A Failure of Oversight Lompoc Housing and Community Development Corporation

Conclusions 3

• CL1
  Lompoc Housing and Community Development Corporation loan agreements gave Santa Barbara County, as the lead entity in the HUD HOME Consortium, authority to require audits and inspect the organization‟s records.
• CL2
  The Lompoc Redevelopment Agency did not enforce the restrictive covenants on Lompoc Housing and Community Development Corporation property. Official notices of 12 Lompoc Community Development Department Memorandum, dated 11/21/11 Santa Barbara County Grand Jury 7 A FAILURE OF OVERSIGHT noncompliance did not enunciate consequences nor did the Redevelopment Agency Board of Directors take action when it had the opportunity.
• CL3
  The U.S. Department of Housing and Urban Development, in setting up guidelines for the HOME program, required the County, as the lead entity, to establish controls for compliance with HUD regulations. HOME loan agreements allowed the County Department of Housing and Community Development to examine LHCDC‟s books on all properties with 10 days‟ notice and audited financial statements were required initially in order to approve a loan. Although there were some variations in the loan documents‟ reporting requirements, it was the monitoring and enforcement of the loan requirements that ultimately fell short. It is also worth noting that audited financial statements would not necessarily affirm compliance with loan agreements and for that reason, the Jury concludes that HCD should have taken the initiative to conduct its own inspection of 10 Section 33; Loan Agreement between Santa Barbara County and Lompoc Housing Assistance Corporation dated November 23, 1999 11 This directive requires entities that receive federal loans and grants to submit yearly audited financial statements. 6 Santa Barbara County Grand Jury A FAILURE OF OVERSIGHT LHCDC‟s financial records, especially when there was an increasing pattern of noncompliance. In summary, the loan agreements offered many opportunities to make demands of LHCDC that were reasonable and prudent. But the Department of Housing and Community Development simply didn‟t do its job in seizing the opportunities available in the agreements. Some of these opportunities were discretionary in that HCD had the option to request inspections and records. As the attached Appendix demonstrates, there were ample signs of trouble. Initiative was not exercised and too many opportunities were missed. The Lompoc Redevelopment Agency loaned the Lompoc Housing and Community Development Corporation approximately, $1.7 million while the agency was technically out of compliance.12 It did not enforce its loan agreements and covenant restrictions when there was a clear pattern of failing to respond to the agency‟s requests. In addition, official Notices of Noncompliance, sent to LHCDC in 2007 and 2008, did not state the consequences of noncompliance. The notices stated only that the property‟s noncompliance will be noted in the RDA‟s Compliance Summary to the Redevelopment Board as well as the agency‟s Annual Report to the California Department of Housing and Community Development. The Redevelopment Board, and ultimately the Lompoc City Council, bear the responsibility for this inaction. The 2011-12 Santa Barbara County Grand Jury concludes that the Summary of Notable Correspondence (see Appendix) demonstrates a pattern of missed opportunities by Santa Barbara County Housing and Community Development, the Lompoc RDA, and the Lompoc City Council to enforce their respective responsibilities for compliance with contractual obligations. In the end, neither the interests of the people in need of low- income housing nor the interests of the taxpayers were served by agencies exercising discretion in the enforcement of regulations. If attention had been paid and LHCDC had been forced to better manage its affairs in a timely fashion, low-income renters in Lompoc would have been much better served, and taxpayers would have been saved millions. FINDINGS AND RECOMMENDATIONS Finding 1 Lompoc Housing and Community Development Corporation loan agreements gave Santa Barbara County, as the lead entity in the HUD HOME Consortium, authority to require audits and inspect the organization‟s records. Finding 2 The Lompoc Redevelopment Agency did not enforce the restrictive covenants on Lompoc Housing and Community Development Corporation property. Official notices of 12 Lompoc Community Development Department Memorandum, dated 11/21/11 Santa Barbara County Grand Jury 7 A FAILURE OF OVERSIGHT noncompliance did not enunciate consequences nor did the Redevelopment Agency Board of Directors take action when it had the opportunity. Recommendation 1a That the Santa Barbara County Board of, Supervisors establish a policy that the Auditor- Controller conduct an annual audit, with time certain deadlines, of all organizations that receive County funds in excess of $100,000. Recommendation 1b That the Lompoc City Council establish a policy