Introduction

Background

Financial Management of the Program

Management Reporting

Accuracy of the Downpayment Assistance Loan Program (DALP) Database

Answers to Specific Questions

Conclusions and Recommendations

Attachment I - Proposition A Funded Development Repayment Expectations

Attachment II - Written Response from the Mayor"s Office of Housing

June 7, 2002

Honorable Tony Hall
Honorable Gavin Newsom
Board of Supervisors
City Hall, Room 244
1 Dr. Carlton B. Goodlett Place
San Francisco, California 94102-4689

Dear Supervisors Hall and Newsom:

Pursuant to Motions MO2-46 and MO2-48, approved by the Board of Supervisors on March 18, 2002, the Budget Analyst has conducted an expedited limited review of the expenditures made and/or committed from the City"s $100,000,000 Affordable Housing and Home Ownership Bond Program (Program), previously authorized by the San Francisco electorate in November of 1996 (Proposition A). This Program is administered by the Mayor"s Office of Housing (MOH). In accordance with the Board of Supervisors motions, this report (a) provides answers to eight specific questions concerning the Program, and (b) covers other issues found during our limited review.

In accordance with Regulations previously adopted by the Board of Supervisors in October, 1997, the Affordable Housing Development component of the Affordable Housing and Home Ownership Bond Program, or 85 percent of the net bond proceeds, is designed to provide funds for the following purposes, as outlined in the Program regulations:

In addition to providing rental units under the Affordable Housing component, the Program has another component known as the Downpayment Assistance Loan Program, which is also administered by MOH with the assistance of five participating lenders, each of which is either a bank or a mortgage company, selected by the MOH through a Request for Proposals process. Participating lenders submit applications to MOH for approval after determining that the borrower is eligible for a first mortgage and appears to be eligible for a second loan from the City to assist the borrower with a downpayment. The Downpayment Assistance Loan Program provides downpayment assistance to low- and moderate-income, first-time home buyers.

The first series of the $100,000,000 in Affordable Housing Bonds in the amount of $20,000,000 was issued in February of 1998. The second and third series in the same amount were issued in June of 1999 and June of 2000 at $20,000,000 each. The fourth and fifth series were issued in June of 2001 in the aggregate amount of $40,000,000, resulting in all $100,000,000 of the previously authorized bonds having been sold.

FINANCIAL MANAGEMENT OF THE PROGRAM

The Budget Analyst reconciled the sum of each individual Downpayment Assistance Loan Program (DALP) loan and each individual Rental Housing Development (Development) loan or grant recorded in the City"s Financial Accounting and Management Information System (FAMIS), with the FAMIS "Housing Account" total of $55,210,406, an amount that we obtained from the Controller. Although we were able to reconcile the detailed disbursements to the summary totals, we found that $1,384,719 of the Downpayment Assistance Loan Program payments had been posted to the incorrect bond issuance. Further, we found that a $412,394 payment for the Affordable Housing "Development Account" had actually made from a DALP Account.

According to Mr. Roger Sanders, Director of Finance for MOH, MOH has been working with the Controller"s Office to correct the accounting errors, including correcting the $412,394 Development Account disbursement from the DALP account and errors in classifying Affordable Housing "Development Account" disbursements as grants or loans. Mr. Sanders estimates that the corrections to FAMIS will be completed by June 30, 2002.

Application Fees

Each Downpayment Assistance Loan Program application requires a nonrefundable application fee of $300 or one percent of the downpayment loan assistance amount, whichever is less. According to the Program Regulations, such fees are to be deposited in the Housing Program Fees Fund, which was established in accordance with Section 10.117-100 of the Administrative Code, "to pay the costs of the Mayor"s Office of Housing for administering housing programs for which administrative funding is not otherwise available."

MOH staff informed the Budget Analyst that they were unaware of the foregoing provision and that the application fees, which total $64,810 according to the FAMIS report, had been incorrectly deposited to the DALP account.

MANAGEMENT REPORTING

The Annual Report

Chapter 43 of the Administrative Code established the "Affordable Housing and Home Ownership Bond Program." Section 43.3.7 of Chapter 43, titled "Reports to the Board of Supervisors," requires that MOH provide an annual report to the Board of Supervisors on the status of the Program.

