Pursuant to Board of Supervisors Motions MO2-46 and MO2-48, approved by the Board of Supervisors in March of 2002, the Budget Analyst has conducted an expedited limited review of the management of the Affordable Housing and Home Ownership Bond Program (the "Program"), as administered by the Mayor"s Office of Housing (MOH). The specific direction from the Board of Supervisors" Motion MO2-48 was to audit already expended and/or committed funds, provide verified answers to eight specific questions concerning the Program"s efficiency and effectiveness, and to report on any other issues found during the limited review. We have attempted to confirm through independent sources all of the information obtained from the Mayor"s Office of Housing that is included in this report. In that regard, the Budget Analyst has made use of source data and information provided by the Office of the Controller, the Department of Building Inspection, the Planning Department, the Tax Collector"s Office, the Assessor"s Office, and the Redevelopment Agency.

BACKGROUND

The City"s electorate approved Proposition A in November of 1996, authorizing the City and County of San Francisco ("the City") to incur indebtedness of $100,000,000 in General Obligation bonds to (a) finance the development of housing affordable to low-income households in San Francisco, and (b) to provide down payment assistance to low- and moderate-income, first-time home buyers.

In October of 1997, the Board of Supervisors established authority for the Affordable Housing and Home Ownership Bond Program by adding Chapter 81 (now, Chapter 43) of that title to the Administrative Code (Ordinance No. 445-97). Chapter 43: a) established the purpose of the Program, b) provided for the Controller to establish a separate account for depositing bond proceeds, c) provided for 85 percent of the net bond proceeds to be used for the development of affordable rental housing, and d) provided for 15 percent of the net bond proceeds to be used for downpayment assistance for low- and moderate-income, first-time homebuyers. Chapter 43 also assigned responsibility for administering the Program to MOH and directed MOH to prepare regulations (the "Regulations") for the Program, which were adopted by the Board of Supervisors in October of 1997. Finally, Chapter 43 requires that MOH provide an annual report to the Board of Supervisors on the status of the Program.

In October of 1997, the Board of Supervisors also established the general terms and procedures for issuing bonds under the Program (Ordinance No. 449-97). Ordinance No. 449-97 provided that the Controller create an Affordable Housing Bond Housing Account (the "Housing Account") and within the Housing Account, a "Development Account" for controlling funds allocated to affordable housing development projects, and a "Downpayment Assistance Loan Account," for controlling funds allocated to downpayment assistance.

The affordable housing component of the Affordable Housing and Home Ownership Bond Program is designed to provide funds for the following purposes, as outlined in the Regulations:

1. To finance the acquisition of real property for constructing or rehabilitating dwelling units for rental to low income individuals and families, and constructing or rehabilitating non-residential space that is incidental to the residential use of the property.

2. To finance "hard" construction costs or rehabilitation costs of such dwelling units and incidental space.

3. To finance "soft" costs of such acquisition, construction, or rehabilitation, including but not limited to a) costs of permits, testing, and environmental evaluations; b) professional fees and costs incurred in the design and construction of the project; c) financing fees; d) legal fees; e) taxes and insurance during the project development; etc.

The Regulations provide that the Mayor shall designate an Affordable Housing and Home Ownership Bond Program Housing Committee (the "Housing Committee") consisting of the members of the Redevelopment Commission of the City. The responsibilities of the Housing Committee include (a) advising the Director of MOH ("the Director") on the allocation of funds and other aspects of the operation of the Program, and (b) reviewing applications for loans or grants from the Development Account and making recommendations to the Mayor regarding funding.

The Regulations also require that MOH shall establish a system for monitoring the ongoing compliance of Program-funded rental housing developments, particularly in regards to the affordability and occupancy of the developments.

According to MOH, a major objective in allocating Proposition A funds to development projects is to complement funding provided from sources outside of the City, such as Federal funds from the Department of Housing and Urban Development (HUD), so as to maximize the development of affordable housing. Funds allocated to Presentation Senior Community, as shown in Exhibit A on the following page, illustrates how Proposition A funds were leveraged against other City and non-City funding to produce senior, low-income housing in a particular development.

