Report Prepared by: Kimberly Nutt, Housing Program Supervisor, Housing Division/Development Services Department
Title
SUBJECT: Consideration and Approval of Substantial Amendments to the 2019 and 2024 U.S. Housing and Urban Development Annual Action Plans, to Consider Repurposing Remaining Coronavirus Community Development Block Grant (CDBG-CV) Funding Originally Appropriated to COVID-19 Pandemic Response Programming in the 2019 Annual Action Plan; to Consider Repurposing CDBG Funding Originally Appropriated in the 2024 Annual Action Plan; and, to Consider Appropriating Unanticipated Amounts of 2024 Program Year CDBG Program Income to Suitable Eligible Project(s) that will Expedite Expenditures
REPORT IN BRIEF
Considers and recommends approval of proposed amendments to the 2019 and 2024 U.S. Department of Housing and Urban Development Annual Action Plans involving a change in the use of the remaining 2019 Coronavirus Community Development Block Grant (CDBG-CV) funds and the City’s normal entitlement Community Development Block Grant (CDBG) funds, to activities that will expedite the disbursement of both funding sources to meet approaching HUD expenditure deadlines. Additionally, the 2024 Annual Action Plan substantial amendment considers the prior request of City Council to have the opportunity to evaluate making a change to the use of project funding preliminarily awarded to Sierra Saving Grace Homeless Project’s acquisition/rehabilitation activities and recommends no change to the previously approved use of CDBG funds.
RECOMMENDATION
City Council - Adopt a motion:
2019 Annual Action Plan Amendment:
A. Approving Fourth Amendment (Third Substantial Amendment) to the 2019 Annual Action
Plan that moves all remaining, unspent CDBG-CV funds (up to $500,109.69) from all current COVID-19 Pandemic support and response projects to the 2023 program year K/13th Street/Hwy 59 Water-Sewer Main & ADA Improvement project currently in progress, which serves a primarily residential area and prepares and plans for future pandemics by helping to protect the City’s potable water supply; and,
B. Creating a new project in the 2019 Annual Action Plan that proposes to add all remaining, unspent CDBG-CV funding (up to $500,109.69) to the 2023 program year K/13th Street/Hwy 59 Water-Sewer Main & ADA Improvement Project.
2024 Annual Action Plan Amendment:
Approving the First Amendment to the 2024 Annual Action Plan, to include:
C. Allocating $60,327.87 of unanticipated 2024 Program Year program income to a new 2024 project that proposes to provide supplemental CDBG funding to the 2023 program year K/13th Street/Hwy 59 Water-Sewer Main & ADA Improvement Project; and,
D. Reallocating the combined total of disencumbered CDBG Prior Year Resources and reductions in budgeted Activity Delivery Costs ($221,867.37) to a new 2024 project that proposes to provide supplemental CDBG funding to the 2023 program year K/13th Street/Hwy 59 Water-Sewer Main & ADA Improvement project; and,
E. Reallocating in advance an anticipated $307,913.40 of CDBG Prior Year Resources, which are expected to be returned to the City during the 2024 Program Year, to the new 2024 project that proposes to provide supplemental CDBG funding to the 2023 program year K/13th Street/Hwy 59 Water-Sewer Main & ADA Improvement Project, after a repayment to HUD of unrelated ineligible expenditures with local funds is completed; and,
F. Creating a new project in the 2024 Annual Action Plan (Project #14) utilizing the funding reallocated in Actions B, C, and D, above, to provide supplemental funding to the 2023 program year K/13th Street/Hwy 59 Water-Sewer Main & ADA Improvement Project that is currently in progress; and,
G. Formally approving 2024 Project #2, and award CDBG funding in the amount of $586,381 to Sierra Saving Grace Homeless Project, for acquisition with rehabilitation of a 1-4 unit property(ies) within the Merced city limits, as preliminarily approved with the original 2024 Annual Action Plan approval in August 2024; and,
H. Authorizing staff to finalize and complete all sections of the Annual Action Plan affected by the substantial amendment and submit the amended plan to HUD; authorizing the City Manager to execute all related documents, certifications, and agreements with HUD; and,
