Report Prepared by: Kimberly Nutt, Housing Program Supervisor, Housing Division/Development Services Department
Title
SUBJECT: Continued - Additional Information and Options Requested by Council in Order to Authorize Submission of a Formal Request to the U.S. Department of Housing and Urban Development (HUD) Asking for Voluntary Grant Reductions (VGRs) of Future CDBG and HOME Allocations in Lieu of Repayment from Local Funds; or Authorization to Make the Required Repayments to HUD from Local Funds; or Authorization for a Combined VGR and Local Fund Repayment from Either General Fund or Fund 1020 Affordable Housing, Stemming from the January 2020 HUD Environmental Monitoring Findings and Required Corrective Actions for the Gateway Terrace II Affordable Housing Project
REPORT IN BRIEF
Provides the City Council with additional options and information that was requested at the October 21, 2024, Council meeting to assist Council in authorizing the City Manager to move forward with a formal request to HUD to voluntarily reduce future CDBG and/or HOME annual allocations, or authorize repayment to HUD from General Fund and/or Fund 1020 Affordable Housing, or authorize a combined Voluntary Grant Reduction and General Fund/Fund 1020 repayment, in order to satisfy HUD’s required corrective action to repay ineligible expenditures of CDBG and HOME and resolve the environmental findings.
RECOMMENDATION
City Council - Adopt a motion:
Voluntary Grant Reduction Only:
A. Authorizing the City Manager to submit a formal letter to HUD requesting Voluntary Grant Reductions of both CDBG and HOME allocations, with a full 1-year reduction of CDBG and a 3-year reduction of HOME; or,
B. Authorizing the City Manager to submit a formal letter to HUD requesting Voluntary Grant Reductions of both CDBG and HOME allocations, with a 2-year reduction of CDBG and a 3-year reduction of HOME; or,
C. Authorizing the City Manager to submit a formal letter to HUD requesting Voluntary Grant Reductions of both CDBG and HOME allocations, with a 3-year reduction for each allocation;
Or -
Repayment from Local Fund Only:
D. Approving a Supplemental Appropriation from the unreserved, unencumbered General Fund balance in the amount of $700,507 to repay the full balance of the ineligible activities; or,
E. Approving a Supplemental Appropriation from the unreserved, unencumbered fund balance of Fund 1020 Affordable Housing in the amount of $700,507 to repay the full balance of the ineligible activities; or,
F. Approving a Supplemental Appropriation from each of the above unreserved, unencumbered fund balances, General Fund and Fund 1020 Affordable Housing, in amounts as determined by Council up to the amount of $700,507;
Or -
Combined VGR and Repayment from Local Fund:
G. Approving the City Manager to submit a formal letter to HUD requesting Voluntary Grant Reduction of CDBG at a 1-, 2-, or 3-year reduction, and a repayment of $392,593.55 of HOME ineligible activities from the unreserved, unencumbered fund balances of General Fund or Fund 1020 Affordable Housing, or other appropriate local fund, at Council’s discretion for the number of years of CDBG reduction and HOME local repayment source.
And -
H. Authorize the Finance Officer to make any and all needed budget adjustments and other actions to support the Council’s above determination.
Body
ALTERNATIVES
1. Approve Recommendation A, B, C, D, E, F, or G and H; or,
2. Approve, subject to modifications as specified by Council (with modifications specified in the motion); or,
3. Deny the request completely; or,
4. Refer back to staff for reconsideration of specific items as requested by Council; or,
5. Continue item to a future Council meeting (date and time to be specified in the motion).
AUTHORITY
Charter of the City of Merced; and, Pursuant to Title 24 of Federal Code of Regulations Parts 92 and 570.
CITY COUNCIL PRIORITIES
As provided for in the 2024-25 Adopted Budget.
DISCUSSION
Prior Council actions and all other information that Housing staff has presented for past meetings regarding this matter is provided for your convenience and review at Attachments 3 through 7.
At the October 21, 2024, Council meeting, the required five affirmative votes could not be obtained after three motions that proposed different actions on this matter. However, the Council agreed to continue this item to the next Council meeting and requested staff provide more potential options to assist a required 5-vote decision.
Options A, B, C Voluntary Grant Reductions Only
To help illustrate what a Voluntary Grant Reduction (VGR) reduction in future years would look like, Staff has prepared the table in Attachment 1 and abbreviated below. This table provides a range of available funding over the term of the reduction, one to three years. Program Income for both funding sources is not factored given the unpredictability of those funds.
Through the Annual Plan process Council is aware of the projects and programs that can be funded from these two sources. A VGR could potentially affect the Housing Division’s general administrative and staffing budget, the amount of public service project funding, and the amount of remaining funds available to dedicate to other eligible projects.
