Report 2014-037 All Recommendation Responses

Report 2014-037: California Department of Housing and Community Development: Inconsistent Oversight Has Resulted in the Questionable Use of Some Housing Bond Funds (Release Date: September 2014)

Recommendation #1 To: Housing and Community Development, Department of

To ensure that it complies with state law and maximizes the public benefits that its Multifamily Housing Program provides, HCD should improve its current process for awarding program funds by documenting its determination of whether the costs of proposed projects are reasonable.

6-Month Agency Response

The HCD Division of Financial Assistance (DFA) has revised the Notices of Funding Availability (NOFA) "Projects with Extraordinary High Development Costs" section to be more specific regarding the supportive documentation, analysis, and approval process to determine if proposed project costs are reasonable (See Attachment AF1a - highlighted text). An internal Management Memo has been approved and implemented memorializing the review, analysis, and documentation process (Attachment AF1b).

California State Auditor's Assessment of 6-Month Status: Fully Implemented

60-Day Agency Response

The HCD Division of Financial Assistance (DFA) staff and management are currently evaluating and drafting language to include in the Staff Recommendation Report that is submitted as part of the project review process. The language will be more specific regarding the analysis and approval process to determine if proposed project costs are reasonable.

California State Auditor's Assessment of 60-Day Status: Pending

Recommendation #2 To: Housing and Community Development, Department of

To assure the validity of its cost comparisons for Multifamily Housing Program projects, HCD should update the program's historical cost spreadsheet either by including projects it approved after 2008 or by adjusting the tool's data to current values.

6-Month Agency Response

DFA has updated the historical development cost spreadsheet on 9/23/2014 adding the most recent committee approved project development costs (see Attachment AF2a). The information has been posted on the HCD/MHP website (Attachment AF2b).

California State Auditor's Assessment of 6-Month Status: Fully Implemented

60-Day Agency Response

DFA staff are currently updating the historical cost spreadsheet. The spreadsheet will be updated annually.

California State Auditor's Assessment of 60-Day Status: Pending

Recommendation #3 To: Housing and Community Development, Department of

To meet the intent of the law, HCD should approve and fund for the Catalyst Program only those projects that more directly create or preserve housing opportunities.

Annual Follow-Up Agency Response From November 2015

HCD has revised its policy covering the Catalyst Program, via a management memo. The policy change satisfies the concerns raised in this finding. Supporting documentation has been provided.

California State Auditor's Assessment of Annual Follow-Up Status: Fully Implemented

HCD's policy changes should help it ensure that only projects that more directly create or preserve housing opportunities receive funding.

1-Year Agency Response

HCD maintains what was stated at the 6-month status report and emphasizes that staff will ensure all proposed scope of works for any future standard agreement are consistent with these requirements. Therefore, this finding is fully implemented.

California State Auditor's Assessment of 1-Year Status: No Action Taken

As we stated in our assessment of HCD's 6-month status report, the guidance HCD indicates it provided to its staff regarding the four catalyst projects yet to sign a standard agreement does not ensure HCD will comply with state law. Specifically, as we indicated in our report, we do not believe state law allows funding for projects that do not create or preserve affordable housing.

6-Month Agency Response

Staff have reviewed the current status of all catalyst designees. Of the 10 designees, 6 have executed standard agreements with identified scopes of work. HCD is not proposing to amend existing standard agreements or disapprove fund disbursement requests on activities previously approved by HCD through an executed Standard Agreement. However, for the remaining 4 Catalyst Designees without a completed standard agreement process, staff have been notified to review proposed scopes of work to ensure all future activities funded through the Catalyst Program are in support of "creating or preserving affordable homeownership opportunities" consistent with the Statutory Authority. Staff will ensure all proposed scope of works for any future standard agreement are consistent with these requirements.

California State Auditor's Assessment of 6-Month Status: No Action Taken

The guidance HCD indicates it provided to its staff regarding the four catalyst projects yet to sign a standard agreement does not ensure HCD will comply with state law. Specifically, as we indicated in our report, we do not believe state law allows funding for projects that do not create or preserve affordable housing.