Exhibit A
Funding Sources
Presentation Senior Community

The Downpayment Assistance Loan Program (DALP) is administered by MOH with the assistance of five participating lenders, each of which is either a bank or a mortgage company, who were selected 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. Subject to the availability of funds and set-asides for low-income, first-time homebuyers, DALP loans are made on a first come, first served basis. All properties purchased with downpayment assistance loan funds must be single family residences located in the City and County of San Francisco, including condominiums, townhouses, and share cooperative units. The original maximum DALP loan amount of $50,000 was raised to a maximum of $100,000 in June of 2000 under the authority granted the Director in the Regulations. The City"s second loans are secured by a promissory note and a Deed of Trust recorded against the property.

The first series of Affordable Housing Bonds in the amount of $20,000,000 were issued in February of 1998. The second and third series in the same amount were issued in June of 1999 and June of 2000. The fourth and fifth series, 2001C and 2001D respectively, were issued in June of 2001 in the aggregate amount of $40,000,000. All $100,000,000 of the authorized bonds has therefore been sold.

FINANCIAL MANAGEMENT OF THE PROGRAM

Revenues and Disbursements

Based on recorded transactions in the City"s Financial Accounting and Management Information System (FAMIS) reports produced by the Controller"s Office, Housing Account revenues of $104,832,581 have been received and disbursements of $56,325,339 have been made through March 31, 2002, as summarized below in Table I, below. The undisbursed balance of $48,507,242 is comprised of approximately $43.9 million in Program commitments or pending/potential commitments and approximately $4.6 million in uncommitted or unexpended funds, depending on the final tabulation of allowable costs. According to MOH, the uncommitted and unexpended funds are reserved for the Downpayment Assistance Program. Those undisbursed balance figures will be augmented in the future by loan repayments, as cited later in this report.

Table I

Housing Account Revenues and Disbursements
February 1998 through March 31, 2002

Concerning Program revenues shown in Table I, "Interest Earned" in the amount of $4,070,083 represents income earned on bond proceeds that the City Treasurer has on deposit with financial institutions. "Interest Income" shown in Table I represents the value of the bond interest payable to the City at the time of bond issuance.

Concerning Program funds disbursed for loans and grants, FAMIS reports show a total of $55,210,406 as having been disbursed through March 31, 2002, as displayed in Table I. 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 FAMIS with the FAMIS "Housing Account" total of $55,210,406, which we obtained independently from the Controller. According to information contained in FAMIS, the $55,210,406 is comprised of $50,516,015 in "Loans Issued," as shown in Table I, and $4,694,391 in "Other Professional Services-Grants," also shown in Table I.

Table II on the following page shows the apportionment of the total $55,210,406 loan and grant disbursement amount between the DALP ($13,580,725) and the Development Program ($41,629,681). The DALP includes no grants; therefore the $4,694,391 grant amount reported in FAMIS was for grants made to Development projects. However, financial information provided by MOH contained in Attachment I to this report shows that grants in the amount of $13,372,393 have been made to development projects. Thus, although the Budget Analyst has determined that the combined disbursement figure of $41,629,681 for Rental Housing Development loans and grants, shown in Table II, is accurate, the apportionment between loans and grants is not reflected accurately. According to MOH"s Finance Director, this condition exists because loan and grant transactions have not always been correctly coded.

$216,624, of the $604,248 in "Other Professional Services-Other than Grants," was disbursed to pay legal fees related to bond issuances. According to MOH, the remaining $387,264 was actually a loan that was incorrectly coded in FAMIS. As of the writing of this report, MOH had requested that the Controller process a correcting entry and the Controller had processed that request to show that the $387,264 was a development project loan.

Although we were able to reconcile the detailed disbursements to the summary totals, we found that $1,384,719 of the DALP payments had been posted to the incorrect bond issuance. Further, we found that a $412,394 payment for a "Development Account" project had actually made from a DALP Account.

