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Redevelopment Spending On Housing Receives Severe Scrutiny

Property taxes collected by redevelopment agencies provide the largest ongoing source of funding for low- and moderate-income housing development in California about $1 billion annually. How agencies account for and spend that money may be about to change in light of a state Senate investigation and front-page newspaper stories.

I would not be surprised to see 10 or even 20 pieces of legislation introduced in 2011 that concerns the 20% of tax increment revenue that redevelopment agencies must set aside for low/mod housing. I expect to see Democrats introduce legislation that somehow caps low/mod "overhead" expenses. Conversely, there could be Republican legislation that limits or closes down the housing set-aside, as some Republicans have in the past proposed taking money sitting in redevelopment agencies' low/mod housing funds to help balance the state budget.

Bottom line: The redevelopment low/mod housing status quo is unlikely to remain.

Under state redevelopment law, agencies must spend 20% of tax increment revenue on developing new low- and moderate-income housing, rehabilitating such units, acquiring long-term covenants that restrict occupancy to low- and moderate-income households, subsidizing rents and maintaining the existing supply of mobile homes. However, ensuring that agencies actually spend the low/mod money properly has been an ongoing battle for the state and affordable housing advocates, as some agencies have been eager to spend the set-aside on almost anything except actual housing.

The state Department of Housing and Community Development, the state controller's office and the attorney general's office have varying levels of oversight. The controller's office and HCD collect annual reports from agencies, with HCD's reports focused on use of low/mod money. From 1998 through 2007, HCD conducted 42 audits of redevelopment agencies, forcing numerous agencies to change illegal or questionable spending practices. Budget cuts forced HCD to suspend the audits.

Last year, the Senate Transportation and Housing Committee and the Senate Local Government Committee asked the new Senate Office of Oversight and Outcomes to examine redevelopment agencies' low/mod housing spending. After a full year of investigation and analysis, the oversight office released a 118-page report on September 30 that found a lack of oversight. The well-documented report is sure to rile up advocates of affordable housing, good government and limiting redevelopment activity.

Although investigators compiled data on all 398 active redevelopment agencies, they focused on 12 agencies. Investigators looked at the spending and housing accomplishments over a 13-year period (from fiscal year 1995-96 through 2007-08) for nine agencies that reported the highest levels of low/mod expenditures for "planning and administration" and for three agencies chosen at random for comparison purposes. The findings are unsettling:

The Torrance Redevelopment Agency "reported no affordable housing accomplishments" for the 13-year period. Although the agency subsidized rent for up to 113 senior apartments, it did not build, rehabilitate or acquire an affordability covenant on a single unit despite expenditures of roughly $500,000 a year from the low/mod housing fund.

The Covina Redevelopment used its low/mod housing money "mostly to subsidize homeownership and the rent of senior citizens and victims of domestic violence, as well as to pay the salaries of code enforcement officers and make debt payments." In the final 12 years of the study period, the agency produced only eight new units, despite having $11.3 million in its housing fund in the 2007-08 fiscal year.

The Culver City Redevelopment Agency's low/mod housing fund grew from $3.2 million during the 1995-96 fiscal year to $22.1 million by 2007-08, but the agency built only four new units, rehabilitated 31 and acquired affordability covenants on 12 units and virtually all of that activity was prior to 1999. During the 2007-08 fiscal year, the agency spent $2.16 million on planning and administration, including $1.5 million to employ workers in 15.2 positions in a neighborhood preservation program.

The Hercules Redevelopment Agency contracts out its affordable housing program to a private company founded by the city manager, who may or may not still own the company. The agency spends exactly $16,666 a month on unitemized "overhead" and paid $800 a month of low/mod funds to a Sacramento lobbyist.

An average of 76% of Monterey Park Redevelopment Agency low/mod expenditures were for planning and administration. During the last 11 years of the study period, the agency rehabilitated six units.

The Pismo Beach Redevelopment Agency existed for 23 years without completing any housing activity. The city deactivated the agency earlier this year.

By comparison, the San Leandro Redevelopment Agency (one of those picked at random for scrutiny) spends substantial amounts on planning and administration (on average, 33% of annual expenditures), but the agency produced 155 new units and rehabilitated 153 during the study period.

So far, no one has disputed the findings. Nancy Vogel, the oversight office consultant who prepared the report, told me, "It wasn't easy getting that information from the redevelopment agencies." California Redevelopment Agency Executive Director John Shirey interceded on Vogel's behalf when she got stonewalled by some agencies.

When I spoke with him recently, Shirey declined to defend any agency that goes more than five years without producing actual housing units. But he was critical of the Senate report for its unrepresentative sample.

