The URL can be used to link to this page

Home My WebLink About0105.092January 9 1 ]992 HONORABLE CITI COUNCIL PalQ Alto, CaTifornii Atte~tion: Finance Committee STAFrING FOR COMMUNITY DEVELOPMENT ~BJ,OCK GRAt,T PROGRAM M~mbers af the Council: REPORT~ IN BR!~f This re~ort and attachments r~late to a staff proposal for changes in the manage-mel1t of the Community Developmer1t Block bfCl:nt (CDBGJ Program. Changes are requ~red in order to bring the City's program into compltance with HUD regulations and conditions stated i~ the (oopers & Lytrand management letter, and to improvE future management and directiofl of the program. BACKGROUND The Federal CDBG program pra~ides block grants to local jurisdictions to be ;Jsed to ass.ist low-income persons. The primary thrust of the program 15 community development, such as hous.ing. Allowances are made for inclusion of pubiic service agencies, economic development and program administration. \lIlthin the City Qf Palo Alto, respons.ibil it.v for the CDBG prognm is currently s.plit between Corr.muflity Sen'icEs, Plaflning and Finance" The Hur:,an Services Di .... isio11 of the COmTnLlnity Services Department is funded by (DEG for 1.0 Mar,agerr.ent Assistant, 0.5 Staff Secretary and 0.1 Admirlistrator Humar Services. They are responsible for work \frj"ith the CitiLens A<jl,lisory Co.M1iltee (CAC), processing of CDBG applications, preparation af required reports and program monitoring. Within the Plann~~g Division of the Planning Department, the Manager Planning Projects is the liaison to the Palo Alto Housing Corporation (PAHC) and is responsible for preparation of various housing plans such as the Housing Element and the Comprehensi~e HOUSing Affordability Strategy (CHAS}. This position is currently funded solely from the General fund. The Finance Department pru~ides accounting and real estate ser .... ices which are also funded only from the General Fund. Recer·t HUD monitoring reports on the Palo Alto CDBG. ~ro9ram revealed ~evera"_ areas in which the City 'lIas not ir. full compliar.ce with HUD regulations. The CMR,105:92 t~~~t;:,", .-"'-!::~< 7:~'-' - - ,~ - Coopers & lybra~d m~nagement letter r~stated the problems in these areas and suggested that the City make some spacific [~ange5 to improve documentatlon and impro~e procedures. Co~ies of the monitoring letters, the City's responsEs and th-e City's respons~ to Ue maMge~ent letter are att,acr.ed. The major areas of concern ~ithin the tOBG program as stated by these reports include the following: 1. Certain nonprofit co~~unity·based agencies did not have adequate procedures 'n place for tracking of program i~cDme and did not have a specific accounting method for determining indirect program costs. 2. Pa10 Alto Housing Corporation was described as a ~special sub-r~cipient· in reports filed with HUD, while the City contract .... ith PMC described PAHC as a "consuHant u • The contl'act Scope of Ser .. ices outlined ser1ii::es ln both categories; hOWEver, HlJD requirements for procurement of the various services described are differ~nt. Proper determination of tne agency's status is necessarj. 3. The City's current monitDring and auditing requirements fer agencies receiving CDBG funds is not adequate. 4. The City has failed to expend CD8G funds in a timely manner. Specifically, the City has budg~ted COBG funds to a landbank account. This fund has built up oyer time and now exceeds HUD limitations on maximum d:lll ars. Staff has identlfied the following areas of additional concerns and ireas that must be addressed in order to impro~e the operation of the City's CDBG program: 1. Re~ponsibility for the CDBG program has been scattered through several departlTt€nts within the City organiz.ation. This has resulted in i fragmented approach that is further hampered by the lack of a sing1e responsib~e person. 2. Federal regulations and monltoring requirements have ircreased a~d are e.xpe-cted to i=1crease further. Staff has been ir.formed th.at after the first of t~e ye3f, HUO will be monitoring t~e ~nvironmental regulations as they perta ir, to the CDBG. pro9idm. 3. New federal programs, slJch as HOME (Home CF"nership ~ade Easier) and HOPE (Home OWn'!!rship and Oppo~tunity fer People Everywhere). have been approved and will require furU1er City staff irl .. olvement. 4. In past years the C1ty funded the ~ajorltJ of the administration of the (OBG program out of the GPn~ral fund by as:iigning CD8G functions to ~arious City personnel. As staff was reduced through budget reductions, the ability of remai~ing staff to oversee the CneG function was reduced by the need to address ~ther priorities. CMR:105:92 p. \cmr\cmr .t.a f f .({!l) 1/9/92 Fage 2 I 5. :.) .. _ .. --_ ....... ....'....._- " , Due to a lack of sufficient City staff tim~, the Cit, has nDt been able to adequately plan and administer the COSG program. For example: • T~~ Cc~per$ & Lybrand managewent 1etter h~s specific~111 recorrrnended pl"eparation 07 a CDBG pol icies and procedures m'lnual, development of an annual checklist and instructions for sub rt!Cipients, and a ",ark p;an fot monitorir.g personnel. Preparation of these documents is not f~asible ~ith current staffing. • HUD regulations require preparation of a~d substantial funding compliance 'With an overall j:llan of action flJJ'" the community_ This plan must be i.Jpdated eVHj three YE'~rs. The City's COSG pian was last approved in 1988 and prepara:icr1 of a n2w plall ~Ias. nDt begun. • Ci ty staff do not ha ... e the worki ng rel ationship ·",it!"; KUO staff that is obtained through cay-ta-day contact. • The Ctty has not been prc-acliwely directing the use of funds to sohe loca1 housing prcb1ems. • Some City Capitai lmprovement Projects may be eligible for COB{; funding. Staff has ~ot been able to work with other City departments to identify and implemept poter1tial projects. • City staff has not been able to pro .... ldi.· adequate training and informati~n on federal regu\at'o~s to nQn-p~ofit Qr9anilati~ns recehing CDBG funds. CDBG fINANCING INFD8MAT1ON for 1991-92 the City's entitlement for COBS funds ~'as 5598,000. This was an increase over the 1990-91 entitlement of $533,000 and another 4 percent increase is anticipated in 1992-1993. ~he City's entitlement has increased from year to year, but significant additional i~creases are not expected unless additional Fede~al legislation is e~act~d. COBG regulations related to eliglble acti~ities and how actlvitjes are funded are extreme1y complex and interrelated. Some of the mor~ perti~ent regulations relate to prograIT"< incom~> program administratiQn a.nd public service funds_ Program income, which is gross incJme less CDBG-eligible expenses? must be returned to ttle City to be u5-2d for additiorjal CDBG~eligible projects. For 1991-92, the estimated program jncome will be $200,000. These funds will come primarily from loan paybacks on the original Housing Improvement Program. Twenty percent of the City's entitlement plus 20 percent of program income may be used for expenditures as~ociated with overall adminis.tration of the CDSG program. This "incl\J~t-s staff dhectly resporlsioie for tlie CDBG-program, as well as staffing for o~'erall plans such as the HOllSing flement, Comprehensive Housing Affordabilitj Strategy (CHAS) and ot~er r~lated documents. In past CMR:I05:92 p:\C1!\r\cmr~taff c,fh I/9/92 Pag' 3 •. '~.>; 3»;: . ", .. , ;t.'.'· ... ~. ~.~.' l··~··: i ... ~: ; " - '. o years. the City has funded City staff, Mid Peninsula Citizens for Fair Houslng and th! P~10 Alto Housing Corporation from program administratio~ funds. Fifteen percent of the City's entitlement plus 15 perce1t of program income can be used to fund specific services of a public ser~ice nature. A list cf these agencies and thelr funding is shewn en the attached 1991-1992 CDBG funding Summary. After actua1 program admjn'~traticn funds are subtracted frDm the C1ty 's entitlement plus program 1ncom~. a m'nimum of 70 percent cf the remaining COBG funds must directly benefit lo~-income recipients. AlTERNATIVE SOLUTIONS Staff has identified four basic organizational options ;t1 order to address the problems in the CDBG pr~9iam: • Not accept the CDBG funds. Staff does not consider this a ~iable option. Although the regulation~ are (u~berso~e and not desig~€d for some of the unique conditions of Palo A1to , appro~imately HOO,OOO in f .. mds are available every year to assist low-ir1tome p€rsans~ particularly in the ar2a of housing. • The City could contract OIJt for a separate agency to administer the CDBG program. Again, staff does not find this to be a vicble option in that th~ City wvuld still be ultimate,} re)po~sible for the program, including monitvr1ng of the contract. This would still require City staff support and would np.gate any advantages that might be obtained from a contract. Staff d~es not know of any jurisdictictl that contracts fer overall administration of the (DBG program and HUD does not encouraye '] oeal juri sdict ion to utilize contract administration. • The City could continue to ma~age tne program within the City organ1zatjo~ with the existing split r€s~onsibilities between three departments. One addition~l planner, 0.5 secretary ~nd 0.25 supervisory time ~ould be required 4n the Planning Department. Because of the continua:jon of the inherent problem of split responsibilities, staff do:s not recommefld this alter'native. • Finally, the City could manage the program within the City organization by providing for a slngle responsible division and adequate staff to administer the COSG program and related housing programs. This is staff's preferred optiOl', in that it wou1d allow 4mplementation of signifiCant changes to 4mprove the program and provide for operation in complia!1ce witM HUD nquirernents. It would increase the ability of the City to pro-actively support housing solutions, better utiliz~ the COSG funds for a variety of projects, would allow suffici~nt staff time to address those issues that are unique to Palo Alto ar.d bring the pr~gram into substantial compliance ~ith federal regulatlons. CMP.:I05;92 p \cmr\cm,.~tdff, db 1/9/92 Page 4 • 1 I t • I • I .. I 11 " :1 " 1 - .. i:-- PRoposrp REORGANIZATION Of (Il.