I. Authorizing the Finance Officer to make any necessary budget adjustments.
Body
ALTERNATIVES
1. Approve, as recommended by staff; or,
2. Approve, subject to conditions as specified by the City Council; or,
3. Deny the request; or,
4. Refer back to City Manager or Housing Division staff for reconsideration of specific items as requested by the Council; or,
5. Defer action to a future meeting (date and time to be specified in the motion).
AUTHORITY
Charter of the City of Merced, Section 405, 409, and 411 et seq.; Title 24 of the Code of Federal Regulations Section 91, requiring participating local government jurisdictions to involve citizens in the process of substantially amending previously approved Annual Action Plans involving the use expenditure of Federal HUD funds; and the City of Merced/HUD Citizen Participation Plan, as previously amended.
CITY COUNCIL PRIORITIES
As provided for in the 2024-25 Adopted Budget; and the 2024/25 Council Priorities regarding Quality of Life, Economic Development, Public Safety, and Community Investment that can be addressed through HUD funding.
DISCUSSION
Housing Division staff requests City Council consideration of two substantial amendments to two different Annual Action Plans that will shift the use of funds to activities that will both expedite expenditures to meet various HUD-imposed deadlines and meet federal fund financial management requirements.
For the purpose of the proposed changes, a substantial amendment, as defined by the City of Merced’s current HUD Citizen Participation Plan, is defined as a change that affects more than 75% of the allocation of funding in any project and/or total distribution, and is required when substantially changing any one of the following:
• To substantially change the allocation priorities or the method of distribution of funds; or,
• To carry out an activity using funds from any program not covered by the Consolidated Plan, including program income, not previously described in the Consolidated Plan; or,
• To substantially change the purpose, scope, location, or beneficiaries of an activity.
2019 Annual Action Plan - 3rd Substantial Amendment - CDBG-CV funds
Background:
Between April and September 2020, HUD allocated a total of $1,193,573 of Coronavirus Community Development Block Grant (CDBG-CV) funds in two separate rounds of funding (1st round: $661,246; 2nd round: $532,327) to the City of Merced that were authorized by the U.S. Congress’s Coronavirus Aid, Relief, and Economic Security (CARES) Act to prevent, prepare for, and respond to the effects of the COVID-19 Coronavirus pandemic.
The City substantially amended its 2019 Annual Action Plan twice to allocate the two rounds of funds to projects which, after a community needs assessment, addressed the highest community needs at that time: short-term rental assistance, food bank assistance, and microenterprise/small business assistance with a documented Covid-19 related reason. As of 12/19/2024, the City and its program partners have expended a total of $693,463.31 of the allocated CDBG-CV funding. However, the programs are no longer able to spend the funds, indicating that community needs have shifted back closer to pre-Pandemic levels. A balance of approximately $470,109.69 remains, which takes into account one reimbursement request pending from one of the programs. If not reimbursed, the balance of CDBG-CV to be reallocated will be $500,109.69.
When they were issued by HUD, the CDBG-CV funds could be used to prevent, prepare for, and respond to not just the 2020 COVID-19 pandemic, but for future pandemics, as well. Therefore, with the COVID-19 pandemic behind us and a final expenditure date of September 4, 2026, for the funds approaching quickly, the Housing Division wishes to re-allocate the entire available remaining balance of CDBG-CV funds to activities that consider ways to prevent and prepare for the next pandemic.
Staff Recommendations:
Prevent & Prepare eligible activities that the City potentially has the capacity to carry out are those included in Attachment 3. This list includes projects which reconstruct degraded water lines to ensure potable water delivery to existing residents, which is the proposed new use for the remaining CDBG-CV funding (highlighted in the attachment).
