual
costs and staffing pressures would depend upon the number and
complexity of cases referred to the Board. The Board further
notes that they have recently had trouble filling vacant
positions.
The Department of Justice identifies unknown, but likely minor
costs as a result of increased prosecutions of RDAs with major
audit violations, and providing counsel to the Board of
Accountancy and the SCO. It is likely that few cases would be
referred to the AG for prosecution. The current AG workload for
referrals of audit violations from the SCO is minor and would
likely remain minimal as actual litigation is very rare in these
cases.
The bill would place numerous additional requirements on RDAs
related to the increased obligations for accounting and
expenditures of L&M funds. Any new costs incurred by RDAs would
be entirely local and are not reimbursable by the state.