~G ST!,f£'H'-~ Since the thrust of the COBG progr3m is housing, st~ff bel leves tha~ central iz.ed mar]agement and administration of t~e COSG prQgf'a~ should shift to the Planning Department, effective with the 1992-1993 City budget. If the Finance Committee's January re,Ji(·w of this issue results in initial s~pport for the additional staff to admi~i!ter t~e CD8G program, staff will use t~le first half of 1992 as a transition p~riod to make thE appropriate administrative changes. Since the majority of funding for the Hu~an Serwice co~tracts i~ from the Ge~eral Fund, oversight of these co~tracts wc~ld remain in the Human Ser~jces Oi~ision. A 0.5 Management Assistar.t in ,l-juman Ser'i{ices and a D,S Secretary would be funded from th~ General Fund to admi~ist~r and mcnitor the!e contracts. Monitoring and reponing of Ue COBG portion would be moved to the Planning Division. ~ith the d~sired cons~lidation of COBG and housing responsibilities, staff belie~es that it will be mare appropriate for the Pla~ning Division to oversee the COBG portion of the human services contracts, than it is for Hu~an Ser~ices to admin i 5ter all of the housing programs, In order to properly admini!ter the program, a full-time housing plann9r is required in additiJ~ to the existing M6nagement Ass~stant. Secretarial staff would be increased from 0.5 to 0.7 persc~ years. Significant involvement is required by the supervisor, who would be the Manager Planning Projects. Super~isory functions would be increased from 0.1 to 0.25. Fin~nce Oepartment support would remain as is, ~ith an allowance for utjlizing COBG program administration funds to reimburse existing staff for work already bein9 performed for (DBG. The Human Services Division wouTd retain a 0.5 Managemert Assistant and 0.5 Secretary to oversee some of the Human Sen·i'.:e Contrac.ts and to cor.tinue stiiffing the Disability Awareness T.ask Force. This Divjsion hH experienced an increase of responsibility o~er the past year beyond the COBB-related activities and the COBG Coordinator has been assisting in some of these areas. The City Council priority, "People in Crisis", has led to additional projects, su~h as developing fund raising proposals to assist rlonprofit agencies dur'ng these times of limited C1ty fl.lndirg, iqle~enting collaborative prDje(ts a!r.ong huma~ service agencie~ pro~iding similar ser~1ce5, and assistjng the Human Service Admjnistrator with special proj2cts. The 0.5 Manageme~t Assistant posltion would allow these assignments to cDntinue with t~e redeployment of the CD6G Coordinator to the Planning Department. Compensation of the HUman Services Diyision employees wOIJld co~e from the Genera1 Fund. Fundi~g for Cit~ Staff The following cha~t identifies the staff required to administer the CD8G program and the CDBG funding amounts, which would come fram CD8G program admintstratiDn fu~ds. Since s.ome existing positions wou.ld now be parti:llly funded from CDSG and some additional positions are required, a cclumn is i~cluded that indicates t~e effect on the General Fund. A plus sign (+) indicates a saving to the General Fund) s.ince that portion of salari~s would CMR:lOS:92 ~ \C"';\O'TIf'staff tdb 1/9/92 Pay. 5 ---.. -- '" be paid by [DBG. A minus slgn {o) indicates a positl0~ that would now require General F.;nds. Planning: 1.0 Manag~m~nt Assistant 0,7 Secretary 0.25 Manager Planning Projects 1.0 Senior Planner PLANNING SUBTOTAL Community Ser~ices: O.S Management Assistant (J. So Secretary O,} Administrator H~man Services COMMUNITY SERIIC[S SUBTOTAL finance: O.S Senior Financial Analyst/Senior Accountant TOTAL PERSONNel ~ 40,601 n,BSS 14,471 ~J.~ 119,376 20,301 16,328 S 789 42,418 17",2.L8 199,li1 Effect on General 0 0 +14,472 0" +14,471 -10,101 -16,318 -\,769 -41,418 +17,518 418 Fun~ Tot.l C08C S ~qu ired 40,601 22, BS9 14,472 ~1.344 129,376 0 0 __ 0_ 0 27.518 156,794 Program administration funds a~aiiable during the 1992-93 fiscal y~ar should be at least S156.900. This is based on 20 percent of a S~98,OOO entitlement t:md 20 percent of 5200,000 in pi'ogram income. The net effect of the proposed stiffing char.ge on the Gen~nl Fund will be zero. The $42,000 required to ccntinue to fund the pOSitions in Human Ser~ices would come from General Funrl sa1ary savings for tne 0.25 Manager Planning Projects in Planning and the 0.5 Senior Accountant in ~in~nce. funding for Mid-Peninsula Citizens for fair Housing Since the estimated program administration funds are equal to the estimated City staff personnel cos.ts, funding for ~lid-PenirtSula Citizens for Fair Housing would have to come from other sources. However, staff estimates th~t $15,000 of the anticipated COBG salaries. will be offset by direct project c!elhery costs which are not subjE'ct to the 20 percent program administration cap. This 515,000 would be available to fund Mid-Penins~la Citizens for Fair Housing, whicn was funded for $24,333 i~ 1991·92. Staff and the Citizens Advisory COrrr.littee had recommended Ok reduction in funding for 1991·1992 and, CMR:I05:92 p, \cmr\cmr$uff cUb 1/9/91 Page 6 • 1 1 , at COLlneil direction, are re-Jielo"';ng the deji~'er"j costs of the project for adjustment in the 1992-93 fu~djng cycle. Fund i!l..fL.f2.r.-...P_~ __ LQ ___ AJ to Hous j ng Corporat j on In ccmplia~cs with J~UD regu1ations, f~1din9 for Pa10 Alto Housing Corporation will have to be modified. For purposes of CDeG funding, PAH~ was previously designated as a NeighborhoDd B~sed Nonprofit Organization, which is a type of s\Jbrec~p~er.tj t"\'Ow£'ier, Pi1HC does [lOt meet He HUD requ~re't'!',ents for neig~,borl1{1cd base,j design.atioll. The City Attorney's office h~s determ-ined PAHC to be a local De."elopl~er.t (orporatiol'l, whjch is another type of subrecipienL As a Local Development Corporation. PAHC is eligible for COBG funds related to specific pre-de~Elopment i~d pre-project de~elopment costs. This includes staffing costs, appraisals, termite inspection, and other costs related to th~ pur-chase of specific CDBG fl--igHl\2 p)~operti€"s such as the recent purchase of 3020 Emerson Street. Similar costs associated with other proposals to deve10p additional housing o~partunities for CDBC eligible inco~e te~ants would also be el ig;ble. PAHC ;s also e'j-iglble for COBG funds for program services for specific allowable activities under He Public Serdce ntegory. These might include housing counseling and referrals. Appl icatior1 for these funds would be mad! during the regular CDBG applicatior1 process end would be in competition with other public service agencies. PAHC administers the sales and resales of tne City's Below MarKet Rate purchase and rental prcgram_ Cc,s.t of ad~ir.is.tration of this program cor.Jld come from the City's HO<Jsin'~ Resene fUTlds. which is allowed under the Housing Reserve Guidelines. The 1991~92 contract with PAHC approved by Council allowed for up to $20,000 from this source. Most BMR sales and resales do not involve CDSG incQme-e1igib1e app1icants. The staff proposa7 outlined in this CMR would utilize all of the available (OBG program administration funds. Thi~ wou1d ~ot allow the tity to use COSG f~nds for any general PAHC activities. such as ad~inistrative costs, review and c.omm~nt on the City's Hou~ing El-ement, assis.tancE-dnd review in the preparation of the (HAS and r2~iew of housing proposals frQ~ other agencies. In addition. management acti'oJitio::s assc.ciat>?d >;.:\th a project shOUld be included as an expense of that project, which is a~ eligible deduction from program income for that portion of the project which was CDBG funded. Witr.o~t using the General Fund, stc.ff b~lie'tes that $.60,000 to $75,000 co~ld annually be utilized by PAHC in the above areas for specific eligible projects or activities. Staff recom~ends that the f"inance (orTl:t,ittee recommefld ap~roval of the addit;nnal staff as outlined in the CMR. 1f approve,j, staff will move forward CMR:I05;92 p: \an,.\~ItI~staH ,cdb 1/9/92 Page 7 • ~ .. ~-~ o '-;"-' with the admjnistrati~e assig~m€nts and ~il' ut11jz~ the fir~t ha~f of 1992 to transition the administraticn and ope(ation of the COBG program. Stiff will return to Council with specific recommendations for funding Mid· Peninsula Citizens for FaIr Hou~jng and PAHC during the 1992-93 COBG funding cycle. Staff IIIIill CO!it'inlJe to work with PAHC on aHernate sources of fundinl!t. Respectfuliy submitte~" • ...--, ,_.Oe-V;·'.J (.A" •. WCr->. / /'££"&4-.JC--- . .~L- 0;(/ -'f' if / /t.?;.~ /'l ~Aa;:/'-"f KENNETH R, SC~RE IBER ./ Director ~f Planning and JAMES E. ~ILLILAND Manager Planning :.----,. W~L>ZANU-E:~~~~-----Communi ty Envi ronment City Manager Attachments: 1991·1992 CDBG fundic9 Summary April 4, 1991 HUD Monitoring letter June 3~ 1991, C1ty reply letter August 9, 1991 HUD Mcoitoring L.tter December 20,1991, CH.v reply Tett:;r COl!lT1ent 4 of Coopers &. Lybrand management letter and staff response PAHC letter dated October, 4. 1991 CC: Mid-Peninsula Citizens for Faif HDUSj~9 Palo Alto Housing Corporation CMR:I05:92 p: \Cl'lIr\~r$t<lff .cdb 1/9/92 Page e - --..... --~-~--,-- JSf1 08.1932 05:1DF11 Public Scry!ce Catholic Charities -OmbudsrTWl Community Servi= Arency EmerJency Housln& Consoni U In Family Seriice Associatioo IMovauve Housin& 1991 -1992 COBG Fu .dint Summary Peninsula Area Information & Referral Scnior Coordin.li", Council -Shar<d Hoasin, Utball ML'1.istry Admjni uIJtion Cit:l of Palo AIIO Mi~-~in.sula Citizens for F';, Housing HQUlinglCommllDjtv Facilitil!'$ City or Palo Affordable Housing· Palo Alto Hoosinl Corporation • City of Palo ALIa -Park A""mibili ty Sub-total Sub-tolDl City of Palo Alto -Senior Center R..,o,.ooo C.A..R ... Swim Center Renovation Lytton Gardens -Emergency Generator Alia-Peninsula S'Upport Network -Shelter R~no'¥;u.ioll Palo Alto A~lescent Sav\ces -Coravar. House Repairs City of Palo Alto -L&ndlmnk Peninsula Child,.,,', Center -Fire Alar"., System Second H.", .. I Food Bank -Distribution Center Senior Coordinatin, Council -Cold Slo""e Senior Coordinatinl Council -Home Repair SteVen"," House -Deck Repair City of Palo Alto Plannin& Dept. Direct Cost> Sub-lolJll TOTAL Sour"" of Funds: 1991192 CDW Allocation KousinS Impro\'em,en! Program Pro&nm Income Reallocation Pri<rr year's nal1ocations 598,000 100,000 195,000 :l.U8.§ • Includes up to a maximum of Si~O,(..'I{)Q in administration funding Funds Allocated 9,689 2,500 15,000 15,000 24,000 12,000 10,000 ~ 118,139 8l,OOO ll.lli 105,333 32,200 75,000 40,000 40,000 64,73' 67,592 20,000 39,000 313,000 15,770 25,000 3,400 15,000 5,000 ~ 501,364 APR a 4 1591 Mr. William Zaner City Manager City of Palo Alto P.O. Box 10250 Palo Alto, CA 94303 Dear Mr. Zaner: SUB.]'ECT: Monitoring Report U.S, Oo!'partmel'll Or:rrtiiJlrl'l'il and Urbill." De .. elopmilni S~r: Franci:sco Ae-g<onal ON.ce" Region;X 450 Goldeo'1 Gale ,,-,,'en,,!: San. ~ranCI~":O, Calif'Jr."1ia ~41C2,34.:a r::~1 ~ . =-.. community Development Block Grant progya~ (CD8G) Grant Number: B-'O-MC-06-G020 On January 29-31, 1991, ~x. Alan Schuckrna~J CCITE.unity Pla:.ning a!ld Development RE'presel"ltati--'e,. met ..... it::. SIl2.a:-:ne Richards of your staff. T~e purpose of the ~o~it=ring was to determine whether the Grantee a~~nisterec a~d implemented its CnBG prograo in accordance with its Fin~l Statement and appropriate Federal re~uirements~ T~e mc.nitoriIi.9 concentrated on the areas of : l~ational Objectives/Eli'3'i~ility Program Income Subrecipients Bousing Assistance Flan/MEE Program Progress Bomeless Activities Procurement In addition, any findings or concerns from previous monitoring reports and any corrective actions prc~osed by the grantee ""ere reeval>lated. Note that a finding relates to a p-r-og:.am element which does nct comply '\fo'ith a Fec!eral Statute or regulation, 'fI,,'heZ'eas a concern is either a potential finding or a discu5si::;n of an element 'W'bich migbt be improved. On February 26, 1991, an exit cc,nference was conducted by BUD Staff in order to present and discuss with City Staff the results of our monitoring. Participating frem BUD were Marty Mitchell, Program Manager and Alan Schack~an, Community planning and Develop~ent Representative. Participating froo the City of Palo Alto ~ere willi~ Zaner, City Manageri Emily Harrison~ Director of Finance; Suzanne Richards, CDBG Coordinator_: :Ken Schreiber, Director of Planning and Community Environment; Paul Thiltgen, Director of Community Services. • ~, ~, _. -- , , 2 While noting areas of compliance or imrrovemeGt, this office also has identified in the er.closu:!"es, spec.ific findinqs and/or concerns for each area monitored. Wherever possible we have in.:-lcded recommendations intended to correct these problems. For ease of identificaticn, findings and conc'erns have been nu.mhered sequent.ially ...... it1:in each section of the report. Please respond to the findinss~ COnCerl1S or recommendations '"tithi:J. 30 days of the date 0': thi.!-letter l unless other ... ·i.se ~oted. We ~ppreciate the c~operaticn and assi5ta~ce extend~cl to the BUD Staff by the City of Palo Alto during the monitoring visit. Should you ha·.re any questions regarding this letter, please call Mr~ Alan Schackrr.an, Con~unity Planning and Development RepresentativE, at (415) 556-3751. Enclosu=e Very sincerely yo:.:-::-:;, f!d>;t; !