MOH has published an annual report each year in compliance with the foregoing provision. However, to date, MOH has published each Annual Report prior to the end of the fiscal year covered by the annual report. For example, the annual report covering the fiscal year ended June 30, 2001, has a publication date of April 27, 2001, and contains estimates concerning Program activity for the remainder of the fiscal year instead of actual performance.

In addition to providing estimates of activity rather than actual activity, MOH"s practice of publishing annual reports prior to the completion of the fiscal year will have an added adverse effect on the quality of information that could be provided, if that practice is continued for the Fiscal Year 2002-2003 annual report.

Finance Committee Reports

The Board of Supervisors approved regulations implementing the "Affordable Housing and Home Ownership Bond Program" in October of 1997, imposing additional conditions to the Regulations as originally formulated by the MOH. The Regulations presented by MOH were amended by the Board of Supervisors to require that:

(a) The Director of the Mayor"s Office of Housing"s annual report provide information on the populations served by programs funded with the Affordable Housing Development Account, including family size, economic status and minority representation;

(b) The Mayor"s Office of Housing shall report to the Finance Committee of the Board of Supervisors on projects that have been selected for funding through the Notice of Funding Availability (NOFA) process and through the "opportunity fund" process, and

(c) The Budget Analyst of the Board of Supervisors shall review and report to the Finance Committee on the projects selected with sufficient information regarding project plans and actual construction, administrative and other relevant project cost analysis based on the reports submitted by the MOH to the Finance Committee of the Board of Supervisors.

However, the Mayor"s Office of Housing has never submitted separate reports to the Finance Committee of the Board of Supervisors in compliance with item (b) above. Therefore, the Budget Analyst has not reviewed such reports. According to Mr. LaTorre, MOH incorporated the required information into its Annual Reports in order to fulfill this requirement. However, the Budget Analyst"s notes that MOH is required to submit separate, detailed, periodic reports on development projects selected for funding, to the Finance Committee of the Board of Supervisors.

ACCURACY OF THE DALP DATABASE

MOH provided the Budget Analyst"s Office with two Microsoft Access Databases that contain information on the Downpayment Assistance Loan Program (DALP). The Budget Analyst sampled 44 of a total 215 DALP recipient records, in order to determine the accuracy of the data contained within the databases. The Budget Analyst found that 20 or 45 percent of the 44 loan recipients" records contained at least one error.

The Downpayment Assistance Loan Program database is used for recording information on all of the significant characteristics of a DALP loan, including the recipient"s income, the purchase price and location of the residence, and the gender and ethnicity of the recipient. The information contained in the DALP database is used by MOH for analyzing Program outcomes and also for compiling reports, such as the Annual Report submitted to the Board of Supervisors. Therefore, it is incumbent upon the MOH to insure that the DALP database contains accurate data.

ANSWERS TO SPECIFIC QUESTIONS

As previously noted, the Board of Supervisors requested the Budget Analyst to obtain answers to eight specific questions pertaining to the Proposition A $100,000,000 in previously issued Affordable Housing Bonds. The questions and our responses are as follows:

Question #1: How many new net units, as opposed to rehabilitated units, of housing have been or will be created?

Answer: Based on our review of the loan or grant agreements for each individual development, a review of building permit applications, and site visits, we estimate that a total of 1,342 new rental housing units have been orwill be constructed with Proposition A bondfunding support at a total cost of $58,238,954.

Question 2: For those projects in which zero units have been reported constructed or committed to be constructed, but a number of beds have been constructed or have been committed to be constructed, who is being served by these new or rehabilitated facilities?

Answer: Seven facilities with a total of 264 beds have been allocated a total of $5,817,521 in Proposition A funding. In addition, one of the seven facilities, Friendship House, is pending an additional commitment of $3,152,000, which would increase the total allocated for the 264 beds to $8,969,521. The seven bed facilities will serve formerly homeless women, formerly homeless persons recovering from substance abuse, formerly homeless veterans, formerly homeless women and their children, and low-income women.

Question 3: How many firefighters, police officers, and teachers have benefited from the home ownership portion of Proposition A?

Answer: Based on the information contained in the "Borrower" field of the Downpayment Assistance Loan Programdatabases, a field in which we found no errors in our sample test of the DALP databases, 13 teachers, one Deputy Sheriff, and one Parole Officer havebenefited from the home ownership portion of Proposition A.