Housing staff recommends moving the remaining balance of CDBG-CV funds (up to $500,109.69) to fund the water main replacement portion of a project that was approved in the 2023 Annual Action Plan, is currently active, and needs additional funding to complete the work by early Spring 2026:
• K/13th/Hwy 59 Water/Sewer Main Replacement and ADA Improvements
This public infrastructure project was originally linked to the Gateway Terrace II (GTII) affordable housing development, which has had its previously allocated funding since rescinded by HUD. HUD has approved this infrastructure as a separate project from the GTII development, and thus, is able to use HUD issued funds.
The project, which has its required (Federal) National Environmental Policy Act (NEPA) environmental clearances in place, involves partially collapsed water and sewer mains that run through a public utility easement in the parcel, across K Street, through a connecting alleyway, and underneath Martin Luther King Jr. Way where it becomes CA State South Highway 59 south of Highway 99. The overall project also includes the installation of Americans with Disabilities Act (ADA) improvements in the right-of-way surrounding the vacant GTII site. All of these improvements are still necessary for any type of project to be built on the site, especially the needed repairs to the municipal utility mains.
In addition to replacing the partially collapsed, aging lines, an element of the scope of work involves moving the water main further away from the existing sewer main in the existing trench. Moving the two mains further away from each other ensures that water quality will not be affected should the sewer line leak at any time in the future. It is this improvement to protection of the City’s current and future water supply that enables it to be funded by CARES Act CDBG-CV funds.
Housing and Engineering staff have begun collaborative work on the project, including drafting an interdepartmental memorandum of understanding (IMOU) that describes the project budget (including these funds), scope of work, and expected responsibilities of each division.
Considerations;
In considering a change of use for these funds, staff’s current project workload and capacity to carry out compliant projects within established protocols, procedures, and timeframes should be considered. All remaining CDBG-CV funds must be fully spent by September 4, 2026, or HUD will rescind them. Therefore, the new activity selected should be that which can be carried out and completed as efficiently as possible. The best way to do this is to simply add the funds to an eligible project that is currently in progress.
In addition, completing this project by Spring 2026 is paramount, given that the State Dept. of Transportation is slated to begin work on South Highway 59 in early Spring 2026. This project must be completed before Cal Trans can start.
2024 Annual Action Plan - 1st Substantial Amendment - CDBG funds
Background:
The 2024 Annual Action Plan was approved by the City Council at the Final Public Hearing on August 5, 2024, and the Housing Division received HUD approval of the plan on November 7, 2024.
At the final meeting, City Council approved the list of projects included in Section AP-35 of the plan, but only preliminarily approved Project #2, which involves acquisition and rehabilitation of existing 1-4 unit residential property(ies) through a continuing partnership with Sierra Saving Grace Homeless Project (SSG), a 501(c)(3) non-profit organization. The preliminary approval was with the request that staff begin a substantial amendment process so that the City Council could consider alternative use(s), specifically ADA accessibility projects, for the $703,656 CDBG funds tentatively slated for the acquisition/rehab activities (amount includes previously budgeted ADC amounts).
Since August, however, more CDBG funding has become available.
First, the Housing Division has received $60,327.87 more CDBG program income (PI) than what was originally estimated to be received by this time (estimates are based solely on what is expected to be received from existing housing loan repayments). HUD requires that current year program income be expended before the yearly allocated amount.
Because of the larger than expected amount of program income now on-hand, this could potentially have a detrimental effect on required CDBG expenditure timelines. The City cannot have more than 1.5 times its yearly allocation on hand on it’s “timeliness test” date of May 2nd each year. Thus, the additional PI funds need to be allocated to a fast-moving project in order to expend them before this timeliness deadline.