/dUb/ r I Ha::-ty Mitchell Prc;ram Manager j Te~ B Cf!ice of Caw~~nity Planning a."'.d Ce'.~elopr:er:t ! j , i I /) --o !.~DEX COMMUNITY DEVELOPMENT SLOCK GRANT (CDBG) GRANT NUMBER: B-90-MC-06-0020 PROGRAM MONITORING AR?.AS SECTION National Objectives/Eligibility Program Income Subrecipients Housing Assistance Plan/~~E Program Progres5 Homeless Activities Frocurement INDIVIDUAL ;'CTIVITTES REVlE"I'iED: Palo Alto Eousing Corp~ (P.~C) Senior Housing Counseling Catholic Charities Innovative Sousing -Shared Ecusi~g Connerly &: Associates -Eotlsing I:!lprcvemer:t Fr·:::s:=a.:'":1. Urban Ministries COMMUNITY PARTICIP~S; Jane Ealey, Adin_:"nistrator cf Euman Services Suzanne Richa~ds, CDSG Ccordi a~o=, Human S~=v~ces Emily Earrison, Director of F na~ce Fred Berman" Chie:!' Euilding 0 ficial William Fellman, Manager, Rea Froperty Jim Gilliland, Planner Joe Raletky, Urban Ministries I II III IV V VI VII ?-" ~<-i.. "-0, ~. -'", This is a revie~ of activiti€s for compliance ~ith one of the three COSG pr~4ry objectives and of eligibility classifications for individ~al CDBG projects and activities. The City of Falo Alto has a variety of public service activities providing co~~nity service to qualified client grou.ps within the City. From analysis c,f grantee files and on-site visits it appears that these activities do meet BUD primary objectives and eligibility requireIDents~ Service to the lo\"!-moderate inco::ne groups, either through lilI'.ited cli~ntele, direct benefit or area benefit are met~ Sites are being researched for the purpose of providing cpportunit,ies for affordable housing for low-moderate income persons/families. Many of these people are employed in the Palo Alto are'but cannot afford the high cost of hOllsing (rental and ownershipj. One site has already been assembled =:1d is ~lndergoing an envirorur.en.tal review as part of the ~~ty's land-banking activities. There are no findings or concerns in this area. • . ----------. rI -PROGRAM INCO~ The grantee is required to report all income received from the use of COBG fun~s ar.d the proper expenditure of that income for CDEG-eligible a~tivities~ Furthermore, that income must be sp~nt first before further dra· ... ·downs are requested from the letter ~f credit. Grantees are required to present to BUD as part of their Final StateC'.ent package, a program year. bucget based upon p=ojected program income ~s ~ell as th~ allocated entitlement amount~ Finding XI~4= Afteor a revie ...... cf City records and convers:ations witb the staff of va=ious departments it is apparent that no one is keeping records or tracking the potential for program income at this time f~r the Palo Alto Housing Corp. (FMC). The City ann:.lally prepa::-es d contract with PARe for the receipt of CD5G f~~ds~ In return the contracts show that a va;~ety of seJ;".ric>?s are performed fer the City and in behalf of the comr,!.:;"!ity at large~ Tbese records are required by the CDBG L::"ltitle!:le:lt F-egulations 570.504, 85.2Q • 85~25 (Grant A~i:listr~tio~, aed OMB Circular A-IIO (governing no~-prQtit orgc~izaticns). Recommendation: The qrantee provide cc.cur.:entation that the 5ubreci...pJ.enJ::_J.§_ ~eg'pir;tg _a.,gcpunting .and fin~ncial_records .for it-s-B·ub-assiste~ activities ar.":: re?Q;:-tin'; tllat i::!cr=i'.ation t6-t.he~City:-"In addition, the City sho ...... e-.;-icer.:ce of a tr~~.gr!:l~~.jIla .mo51t<rring ~mechanism cf sub~ecip':'en t (including ~C) financial accounts. III -SUBREClprENT~ This is a review and analysis of the exte~t of the grantee's monitoring of subrec.ipients and Third Party Contractcrs to assure adherence with applicable federal management and ~dministrative 6tanda~ds. The records reviewed by BUD staff indicates that files for ser1lices rendered are kept by the City staff. 'These records ir.dicate that contracts, with appropriate language and scope of services, payment methoes: etc. are O~ file. Citizen participation reco~ds are also on file for each of these parties. The records are kept by program year and a record of periodic reporting from the 5ubrecipients, and monitoring of the 5ubrecipient by.City staff are on file. For public service activities, the files indicate that these sUbrecipients have -intake forms· t~at provide esse~tial information" including demographic and incorr:e cat a reg\.!ired for eligibility and natior:al objective determir:.ctions. It. is O...9r_ r_ecommendation that in the appropriate types of ,5 __ ~_~"'.ice_ activities--a --respon.::;ible sUb.tecipient staff offic ia1 indica~te -,,=e_rific~~ion of __ x!:O'y infor:natior;., particlJ.larly income data. In addition, the records and contracts for the Palo Alto Housing Corp. (?~.F.C} ","'ere also review"ed, re.s;:lting i:1 the following findings. Fi~9in9 III-I: There is an incor.sistency i~ the relationship between the City and the organization k>lown as Palo Alto Housing Corp~ (PABe). For CDBG reporting purposes on the Grantee Performance Report" PABC is identified for most of its services as a ·Specia} ___ Subre __ ~i_:pient... There are services performed by this organ1zat~on Eha-t-mciy qualify in that category as a Local .Development Corporatio~ under the a~spices of the regulations S70.204(c) (3) and 57D.207(b) (3) [iii). 8owever" the contract bet~een the City of Palo Alto and P~~C fer ho~siag services, icentifies P~£C as ·ccn~ulta~t·~ This creates a cifferen~ relationship t~an that of special 5ubrecipient, and a different set cf procureme~t requirement~ than the City has pursued~ Additionally, ~he scope of services outlined in Exhibit A of the agreement between the City and PARe covers a range of activities that should be considered as different t:ypes of services r ?otentially requiring different procurement methods r separate and/or different contracts 'Ioli th the ci t~1' ~ Sen·ices performed directly on behalf of City staff (assistance in the development of the housing element of the general plan) is quite different from housing activities for the community at large (pre-development costs, site acquisition) • Recommendation: The City identify services to be performed with CDBG funds according to appropriate categories. When _ ... -........ ,,'.' I 1 ! • - funds fer these services a!:e awarded., ..... hether th~y be to FAnC or some other non-profit, consultil.nt or prcfessional organi~ation, the appropriate a~ree~ents or contracts are utilized between~the City and the other party .. These documents must contain the appropriate language and conditions req~ired in the regulations. The recipients awarded the funds to c.arry cut these services be apprised of their re3ponsibilities and reporting require>Ilents per the cegul -,tiens. The City D'lU:st Inonitor' these activities ar.-::i serv~ ::''';$ annually .. Finding 1II-2 -Indirect Cost Allocation pi an: For J".::m profit or;anizations with agreements and contracts fer CDBG funding ~ith the City. They may have costs incurred for common or joint purposes and benefit to more than one activity (indirect costs}. The eligibility for such costs must be determined and then allocated in a manner which will result in the grant program's bearing its fair share of total indirect ccst.s by developing a:l indirect cost rate. No ev-idence of an approved ir.direct cost plan for P.;SC, according to the require:nents of (ll-f.3 Circular P.-llG. ReccmD1endatioc.: L The City de~.relcp an Indirect Ccst Allocation f::>r Nc.'1- Profit Crganlzaticr .. s., ac::cr-d':':"n'i to the re':;i· ... ire:r,ents elf CZB Ci:=-cular A-llD. :2 ~ The City c!eter:nine costs t!1at have been ex;:enced by P.:!..EC which would fall under t~e requirements of A-1IO. Indirect costs expended ~ithou~ an approved plan for the periods of time involved lItay be disallowed by BUD after our revie'~. • :I '1 • "--_.----'-. rv -HOUSIN~ISTANCE PLAN/MBll This is a. revieW' of the grantee' 5 performance ir~ Qeetinq the qoals identified in their three-year BAF ~nd annual ~ in=rement. This is also a revie~ of the grantee's minority business enterprise {MBE) contracting Activity. Finding TV -1: BUD Regulations S70.507(c) requires the lSubm.ission of semi-annual t-'.BE reports" due cn }.pril .3\l and Octcber 31 of each calendar year~ The City of Palo Alto, as of this date has not submitted the report that was due Octo~r 31, 199D. Reecmmendation: The City has verbally told HUO that t~e MBE report is bein9 prepared at this time~ It is incumbent cpon the grantee to prepare and submit required repor~s for the CDBG program in a timely manner. The City's Housing Assistance Plan (RAP) is consistent with its thr-ee-year-goals and single-year increment. The high cost of land and rental costs have IDdde it difficult to achieve over-all affordable housing goals. This office is available to assist the City in exploring ways to create workable affordable housing such as air-rights and SRO's. During the current year BUD ~'ill l::e .... ·c:-king with g:t:2.!ltees ~oward implementatian of new BUD programs a~d reguire~ents stemming from the Cr2'-~ston-C-onzalez Affordable Housing Act. The BOME, HOPE and Shelter Care programs will become evailable and the replacement for the Eousicg Assistance ?lan (HAP) must be designed and implemented by all grantees. rhat will be known as the Comprehensive ~ffordability Eousing Strategy (eRAS) ~hich will be an opportunity for local, state and federal entities to work toward planning and overcoming obstacles to th~ affordability of housing in this country. '" • ,- This is a review of individllal projects/activities and th~ prcgram as a whole to assure that the}" are being implemented and funds expe::.ded in a timel}" Ir'.anner. Finding V-l~ It has been the intent of the City of Palo Alto to dw -landbanking" for the purpose c·f creating opportunities for the development of affordable housing_ In doing so., the City has ~~aked a large amount of CDBG entitlement funds Over the last several yeazs to single., large-ticket projects. The danger in this type of a~tivity is that any ~nags that develop in the processes required along the ~ay will inevitably create a "program progress· red flag with BUD requirelI'.ents. This is, i:. fact, what has occurred with this grantee. At this point in t~e, the City has 2482 years of lme.xpendec CDBG funds. As of July 1, 1991, ~hen the next entitlement allo~ation is delivered to the letter of credit, that figure ..... -i11 alllshrco:n to 3.5 years. The benchmark used fo~ unexpe~ced funds is 1.5 years or less. The key to this particular exp~nditure problem is the anticipated acquisition of vacant la~d at the cor~er of Page Mill and Ash. Rec ommendat i on: 1. The City should ~ake ev"e=y e£fcr-t to accoffiolish the resolution of envir:or....mental conce~::l.s a;:d sllbsecuent. acquisition of this site for appropriate housi~g before the approval of the next Final Statement and award of entitlement funds. 2. The City should, at all times, have a backup of contingency activities available d't:.ring any given program year. Should there be any reasoos for activities, particularly large-ticket projects to be held up, then there \IIould be other activities to gc to. The activity that has been held up can then be reinstated at another more ~ppropriate time4 '"----- -"" . , -~. ----_. ----., --...~~--...... -..... "..---~.,. --. <- The serious problem today of ho~elessness now affects every county and every co~unlty. It is no longer a problem that can be turned awaj' from a:::: :some. one else' 5 or a "big city~ problem. Bow each of HUD's 'CDBC grantee's are ~orking to ..... ard resolutions to this prcblern, particularly ..... ·ith CDBG and other BuD programs that are available is our interest and concern. What has been discussed with the city staff during this ~onitcring is the extent anc nature of the homelessness in this community; the possibilities that Inight be a·.