"These are known agencies of concern. She might even have gotten some of the agency names from us," Shirey told me. He was also unhappy with the report's characterization of planning and administration costs as a percentage of annual expenses, rather than as a percentage of funds available.

"There is some unfairness in the way it has been characterized for a long time," said Shirey, who noted that admin costs may appear artificially high for several years leading up to a development project completion. "Agencies for the most part do a good job with their housing programs and are reasonable with their planning and administration costs."

All of the agencies singled out in the report are small to mid-sized entities. Christine Minnehan, a legislative director for the Western Center on Law and Poverty, said it might have helped to look at a large agency or two that does produce a substantial amount of affordable housing.

Vogel conceded it might have been useful to compare and contrast 12 agencies with the highest planning and administrative expenses with the 12 agencies reporting the lowest spending on planning and administration. Still, she stands by the report.

The report contains 13 recommendation, among them: Increase redevelopment agency transparency, bring back the HCD audits, improve annual agency audits performed by CPAs, and tighten the law on permissible expenditures.

"In some ways, everyone is to blame," Vogel said.

One obvious solution would be to place a cap on the percentage of money spent on planning and administration, something the federal Department of Housing and Urban Development does when it provides grants.Catherine Rodman, an attorney with San Diego-based Affordable Housing Advocates who has sued several jurisdictions over their use of low/mod funds, recommended a planning and administration spending limit of no more than 10%.

"Because of Proposition 13, and because they don't want to build affordable housing, cities are using the housing money for staff. They consider it a slush fund," Rodman charged.

However, the CRA has long opposed a cap as too inflexible, and there is concern that a planning and admin limit would simply lead to accounting trickery by recalcitrant agencies.

Minnehan recommended reviving the HCD audits and improving HCD's online data collection system. Those moves would force bad actors to change their ways and educate people in agencies who are trying to do the right thing. Occasional intervention by the attorney general's office would get some attention, she added. However, Minnehan said, any reform or solution must ensure that large agencies with proven affordable housing track records she singled out San Jose, Los Angeles and San Francisco are not hindered.

The Senate investigative report came out only days before two stories in the Los Angeles Times on the same topic. The Times concluded, "At least 120 municipalities spent a combined $700 million in housing funds from 2000 to 2008 without constructing a single new unit. In case after, The Times found, cities spend substantial sums for little return" With the assistance of CRA and HCD, the newspaper put together an online database of redevelopment agency low/mod spending over an eight-year period.

Some of the bad actors in the newspaper stories are the same ones identified in the Senate report Monterey Park, Pismo Beach, Hercules. The Times also cited horror stories from cities as varied as Avalon, King City, Grand Terrace and Santa Ana. 

Shirey called the Times stories unfair. He was particularly upset with the decision to lead off the stories with a corruption anecdote involving a Temple City redevelopment project gone wrong.

"I don't think it's fair to tar redevelopment with the brush of crime and corruption, which she [the Times reporters] did in the lead example from Temple City," Shirey said.

Although several other anecdotes in the Times stories are years old, the newspaper stories combined with the Senate report paint an unflattering picture.

Still, it appears that the large majority of agencies are trying to comply with the law. The $700 million that the Times suggests was wasted would amount to only about 10% of the money that redevelopment agencies devoted to affordable housing during the eight-year period the Times examined. Many agencies in the database reported keeping planning and administration costs to 20% to 30% of expenditures, and reported producing, rehabilitating or subsidizing substantial numbers of units.

I'm not excusing government waste and corruption. The state needs to do something to ensure all low/mod money is spent to provide actual housing and not to provide chosen landowners with sweetheart deals or to pay the bills at City Hall. But any real reform will need a careful balance.

Oftentimes, reports such as the one from the Senate oversight office and even from newspapers provide the impetus for legislative committee hearings. However, as one Capitol insider told me, hearings are best suited for fact finding and building momentum. The Senate report provides all the facts necessary, and momentum should be easy to generate, my source said.

Shirey predicted we will see "12 or 15 pieces of legislation aimed at punishing the innocent. We're going to have an avalanche of legislation come January."

Minnehan questioned whether significant reform can get through a Legislature packed with former city councilmembers who sat on redevelopment agency boards. In general, those lawmakers resist anything that increases agencies' affordable housing obligations, or that eases advocates' path to the courtroom, she said.

One wild card to consider is the state budget, which is not truly balanced. When the next administration and Legislature go looking for money in 2011 , redevelopment funds could appear to be easy pickings in light of the recent investigations.

Paul Shigley