Compounding the potential issue of having too much on-hand funding in May, a Summer 2024 HUD monitoring revealed that the Housing Division must alter how it has historically budgeted, calculated, and charged Activity Delivery Costs (ADC) projects to cover the time staff spends managing and completing projects. This has resulted in a reduction of the amounts that Housing staff will be able to charge to CDBG as ADC costs, leaving additional CDBG funds to reallocate to new project(s). Further, a handful of 2023 CDBG projects were not able to expend all of their awarded funding by the end of the program year. Between ADC budget reductions and these unexpended prior year carryover funds, there is $221,867.37 of CDBG funds that need to be reallocated to other uses and spent.
Finally, as a result of the Council decision made in recent months regarding which method of repayment to use to repay HUD for previous CDBG expenditure that were later determined to be ineligible (voluntary grant reduction (VGR) or local fund repayment), the Housing Division is expecting the repaid CDBG funds in the amount of $307,913.40 to be returned to the City by HUD to be reallocated and expended. At the time, Council was advised of the many and fairly complicated pros and cons involved in their decision, and the return of these funds was one of the “cons”. With the repayment pending, the City must plan for what project these funds will be reallocated to when they do come back, so as to ensure that they don’t also have a negative effect on the CDBG Timeliness test date in 2025 or even 2026.
Staff Recommendations:
1. Project #2 - Acquisition with Rehabilitation Activities:
Per the above provided background that has occurred since Council’s August approval of the current 2024 Annual Action Plan, the decision now at hand involves more than Council’s original request for a substantial amendment decision of whether to change the use of funding for 2024 Project #2 (Acquisition/ Rehabilitation housing activities). It has shifted to the primary need for projects that will help the Housing Division and the City meet HUD’s Timeliness requirements. As of the writing of this report, the City must fully complete a drawdown of at least $535,637 of CDBG funds by May 1, 2025.
With quick expenditure of CDBG funds now a major priority because of the excess of CDBG funding at hand, City staff does not recommend that the originally approved use be changed. The City has previously partnered with SSG on this type of project multiple times, each time successfully being able to expend funds quickly and each of those times with successful outcomes of converting market rate housing to affordable units, preserving the City’s existing housing stock, improving neighborhood blighted properties, and providing affordable, permanent supportive rental housing to deserving LMI and formerly homeless residents.
As the City is not yet contracted with SSG due to the project’s preliminary status, a specific project site has not yet been formally selected; however, SSG staff have been scouting potential properties during the interim in order to implement the project quickly, if needed, and once an agreement is in place with the organization. Once formally contracted, SSG is expected to be able to help the Housing Division draw down $586,381 by the May 2nd timeliness deadline. Then, once fully rehabbed, all involved units in a purchased property will be subsequently rented to low- to moderate-income (LMI) households, in order to ensure that the intended CDBG National Objective is met.
Simply stated, without the partnership of SSG for the approved acquisition/rehab activity, the City will not meet HUD’s CDBG expenditure timeline requirements. This will result in increased workload for Housing staff and an increased “at-risk” status by HUD, resulting in additional time-consuming monitoring to assure that the City is in compliance.
2. Allocation of all excess CDBG to an existing 2023 (prior year) project:
To expedite the additional CDBG funding that has become available since August 2024 as discussed above, the Housing Division recommends the creation of a new 2024 Annual Action Plan project, numbered as Project #14, to provide supplemental CDBG funding to the same 2023 water/sewer main and ADA improvement project as recommended for the re-use of CDBG-CV funds discussed above for the substantial amendment to the 2019 Annual Action Plan:
• K/13th/Hwy 59 Water/Sewer Main Replacement and ADA Improvements
As previously stated, this project has already received its NEPA environmental clearance, is in need of additional funding, and is already underway by Engineering and Housing staff. This is important, as this saves all involved staff valuable time, does not add additional projects to an already full list of capital improvement projects, and ensures that the HUD CDBG timeliness test to be done in 2026 is also compliant and timely.
As such, the total amount of 2024 CDBG funding to be allocated to the 2023 water/sewer main project is $590,108.64.