Question 4: In the budgets of the completed projects, what were the original total budgets in comparison to the final budgets; and, in addition to Proposition A funds, what other sources of funding were used?

Answer: The original budget and final actual expenditures for the ten projects that have been completed as of the writing of this report,with the use of Proposition A funding, are shown in Table VIII of the report on page 20.Table VIII shows that for all completed projects, new and rehabilitated, the "Original Total Budget" was $55,765,262, and the "Final Total Expenditures" were $55,337,807. Table VIII also shows that "Initial Proposition A Funding" for those projects was $16,957,468, and that "Final Proposition A Funding" for those projects was $22,120,387. Other funding has been provided by the City"s Hotel Tax Fund, by (a)the Department of Housing and Urban Development and (b)the Veteran"s Administration.

Question 5: For each completed project and each project under construction, what building, planning, and other fees and taxes due to the City and County were paid and/or waived?

Answer: Based on the Department of Building Inspection"s Permit Tracking System and the Planning Department"s Parcel Information Database, $696,446 in building permit fees has been paid for 57 building permits, $484,616 in planning fees has been paid for the processing of 24 land use applications, such as variances and condition uses, and $22,900 in building permit fees have been deferred by the Department of Building Inspection, for as long as the projects which have beengranted deferrals retain their non-profit status.

Question 6: For each completed project and each project under construction, how much revenue in Property Tax is each project delivering to the City and County?

Answer: Tax payments made by the development projects for Fiscal Year 2001-2002, as reported by the Tax Collector, are shown in Table X on page 23 of our report. Development projects located on Treasure Island or the Presidio do not pay Property Taxes. One development project, Presentation Senior Community Center, has paid Property Taxes of only $1,663, although the tax record shows the assessed value of the property as $9,563,640. The reason is that the Assessor, following examination of Presentation Senior Community"s exempt status application, which includes approvals for both Federal and State income tax exemptions, has granted Presentation Senior Community a Property Tax exemption. The $1,663 collected by the Tax Collector for FY 2001-2002 is for a Unified School District budanalyst ($934) and an apartment license fee ($729).

Question 7: Of the loans made with Proposition A funds for the development of rental housing, how much of the loans have been repaid, how much of the loans have been forgiven, how much of the loans remain outstanding, and what is the repayment timetable for those loans to be repaid?

Answer: Although the City"s Financial Accounting and Management Information System provides an accurate total sum of Affordable Housing "Development Account" disbursements for loans and grants, the apportionment between loans and grants is not reflected accurately. Thus, Attachment I, provided by MOH, shows a total of $13,372,393 in grants for Affordable Housing Developments. However, Table I of the report shows a total of $4,694,391 in grant disbursements from the Affordable Housing "Development Account," as reflected in the City"s Financial Accounting and Management Information System. According to MOH"s Finance Director, this condition exists because loan and grant transactions have not always been correctly coded. Because of this condition, the Budget Analyst was not able to independently verify the loan and grant disbursement figures and the amount that has been repaid on loans made for the development of rental housing.

Question 8: What is the turnover rate for residents in the completed rental housing developments? Of the original tenants in each completed development, how many remain in their units?

Answer: Turnover rates vary significantly dependent on whether the development project is part of a program designed to support permanent residents, such as is Presentation Senior Community, or is designed as a transitional facility to assist clients in transitioning to a permanent living situation, such as Rites of Passage and some of the Treasure Island projects. For each completed development project, the turnover rates and the number of original tenants remaining are shown in Table XI of the audit report. The turnover rates for projects opened for at least one-year range from one percent at the Presentation Senior Community to 200 percent at the Haight Ashbury Free Clinics" program at Treasure Island. The original tenants remaining in the completed developments range from none of 50 beds at the Haight Ashbury Free Clinics to 92 of 93 units at the Presentation Senior Community.

Budget Analyst"s Comments on the Written Response of the Mayor"s Office of Housing

The Director"s written response to our review is attached to this report beginning on page 31 (Attachment II). The Director has stated on the first page of his response that "In general, MOH concurs with the findings and recommendations of the Review," and that "Your review will assist us in strengthening the Program in the future." Accordingly, we wish to thank the Director for the cooperation and assistance he and his staff extended to our staff during this review of the Affordable Housing and Home Ownership Bond Program.