that the Management Services Director conduct an annual audit, with time certain deadlines, of all organizations that receive City funds in excess of $50,000. Recommendation 2a That the Santa Barbara County Auditor-Controller report the results of these audits annually to the Board of Supervisors prior to County budget approval. Recommendation 2b That the City of Lompoc Management Services Director report the results of these audits annually to the City Council prior to budget approval. Recommendation 3a That the Santa Barbara County Board of Supervisors appropriate the necessary funds to allow the Auditor-Controller to conduct annual audits per Recommendation 1a or, where permissible, require that organizations receiving county-controlled funds in excess of $100,000 bear the cost of an annual audit. Recommendation 3b That the City of Lompoc appropriate the necessary funds to allow the Management Services Director to conduct annual audits per Recommendation 1b or, where permissible, require that organizations requesting grants or loans in excess of $50,000 bear the cost of an annual audit. Recommendation 4a That the County of Santa Barbara withhold all funding from any organization that fails to supply complete records for annual audits or has failed to meet requirements of existing contracts. Recommendation 4b That the City of Lompoc withhold all funding from any organization that fails to supply complete records for annual audits or has failed to meet requirements of existing contracts. 8 Santa Barbara County Grand Jury A FAILURE OF OVERSIGHT REQUEST FOR RESPONSE In accordance with California Penal Code Section 933.05 each agency and government body affected by or named in this report is requested to respond in writing to the findings and recommendations in a timely manner. The following are the affected agencies for this report, with the mandated response period for each: Santa Barbara County Board Of Supervisors – 90 days Finding 1 Recommendations 1a, 3a, 4a City of Lompoc – 90 days Finding 1, 2 Recommendations 1b, 2b, 3b, 4b Santa Barbara County Auditor-Controller – 90 days Finding 1 Recommendation 2a Santa Barbara County Grand Jury 9 A FAILURE OF OVERSIGHT This page intentionally blank 10 Santa Barbara County Grand Jury A FAILURE OF OVERSIGHT

Observations 1

• OB1
  In 1990, LHCDC first incorporated as a California Public Benefit Corporation as Lompoc Housing Assistance Corporation (LHAC). Its sole purpose was to purchase and operate low-income housing in the community of Lompoc. In 2001, it changed its name to Lompoc Housing and Community Development Corporation, or LHCDC. Between 1992 and 2007, the organization purchased 40 properties in the City of Lompoc and two parcels outside the city limits. It also began purchasing commercial properties such as the Lompoc Theater. Major Sources of Funds LHCDC was Lompoc‟s primary agency for providing affordable housing. Although the city invested in affordable housing through other owners, none came close to the number of properties owned and managed by LHCDC. This non-profit agency held nearly two- thirds of the affordable units in the city. It received money from a myriad of sources. The Jury identified 12 sources of funds that were directed to LHCDC projects. Of these, virtually all were channeled through the City of Lompoc (or its Redevelopment Agency) or Santa Barbara County. Some money for the two homeless shelters, Bridgehouse and Marks House, came through the County‟s General Fund. These funds totaled 2 Santa Barbara County Grand Jury A FAILURE OF OVERSIGHT approximately $800,000 over 20 years.4 This report primarily examines the three regulatory agencies that had a fiduciary duty to oversee taxpayer funds through the administration of programs, whether local, state or federal. These three agencies are the County of Santa Barbara through the Department of Housing and Community Development (HCD), the Lompoc Redevelopment Agency (RDA), and the City of Lompoc. HOME Consortium In 1994, the County and the Cities of Lompoc, Santa Maria, Guadalupe, and Carpinteria formed the Santa Barbara County HOME Consortium to distribute federal HOME Investment Partnership Act funds. HOME, a program of HUD, is the largest federal block grant program distributing money exclusively to create affordable housing. Under the HOME program, local governments join together to qualify for federal money to meet affordable housing needs. The proper roles and responsibilities for HOME consortia nationwide are outlined in Title 24, Part 92 in the Code of Federal Regulations. The Santa Barbara County HOME Consortium‟s initial agreement, executed May 3, 1994, outlines the duties for each of the partners and references the terms and conditions of Title 24 as the controlling regulation. Since the formation of the HOME Consortium, Guadalupe has left the group, and Buellton, Solvang and Goleta have joined. Throughout this period, the County has served as the lead agency responsible for enforcing Title 24 requirements. The agreement has