|
CDBG - Estimates based upon allocation amounts over last 10 years = $920,000 to $1,150,000/year* |
|
# Years |
Reduction amount/year |
Adjusted total CDBG allocation |
Subtract: adjusted direct/indirect admin budget (20% cap) |
Programs supported by admin funds |
Subtract: adjusted budget for Public Services |
Remaining for other CDBG projects |
|
1 |
$307,913.40 |
$612,086 to $842,086 |
($122,417 to $168,417) |
Continuum of Care @ $38,000 |
($91,812 to $126,312) |
$397,857 to $547,357 |
|
2 |
$153,956.70 |
$766,043 to $996,043 |
($153,208 to $199,208) |
|
($114,906 to $149,406) |
$497,929 to $647,429 |
|
3 |
$102,637.80 |
$817,362 to $1,047,362 |
($163,472 to $209,472) |
|
($122,604 to $157,104) |
$531,286 to $680,786 |
* program income not factored
|
HOME - Estimates based upon allocation amounts over last 10 years = $330,000 to $575,000/year * |
|
# Years |
Reduction amount/year |
Adjusted total HOME allocation |
Subtract: adjusted direct admin budget |
Programs supported by admin funds** |
Remaining for other HOME projects |
|
1 |
$392,593.55 |
$ -62,593 to $182,406 |
($0 to $18,240) |
Fair Housing Services @ $34,000 ** |
$0 to $164,166*** |
|
2 |
$196,296.78 |
$133,703 to $378,703 |
($13,370 to $37,870) |
|
$120,333*** to $340,833 |
|
3 |
$130,864.52 |
$199,135 to $444,135 |
($19,913 to $44,413) |
|
$179,222*** to $399,722 |
* program income not factored
** only with adjusted HOME allocation of $340,000 or greater
*** range remaining does not include required funding of Fair Housing Services
The City does have available CDBG funds to accommodate a single year VGR should the Council wish to structure in that manner. HOME would have to be spread out over future years, three at the minimum.
HUD has recently provided additional information and guidance relating to VGRs of CDBG funds. The ability to use VGRs for repayment was suspended shortly after the attached 2012 HUD VGR memo -- however, HUD is reenacting it very soon, along with other pending changes to CDBG regulations. As such, HUD has advised that, if Council chooses a VGR for the CDBG corrective repayment, the City can submit the request. However, it will be on hold until HUD updates and rolls out its internal processes. That timeline is unknown at this time.
Options D, E, F - Repayment from Local Funds Only
These three options are variations which only include repayment from local sources.
Option D. Would be from the unreserved, unencumbered General Fund balance in the amount of $700,506.95 to repay the full balance of the ineligible activities.
Option E. Would be from Fund 1020 Affordable Housing in the amount of $700,506.95 to repay the full balance of the ineligible activities.
Option F. Would be some combination of the two funds in amounts as determined by Council.
HUD has recently provided feedback to answer the question of whether the CDBG and HOME funds involved in the ineligible activities can be reused by the City once a repayment from local funds has been processed. For both CDBG and HOME, the City will be able to regain access to the previous funds almost immediately, enabling them to then be allocated to another eligible activity through an amendment process, in order to give residents the required opportunity to comment.
Fund 1020 Affordable Housing - Eligible Uses of Fund
The Affordable Housing Policy is provided with this report at Attachment 2. The policy lists the eligible uses of the fund. Council asked a question about eligible uses at the October 21, 2024, meeting.
All the ineligible costs determined by HUD through the 2021 HUD Environmental Findings report are considered either pre-development or soft costs related to providing affordable housing. Included in HOME and CDBG expense were appraisal and market studies, State Water Resources Control Board permits, Financial Advisory Services/ Construction Financing fees, CPA accounting fees, County recording fees, legal fees, architect and engineering fees, and City building permits. Activity delivery costs were charged by the Housing Division to include direct staff hours and indirect costs associated with the project at the time.
Among the eligible uses of Fund 1020, listed at Item (1) c. and n. are the following appropriate uses (excerpted):
(1) c. The predevelopment, development…[costs] of multifamily, residential live-work, rental housing that is affordable to extremely low, very low, low, and moderate-income households, including necessary operating subsidies.
(1) n. Soft costs that support affordable rental housing developments including, but not limited to, costs of engineering and architectural design and drafting of plans, water and sewer facility connection fees, building permit fees, development application fees and costs of discretionary reviews, development impact fees, and environmental reviews and fees.
As previously mentioned, the Gateway Terrace II project is still a viable affordable housing project. Currently site ownership transfer is tied up HUD red tape which affects the ability to use ARPA funds. The project is also barred from using HUD resources but other sources such as the Affordable Housing Fund, State Housing and Community Development (HCD) allocations - competitive programs, state tax credits could be used in support of the project. It is the intention of City staff to continue to work with the developer to identify and secure sources to support the project.
IMPACT ON CITY RESOURCES
VGR Options - any reduction of the annual CDBG and HOME grants will potentially affect the services provided and the administrative budget for the Housing Division. Should the council select one of the three VGR options, those reductions will be seen in future years, if approved by HUD. A VGR may potentially require backfilling of other local sources to cover administrative costs.
Repayment Options - the Affordable Housing Fund has a balance of $881,017 as of 6/30/24. The City Council can choose to pay a lump sum of $700,506.95 from this fund as the GTII project would have met the Affordable Housing Policy for use of the funds. The City Council can also choose to pay a lump sum amount of $700,506.95 from the General Fund. The City Council may also choose to use a mixed amount of funding to repay the lump sum amount. For example, they can vote to repay the amount to HUD with 50% from the General Fund and 50% from the Affordable Housing Fund.
Approval of any Recommendation of D through H will require 5 affirmative votes.
ATTACHMENTS
1. Voluntary Grant Reduction - Anticipated Effect on Future Allocations
2. Affordable Housing Fund Policy (Council Resolution 2023-55)
3. October 21, 2024 - Administrative Report
4. May 6, 2024 - Administrative Report
5. April 2, 2024 - Administrative Report
6. HUD Guidance Memo - Voluntary Grant Reductions in Lieu of Repayment
7. HUD Environmental Findings Report (October 21, 2021)