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- California Department of Housing and Community Development
- State Treasurer's Office
California Department of Housing and Community Development
October 27, 2020
Elaine M. Howle
California State Auditor,
621 Capitol Mall, Suite 1200
Sacramento, California 95814
RE: California's Housing Agencies: The State Must Overhaul Its Approach to Affordable Housing Development to Help Relieve Millions of Californians' Burdensome Housing Costs
Dear Ms. Howle:
The Department of Housing and Community Development (HCD) appreciates the California State Auditor's examination of Tax Credits and Financing for Affordable Housing Projects in its draft report titled "The State Must Overhaul Its Approach to Affordable Housing Development to Help Relieve Millions of Californians' Burdensome Housing Costs."
HCD's mission is to promote safe, affordable homes and strong vibrant communities throughout California, and we appreciate the focus and recommendations on how delivering on this mission can be improved and enhanced. Recognizing that the COVID pandemic has made responses to affordable housing goals more challenging, the pandemic has also brought to light why addressing housing affordability and supply is critically important.
We concur with the recommendations to increase collaboration amongst our partners and are encouraged with the progress that has been occurring throughout 2020 as the state has sought to display a set of values and goals to improve initially the competitive delivery of California Debt Limit Allocation Committee (CDLAC) resources. Of additional note is the Governor's recent signature of AB 434, which will provide an opportunity to continue to better align HCD's own programs and will necessitate working with governmental and non-governmental stakeholders to maximize the use of the state's limited affordable housing resources.
Additionally, HCD stands ready to work with the Legislature on opportunities to strengthen existing law to enable HCD to more effectively enforce state law and better promote the development of affordable housing.
Thank you for this opportunity to respond to this draft report. Should you have any questions, please contact HCD's Chief Internal Auditor, Mathew Raute at (916) 247-6375 or Mathew.email@example.com.
cc: Lourdes M. Castro Ramírez, Secretary, Business, Consumer Services and Housing Agency
Patti Ochoa, Administrative Process Manager, Business, Consumer Services and Housing Agency
State Treasurer's Office
October 27, 2020
Elaine Howle, CPA
California State Auditor
621 Capitol Mall, Suite 1200
Sacramento, CA 95814
Dear Ms. Howle,
The State Treasurer's Office (STO) appreciates the opportunity to respond to the draft report titled "California's Housing Agencies: The State Must Overhaul Its Approach to Affordable Housing Developments to Help Relieve Millions of Californians' Burdensome Housing Costs". Please reference the enclosed attachment for a detailed response.
Thank you again for this opportunity. Should you have any questions or require additional information, please do not hesitate to contact me at (916) 653-2995, or by email at firstname.lastname@example.org
In Peace and Friendship,
cc: Genevieve Jopanda, Chief of Staff
Spencer Walker, General Counsel
Judith Blackwell, CTCAC Executive Director & Interim CD LAC Executive Director
① Thank you for the opportunity to respond to the draft report titled "California's Housing Agencies: The State Must Overhaul Its Approach to Affordable Housing Developments to Help Relieve Millions of Californians' Burdensome Housing Costs". Below you will find a detailed response to the draft report addressed by section title.
The State Mismanaged $2.7 Billion of State Housing Resources That Could Have Contributed to More Affordable Housing
We are limited to our response to this section as the Executive Director of the California Debt Limit Allocation Committee (CDLAC) and the California Pollution Control Financing Agency (CPCFA) at the time frame of which this section is referencing are no longer with the agency. Additionally, Treasurer Ma and her administration took office in January 2019.
To add some background, the 4% tax credits, which are issued by the California Tax Credit Allocation Committee (CTCAC), also require private activity bonds, which is where CDLAC governs the private activity bonds issuance. CDLAC has not faced competition for bonds in recent history.
② Under the current leadership of the interim CDLAC Executive Director, CDLAC has developed a new carryforward policy. In an effort to utilize all volume cap authorized for the program year, if there is a balance of unallocated private activity tax-exempt bond allocation available, CDLAC will make lump sum carryforward allocation available to certain highly active issuers.
If selected, the issuer would receive a lump sum carryforward award of allocation at the December CDLAC committee meeting. The issuer will have three years to utilize this allocation for their future projects.