The Director however has taken issue with some of the findings and recommendations contained in our report. The Budget Analyst"s comments on the Director"s response are keyed to issues listed by the Director, with the Budget Analyst"s final report page numbers showing as a reference.

Management Reporting - Finance Committee Reports (page 8)

The Director states that MOH believes that the language of the Regulations does not require that MOH submit separate reports on development projects to the Finance Committee. The Director states "The Annual Report provides, in our view, an appropriate format to present that information to the Finance Committee as well as the rest of the Board and the general public." Although the Director may have the view that the Annual Report serves to satisfy the Finance Committee"s need for information, that is not what the legislation requires.

Chapter 43 of the Administrative Code, which established the Affordable Housing and Home Ownership Bond Program, requires that MOH prepare regulations for the program and that MOH provide an annual report to the Board of Supervisors, as follows:

Section 43.3.6. Regulations. The Mayor"s Office of Housing will prepare regulations for the program, which shall be subject to approval of the Board of Supervisors by resolution.

Section 43.3. Reports to the Board of Supervisors. The Mayor"s Office of Housing will provide an annual report to the Board of Supervisors on the status of the program.

The Board of Supervisors approved regulations implementing the "Affordable Housing and Home Ownership Bond Program" in October of 1997, imposing additional conditions to the Regulations as originally formulated by the MOH. The Regulations presented by MOH were amended by the Board of Supervisors to require that:

(d) The Director of the Mayor"s Office of Housing"s annual report provide information on the populations served by programs funded with the Affordable Housing Development Account, including family size, economic status and minority representation;

(e) The Mayor"s Office of Housing shall report to the Finance Committee of the Board of Supervisors on projects that have been selected for funding through the Notice of Funding Availability (NOFA) process and through the "opportunity fund" process, and

(f) The Budget Analyst of the Board of Supervisors shall review and report to the Finance Committee on the projects selected with sufficient information regarding project plans and actual construction, administrative and other relevant project cost analysis based on the reports submitted by the MOH to the Finance Committee of the Board of Supervisors.

As stated in the amended legislation, the Board of Supervisors not only required separate reports to the Finance Committee, which would be reviewed and reported on by the Budget Analyst, but also requires specific information items to be included in the annual reports, such as "family size, economic status and minority representation" of the populations served by programs funded with the Affordable Housing Development Account.

The requirement to provide separate reports to the Finance Committee of the Board of Supervisors on projects that have been selected for funding through the Notice of Funding Availability (NOFA) process and through the "opportunity fund" process is clear as is the direction to the Budget Analyst to "review and report to the Finance Committee on the projects selected with sufficient information regarding project plans and actual construction, administrative and other relevant project cost analysis based on the reports submitted by the MOH to the Finance Committee of the Board of Supervisors."

The Director has stated in the MOH response "If the Board of Supervisors feels that separate reports to the Finance Committee are desirable, we would of course be happy to provide such reports. If that is the case, we recommend that the Regulations be amended to incorporate a specific requirement for a report to the Finance Committee."

On the contrary, the requirement to provide separate reports to the Finance Committee of the Board of Supervisors already exists. If the Director of the Mayor"s Office of Housing feels that it would be desirable to have the information contained in the annual reports satisfy that requirement, then we recommend that the Director submit legislation to the Board of Supervisors for the purpose of amending the Regulations to effect that change.

Accuracy of the DALP Database (page 9)

Concerning the errors contained in the DALP database, as identified by the Budget Analyst, the Director has stated, "MOH has already completed a comprehensive review of the DALP application files and identified data errors for all DALP loans. The corrected data will be incorporated into the database in the near future. MOH will also revise its data entry procedures to ensure review of data for accuracy at the time the data is entered."

The Budget Analyst commends this timely, corrective action taken by the Director.

Question 1 (page 12) How many net new units, as opposed to rehabilitated units, of housing have been or will be created?

MOH agrees with the numbers of "units" and "beds" reported, but has taken issue with "the implied false dichotomies between "net new units" and "rehabilitated units" and between "net new units" and "beds in facilities designed for individuals," which according to the Director, was "created by the form of Question #1 and the Review"s literal interpretation of the word `units.""