60-Day Agency Response

The HCD Housing Policy Division (HPD) continues to assess projects, and will review those not currently under a standard agreement. HPD will complete the assessment by the 6-month status report.

California State Auditor's Assessment of 60-Day Status: Pending

Recommendation #4 To: Housing and Community Development, Department of

To ensure that recipients submit required status reports, HCD should develop and implement strategies to better monitor these reports. For example, program management could review a central tracking spreadsheet of status reports and require staff to contact recipients that are not complying with requirements. After six months of noncompliance by recipients, HCD should send warning letters to recipients that it will cancel their awards or seek remedies and require them to return the funds unless they provide the reports within a specified time.

1-Year Agency Response

The Local Housing Trust Fund Program standard agreement includes a change that once the Contractor is awarded, they must submit annual status reports to HCD, even prior to the disbursement of funds. This satisfies the CSA request to require "some reporting before the initial disbursement request." For the SERNA program, a policy document is provided to show what is required for past due monitoring reports. Both issues are resolved and implemented.

California State Auditor's Assessment of 1-Year Status: Fully Implemented

6-Month Agency Response

The DFA BEGIN program developed a formal reporting process, which is documented in the Desk Manual (Attachment AF4a-1, AF4a-2), and includes processes for collection, tracking, and follow up of reports.

CalHOME revised its Desk & Operations Manuals to include an improved reports collection process (Attachment AF4b-1, AF4b-2 red text), which includes processes for ensuring report collection and tracking, recipient correspondence documentation, and follow up for non-compliance.

Local Housing Trust Fund Program monitors the status of recipient activities via the LHTF Disbursement Request Form (Attachment AF4c-1). Recipients who have not requested a disbursement are not required to submit a status update since there are no changes to report. The status of LHTF disbursements/reporting is updated on Attachment AFc-2.

Serna - DFA management reviews the status of the CAPES Annual Reports and Operating Budget submission compliance monthly. (AF4d).

California State Auditor's Assessment of 6-Month Status: Partially Implemented

Although HCD provided support that it had modified its policies for the BEGIN and CalHome programs to address our concern, it did not do so for the Local Housing Trust Fund (LHTF) program or the Joe Serna, Jr. Farmworker Housing program. As we note in our report, the LHTF's policy of waiting for a recipient to request funds is insufficient for monitoring its awards because of the significant amount of time that may elapse between award of funds and a request for disbursement. Further, the documentation provided for the Farmworker Housing program shows only that HCD is tracking required reports; it does not indicate what HCD will do when recipients fail to submit required reports, as documentation HCD provided to us shows has already occurred.

60-Day Agency Response

DFA is evaluating and developing a centralized reporting process. One option currently under consideration is a report generated from HCD's internal database, CAPES. Consequences for recipients who do not comply are being reviewed on a program by program basis, taking into consideration the fact that existing programs do not have the same reporting requirements.

California State Auditor's Assessment of 60-Day Status: Pending

Recommendation #5 To: Housing and Community Development, Department of

To ensure that recipients spend advanced funds promptly and that it has accurate information about outstanding advanced funds, HCD should do the following:

- Develop a thorough process to track and monitor advances.

1-Year Agency Response

The DFA CalHome program has updated their desk manual (pg 55) to specifically require documented justification by senior management on waivers to the policy. Per CSA, this type of documentation would resolve their concern. This issue is fully implemented.

California State Auditor's Assessment of 1-Year Status: Fully Implemented

6-Month Agency Response

DFA BEGIN updated the Desk Manual to include the policy and process for tracking fund advancements (Attachment AF5a, red text).

CalHome produced a Management Memo (AF5b-1) outlining its advanced funds policy. The memo was provided to all active award recipients. CalHome updated its desk manual with staff instructions on documenting draw requests (AF5b-2, red text).

California State Auditor's Assessment of 6-Month Status: Partially Implemented

Although HCD updated its policies to include a process to track and monitor advances for its BEGIN and CalHome programs, those policies allow the CalHome program manager to waive its advance policy at his or her discretion, increasing the risk that HCD will experience the same problems with advances we found in our report.

