Report Prepared by: Kim Nutt, Housing Program Supervisor and Venus Rodriguez, Finance Officer
Title
SUBJECT: Approval of a Fiscal Year 2024-25 Supplemental Appropriation from the Unencumbered, Unreserved Fund Balance of Fund 1020-Affordable Housing in the Amount of $218,000 and Transferring to Fund 2500-Housing Administration
REPORT IN BRIEF
Staff is requesting a Fiscal Year 2024-25 supplemental appropriation from the unencumbered, unreserved fund balance of Fund 1020-Affordable Housing Fund in the amount of $218,000 and transferring to Fund 2500-Housing Administration to cover the shortfall due to staff administration of several projects.
RECOMMENDATION
City Council - Adopt a motion approving a Fiscal Year 2024-25 supplemental appropriation from the unencumbered, unreserved fund balance of Fund 1020-Affordable Housing in the amount of $218,000 and transferring to Fund 2500-Housing Administration.
Body
ALTERNATIVES
1. Adopt the motion as recommended by staff; or
2. Modify the action (specify in motion); or
3. Deny the action.
AUTHORITY
Charter of the City of Merced, Section 200.
Affordable Housing Policy.
CITY COUNCIL PRIORITIES
As provided for in the 2024/2025 Adopted Budget.
DISCUSSION
Fund 2500-Housing Administration is the operating fund for staff, materials, supplies, etc. of the Housing Division. Depending on the project type, revenue can typically be received from activity delivery cost (ADC) reimbursement of projects funded by CDBG, HOME, Low- and Moderate-Income Housing, CalHOME, Begin and other housing grants. Due to receiving less revenue than expected in FY 2024-25, the fund is short by $302,360. Staff is proposing to reduce the FY 2025-26 budget by $84,360, which leaves a shortfall of $218,000. Staff is requesting Council approval of a supplemental appropriation in the amount of $218,000 from Fund 1020-Affordable Housing for the shortfall in Fund 2500-Housing Administration.
Generally, there are two main factors that have contributed to the shortfall of expected Activities Delivery Costs (ADC) revenues as they were budgeted for the 2024-25 program year. The 2024 Annual Plan was initially prepared and approved in Spring 2024 with potential revenues from project activity delivery of approximately $401,128. Shortly after this approval, HUD conducted a routine compliance monitoring of the City’s administrative and financial management procedures, which brought forth corrections that needed to be made to longstanding ways that the City had been calculating and drawing down its ADC revenues.
After amending the 2024 Annual Plan with these corrections in February 2025, the plan’s ADC budget was reduced to $299,850, which includes some amounts that likely will not be realized for one to three years. Compliance corrections now dictate that the Division cannot draw down ADC until projects are fully completed. Also, the Housing Division now budgets ADC by the estimated number of direct staff hours that may reasonably be expected to be put into each eligible project - no longer a general percentage of the project budget that is then pooled and used to cover all accrued costs. Changes also occurred to the indirect cost rate and method that the Division had been charging and drawing down indirect costs, due to updates that need to be made to the federal Cost Allocation Plan.
Secondly, some projects take more than one or even a partial fiscal year to complete, and others, such as accumulated HOME funds meant for affordable housing projects, which carry budgeted ADC estimates, were not committed to a project during the year. Large affordable rental housing projects take approximately 18-24 months to construct and full lease-up can take up to six months following occupancy clearance.
Further, access to the CDBG and HOME grants was not obtained until early November 2024, leaving little time amid the HUD financial procedure corrections and Plan amendment to implement and fully complete projects within the 2024-25 fiscal year. For example, Sierra Saving Grace was successful in acquiring a two-unit property by the end of the fiscal year, but rehabilitation work and tenant occupancy carried over to August 2025. Completion of most projects cannot be declared until the occupant reporting data is documented and the project then closed out in HUD’s online system.
For State grants such as CalHome 2021 for first-time homebuyer and homeowner occupied rehabilitation activities or HomeKey for affordable housing projects, there is usually no allowance for activity delivery hours accrued by City staff, since project activities are typically carried out by outside organizations and/or developers who receive the benefit of the grants’ administrative cost allowances. However, in most cases, the accrued time and other costs logged by City staff is significant and directly project-related, including environmental review coordination, public noticing/publishing, project assistance application review and pre-approvals, and post-construction costs such as long-term project compliance monitoring. These costs against State grant projects cannot be billed to the federal grant general administration fund, necessitating another funding resource to be determined. As such, these are the types of administrative costs that are incurred by Housing staff which Council has approved as eligible to be funded by Fund 1020-Affordable Housing based on activity type. Costs not listed as eligible in the Fund 1020 policy but directly related to affordable housing may require revisions to the Affordable Housing Policy which will likely come to City Council for approval with Mid-Year budget review.
The following is the Fiscal Year 2024-25 financial report and FY 2025-26 proposed budget reduction to balance the fund.
|
Fund 2500 Housing Administration |
|
Fiscal Year 2024-25 |
|
|
|
|
Beginning Balance |
$ 99,899 |
|
|
|
|
Revenue |
|
|
CDBG |
103,595 |
|
HOME |
41,581 |
|
LMI |
25,000 |
|
Interest |
496 |
|
Other |
12,732 |
|
Total Revenues |
183,404 |
|
|
|
|
Expense |
|
|
Personnel |
454,287 |
|
Materials and Supplies |
41,235 |
|
Administration/Overhead |
90,141 |
|
Total Exepense |
585,663 |
|
|
|
|
Revenue over Expense over/(under) |
(402,259) |
|
|
|
|
Fund Balance |
$ (302,360) |
|
|
|
|
|
|
|
FY 25-26 Appropriation Reduction |
84,360 |
|
|
|
|
Fund 2500 Shortfall |
$ (218,000) |
The current City Council adopted Affordable Housing policy allows administrative costs incurred by the City for staff time spent on allowable activities to be recovered from the Affordable Housing funding.
IMPACT ON CITY RESOURCES
Fund 1020-Affordable Housing has $307,854 as of the end of FY 2024-25. There is funding available of $218,000 to cover the shortfall needed in Fund 2500-Housing Administration. If this transfer is approved, the ending balance in Fund 1020-Affordable Housing will be $89,854. In FY25-26 adopted budget, there is a budgeted Transfer In of $1,012,500 from the General Fund into Fund 1020-Affordable Housing.
This item will require 5 affirmative votes of Council Members for approval.
ATTACHMENTS
None.