been renewed every three-years since 1994. The HOME Agreement makes clear that the County has the responsibility to supervise the HOME Program. Even clearer are the responsibilities under Title 24: Properties given HOME loans must demonstrate affordability The participating organization must submit records to the lead entity The loan document must specify that termination is an option for a breach of the agreement In the 1996 publication entitled HOME Consortium Guidelines, HUD addresses the need for enforcement. According to HUD, Santa Barbara County Housing and Community Development Department, as the lead entity for the HOME Consortium, thereby assumes responsibility for the performance of all the participants and must file an Annual Report with HUD. The lead entity should specifically reserve the right to require a member jurisdiction or sub-recipient to repay HOME funds for noncompliance with HOME requirements, particularly those related to maintaining the affordability of HOME- assisted housing. This is only prudent, since HUD holds the lead entity accountable for repayment of funds in the event the activities it administers fail to meet HOME requirements, or in the event that housing that is assisted with HOME funds fails to meet the affordability requirements (italics added).5 4 Santa Barbara County Auditor-Controller 5 Establishing and Managing a Successful HOME Consortium, U.S. Department of Housing and Urban Development Community Planning and Development, 2006 Santa Barbara County Grand Jury 3 A FAILURE OF OVERSIGHT Inconsistent Loan Agreements According to the Santa Barbara County Housing and Community Development Department, the loan contracts between the County and LHCDC are the only written agreements between the two parties. These documents were written over a period of many years, and the terms and conditions differ from agreement to agreement. All of the loan agreements specify the degree of rent restriction on each unit in the property. For example, the rent restrictions, or covenants, may stipulate that rents charged cannot exceed 30 percent of 50 percent of the County‟s median income. Some of the loan agreements call for an annual Occupancy Summary, a list of tenants and rents, to be filed with the County after initial rents are certified at the time the property is purchased. Some of the loan agreements are clear as to a required Annual Report, defined in the definitions section of the agreements as an independent audit. LHCDC‟s Casa Con Tres loan agreement, for example, does not require an Annual Report to be filed but, instead, stipulates that the County must approve all rent increases. The Pine Avenue loan agreement requires annual recertification of rents but doesn‟t spell out the procedure. It does not require the submission of an annual audit but reserves the right to examine records upon request. In some loan documents an Annual Report refers to the submission of rents and, in others, it appears to refer to a financial report. The “K” Street loan makes annual financial statements a requirement. The loan required an annual payment and with that payment LHCDC was to submit its annual financial statement to the County HCD. It is less clear whether the financial statements required are for LHCDC as an organization or whether they are for individual properties. In any case, much of this information was not forthcoming. Lompoc Redevelopment Agency Enforcement In 1984, Lompoc established a Redevelopment Agency to combat urban blight. California law stipulated that 20 percent of an RDA‟s expenditures must be spent on affordable housing. As noted, the RDA had loaned LHCDC $1.8 million by October 2009.6 Each loan required annual monitoring of deed-restricted affordability covenants to comply with California‟s Redevelopment Agency guidelines. These covenants were the same as those monitored under the HOME program. The RDA relied upon LHCDC‟s rent survey to certify compliance with rent levels whereas the HOME Consortium examined rent rolls itself. LHCDC was required to send survey results for each housing project to the RDA annually. This process insured that rents did not exceed the affordable levels established by the covenants. The surveys were to be submitted to the RDA each December. The RDA, in turn, was required to send along certifications to the California Department of Housing and Community Development by May 30 as required by California Redevelopment law. Judging by the correspondence to LHCDC, the Lompoc RDA reviewed rent surveys closely. For instance, on June 22, 2007, the RDA sent the following letter to LHCDC: The 2006 Annual Report [from LHCDC] on Casa Con Tres Apartments reveals that rents being charged all tenants exceed maximum allowable rents for very low-income households as defined in the RDA‟s Affordability Covenant on the property. 