60-Day Agency Response

DFA staff and management are currently evaluating the process to track advanced funds. The evaluation involves a more efficient coordination through the HCD Admin Division, to reconcile and improve accuracy of data and determine any amounts outstanding.

California State Auditor's Assessment of 60-Day Status: Pending

Recommendation #6 To: Housing and Community Development, Department of

To ensure that recipients spend advanced funds promptly and that it has accurate information about outstanding advanced funds, HCD should do the following:

- Reconcile advances to its accounting records and to documentation to ensure that recipients spent all of the advances that HCD made previously.

1-Year Agency Response

The DFA CalHome program has updated their desk manual (pg 54) to reflect the change that staff must ensure status reports are current and reconciliation is required prior to disbursing additional funds. This issues is fully implemented.

California State Auditor's Assessment of 1-Year Status: Fully Implemented

6-Month Agency Response

The BEGIN Program updated its desk manual to include the Mortgage Draw Request process to ensure that recipients spend all advances previously made (AF6a-1, red text). All BEGIN funds have been reconciled. Staff track and monitor draws and usage of advances and reimbursements via the Borrower Summary (reconciliation) as draw requests are received from the Awardee (AF6a-2). Required reporting is tracked through a log (AF6a-3). CalHome implemented a Management Memo outlining its advanced funds policy (AF6b-1), and updated its desk manual with staff instructions on the new policy for unused advanced funds (AF6b-2, red text). Staff use the Borrower Summary (reconciliation) to track, monitor, and account for use of advances (AF6b-3). Management has implemented the Draw Tracking log to monitor available funds and current reporting status in administering the new policy that no request for funds will be processed until a recipient is current (AF6b-4). Management has implemented the Award Usage report to monitor and track the status of advanced fund usage that were issued greater than 180 days since the date the report is generated.

California State Auditor's Assessment of 6-Month Status: Partially Implemented

Although HCD provided documentation that it is tracking and reconciling its advances for its BEGIN program, the documentation provided for its CalHome program does not show that the advances are being reconciled with its accounting records.

60-Day Agency Response

The BEGIN Program is revising its Mortgage Assistance Draw Request process in the BEGIN Desk Manual (pages 9-11) to address advances over 90 days. BEGIN program staff has worked diligently to reconcile all outstanding balances, and are close to full reconciliation.

For the CalHome program, DFA staff and management are reviewing current regulations to ensure the appropriate controls are in place for the continued efficient and effective administration of advances.

California State Auditor's Assessment of 60-Day Status: Pending

Recommendation #7 To: Housing and Community Development, Department of

To ensure that recipients spend advanced funds promptly and that it has accurate information about outstanding advanced funds, HCD should do the following:

- Clarify when recipients must return unspent advances either by revising its policies and procedures or by seeking regulatory change, if needed. For example, HCD could consider requiring recipients to return advanced funds held more than 90 days, to pay an interest penalty on the outstanding funds, or to face other corrective action.

1-Year Agency Response

The DFA CalHome program has updated their desk manual (pg 55) to specifically require documented justification by senior management on waivers to the policy. Per CSA, this type of documentation would resolve their concern. This issue is fully implemented.

California State Auditor's Assessment of 1-Year Status: Fully Implemented

6-Month Agency Response

DFA BEGIN issued a Management Memo to notify recipients of the requirements associated with advanced funds (AF7a-1). BEGIN updated its desk manual to include the modified policy and procedures for funds advancements (AF7a-3, red text). BEGIN updated its Operations manual to include the modified policy and procedures for funds advancement (AF7a-4).

CalHome implemented a Management Memo outlining its advanced funds policy (AF7b-1) and updated its Desk Manual with staff instructions on the new policy for unused advanced funds (AF7b-2, red text).

California State Auditor's Assessment of 6-Month Status: Partially Implemented

Although HCD updated its policies to clarify its policy regarding unspent advances for its BEGIN and CalHome programs, those policies allow the CalHome program manager to waive its advance policy at his or her discretion, increasing the risk that HCD will experience the same problems with advances we found in our report.