-'-aile.ble -tor mitigating this; the extent that BUD Ir'.ay be o! assistance to the city in this regard. Some of the possibilities and options discussed were SRO hocsing, as designed for the 1990's, with it's capabilitiy to physically and aesthetically be an integral p.a:.-t of the IleighDot"hcod and community; utili2ation of air-rights over ~nused and u~der-utilized sites; ~c~e coope~ative effcrts in concE~t with the areas' major em~loyers of those pe~scr.s who cannot =fford the housing costs of the locality in which tney are ~plcyed; and use of financial and planni~g techuiq~es that :.uld e;]..able the establishrne:J.t of increased housing affordability. • VII -PROCUREMENT This review is an analysis of the City~s prccurement procedures for compliance with BUD Regulation 24 CFR Part 570 (Grant Administration/Common Rule) and GMB Circular A llO. Findi~g VTI-l: The CiLy identifies the Palo Alto Sousing Corporation (PARe) on its Grar.tee Performance Report as a ·Special Subrecipient-, however, the contract between the City of Palo Alto and FABC for housing services, identifies PARe as ·consultant-. A. ~~ eligible 5ubrecipient as d~scribed i~ 57v.204(c) (3) and 570.207(b) (3) (iii) most be uncertaking neighborhood revitali~ation and/or activities in the support of the development of low or moder~te income housing. They must carry out the project,s) in name and deed and not be a pass through for the CnBG funds. PABC might qualify under this definition as a ,Local Development Corporation and would be reguired to have a subrecipient agreement with the grantee. S. A consultant for the g~antee is a contractor hired by the grantee and subject to the procure~~nt requirements stated previcusly'. C. The scope of services outlined in Exhibit A of the agre€ment with PARe covers a range of a~tivities which may fall into differ ins categories of relationship ~hich could not be covered in a comprehensive a;reement~ For example, project development and site acquisition could very well be performed by an eligible special sutrecipient~ Assisting ~he City staff in the development of the City's Housing Element would be performed by a consultant, for professional services. D. In the process of procuring the se~-ices of a consultant or other contractor services, for PAEC or any other entity, the methods described in 85.36 (Common Rule) must be followed. Recommendation.: p.~. Determine which sen.rices needed. to be perfo!."1I!ed fc,r the City would apply to a -special subrecipient~ and publicize the need and availability of funds for those services. Prepare an appropriate sUbrecipient agreement as described in the BUD Training B~lletin of August 1990~ entitled ·Subrecipients -Co~~unity Development Block Grant Entitlement Program·, which was presented to the City staff at the exit conference. B. D~termine which services needed to be pe=formed for the City would apply to the procurement requirements of SS.36 (Common Rule) and follow those methods and procedures for contract award and accountability. .."-..... ..... ,,.:-.. i 1 , i I I ! I i Me. Marty Mitc~e'! Program Manager, Team 9 Office of (olTlllunity Planning and Development U.S. Oepartmp.nt of Housing and Urban Deve10pment 450 Golden Gate Avenue San Francisco, CA ~4]02-3448 De.r Mr. Miten.!!: Subject: Monitoring Report June 3, 1991 Community De-velopmant Block Grant Program (CDSG) Grant Number: B-90-~C-06-00~a l'nis letter is the City of Palo "ltc's response to the Department of HO\..l~1ng and Urban De'w'elapment's {HUD) MQI1itorirlg Report dated Apr-il 4, 199], regarding the City of Pale ~Tto Community Development Block brant (CDBG) Program. Th~ focus of the Monitoring Report and the majority of the findings relate to the City's contractual relaticnship wit~ the Palo Alto ~ousin9 Corporation (PAHC), the extent to which PAHC is being monitored, and the d'e~ay in expe:'lding CDBG 1 andbank funds. ~e appreciate your comments on the C08G Program, as well as this opportunity to respond. In addition, we appreciate the extension of time allowed for preparation of this response. Since we are currently in the process of alloccting the 1991-1992 CD8G funds and preparing new contracts for CDSG sub recipients far the 1991-]992 yearl the timing of your Tetter permitted uS to begin mai:.ing corrections. Haw~ver, ~t rr,:Jst be noted that some modifications .ill reQu~re additil)nal time. We have Mted U.o~e items that 'Will carry oller to the 1991-1992 CDSG contract year and w411 be resolved prior to 1992-1993 c.ontracts. This letter responds to the finding$ an,j concerns by area in the same order as presented in your April 4, 1991 letter. I -NATID~AL OBJECTIVES/ELIGIBILITY No findings or concerns i~ this area. • , [ - ,~:~:::.-q.1 .W;lJ3>t;%d 0:;:3'.= j~PRGGRAM INCOME: FINDiNG II-4; Insufficient Monitoring of Program Income In response to HUQ's findings, the City has requested PAHC issemb1e dDcume~tation and financial records ~f CDBG-funded acqulsitl0ns an1 ;mpro~ement5. so that an app1icable rate of prngrarn i~com~ per property can be determinec'. Program income subsequently disbursed for eligible activities will also be identified. Srant receipts and expenditures will be accounted for separately from non-CDBG activities wit~;" P~~C/s i<:cQunting system. This pro:.:-ss has been st:.rted ar-d City staff will provide HUO with documentation as it becomes availabie. For future reimbursements, PAHC 5ubm)ttal requirements to the City are being revised in conformance w;t~ HUD re~uirements. PAHC will submit an actounting of COBS activities for tht reporting periods and the City will consolidate this information 011 the annual Grantee Performance Report to HUD. The City's Finance D~partment has. now de''I''O!1oped an audit and monitoring program to assure that sub-recipients~ financial management systems are kept in accordance with applicable federal requirements. III -SUBRtCIPIENTS FfNDl NG I J( -1 ! [ncoris ; stency in re 1 at i onsh i p between City and PAHC. This finding is ilso discussed further in Section VII Proc1Jrement. The City of Fiio ,.t.,Ho is concerned with the findings with regard to the relationship between the Palo Alto Housing Corporation and the City. including the written form of the current contract. However, we note that the Scop~ of Services and the designation of PAHC activities as activities of a special sub-recipient were suggested by HUD personnel during their 1989 ITKlnitoring visit. The contract arId Scope of Services were amended at that time to include ·consulting services· under the Planning Administration category. Although we are now changing the foclJS of the c'Oi1tract ; n response to the concerns raised in your April 4, 1991 letter, '1'12 feal that we have been in compliance in these areas. Since t~e inception of PAHC in 1969, the City has relied on PAHC as a resource to provide the City \With e;:;:peitise on federal and state housing legislation, knowledge on local housing issues~ abtlity to prepare pre development and de ... 'elopment proposals for affordable housing, ~nd: a.s i:I resource for revie-..ing various housing proposais. in the City. The PAHC Board and staff offer a unique cross-section of individuals with varied area.s of expertise. Because of their expertise in the Palo Alto community ~nd tneir long standing performance record, the City has u~ed PAHC as a ·consu1tant· to provide knowledge and guidance on housing issues. This input became even more essential after City buaget.cuts r€duced th~ number of ,110. 1990/A/UIfUOFll .. -............... 11' .... t ! I. I ~ , , I . --.-~:, " , I I l • "" -'-.. , ----.-..:' .. -."~~ ------_ .. --.. ---.--.~ P1anning Department staff able to perform t~ese tasks. after a. hous.ing plinner-position 'Was eliminated, PAHC's assistanc-e was deemed il1'lperative. In part icu1ar, i~p .... t and We take exctption to the inference t~at ce-rtain of these areas of assistance are n~t in ke€pin9 wit~ housing acti~ities for the community it large. Utilization of tne Expertlse and community-based kno\liled~e of PAHC for assistance in preparation of the Hot.:sing Element, retention of existing affordabl~ housing units in the City, and preparation of such HUD required documents as the Housi~g Assistance Pian (HAP) and the Comprehensive Hou5i~3 Affordabilit] Strat~gy (CHAS; are consistent with housing activities for the community at larg~. Although there may be other for-profit consultants in the Bay Area who could prD~ide some of t~ese genera' consulting services, their know1edge and expertise in the Pa10 Alto comm~nity would net be as great, and their need for profit ~ou1d not provide the optimal ser~ic~s for the funds a~ailabTe. Similarly, other non-profit orgallizations in the Bay Area do not ha .... e the local credibility and pxpertise that PAHC has obta~ned. The 1991-1992 contract i5 being rewritten and acthities will be funded with both City and COBG funds. 'ihe revised contract 'Will specify those items to be performed by PAHC, such as administraticn and management of projects either owned or controlled by PAHC, project development costs, and adm'inistration of 8MR sales and ren'tals, including CDBG and non-COSG eligible units. In addition, it includes a request tQ a11o ..... PAHC to complete some: on-go1ng consulting services begun ur,der the 1990·1991 contract. FINDING I1I-2: Indirect Cost Allocation Plan The City is currently reviewing PAHC1s actual casts from its independently audited financial statements of prior years in order to develOp an indirect ca~t rate. This prDcess has alread$ begun and is .xpected to be completed by October I, 1991. CDBG funding provided bj the City ""'ill also be reviewed to determin~ 'if past indirect costs charged have exceeded the developed rate. The approved indirect C\:lst rate wilt then be arplied conSistently by PANe and revised when necess~ry. The procedures followed in evaluating t~e indirect cost rate and results of the priQr year re~iew will be documented and avaiiable with the Grantee Performance Report to HUD. 1"1 -HDUSINr, ASSISTANCE PLAN/MBE Fjnding rV-l: Semf-annual MBE report This document has been submitted by the City's Inspectio~aT Ser~ices Division. A copy is enc1osed. :' '" '. ~, v -P~OGRA~ P~OGRESS Flndi~: lindbank funds !n prevlous responses to ~ua monitor~ng reports, the City has outlined th~ problems associat!d w,th the landbank funds in a built-out city such as Palo Alto. where land and housing costs are high. A~ditiona11y, there-are virtually no existing housing projects with 51 percent low income residents. Under these condltfo~s it is important that the City be abie to pro~ide affordable housing in order that 1ow-income people can live ciose to wcrk, family, friends or a~ailable services. Howe~erl because of the cost, it is m~re difficult to put together a workab1e real estate program tnat will satisfy i goal of pr~~iding affordable housing. The housing stocK. in Palo Alto is generallj of very 11;9h quality and useable vacant 12nd is almost nonexistent, consequently, the cost of existing housing and vacant land is also .... ery high. Some examples i nc:l ud"!; 1. Vacant S.OaO-sQuare-foot lots selling for a minimum of 5300,000, when available, 2. A low-end two-bedroom condominium starts at 5275,000, 3. Single-family homes start at S30n,OaO, and 4. Multiple-family proje~ts start at S80,OOO per unit. ~ithout landbanking, we would be limited to projects reiated ta de .... elop~ent of grDUp homes or individual units. Both of t~ese areas ~i .... e limited uses and f~r the long term do not