6 Lompoc RDA, Redevelopment Housing Loan Covenants as of October 15, 2009 4 Santa Barbara County Grand Jury A FAILURE OF OVERSIGHT The Lompoc RDA sent numerous letters to LHCDC stating the correct rent amounts and requesting tenant rent reductions. Casa Con Tres had an RDA loan of $46,335 and a County HOME loan of $157,300. Therefore, the County had deed-restricted covenants on the same property and these covenants were also noncompliant. Curiously, on July 27, 2007, a month after the RDA letter stated noncompliance, the County HCD conducted its annual inspection of all nine LHCDC HOME properties. In the HOME Consortium‟s 2006-07 Annual Report, the County concluded the following: The Santa Barbara County HCD monitored a total of 17 HOME funded rental projects managed by four different agencies. No non-compliance issues were identified in this year’s monitoring.7 Early Signs of Compliance Trouble In a 2011 memo, the Lompoc Community Development Department reported to the City Council that LHCDC already had a property out of compliance as early as 2003 for failing to file the Affordability Covenants Annual Report.8 The summary of correspondence in the attached Appendix shows a clear pattern of repeated delays and missed deadlines as early as 2003. On May 13, 2003, Lompoc‟s RDA administrator had loan documents repeatedly re-issued to accommodate LHCDC‟s lack of preparation. We have been unable to close escrow on Casa Con Tres Apartments for six months because of your failure to provide necessary documents including project cost estimates and a Board of Directors Resolution.9 A letter dated July 7, 2004 further illustrates LHCDC‟s unresponsiveness. On this date, the Lompoc RDA notified LHCDC that it was three months late with its reports. Technically, the agency is in default, the letter states, since compliance with covenants has to be certified and sent to the state. This is the first of many memos that warn the agency that it is late with reports and serious consequences will follow if the paperwork is not sent. Consequences did not follow. In 2006, one of eight LHCDC properties with RDA loans was out of compliance with affordability covenants. In 2007, five of eight properties were noncompliant according to the Lompoc RDA. Beginning 2008, all LHCDC properties that had RDA affordability covenants were noncompliant. There is a time lag in some of the official notifications. The official notice for noncompliance of the 2006 Casa Con Tres Annual Report, for instance, did not occur until September 30, 2008, although a reminder letter had been sent in June 2007. Audited Financial Statements As previously noted, not all of the loan agreements between the HOME Consortium and LHCDC require that the agency submit annual financial statements. Some agreements state only that LHCDC must permit the County to examine its financial records upon request. For example, the loan agreement for the Casa Con Tres property states only the 7 Santa Barbara County HOME Consortium 2006-07 Consolidated Annual Performance & Evaluation Report, July 06- June 07 8 Lompoc Community Development Department Memo to City Council dated November 21, 2011 9 Memo from Lompoc RDA to LHCDC, May 13, 2003 Santa Barbara County Grand Jury 5 A FAILURE OF OVERSIGHT following with regard to audits: Borrower shall make available for examination at regular intervals and during normal business hours to Lender all books, accounts, reports, files, and other papers or property with respect to all matters covered by these Loan Documents, and shall permit Lender to audit, examine, and make excerpts or transcripts from such records.10 2006 was the last year that LHCDC submitted audited financial statements. There is no evidence that HCD requested audited financial statements from LHCDC until March 25, 2009 when HCD finally demanded “entity-wide” financial statements. In the letter, it quoted the loan agreements as requiring audits and inspections upon request. It also referred to Office of Management and Budget (OMB) Circular Number A-133. OMB circulars are specifically mentioned in the loan documents as part of applicable HUD HOME regulations.11 In April 2009, LHCDC responded to HCD‟s request and said that the 2007 audit would be completed by the end of August 2009. The County never received the audit or any subsequent annual financial statements from LHCDC. Postscript In August of 2009, LHCDC received a Notice of Default on its loan from the City of Lompoc for Marks House, the City‟s shelter for homeless families. Additional notices of nonpayment from other lenders followed. In January 2011, LHCDC wrote to the County requesting technical assistance from HUD in creating a workout plan. In late 2011, two commercial lenders filed suit. Eight LHCDC properties were placed in receivership. Marks House closed briefly in January 2012 and reopened under new management. Bridgehouse closed for 52 days and reopened in March, also under new management. Although LHCDC announced plans to dissolve by the end of 2011, it has not done so as of this writing.

Agency Responses 3

Government agencies' official responses to this report's findings and recommendations. Click on a response to see the structured breakdown.