60-Day Agency Response

DFA staff and management are revising policies and procedures to clarify when recipients must return unused funds.

California State Auditor's Assessment of 60-Day Status: Pending

Recommendation #8 To: Housing and Community Development, Department of

To maximize the benefits of its on-site review for CalHome, HCD should revise its current risk assessment tool or develop a new tool to identify the recipients that are at high risk of noncompliance with program requirements. For example, HCD could identify recipients as high risk that have received large amounts of funds and have not submitted required status reports for two consecutive periods.

6-Month Agency Response

CalHome has revised its Desk and Operations manuals to include a new risk assessment process to help identify high risk recipients (AF8a, red text). A new Risk Assessment Form and Tracking Report were implemented by management and staff in October 2014 including data points - percentage of grant amount drawn, amount of award, timeliness of report submission, and contract extension request (AF8b).

California State Auditor's Assessment of 6-Month Status: Fully Implemented

60-Day Agency Response

The CalHome program is developing a new risk assessment tool to help identify high risk recipients. The new assessment tool will include the following recommended categories: percentage of grant amount drawn, amount of award, timeliness of report submission, and contract extension request.

California State Auditor's Assessment of 60-Day Status: Pending

Recommendation #9 To: Housing and Community Development, Department of

Once it has an effective risk assessment tool in place, HCD should establish a process to ensure that it consistently uses the tool to select the recipients at highest risk for on-site monitoring.

6-Month Agency Response

CalHome has revised its Desk and Operations manuals to include a new risk assessment process to help identify high risk recipients (AF9a, red text).

California State Auditor's Assessment of 6-Month Status: Fully Implemented

60-Day Agency Response

DFA staff and management are developing a new process that will be incorporated into the CalHome procedure manual.

California State Auditor's Assessment of 60-Day Status: Pending

Recommendation #10 To: Housing and Community Development, Department of

To ensure that its data system is a useful tool for managing its housing bond programs, HCD should revise its strategy documents to clearly outline the steps it will take to address CAPES' current weaknesses. It should include specific timelines and activities within its strategy documents.

6-Month Agency Response

HCD Admin Division has developed a CAPES Enhancement Project Strategy (Attached Strategy document) plan to address needed enhancements to CAPES. The plan includes system priorities, user requirements, potential software developer requirement, and a timeline for completion of each system improvement.

California State Auditor's Assessment of 6-Month Status: Fully Implemented

60-Day Agency Response

HCD Admin Division is currently developing a Strategic Project plan to address needed enhancements to CAPES. The plan will include system priorities, user requirements, potential software developer requirement, and a timeline for completion of each system improvement.

California State Auditor's Assessment of 60-Day Status: Pending

Recommendation #11 To: Housing and Community Development, Department of

Before July 2015 HCD should adopt policies identifying the steps it should take to ensure that it does not exceed statutory administrative costs limits from bond funds and follow those polices when warranted.

1-Year Agency Response

HCD's Admin Division has updated the new policy to include an annual management review to ensure a review of administrative cost information on a regular basis. This issue is fully implemented.

California State Auditor's Assessment of 1-Year Status: Fully Implemented

6-Month Agency Response

HCD Admin Division developed a new policy to ensure the Department does not exceed statutory limitation of administrative costs for all Bond Programs (Attachment - Admin Mgmt Division Policy document).

California State Auditor's Assessment of 6-Month Status: Partially Implemented

Although HCD issued a policy to track its administrative costs, the policy contains no steps to ensure its management reviews the tracked costs and thereby ensure it does not exceed those limits.

60-Day Agency Response

The Department has enhanced its internal program cost tracking tool to identify the total actual and projected administrative costs for each of the bond programs. The Department will create policies and procedures to clarify the processes necessary to prevent exceeding administrative cost limits in the future.

California State Auditor's Assessment of 60-Day Status: Pending

All Recommendations in 2014-037

Agency responses received are posted verbatim.