To keep track of this carryforward allocation, CDLAC created a tracking sheet that includes the name of the issuer, the amount of lump sum carryforward awarded, the year in which the allocation was awarded and columns for the future projects and the amount of allocation being used for the specific project. The sheet also includes a running balance column to keep track of the available lump sum carryforward allocation remaining after each award.
Issuers are required to also report usage a week after every allocation meeting and provide CDLAC with the remaining balance for comparison and reconciliation with CDLAC's tracking sheet. Issuers are also required to report any and all allocation not issued for a project utilizing the carryforward allocation on a weekly basis.
The CDLAC analyst uses this information to report the status of the lump sum carryforward allocation to the Executive Director on a bi-weekly basis. Carry forwards will also be posted and updated on CDLAC's website on a monthly basis.
The State Needs to Determine Where Its Resources Will Make the Biggest Impact
Historically, the 4% program has been non-competitive and therefore the tax credits have been available to all developers who apply given they meet the minimum CTCAC requirements. These applications are not competitively scored and therefore the funding of one project in a given geographic area has no effect on another project funded in another geographic area. If no applications are received in a program where the 4% credits are non-competitive, there are reasons why some projects are not feasible in a given geographic area.
③ While some geographic areas may show a need for affordable housing, there may be barriers preventing projects from applying. Some communities have little or no funding to pair with the tax credits to make the project feasible, especially given the limitations associated with the tax credits pursuant to federal law. Given the allocation of tax credits is a public and private partnership, there may be a lack of interest to build in certain areas due to risks to the investor ownership, which could affect the credit pricing in those deals resulting in lower equity. Some communities experience opposition from advocates who are against affordable housing projects in their area.
④ The CTCAC Executive Director and interim CDLAC Executive Director and executive team participates in panels at housing conferences throughout the state, including the Rural Housing Summit where stakeholders developing in rural areas attend and participate. Starting in 2012, CTCAC staff also began meeting with California Native American tribal representatives and since then have attended various housing conferences in cities such as Ukiah, Tuolumne, and Cabazon regarding the availability of tax credits.
④ The housing conferences, available to housing developers, allow us to promote the Tax Committee and the credit availability. In addition, the California State Treasurer embarked on a 5-city listening tour in January 2019 and then another 10-city tour in June 2019 to encourage affordable housing throughout the state and seek feedback. The tours included cities of Los Angeles, San Diego, Sacramento, San Francisco, Fresno, Riverside, Buena Park, Bakersfield, Port of Hueneme, Redding, and San Jose.
④ As with the 4% program, the 9% program is subject to the same barriers noted above with regard to some geographic areas where no applications are received. The 9% program is a competitive program and is oversubscribed at least 2 to 1 and sometimes 3-4 to 1. Twenty percent (20%) of the 9% federal credits are set aside for rural projects, which includes 7 counties noted not to have an application or award of tax credits through 2015 and 2019. While there is currently no county apportionment within the rural set aside, CTCAC could benefit with further review of the various counties within the rural set aside. As stated above, CTCAC staff attend and present at rural conferences (Rural Housing Summit, Native American conferences, etc.) where stakeholders developing in rural areas throughout the state attend and participate, which again include rural cities Ukiah, Cabazon, and in Tuolumne County. CTCAC participation provides prospective rural applicants information on CTCAC and credits available.
The State's Cumbersome Processes Can Unnecessarily Slow Down Affordable Housing Development
⑤ The Multifamily Housing Project in the California Housing Financing Agency (CalHFA) is now well coordinated with CTCAC. CalHFA and CTCAC had a number of internal meetings to review CTCAC's guidelines as well as a number of meetings with the Debt Limit Committee to make recommendations to CDLAC on emergency regulations and proposed longer term regulations. Among other things we:
- CalHFA Adopted CDLAC/CTCAC Application for our Application
- CalHFA Tracked and co-managed the allocation of State Tax Credits related to MIP with the CTCAC team.
- CalHFA Worked Directly with CTCAC team to review individual deal underwriting.
As a result, our 4% program now has a percentage of state tax credits that is set aside every year, beginning in 2020, in order to coordinate with the CalHFA program with regard to our state tax program. This amount is set aside every year so that CalHFA can pre-approve their mixed income program without also going through the California Debt Limit Committee process. We have also begun conversations with the Executive Director of California Housing and Community Development regarding a similar program. In fact, on October 27, 2020, CalHFA received an award from the National Council of State Housing Agencies for its Mixed Income Program for producing more housing in less time and with less public Subsidy as a result of its partnership with the STO.