pro~ide the best cpportumty to obtain the greatest number of affor~able housing units. Since the CDBG landbank funds and City Renta1 Housing Acqvisition Program (RHAP) funds are available for proposed uses from any non-profit or for-profit grrup as individual projects: become viable, the City al~ays has se~eral projects und~r consideration for use of both funds. Howe~er, dlj~ to Hie complexity of Ule 'Pr~jects requiring such large fundii1g, timing runs. lOl'1ger a:id is subject to del ays and breakdowns:. For example, in Spring 1990 six prcjects had progressed far enough to merit close attention for exp€nditure of the 1andbank funds. fi~al appro~al of anyone of the projects would have used all of the funds in the landbank. Other projects were being considered, but due to the nature of real estate financing. were not public knowledge. • - The six proposa1s inc1uded the fo11owing: page ~i11/Ash Streets: Fer severa1 years the City ~as b~en ~o~king towards the purchase of a vac~nt parcel at Page Mill and Ash Streets froID Santa Chroi County. Ir. our "UD respof1se letter (If 6/7/90, 'We fully expected that purchase of site wou1d occur vithir. four to fi~e months. In Detember 1990, the item was agendized for City Council action; t'!tlwever, because of the discovery of toxic contaminants on a nearby site, the item was withdrawn in crder for further environmental d<lcumentation to be prepar€d prior to Councn action. The preparation of the ~nvironmental documentation had to be done by outside consultants. This ~as required an RFP process~ contract prEparation, and return to City Council with a co~tract. At I future date, the envfronmental documentz ~nd a recommendation on possib1e purchase will return to City Council. CurrenUy, it is anticipated that tne environmental documentation will be ~ompleted around August ], ]991, a~d a decision on whet~er to purchase the property cou1d be ~ade in Septombor 1991. Lytton Gardens n°. Senior HO'..Jsino: This 51-una Senior Housing project is sponsored by Community Housing Incorporated (CHI). In Spring 1990, the project .as not able to obtain requested HUD Section 202 funcs. CHI hu returnS'd this year wi th a request to the C, ty far funding of $950,000, which (auld include CDSG landbank funds. The Uncertafnt1€S and delays in obtaining T'le .... HUD regulations regarding the 1990 Housfr.g Act ~as resulted in uncertainty on the timing end progress of this project, although a request fer City fu~d;ng cou1d reach City Council in June. (;ty approval would be contingent on cbtaini~g additional outside f:.md1ng s'Ources through eitner federal, state or pr;vat-e financing. At this time~ a dec~sion on the requested federal fina~cing is anticipated to occur by October I, 1991. Oak Manor Apartments: This existing 42-unit family housing a~artment complex was placed or. the market in summer 1990. In December 1990, PA.HC purchased the project for approxim~tely $3.2 million. $1.2 million of City RHAP funds werE! used. Strong corsideration was given to ut+liz'ing the CDBG funds, b~t because the Page Mill/Ash acquisition appeared immin€nt , City funds were substituted. 535 Everett: This al-u.nit, fHe story bui1ding was al so under consideration for purchase. The project was eventually rejected for (i ty purt~ase because an ap~ropri ate financing package could not be assemb1ed to meet the S9 millien purchase price. T~e units were a1so considered too large for SRD, but not suitable for family ~ousing. Sheridan Apartme~ts: This federally subsidized (Section S} 57-unit complex is built on land f~rmerly owned by the City. A deed restriction requires that the City have first option to repurchase the property if p1aced on the market. It also contains i deed restriction rPQu;ring .,' '. participation in tIle Section 8 program through 1996. This property was placed on the m~r~et in summer 1990 ~nd ~o~1d ~av~ been eligible fer COBG landbank funds, However, be':al.Js2 an acceptable-price could not b~ reiched and becau~e of the existing prot~cticn in place, the decision was mad( that landbank funds would be better utilized on other projetts. W. feel that it i. important that the City be able to fund these types of projects in order to provide low~ and very low-income housing in a very e>..pensive housing market. 1r.Ie do net ~el ie'W'e that the c:onstr.aints under which we operate this program are recognized by HUD regulations and benchmark requirements 2nd would encourage HUO to review the req~irements in lig~t of ~nether or not the ~veral1 goal of obtaining affordable h~using is being met~ The Ci ty is aware of the ne~d to spend the COBG 1andbank (l.JnGs and to t~e extent po~sible has made every effort to do so. We ~i~l continue these efforts to spend the funds and will keep several projects under cor.sideration. We will also revise our outreach and review procedures to encourage other qualified groups to develop proposals for use of t~e CnSG landbank funds and to invite specific ~nnual proposals for use of COBG landbank funds. At thIs time tn~ Page Mill/Ash Slreet site and the lytton IV Senior Housing Project are stil1 under consideration for funding and are nearing com~letion of other required approy~is. It 1S antltipated that funding of one or the other ~i'l oc(ur prior to October 1~ 1991. We feel that either of these projects is a fitting and appropriate use of the funds. Tnt! City is also con:s.idering an opportunity to create more 1ow-incorne housing through the use of CDSG landbank funds to buy dow!" the cost of units in !Me CHy's Below Market Rate (BMR) program. Ourir.g the 1991- 1992 COBG contract ~e6rt ~e will have as many as II U",ts added to the program. CDBG landbank fu~ds could be used tJ reduce the purchase price of these unit to prices affordable to low-and possiblY ~ery low-income families. The City could utilize approximately $400,000 for this purpose. fn addition, the Sheridart Apartments have recentiy been p:;j,ced bad:: on the market. ff neither the Page Mill/~sh Street site nor Lytton Gardens PI sr-Iouid be rea1ized by October l~ )991, it is the City's intent to pursue a buy doWl'l of BMR units coming into the program OJ'" purchase of the Sheridan Apartments. YI ~OME!ESS ACTIVITIES No findings or concerns _ere listed in this area; howe~er the City is aware of the problems and needs of the homeless and has addressed these cl')ncerns in our recent update of the Housing f1ement. The issue ~il1 be further addressed pr10r to January 1992. This assessment will take JCj1990/WlTlIAHIM ..... -"""'!·~~~;!!!'2 ... $ "'C"I-... --~.-.. -.'".-".-. . ",", _. -, I --- piace as I part of t~e stata re~uired MPreservation of AssTsted Housing to be added to the Cit~~s Housing flement. The City will l1so be assessing and updating possible solutions tQ ~ome1ess prcblems ;1'\ preparing the CHAS. we apprec'fate the offer by HUD in revi-ewing and providing input on the preparation of these docum~nts. Vl! -PROCU~'1J:NT Find~ng VrI-l: Conflic.t 'between "Special Subr!tiplent" tasks and "Consultant" tasks of Pale Alto HDusing Corporition~ As previously stated, t~e Clt, is revising tne contract witn P~C. The revised tontr~ct wiil speclflcal1~ list the e1ig~b1e sub-recipi~nt cat~ories to be undertak~n b~ the PAHC. In 1992-1993, as in previous years, PAHC wil' prepare an app1ication fer CDBG funds to provid~ th~se services through the annual CDSG appli~ation process. Tnese tasks ~il1 incl ude: A. Project M~nagement inc1uding management supervision of CoTorado Park (EO unlts), Webster wODd (£8 units) and Terman (92 units), direct manageme~t of 82 units In the City's Rental Housing ACQuisition Prog~am. ani direct management of ~5 units at (a' ifornia Park. B. Sales and resa1es of CDBC eligible income units of the City~s Selo~ Market Rate housi~g program sales, resales and rentals. Co ShouTd PAHC propose and rf:!cei\l! a.pproval for implementation of a specific housing project, the deve10pment and pre-de~elopment rost.s of tn~t project wOI.!ld be all'owable as a ~pecific project cost and .ould be included in a separate contract. The City '0';11 remo\le from the contract other references to Planning Administration costs re1ated to assistance to City staff~ Planning Commission and City Council in preparing City doc~m~~ts and providing general consulting services that might be funded by CDBG funds. Ho~ever, since PAHC nas been involved in preparation of the previous HAP and in prepari ng the back.ground material for the impendi ng: (:HAS preparation, as well as assist1ng the City ir: efforts to monitor and reta1n the stock. of affordable ho~sing units that i;e at risk of being lost as affordab1e housing, we are requesting that HUD allow for a continuation of a portion of the consult\ng services for the 1991-1992 contract year. Tnis will allow for a SIDootner transition, since the 1991-1992 contract year is now beginning and continuation of these servlces is (ritical to efforts to maintain and impro~e affordab1e housing. During the 1991-1992 contract year, U,e City 'lll'ill be exploring ether opportunities for providing the services that would be considered is consulting servic~s. These possibilities include: ~l99C/oVLTlfL[lfIM · _'"',,, .... "' ...... 1l1li. tot ....... '- -' A. Thro~gh an RFP proces~. the City will obtain an outside consultant to pro\lide Bsistance to He CHy staff, Plal"1ning Commission and City Council in reviewlrlg hOL'sing proposals, advis.ing the City "f proposed le9islaticn ~nd its iffect;, and ey~luation of existing anc prcposed programs affecting housing. Procurement of these contract ser'llices would be in accord ~ith the requireme~ts of 85.36 ((ammo, Rule). B. Utilization ~f COBG funds to hire a housing pla~ner within City Hall to coordinate eligible ~ousing cOl'ltrar:ts and porti"ons {If CDSG grants, and to advise on all !'lousing programs. This person might also oversee an RfP process or a proposal process submitted through. the annual CDBG. funding process. C. Through the sub-recipient proposals for 1992·1993 contracts, an illo~ance would be considered fDr local Developm~nt Cor~orQtions for pre-deve1opment, project development and initill site acquisition costs associated with activities in support of the development of low-or moderate-income housing. These proposals mayor may not be site ~pe~ific. Due to their expertise and knowledge, the City \tWill continue to utll ize: PMC for administration of the 8.:10\1/ Market Rate housing program for all units that are not CDBG eligible recipients. These 5ervices will be charged to the Clty's Housing Reserve Fund. We appreciate ~U~Js coaperdtion in r~viewing a~d advising the City on the Monitoring R~port findings and leok. fonoard to \fIIorl:.in::l with HUn representatives in making the necessary corrections. Should you have any Questions or ~ish to discuss ~~y aspe~t5 of the findings, our respons€s or propos~d actions, pTea~e contact Jim b1l1iland at 329·2679 or Suzanne Richards at 329-2428. @in ;:;~ly. C) (~ .1 1~.M <AllER City M~,nager Enclcs~re: D<::tober 1, 1990 to March 31, 199j MBE cc: Al an Schackman Emily Harri son Paul Toil tgen Ken Schreiber Suzanne Richards Jim Gi 11 ; land ~'199~!All THllDF III ••• , . I :1 'I '. , C) /Lj' \:P) Mr. William Zaner City Manager City of Palo Alto P.O. Box 10250 Palo Alto, CA 94303 Dear Mr. Zaner: " II,$. C.p,.rtmenl OJ "-o.aInt lINt lJr1Nn D .... lc;pmenl Sa.r1 Fr1lnc!K:o ~ion&l Offi.