Combined Effect of both Substantial Amendments
Since both the 2019 and the 2024 Substantial Amendments are recommended to fund the same project, the below chart illustrates all changes that are proposed. A total of $1,090,218.33 would supplement the project between both the CDBG-CV and CDBG funding sources.
|
Annual Plan |
Funding Source Affected |
Effect to Expected Resources (AP-15) |
Effect to Annual Plan Goals and Objectives (AP-20) |
Effect to Annual Plan Projects list (AP-35) |
|
2019 |
CDBG-CV |
No change |
1. Increase 2019 Goal 4 - Public Infrastructure Improvements up to $500,109.69 2. Decrease Goal 2 - Support Services up to $500,109.69 |
1. Add new project to be carried out in PY 2024 and 2025 up to $500,109.69 of CDBG-CV funds: K/13th/Hwy 59 Water-Sewer Main Replacement & ADA Improvements 2. Reduce balance of all remaining CDBG-CV projects to $0 |
|
2024 |
CDBG |
1. Increase Program Income by $60,327 2. Increase Prior Year Resources by $221,867 for rebudgeted ADC/prior year unused funds 3. Increase either Program Income or Prior Year Resources by $307,913 (HUD to provide guidance of where to show returned funds) |
1. Increase Goal 1A by approximately $784,631 2. Decrease Goal 2B by approximately $34,510 3. Decrease Goal 2C by approximately $147,466 4. Decrease Goal 3A by approximately $10,589 5. Decrease Goal 4A by approximately $1,959 |
1. Add new 2024 project as Project #14 with approximately $699,698 of CDBG: K/13th/Hwy 59 Water-Sewer Main Replacement & ADA Improvements 2. Increase Project #1 by approximately $12,065 3. Decrease Project #2 by approximately $99,156 4. Decrease Project #3 by approximately $22,500 |
Other Requirements for Citizen Participation:
In addition to the requirement to process substantial amendments for each of the two Annual Action Plans for the changes needed, the Citizen Participation Plan also requires the City to carry out a minimum 30-day Public Review and Comment Period to give residents reasonable opportunity to both review the proposed changes and provide their input. At a minimum, the City is required to notify the public of this opportunity through the publishing of public notices in three languages (English, Spanish, and Hmong) in local newspapers, on the City’s website, and at the Merced Civic Center, and provide the public with easily accessible ways to view and comment.
Notices in English Spanish, and Hmong were published in the Merced Sun-Star and Merced County Times on January 2 and 3, 2025, and provided a 32-day Public Review and Comment Period from January 3 to February 3, 2025. Both the notices and the website provided instructions for viewing and commenting, as well as instructions for requesting special accommodations, such as language translation and disabled accessibility.
The adopted Citizen Participation Plan does not require a public hearing for approval of substantial amendments. However, residents are still encouraged to provide any comments or other input for this matter, as the City Council typically allows.
IMPACT ON CITY RESOURCES
The two Substantial Amendments involve changes to project activities using CDBG-CV and CDBG funds that have already been allocated and distributed by HUD to the City, with the exception of the additional 2024 program income that has been received thus far during the current program year, as well as the expected receipt of prior year CDBG funds by HUD after repayment to them of the GTII ineligible expenses.
Normally, amounts equaling the additional program income received above the originally estimated amount is held in the unreserved, unencumbered fund balance as unallocated funding. It rolls over into the next year’s Annual Plan as prior year carryover funding. However, HUD allows grantees the option of using unallocated program income the year it is received, as long as the City performs the required Citizen Participation process that allows residents the opportunity to comment on the use of funds and any changes to previously stated annual goals.
Recommendation will require five affirmative votes.
ATTACHMENTS
1. Description and Summary of Proposed Changes - Public Review document
2. Infrastructure project alternatives (with staff recommendations) - Public Review document
3. April 30, 2021 HUD Quick Guide - Using CDBG/CDBG-CV to Support Pandemic Recovery