⑥ In response to the issue of redundant scoring of applications, only the 4% applications had redundant scoring and this occurred only in year 2020. The applications were reviewed by CDLAC for all aspects of the application except for the efficient use of tax credits. The efficient use of tax credits was determined by CTCAC. This created confusion among the applicants because in certain cases although the applicant won on the CDLAC side, it would still not get a credit because it lost on the CTCAC side. This situation occurred one time in February of 2020. This situation will now be eliminated because we have developed new CDLAC regulations which will be voted on in December in which the efficient use of tax credits will now be included in the CDLAC side only.
⑦ ⑧ In response to the statement "Even so, the Debt Limit Committee could have used the standard regulation-setting process to align the program requirements, but it did not initiate this process either." CDLAC has utilized the Emergency Regulation process to develop regulation alignment in the past:
- Modified "Mixed-Income Project" definition (Section 5000)
- Modified & Deleted language under Qualified Residential Rental Project Bonds (Section 5100)
- Added "Eligible Basis" (aggregate depreciable basis) language (Section 5233)
- Deleted and modified language under "Competitive Application Process" (Section 5000)
- Added "QRRP Self Scoring Worksheet" language (Section 5035)
- Added language about CDLAC staff giving applicants 1 business day to cure application deficiencies (Section 5180)
- Added language about giving applicants an option to return allocation within 90 days without forfeiture (Section 5052)
- Added language about bond preservation and recycling program as permitted by 26 U.S.C. 146(i)(6) (Section 5060)
- Added language about Notification of Bond Issue (Section 5141)
- Removed incorrect citation to US Tax Code. Added definition for New Construction, Other Affordable Pool, Preservation Pool (Section 5170)
- Removed incorrect information referring to TCAC Certificate of Previous Participation and Schedule A (Section 5190)
- Removed incorrect citation to US Tax Code (Section 5230)
- Increased Allocations Limits (Section 5233)
In addition we are currently reviewing the entire set of regulations for the Debt Limit Committee and plan to present them to the Board in December of this year.
Tax Committee Monitoring of Affordable Housing Projects
CTCAC follows the non-compliance protocols when conducting the compliance monitoring as stated. While CTCAC has not used its enforcement authority for repeated noncompliance, any repeated noncompliance is reported in conformance with CTCAC procedures. Assessing negative points or levying fines was implemented to address projects outside of the 15-year federal compliance period where noncompliance could be reported to the Internal Revenue Service (IRS) or in the cases outlined in the CTCAC regulations. As stated, it is true enforcement process could benefit from a more holistic approach that considers historical noncompliance and the type and significance of the violation. CTCAC is in the process of reviewing and reassessing its current procedures.
Prior to the IRS audit, the Compliance Section staff only reported Health & Safety violations (H&S) and Level 3 violations using similar standards. CTCAC determined that staff would begin reporting physical non-compliance issues in an effort to transition to the reporting of more items. Due to staffing constraints, the Tax Committee determined that Level 1 and Level 2 violations would be using the 25% calculation always used for specific Level 3 violations. This change significantly increased the amount of non-compliance (Form 8823) filed monthly, compounded with the insufficient staffing available to report every single violation. Of the 1,000-1,200 projects inspected, approximately 95% of projects have some type of physical violation, which equates to 950-1140 projects being reported for non-compliance annually. While the Compliance Section staff was increased recently, some of those staff were added to address the increased inspection monitoring workload associated with the additional $500 million in state tax credits. The other additional staff was to address the additional unit inspections of approximately 3000 more units annually resulting from a change by the Internal Revenue Service (IRS).
In summary, the Treasurer, the interim Executive Director of California Debt Limit Allocation Committee and Executive Director of California Tax Credit Allocation Committee agree with the State Auditor in transferring CDLAC's authority to CTCAC to manage tax-exempt bonds and its responsibilities for reviewing applications and allocating bond resources. Understanding that housing is a priority for California, the State Treasurer chaired many of CDLAC's and CTCAC's board meetings since taking office and has been actively engaged in updating policies for these committees.