Table II

DALP and Development Disbursements
Each Individual Disbursement Recorded in FAMIS
February 1998 through March 31, 2002

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 to correct the $412,394 Development Account disbursement incorrectly made from the DALP account. Mr. Sanders estimates that the corrections to FAMIS will be completed by June 30, 2002.

The Budget Analyst recommends that MOH correct the errors currently contained in the Affordable Housing and Home Ownership Bond Program recorded in FAMIS in order to provide a more accurate accounting record of actual disbursements and a means for the Controller to verify such disbursements.

Application Fees

Each DALP application requires a nonrefundable application fee of $300 or one percent of the downpayment loan assistance amount, whichever is less. According to the Regulations, such fees are to be deposited in the Housing Program Fees Fund, which was established in 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 from the City"s General Fund, federal or state grants, or other sources of administrative funding." Section 10.117-100 also provides that "to the extent that such monies are available and not needed to cover current and anticipated future administrative cost ... and with the approval of the Board of Supervisors, to transfer said monies to the Affordable Housing Fund to make loans or grants for the development of affordable housing in the City."

When asked to provide confirmation that the application fees were being applied to the Housing Program Fees Fund, MOH replied that they were unaware of the foregoing provision and that the application fees, which total $64,810 according to the FAMIS report, had been deposited into the DALP account.

MOH administrative costs are funded primarily from Community Development Block Grant (CDBG) funds and funds collected in the Housing Program Fees Fund. Proposition A provided that no administrative costs, other than bond issuance costs, were to be obtained from bond issuance proceeds. Since there are significant costs associated with administering the Affordable Housing and Home Ownership Bond Program, the Budget Analyst recommends that the application fee receipts be re-deposited to the Housing Program Fees Fund as intended by the Administrative Code and used to fund the costs of administering the program. Alternatively, MOH could seek the approval of the Board of Supervisors to use the fees for DALP loans.

The responsible MOH staff have stated that they would process a request to have the funds transferred from the DALP Account to the Housing Program Fees Fund.

MANAGEMENT REPORTING

The Annual Report

As previously stated, 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 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.

In addition to requiring 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 Annual report. The reason for this is that MOH transmitted a "Request for Housing Compliance Report and Information Update" to sponsors of development projects on March 25, 2002, with a response date of May 24, 2002. The significance of this is that the information required by the request is extensive and covers such topics as occupancy and rent, management and maintenance, actual income and expenses, and the most recently completed audit report for the project. The Budget Analyst believes that by including Housing Compliance Report information in the fiscal year 2002 Annual Report, MOH would provide a more comprehensive review of the efficiency and effectiveness of funded development projects and better afford the Board of Supervisors the opportunity to provide feedback to the MOH on its priorities and concerns regarding development projects.

According to Mr. Joe LaTorre of MOH, MOH has submitted the Annual Report prior to completion of the applicable fiscal year in order to provide the Board of Supervisors with the most current information prior to the Board considering a new bond issuance, which in past years occurred prior to June 30.

The Budget Analyst recommends that MOH delay publishing its Annual Report for FY 2001-02 until after June 30, 2002, and that MOH include in that Annual Report the actual performance information for FY 2001-02, and information obtained from the compliance reports submitted by 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 actual data for the fiscal year can be included.

The Director of MOH concurs with this recommendation and has stated that the Annual Report for FY 2001-02 and subsequent Annual Reports will not be published until after close of the applicable fiscal year.

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 provisions proposed by the MOH. The Regulations presented by MOH were amended to provide 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 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 NOFA⁴ 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.

Item (a) concerning the Annual Report is discussed above. Regarding item (b), concerning required reports to the Finance Committee of the Board of Supervisors, such reports have never been submitted. 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.

Therefore, the Budget Analyst recommends that MOH commence submitting reports to the Finance Committee of the Board of Supervisors, as required by the approved legislation.