<:a, ~iQn t.x 0150 GoI2rl Gat. Avefll.it Sen Fl1InclKO, C.'tf'Ornili 9oCl02·3C4e AUG S 1991 OfFICE CF THE ern M'!' NAGER SUBJECT: L~ted Financial Management Review Community Developmeot Block Grant Program Program Number B-90-MC-06-0020 Rental Rehabilitation Program Frog-ram Number R-81-MC-06--0231 City of Palo Alto, California This letter summarizes my limited financial management review of tbe City of Palo .AI to" D H'JD funded community development programs on July 16 and 17, 1991. An exit eonference was held with Suzanne Richar~s, CDBG Coordinator, on July 17, 1991. The focus was on whether the City has the necessary systems and procedures to comply with Federal accountability re~~iremects. I fully appreciate the assistance given by Suzanne Richards and Jennifer Chang during the review. The scope of the review includes the following: 1. Financial grant management 2. Cost principles including procurement practices 3. Subrecipient financial management Overall, the City is in general complian~e with the requirements stated in 24 CFR Part 85 (HUD common rule), OMS Circular A-87. 24 CFR Part 570 Subpart J (Grant Management), and OMs Circular A-128. Nevertheless, several findings, includinq one requiring monetary renumeration, are made and are diseussed ie detail l~ter in the text. 1. Federal Grant Management In this section of the review, I examined the City~s accounting for the CDBG and RR programs, the ~nagement of qrant assets, timely disbursement of funds, use of program I , ' I I 2 income before line of credit dra· ... s, and accurate preparat.ion of Federal reports. I have found that the City has separately identified program funds, tracked real property acquired with CnBG, en.ured that figures reported to HUD were easily traceable to official records, and fronted expenses for CCBG paid salaries with City general funds. I compliment the City for its pe~formanca in this area. Bowever, the City did not comply with cash withdrawal requirements, Finding Number 1 -Non-compliance with Withdraw Requirements- Standard 24 CPR 570.504(b) (2)(ii) of th~ COBG regulations requires the grantee to disburse substantia1iy all other (non-revolving accoant) program income before cash withd~awals are made from the U.S. Treasury. In addition, 24 CFR 65.21(i) of the BUD common rule requires that interest earned on advances be remitted to the Federal grantor agency. City;s Practice From July 1, 1983, through June 3D, 1991, the City of Palo Alto has withdrawn $3,B15,193~60 from its letter of credit. In this period, the City also received $152,320 of program income fram the disposition of the Terman School site~ These proceeds were then placed into a ~on-revolving fund account, which accrued $104,178 of interest from July 1983 through June 1990 ~ C1~he amount of interest for the year ended on June 30, 1991, has cot been reported yet.) Because these funds were not placed in a revolving account, they must be used for any approved CDBG activity. The City did not follow these regulatiocs and consequently caused an unnecessary financing cost to the u.s. Treasury. In effect, $152,320 was inappropriately advanced to the City during this period. Required ~,ction W'ithl.n 30 days of receipt of this letter, the City lIlust take the following actior.s: a. With respect to the $152,320: • \. ~ 1 I b. (1). Expend these proce~ds from the Terman School projec~ on ~pp~oved CDBG activities within seven days or 3 (2). Remit thia amount to BUD via wire tr~nafer procedures for its return to the City's line of credit. With respect to inter~.t earned on the $152,320: (I). Return this amount to BUD via wire transfer procedures for processing to the u.s. Treasury. c. With respect to TJIIdisbu.!:'sed program income from the City's phased out CDBG funded rehabilitation program as of June 30 t 1991: (1). Transfer this amount to the City's CDBG cash account if disbursements are to be made within seven days or (2). Return this amount to HUD via wire transfer procedures for its return to the City's line of credit. (3). Verify that interest attributed to the rehabilitation funds for the period before June 30, 1991, is treated as program i~come and is expended on CDBG activities before tbe next line of credit draw~ Please provide an accounting of this amount to HUD. (4)~ Remit to BUD for return to the 0.5. Treasury any interest earned after 15 days at receipt of this letter. d. Establish procedures to ensure that all program income (except that contained in a revolving accoi.lnt) is Substantially disbursed before a line of credit draw. (I). Inform th19 office of those new procedures. (2). Verify that these proceeds are properly recorded on the SF-272, the Federal Cash Transaction Report. • (3). Carry forward and annotate the corrected balances on ~he next SF-272, Federal Cash Transaction Report for the quart~r end~ng on Septembe~ 30, 1991. COmment Number 1 -Separation of Loan Receivables 4 The City has ta.ken z=.teps to I'ecord its loan portfolio in its General Ledger. To increase control over the program 48set5 and to facilitate program planning, I would recommend that the loan receivables be classifi~d by theil: rates, i.e., zero i.nterest J low interest (by amount), deferred payment, etc. I understand that the RR program has not generated any proqr~ income. 2. Cost principles In this SectiOD of the review, 1 examined the City's procedures to ensure the reasonableness of costs charged to the CDBG program. In completing a COBG activity, the City may expend grant funds for the real estate acquisition, equipment purchase, payment of salaries, indirect costs, procurement of contracto~ services, etc. A princiFsl consideration in determining reasonableness is whether the CDBG program pays its fair share of costs relative to the programmatic benefits received. My review makes the following observations: 4. This office has monitored the City of Palo Alto for real estate acquisition procedures earlier this year. b. No equipment was purch~5ed by the City or CDBG funded st!brecipients. c. The Cityrs chief form of assistance to its subrecipients is the payment of salaries to perform CnBG public services. d. City staff maintains an accounting by activity on its payroll records to substantiate such charges to the CDBG program. No administrative costs hav~ been charged to the RR program. e. With the exception of the Palo Alto Housing Corporation [FARe), neither the City or its subrecipients charge indirect costs to the CDBG program. During the reviev, I provided the City with } [' 5 4 check list to examine indirect charges. The City haa no~ taken steps to review PAEC~s indirect charges and dOCUDlent its 01.l'.:.come. f. All procurement contraots in the CDBG program were under $2S,OOO. However, the City did not complete a cost analysis of procurement transactions to ensure the reasonableness of B~ch cost •• Finding Number 2 -Lack of Cost Analyse~ Standard 24 CFR 95.36(£) and OMB Circular A-II0, Attachment 0, require the grantee and subrecipient to perform a cost analysis with every procurement transaction to ensure cost reasonablenes5 of such charges to the CDSG program. Our office would have considered this requirement met in cases where competitive sealed bids (or pr~ce analysis) were obtained. City~s Practice Fo~ the Grantee Performance Report for the year ended on Jun~ 30, 1990, the City reports nine public facilities/improvement and rehabilitation activities that may trigger the cost analysis requirement. The City was unable to document that it or its subrecipienta had conducted a cost analysis for procurement actio~s~ Required Action Within 30 days of receipt of this letter, the City must: 4. Review affected CDBG act~vities funded in FY 90 dnd FY 91 in relation to published cost indices to determine that these costs were reasonable. b~ Inform this office of the results of an~ly9is. c. Return to the City's CDSG program ~ccount or line of credit I depending on the amount recovered and its subsequent disbursement, if costs were determined to be excessive. d. Advise this office of the step5 that the City will initiate to determine compliance for itself and its Eiubrecipients. 3. Subrecipient FinL~cial Management In thi~ section of the review, I examined the City~s procedures to manage its array of aubrecipients. The scope of th,'!.. section included an analysis of thp .a9reement for financial control., audit ~na9ement, financial reviews, budqet manaqemen~, and indireot cost procedures. In addition, a substantial amount of time during the review was devoted to discussing Palo Alto Housing Corporation~a agreement with the City and differentiating between subrecipient and contractual relationships. Our Program Management Division will acldress these issues under a separate letter. Findino Number 3 -Subr~cipient Financial Monitoring Standard 24 CPR 85.40 of the BUD common rule requires grantees to monitor its ~ctivitie6 (including subrecipient ones) for compliance with applicable Federal requirements (including financial ones). Such monitoring must cover each proqram, function, or activity. City" I!I Practice 6 The City monitors its 6ubrecipients chiefly for programmatic compliance although limited financial testing i. conducted. The City principally limits such examinations to the substantiation of payroll charqes. The realm of financial compliance extends beyond the area of accuracy of payroll ch&rges to a large sphere of KUD, CMB, and Treasury requirements. Kequired Action Within 30 days of receipt of this letter, the City must develop a cbec}, list to cover the pertinent financial compliance iSl!lues (i.e., indirect costs, timely disbursement, use of interest bearing accounts, etc.) and to documen~ conclusions systematically. Thi~ check list should be forwarded to our office for review. As stated during the on site visit, our CPO Monitoring Handbook may be an example of such a process. . ------'" -""2.1 i I "--' Finding Numb@.r 4 -Subrecicient Audit Management Standard OMS Circular A-129, paragraph 9, Subrecipients, requires the City to establish a system to ensure that subrecipient audits meet applicable requirements. 7 24 CFR Part BS.25(b)(3) requires tbat the grantee has 4 system in place to ensure corrective actions required of subrecipients are taken within six month~. City~e Pract.ice The City has 45ked its independent auditor to review the audits condu~ted by its 8ubrecipienta. During the review, I was unable to determine the nature of examination by the Lnd"pendent auditor, nor the controls the City has instituted to assure compliance in this area. Requ ired Ac tion Within 30 days of receipt of this letter, the City must establish an audit management system for its subrecipients. Such a system must indicate that the sUbrecipient audit has~ 1. met the applicable A-110 or A-12B standards 2. been completed by ~~alified person~~l 3~ ita corrective action impleme~ted within six months 4. been submitted tiJnely Sa been made available to the public 6. been sent to Federal central clearinghouse 7. been charged tairly to HUD programs 8. been reviewed for audit quality control This ~£fice has forwarded copies of check li~t9 that the City may use to comply with item 8. Subsequent to the visit, the City internal audit staff contacted me about the acceptability of that staff performing the examinations of affected ~ubrecipients. This option is a viable al~ernative to requiring subrecipients to obtain a separate audit. The City must inform us of the steps that it will institute to determine compliance with these requirements. -----'iIlI!M .......... • ... _' .... _.