The STO also agrees with the State Auditor that access to data on the State's financial resources for affordable housing is important in monitoring and meeting California's housing needs. Additionally, the concept of a housing working group in the Legislature is welcomed as it may be able to ensure the State awards financial resources for housing is addressed in a more timely and efficient manner. We have witnessed that this process is effective through our experience with our CTCAC/CDLAC housing working group comprised of various stakeholders and advocates representing diverse backgrounds and geographic areas.
The Treasurer and CDLAC and CTCAC leadership have demonstrated commitment towards working collaboratively to streamline processes and align with other housing agencies as reflected in some of our work such as the inclusive process by hosting 15 housing tours across the state, developing the CTCAC/CDLAC working group to solicit input towards improving processes to make the it less cumbersome and more efficient for housing developers, and strong working relationship with CalHFA on the Mixed Income Pool process.
We are committed and look forward to working towards the improvement and development of housing to meet California's housing goals.
CALIFORNIA STATE AUDITOR'S COMMENTS ON THE RESPONSE FROM THE STATE TREASURER'S OFFICE
To provide clarity and perspective, we are commenting on the State Treasurer's Office's response to the audit. The numbers below correspond to the numbers we have placed in the margin of its response.
① Throughout its response, the State Treasurer's Office includes technical details and terminology that we describe more generally in the report. None of these details impact the content or conclusions in our report. We provide further comments on the State Treasurer's Office's response below.
② As we state, while the Debt Limit Committee's current policy includes a process for tracking carryforward, which we refer to as remaining resources, and reporting it on its website each month, it lacks reporting provisions to disclose them in its public meetings. Further, when the Debt Limit Committee allocates these remaining resources, it should also consider demand for bond resources, use of previously allocated bonds, documented legislative priorities, and risk of allocated bonds being lost, which it has not done, as we explain.
③ We acknowledge the barriers to affordable housing development at the local level in Chapter 2. Notwithstanding some of the barriers that the State Treasurer's Office cites, the Tax Committee does not actively solicit applications from those areas that are not applying for tax credits. As we state, the distribution of tax credits in some counties is disproportionate to their share of the State's population. Therefore, we recommend that the Tax Committee should immediately identify areas from which it has not received applications or areas with fewer awards per population and use that information to inform regulatory changes to attract more affordable housing developers to those areas.
④ We acknowledge that the Tax Committee has participated in housing conferences throughout the State. However, we found disparities in tax credit awards among certain counties, including seven rural counties that had no tax credits or applications at all from 2015 through 2019 despite having significant indicators of need. Although the Tax Committee maintains data on the number of applications it receives, the tax credits it awards, and the affordable housing units it supports, it has not used this information to identify disparities by geographic region, which is essential for ensuring that affordable housing is being built in all areas of the State, as we state.
⑤ We acknowledge that CalHFA requires applicants to use the same application as the Tax Committee and Debt Limit Committee. However, as we depict in Table 1, these agencies have varying eligibility requirements for applicants applying for financing for a single multifamily project, which can create unnecessary obstacles for developer applicants.
⑥ The State Treasurer's Office's assertion is misleading. The two committees' application approval processes are redundant in multiple ways. As we state, the process wherein two agencies review applications for the same housing projects and separately determine eligibility when the financing is integrally linked is, in several respects, redundant and thus may contribute to inefficiencies. In addition to making awards to most of the same projects, the Tax Committee and the Debt Limit Committee have similar membership and these committee members often discuss the same projects in consecutive meetings in what amounts to a duplication of effort. Further, The Tax Committee and the Debt Limit Committee review the same general project information and require similar, if not identical, documentation—such as market studies—from applicants for the majority of project application components.
⑦ Although the Debt Limit Committee has made some changes to its regulations, for example to clarify definitions, these changes do not align its eligibility requirements with the Tax Committee. As we state, the Debt Limit Committee did not use its emergency regulation-setting process to align its requirements with the Tax Committee's requirements in recent years. As a result, the Debt Limit Committee did not remove unnecessary inconsistencies with its requirements and the Tax Committee's requirements, which may have resulted in slowed production of affordable housing in California.
⑧ In completing our quality control process, we revised this sentence in our report for clarity.