The Budget Analyst"s comment concerning the Director"s issue with the classification of new and rehabilitated units is that the Director appears to desire to have a second, separate question, included in the first question. The question asked in the motion is clear: "How many net new units, as opposed to rehabilitated units, of housing have been or will be created?" The Budget Analyst took that to mean how many units of newly constructed housing have been or will be created. It appears that the Director desires to have included as a part of Question #1 the following question: "How many units of housing newly available to the residents of San Francisco have been or will be created?" The answer to the latter question faces additional variables and is much more subjective than that posed as Question #1 by the Board of Supervisors.

In a review of a program designed to bring affordable housing to the public, a question concerning the number of units to be newly constructed is certainly an important consideration in evaluating the program.

Question 3 (page 18) How many firefighters, police officers, and teachers have benefited from the home ownership portion of Proposition A?

The Director"s response expands the answer to include a larger set of occupations than those contained in the question raised by the Board of Supervisors wherein the members of various other occupations have reportedly benefited from the home ownership portion of Proposition A.

Question 4 (page 19) In the budgets of the completed projects, what were the original total budgets in comparison to the final budgets: and, in addition to Proposition A funds, what other sources of funding were used?

The Director has noted in his comments that Table VIIIA of our report contains additional information on costs, including " a calculation of the Cost per Unit and the Cost per Bed for each of the completed developments." The Director notes that there are a variety of factors affecting costs per unit and per bed.

The Budget Analyst has no comments on this observation by the Director.

Actual and Projected Expenditures Resulting from the $100,000,000 in Proposition A Affordable Housing Bonds

In summary, the $100,000,000 in Proposition A Affordable Housing Bond proceeds, plus interest earnings and related income of $4,832,581, or a total of $104,832,581, has been allocated as follows:

Of this total amount of $104,832,581, $56,325,339 has actually been expended, approximately $43,903,615 has been committed or is pending commitment, and approximately $4,603,627 is uncommitted.

The Budget Analyst observes that the $2,679,507 allocated to rehabilitate 184 beds results in an average cost per bed of $14,563, whereas the $6,290,019 allocated to acquire 80 beds in a new facility results in an average cost per bed of $78,625.

Recommendations

1. The Budget Analyst recommends that MOH work with the Controller to perform a complete review of its FAMIS accounting for the Affordable Housing and Home Ownership Bond Program. That review should include representatives of MOH Program staff to insure that the accounting records are in accordance with Program transactions. Further, the Budget Analyst recommends that the Controller report to the Board of Supervisors when all of the FAMIS records have been corrected and the City"s Financial Accounting System reflects the transactions that have occurred within the Program.

2. The Budget Analyst recommends that the Finance Director of MOH insure that the Downpayment Assistance Loan Program application fees are transferred from the "DALP Account" to the Housing Program Fees Fund.

3. The Budget Analyst recommends that MOH publish its Annual Report for FY 2001-2002 as of June 30, 2002, and include in that Annual Report compliance information submitted by the sponsors of funded development projects. Further, the Budget Analyst recommends that each Annual Report be published subsequent to the completion of each fiscal year so that complete data for each fiscal year is included in the report.

4. The Budget Analyst recommends that MOH commence submitting separate reports to the Finance Committee of the Board of Supervisors, as required by the Program regulations previously approved by the Board of Supervisors.

5. The Budget Analyst recommends that MOH accomplish a complete review and correction of the data contained in its Downpayment Assistance Loan Program database, and that MOH develop procedures for entering new data that include safeguards against faulty recording. The DALP database is used for recording information on all of the significant characteristics of a DALP loan, including the recipient"s income, the purchase price and location of the residence, and the gender and ethnicity of the recipient. The information contained in the DALP database is used by MOH for analyzing Program outcomes and also for compiling reports, such as the Annual Report to be submitted to the Board of Supervisors. Therefore, it is incumbent upon MOH to insure that the DALP database contains accurate data.

Respectfully submitted,

Harvey M. Rose
Budget Analyst

cc: President Ammiano
Supervisor Sandoval
Ted Lakey
Supervisor Daly
Supervisor Yee
Daryl Higashi
Supervisor Gonzalez
Mayor Brown
Pamela David
Supervisor Leno
Clerk of the Board
Marcia Rosen
Supervisor Maxwell
Controller
Supervisor McGoldrick
Steve Kawa
Supervisor Peskin
Ben Rosenfield