-.. ·-~--·-,. --",' Lt. it J'~ - • . ... · . Co~ent Number 1 -.Inclusion of Budget into Agreement To augment control over its subrecipient activities, the City may wish to incoroorate a budggt into its subreeipient aqreemants. • 8 I am looking forward to meeting you on to discuss the contents of this letter, the relationship with PABC, or any other issue. que.tiona, please call me at 556-0392. Aogust 21, 1991, City"s cc: David Martin If you have a.ny Very .i~eer~ yours, ~~ ~~qelo Tam, Director Proqr~ Support Division Offiee of Community Planning and Development Acting Human Services Administrator Suzanne Richards CDBG Coordiantor Emily Harrison Finance Director Jennif er Chang Accountant '. , • r~ I !1 '1 - l~· . "1·' \ '0 t· r~y or .. ' c; d.ln t ': =-_:: __ -: _" '0'-:::: (415) 329·250 Mr. Marty Mitchell Mana&er, Team B Oftice of Community Planning and Development U.S. Department of Housing and Urban Development San Francisco Regional Office, Region IX 45C Golden Gat<: A venue Sa.. Francisco, CA 94102-3448 Dear Mr. Mitchell: December 20, 1991 The intent of this letter is provide you a.1'1d your staff with a status report of OUf progre~s on the issues raised in Mr. Scha<laru!n's monitoring letter of April 4, 1991, Mr. Tom's monitoring letter of August 9, 1991, and our subsequent discussion<; at the meeting on August 21,1991 lI1 San Francisco. In general, I V<rish to assure you that City staff have been wOiking diligently :0 dfect full compliance w~th all Federal regulations relating to the Community Develop-ment Block Gtant program. Financial Compliance -August 9 Lener Finding I -Non.£ompliance with Withdraw Requirements. alb. The City will remit to HUD for return to the Cil)l's line of credit, the $152,320 in program income generated by the Terman housmg projcct. Additionally. ail interest earned on thi.5 5unl (SI32,950 for the period Februal'Y 3, 19&4 through November 30, 1991) will also be remined 10 BUD to be returned to the U.S. Treasury. City regulations requue a Budget Amendment Ordinance and City Council approval for such • tran.saction. The attached copy of the staff report and ordiIlance effecting this transaction was approved by the PaID .l\1to City Council at - .. ", ',' Pag< Two their meeting 00 DeceiIlber 9, 1991, and the appropriate pape["YIork is now being completed in order to return these funds via tile City's line of credil c. The City·s Housing Improvement Program (HIP) is being phase-J out du.( to the relatively low number of inC'..>me eijgibte applicants W!:105e proposed rehabllitation projects Cj,lJalify for funding. No new money has been a11ocate.d to this program for the: past year, and available funds previously allocated to the loan program, but not .spt!nt, were reailocated to other CDBG eligible projects in the 1991192 program year. Progra..rn income (principal plus interest proceeds from loans) generated by the HIP have consistently bceo kept in a separate revolving l@n fund .in accordance with Federal regulations atld expended first on HIP pmgrarr. e~pcnses prior to additional rlrawdoVins from the line of credit for this activity. All inte:rest earned on program income in the revolving loan fund has been mcluded and reported to HUD on ~e armual Grantee Perfonnance Report. We believe the City has followed all applicable federal regufation.'; regardil'lg revolving Joan funds and t.~e TeIX'rting of program income on this project Due to t.~ fact that very little activity is now expected in this program. commencing Jl.!ly 1, 1991, program income from HIP will be .pplied first against all other eligible CDSO expenditures prior to drawdown from the letter of credit For tint quar.er 1991/92, program income exceeded CDOO expenditures, and therefore no reimbursement from HUD was requested. d. A thorough examination has been conduCted by City staff on major 5ubrecipients likely to have generated program income. It was determined that certain activities carried oat by the Palo Alto Housing ColJlOrnlion generated 581,997 ill program inoome during the period July I. 1986 10 June 30, 1991. These funds are being returned 10 the City, ilIld will in turn be remitted to Run for inclusion in the Ct .... ~s letter of credit. .-\n audit report dela.Uing these findings was presented 10 City Council on December 9, 1991. Beginning with the quarter ending September 30, 1991. the SF-272 will reflect program inco",e from all sources stated .bove, and the cash withdra"a1 will be adjusted .""crllingly, Comment 1 -Seraration of Loan Receivables: As of June 30, 1991 the Housing ImprovemenUNon-Proflt Rehabilitation 1021l portfolio W""oS separated into r.wo categories: 1) deferred inl:;!rest loans and 2) low inrerest loans, in accordance with Mr. Tom's suggestion. Finding 2 -Lacl< of Cost Analysis: The Grantee Performance Report for the year ended June 30. 1990 docs report allocations to nine public f&..-ilitieslimprovernents and rehabilitation activities. Three of those projects, however, were nO! pursued by the agencies, and the funds were ialer reallocated to other .-" - ------ Page Three COW eligible activities. A part time slaff person 9.'aS bired in mid November, 1991 to research and compile informatioa and checklists on all of t11e Federal regulations relating to re.ltabilitation acti\';.ties, All public facilities/impro\'ements and rehabilitation activities for which funds are expended in the 91192 program year ",,-ill be in full compliance with all these regulations. Concurrently. the review of p.a.. .. t projects for cost reasonableness has ~6;,m. and tIle information requested sho:.!ld be available shon!y. Finding 3 -Subrecipient Financial MOnltonJlg: We received in mid-September the sample mon~toring che:.cklists from Mr. Tom, and ha .... e also gathered other samples from orner cities as well. We are currently prc:paring a checklist for the City of Palo Alto which will incorporate lI'1e appropriate regulation.Ii. As soon as this is completed it will be forwarded to Mr. Tom for review .. AJl agencies. funded in the current year will be monitored using the new financial checklist prior to the end of the prog ram year. In addition, staff from the City Auditor's office have conducted ex.tensive reviews of s"ubrecipients from the 90/91 program year who received In excess of $25,000 lrl CDBG funding. including the Palo Alto Housing Corporation. Finding 4 -Subrecipient Audit Manzgement: }u noted above, the City's i."1temaJ audit staff bas completed examinations of the three subrecipients who received over S25,iX>O from the City in FY 90/91. The results of the examinations have been communicated to the City Cou~J and the subrecipients. Copies of the audit reports are a.vaiIabIe to HUD when requested. The internal audit staff will incorporate the annual review of the sub:redpients' audits into future audit pJans. Status Report and FollQw-up on April 4 1991 Monjtorine Letter. Please reference also, the City·s reply [0 this letter dated June 3, 1991 and subsequent discussions with HUD represen tatives. S!atus of PARe as a SpedaJ Subrec!pient: Attached please find a copy of the detennination by the City Attorney's Office regarding the designation of Palo Alto Housing Corporation as a Local Development Corporation, and therefore, their eligibility to perfonn ~special acti","ities~. Also enclosed is a memorandum dcscriolng the purpose, scope and responsibilities induded in administering the City" Below Market Rate 'BMR" program which was requested by HUD representatives. --------, .. ""' ,~. _.' ---~--"-- , Page FOIlf Program Prog=: 'The City plans to enter L'1to an agreement with the PaIo Alto Hous[ng Corporn.tico for the expenditure ofapproltimatdy $980,000 in CDBG 'Land'oank' funds in order to pllfchose a 10 unit existing apartment complex which v..ill be used to hou se low and very low inrome individual' or families. Thi, expenditure is expected to take place prior to the end of 1991, but is contingent upon the final BUD environmental approval which caMo-: be given before December 20,1991. In addition to the acquisitio:J costs, the City expects to expend a m.axlmum of S65,()(X) for relocation costs over the next several monL~s iJl order to replace some of the exLcti.ng tenants 'with income eligible tenants. Due to ~'le number of monitoring/compliance issues which have surfaced in the City'S CDBG program over the past year. City Senior Managerl'tenl have been exploring some internal options relating to consolidation of administrative efforts and increasing the CD BG staffm~ level so th>l they are more in line \\11th program tequiremC'lts. A full analysi.s, of tht!se issues will be presented to the Finance ComlT'jtt:e of the City Council ill mid-January. 1992 so that anticipated changes can be coordinated with and incorporaled into the City's next two year budget cycle. w. appreciate HUD', efforts to work with the City in correcting some of these program deiiciencies, and to provide tcchnic~ =istanc< and ttaiJ>j,~g to City staff. Should you have any questions relating 10 any of these issues or the responses, please contact either Suzanne R.ichards III 329-2428 or nm Gilliland at 329-2679. Enclosures ce: CPA: Iim Gilliland Emily Harrison Tracy Kwok David Martin Suzanne Richards Ken Schreiber Paul Thlltgen HUD: Alan Schackman Angelo Tom Very truly yours, WILll"-"f ZANER City Manager ~ n i I i 'I -------------... ,', ' C"Jf;J1,ent 4 0-)OQRrs,~ L.ybrd'ld ~anaqe~nt 'etter a~d staff response {4., Improve the Administration a~d HonitR.~J.ng of the COMmuniu Development Blwck Grant ProgrAm. The following were noted by the DepartMent of HOUS\.TJg and Urban Development {HUD) during field monitoring of the City's compliance with federal r-equirements of its Community Develop ment Block Grant (CD6Gj a-,.,ard: o certain non-profit community based aqenc~es receiving CDBG funds through the City do not have accounting systems S.n place which can adequately tracK p~ogram inccme generated from CD8G grants and indirect program costs o One of the community agencies receiving CDBG funds -was described as a ·consultant~ in its contra~t with the City and as a nspecial subrecipient-in reports filed with the federal government. Proper determination of the agency's status is necessary in order to implement the correct governmental procurement requirements a Generally, BUD dues :lot belie.ve the City's current monitor ing and auditing requireruents for agencies receiving CDSG funds to be extensive enough to meet federaJ guidelines o Unexpended f1.1nds under the city's grant at June 30, 1991, equaled approximately 2.8 times the annual a~ard amount~ Normally, h-uD expects the City to draW' down often enough on the grant to ensure that the ratio of unexpended funds to the total annual award amount does not exceed 1~5:1 In addition, HUD has d~termined that the City must for.'ard program incom~ generated in 1983 from the sale of prcperty originally purchased with CDBG funds, along ""i th interest earned, to the federal governmEnt because these funcs ~ere not applied to subsequent projects qualifying under the CDBG program. To improve the documentation of admini.:::trative procedures relating to federally funded programs and help City staff more quickly identify potential iss'..{es such as those cited above, we recommend that the City compile or implement the following: o A policies and procedures manual specific to the Community Development Block Grant (CDBG) program. The manual would contain information needed by city personnel to understand both the prcgram and associated federal requirements, processing of annual applications submittBd by community based agencies, and reporting requirements for both the city and the funded agencies. ----------- :t. {4., !.Im.X<l"ve tbe AdministratioD and. Monitoring of t~e COlUllunity Development Block Grant progra=. o An~ual checklists for community based agencies requesting COBG funds. The checklist ~ould include required steps to be performed by the agencies and City personnel from the initial application for funding through annual reporting require~ents. steps should ~e dated and signed oy respon sible city personnel as completed. C '..n annual work plan for city personnel responsihle for ~onitoring these agencies receiving CDBG funds through the city. The ~ork plan should include such items as deadlines for processing suhmitted applications for funding as ~ell as tile dates during the funding period on which Ci tr personnel will perform field monitoring of the grantees. The major benefits of documentation would be: o Assistance in the training of employees, parti:::ularly those new to federal regulation " Assurance tha't all city and federal requirements fundin9 are met both in the initial applic2tion process during periodic field reviews for and o Assistance to manaqement in evaluating the performance of city personnel implementing the program This comment directly correlates with the compliance issues raised by RUD officials as a result of the:ir extensive review of Palo Alto's CDBG program over the past year. The City's CDBG Program ~as monitored on-site by HUD officials on three separate occasions durinq the calendar year 19914 The ,results of the HUe audits are contained. in letters to the city Manager dated April 4, April 10, an~ August 9 t 1991. The areas of compliance cited here are all being addressed by City staff and the appropriate actions and responses to HUD have been or are being prepared or initiated. A brief status report follows: . 1J Tracking of program income generated by subrecipient activi- ties City staff determined that only the activities of one subreci pient (The Palo Alto Housing Corporation) ~ere likely to have had the potential tor producing CDBG program income over the past several years. In order to determine program income, an j d ! -' indirect cost allocation plan i~ accord~nce ~ith the require ments of OMB Circular A-l10 vas nece~sary. City staff from the Finance Depart~ent completed an extensive analysis of the PARe's activities in which they established a mutually acceptable indirect cost allocation plan tor pr-ojects during the period of the analysis, July 1# 1~a6 to June 30, 1991. The analysis concluded that $81,997 in progra~ income had been generated dur~ng this period, and the funds were subsequently returned to the city by the PARe and then :r;eturned to HUn to be added to the City's le'tter of credit. The Palo A.Lto Housing Corporation has been instructed' to develop a cost allocation plan for the current contract year. In addition, the City has recommended that the PARC implement a project cost accounting system to allow tor accountability to the City regarding any .future program income qenerated by CDBG pro jects. 2) Contractual relationship bet~e~~ the Palo Alto Housing Corporation and the city of Palo Alto HUD regulations require that specific procurement procedures (i.e~, a request for proposals) be followed in order to establish a contractual relationship for ·fity-initiated III consultant: III services. '1'0 address this issue, consultant services 'irlere eliminated from the 1991/1992 contract except for those services funded by the General Fund, and for a few services which had been initiated in the 1990/1991 program year, and had not been completed. The new 1ft.!'D requirement will necessitate a change in the services contracted for ~ith the PARe, and the way in ~hich the CCSG administrativ~ funds arE-allocated. Additionally, the eligibility of the Pale. ltlto Rousing Corporation to undertake IIIISpecial Activities ot a Subrecipient" was brought into question by their status as a -neighborhood based non-profit corporation" (NBNP). HUO regulations state that NBNP's must function within a distinct geographical area in any unit of local government ",i th a population in excess of 25,000. The City Attorney's Office hC'.s determined, however, that the Palo Alto HOllsing Corpo'!'a tion does fit under another category, a -local development corporation'" which also allow~ them to undertake -special activities". 3J city monitori:i1g and auditing of 5ubrecipients In response to this tinding l the City Auditor's Office . initiated compliance procedures, and undertook the examination of the financial :management systems of the three subrecipients from the 1990/1991 program year who had received in excess cf $25,000 and were therefore subject to the Federal single audit requirement. Results of the audits on these three agencies: The Palo Alto Housing Corporation. Innovative Housing, and Urban Ministry of Palo Alto ~ere presented to council in a report dated December 5, 1991. In order to bring the Palo Alto Housing Corporation' 5 financial management system into • ::'-~{\ .. ,.,..{,.. .. ',-- compliance with t~e ~pplicable ~JO regulations, certain corrective actions ~ere identified and reco~endations ~ade~ A follow-up review will be performed by th~ ~uditQr's office to determine if approptiate corrections have been unde~taken. More extensive financial monitoring procedures for all COSG reCipients are also required, and will be undertaken by City staff during ,t't)e next schC!;duled round of City monitoring visits. 4) U>nexpended Funds in the City's Letter of ·Credit exceed the maximum allowable The City expects to expend approxillately $960,000 on an affordable housing project known as 3020 Emerson in conjunc tion with the PAHe, Py the end of December 1991. Expenditure of f"llnds on this project 'Will red.uce the City' s letter of credit to within the allowable paramet.;;:::rs (l.~ times the annual grant) .. 5) Return of program income generated by the 1984 sale of the Terman School site to BUD On December 9, 1991 the Pale Alto City Co-..;r.c.il approved a budget amendment ordinance for the return or these funds to hlJD, and the return of interest earned to the C.S. Treasury .. City staff has now completed this trar.saction~ Coopers & Lybrand has suqqested the City undertake the following three procedural chanq~s in order to aid in the training of City e:z.ployee.s, ensure t-.hat all City and federal requirements are met, an~ to provide management with a means to evaluate the program: lj A CDBG policies and procedures manual 2) Annual checklist and instructions for 5ubrecipients 3) Work plan for ~onitoT.ing personnel These 5uggestions are valid and should be initiated, but are virtually impossible to implenent with Current staffing levels~ In order to bring the program into compliance, mere of the -adminis trative-funds available under the CQBG proqram must be u~ilized on administration of the program and compliance issues. t, III ::'. 1 ____ ~, __ , .>--~ .. ___ . 'P~lo Alto Hou5ing Corporation! Deo:mber 5» 1991 Honorable City Council Palo Alto ~ California Mombers of the Council: In its Monitoring Report letter of A}ril.(, 1991, HUD !1cted areas in which Lie City of Palo AJto was con.sidered not in confonnance ..... i.th Federal req,uu-ements in its administration and implementation of the Community Develo'pment Block Grant (COBG) program. Among ",veral finCings, HUD indiC<lte<! c"al the PARC', method of repolting to the City, established years earlier a.."1d previously reviewed and approved by HUD, were now founlj to be not fully in complian~ with Federal accounting and fmancial record keeping p.T'ocedure.s. The Ctty was advised to develop an Indirect Cost Allocation Plan for nonprofit organizations, arld then to analyze the costs expended by P ABC according to the provisions of the plan. The Housing Corporadon's accounting system, aIU10ugh formerly acceptable to HUD, is now deemed not in conformance with tilese new d!rectives, and we ~ill be developing a new accounting system (0 ('omply. It has been made very clear to us that there is no question of impropriety by the Corporation. However, City staff~ in fonowing HUD's new directives, has informed. us that "Program Income-bas been genernred from four of the apart.."TIent buildings P AHC has a~quired under the Rental Housing Acquisition Program (RHAP). CDBG funds were used to provide down paymertLs and rehabilitation costs for the acquisition of 42 housing units in OUf Elm, Ferne, Curtner and Emerson South apartments. CDBG funds were also use<110 pay for staff and other costs incurred by PAHC in conducting other CDBG-e1i.gible programs and services, accounting for aboul ha!f of the total costs of operating our office and providing services to the City. \Ve are now advised that City staft calculatio[']s, based on present mterpretation of HUD's CnBG regulations, procedures and accounting methods will require our COBG-funded projects ~5ted above lo pay lo the City's COBG account $81,997, a5 net program income, cQvering the five-year period fiscal 1986/87 through 1990/91. TIt= funds have been kept in the accounts of the respective properties as Replacement Reserves for future rehabilitlticn and major maintenance items. The current interpretation of CDW regulations does not allow deduction from the project's income of a suitable arnount of reserve funds. Accordingly, the funds are to 'be returned, but may be applied for when n~s arise. The proces:s would require appucation at least a half year before tile CDBG funds would be available in the nexl fiscal year's allocation, and lhere would be no assurance that such funds would still be forthcoming at indefinile future dates. 540 Cowper Street. Suite G, Palo Alto. California 94301. (415) 321·9709 .' , Needless to say? we believe that this arrang-::ment i!; both aw"kw<:.rd and uncertain. Prudent management of our apart;'nent projects inv.:Jh''!s not only careful control of rental !m:::ome payments 2nd of ali operating expen:.e categodes, but we also ir:sist tt.at each corr.pIex set asid..:: ample reserve funds. This is normal operating procedure. Ironically, every HUD housing consWJctlon pro~r.un mandates that a."l appropriate Reserve for Replacement fund be established and b~ paid into each aJ"Id every month during the entire length of the mortgage pcri.od. Although only tile accounting or ·Program Income· is before you on this agenda, Hv'D has raised other CDW issues which. if imI'Iemented , would change dramatk.aUy the manner in which the City and the PARe have successfully worked togerller to provide: affordable housing in this community for many ye.us. For over 22 years PARC's primary purpose has been to provide and foster precisely the kind of housing opportunities that t~e CDBG programs mandate. The long-term close coopezation between the City of Palo Alto and the Polo Alto Housing CO!pOration has resulted in substantial accomplishments 1.'1 the provision oflow/moderate in(:ome housing that would not have been possible under a fragmente<l approach. Successful .ho:J.Sing developments usually take several years from conception to completion. Moreover, nonprofit developers in particular must establ.i sh a successful t.-ack record to be able I<> obtain necessary financing for proj oct< . Accordingly, we would app!eciate it if the Council would dirtCl City staff and the Housing CoIJlOration jointly to take these "tl>er CDBG issues to the HUD RegiorW DiIector (and perhaps to HUD Washington) to see if the CDBG regulations could be interpreted more broadly to accommodate Palo Alto's special condLtions which have resulted in housing progr.un.s and projects seen as modelS for other communities. If such efforts prove unsuccessful, and if the Cuui1cil wishes to continue the City's present re14tionsr.ip wiL'1 the PAHC, it couJd alW direr> staff 10 explore gtber fypdiljg SO\JfCCS (such as the Housing Re....~rve) that ~·ol.dd not haw' the !eder.J CDBG ---con.mcnnts. We wish to acknowledge and express appredatior.. for the efforts of City staff members who have been most belpful in working through these matters and expJairurg the new RUD directives \0 the PARCo Sincerely, PALO ALTO HOUSING CORPORATION 9k-~ 9"-foe M4rtjgnetti,Q President , r I ,