Report Prepared by: Kimberly Nutt, Housing Program Supervisor/Development Services Department
Title
SUBJECT: Continued Public Hearing to Receive Public Comment Regarding the U.S. Department of Housing and Urban Development (HUD) 2026 Annual Action Plan; and Adoption of a Resolution Approving the Draft 2026 Annual Action Plan; and, Final Determination and Award of Project Funding Pending HUD Approval of the Submitted Plan
REPORT IN BRIEF
Provides an opportunity for the Public to comment on topics relating to the 2026 Annual Action Plan; Requests Council’s final determination and award of 2026 project funding and adoption of a Resolution approving the Draft 2026 Annual Action Plan, to enable final completion and submittal of the 2026 Annual Action Plan to HUD; and Authorizes the City Manager to execute all related agreements and documents.
RECOMMENDATION
City Council - Adopt a motion:
A. Approving Option 1 of the final project list and related funding amounts to be included in the Final 2026 Annual Action Plan; and,
B. Adopting Resolution 2026-31, a Resolution of the City Council of the City of Merced, California, Approving the 2026 HUD Annual Action Plan, and Certifying Compliance with the Requirements of the Community Development Block Grant (CDBG) and Home Investment Partnership (HOME) Programs.
Body
ALTERNATIVES
1. Approve, as recommended by staff; or,
2. Approve, and refer to staff for reconsideration of and/or changes to specific items prior to submitting the plan to HUD (specified items and changes to be addressed in the motion); or,
3. Refer back to staff for reconsideration of specific items and schedule re-review and subsequent approval of the plan to a future City Council meeting (specific items to be addressed and date and time to be specified in City Council motion); or,
4. Continue to a future City Council meeting (date and time to be specified in City Council motion).
5. Deny the request (City will not receive 2026 HUD funding).
AUTHORITY
The U.S. Department of Housing and Urban Development (HUD), per Title 24 of the Code of Federal Regulations (CFR) 91.105, requires that participating jurisdictions involve citizens in the development of each Five-Year Consolidated Plan, Annual Action Plan, and Consolidated Annual Performance and Evaluation Report (CAPER), including any substantial amendments to the plans; the Charter of the City of Merced, Section 405, 409, and 411 et seq. of the City of Merced; and, pursuant to 24 CFR Subpart F, the City is required to submit the Annual Action Plan to HUD to receive grant funds.
CITY COUNCIL PRIORITIES
As provided for in the 2026-27 Adopted Budget; and all current and future Council Priorities that can be addressed through HUD funding.
DISCUSSION
Housing Division staff requests that Council re-open the Public Hearing continued from the May 18, 2026, meeting and provide an opportunity for City residents and other interested parties to provide final input to the 2026 Annual Action Plan. After all public comment has been heard, staff requests Council then close the public hearing.
After closing the public hearing, staff requests that Council discuss and select the final project funding option that have been provided by staff at Attachments 1 and 2, or provide alternative direction to staff that will enable the final completion of the 2026 Annual Action Plan and subsequent submittal of the plan to HUD for their acceptance and subsequent grant funding issuance.
The Draft of the 2026 Annual Action Plan is provided at Attachment 5 and awaits the necessary final project funding decision in order to finalize the expected project outcomes (i.e., number of individuals or households served) and total per-goal dollar figures in the AP-20 Goals and Objectives section, as well as completion of other pending sections of the plan that discuss planned projects and expected accomplishments.
Any requested final Council changes will be incorporated into the final approved draft to be submitted to HUD by our “on time” deadline of June 3, 2026. The City’s normal submittal due date is the later of either: 1) May 15th of each year (45 days before the July 1 start of each program year); or, 2) Sixty (60) days following HUD’s national announcement of grant funding allocations. HUD announced allocations on April 3, 2026.
Council may also choose to provide direction to staff and request that approval of the plan (and award of funding) be deferred to the next or specified future Council meeting. This choice would mean that submittal of the plan to HUD would be after the City’s June 3rd due date, but would still be acceptable by HUD as a late submittal. However, the regulatory deadline of August 16, 2026, should be considered. After this date, the City would forfeit all its allocated CDBG and HOME funding for the program year.
Following submittal, HUD may require City staff to edit elements of the plan in order to meet specific HUD requirements and regulations that will enable acceptance and approval of the plan. As such, staff requests permission, through the City Manager’s authority, to complete these changes to Council’s approved final draft.
Eligible Activities Using CDBG and HOME Funds - A Quick Review
Expenditure of CDBG and HOME funds is entirely regulated by HUD and the City, by accepting HUD’s allocation of those funds, is required to follow those laws, including laws requiring that the City develop written policies for management of the funding. CDBG is regulated under Title 24 of the Code of Federal Regulations (CFR) Part 570, and HOME by 24 CFR Part 92.
CDBG can only be spent on certain eligible activities under the general categories of Public Facilities and Improvements, Public Services, Economic Development, and Housing activities - but not construction of new housing.
In addition, CDBG activities must meet at least one of the three HUD National Objectives, being: 1) activities benefitting low- and moderate-income (LMI) persons; 2) activities which aid in the prevention or elimination of slum or blight; and, 3) activities designed to meet community development needs having a particular urgency (such as during a national or locally declared emergency). National Objective #1 typically require a 51% LMI minimum benchmark - however, HUD also requires that at least 70% of all CDBG funds must be directed to benefitting LMI persons and households over a one, two, or three-year period that the City designates at the start of the Consolidated Plan period. In the Con Plan, the City Manager certified the designation of Program Years 2025 (last year) and 2026 as this period.
A maximum of 15% of the combined sum of the yearly CDBG allocation plus prior-year program income can be - but is not required to be - directed to activities HUD considers public services. Therefore, the City is limited to this sum as to how much we can fund to local organizations for public service funding. CDBG Administration costs are strictly limited to 20% of the year’s allocation, and housing-related projects such as acquisition of property with associated rehabilitation activities is not a public service and is not subject to the 15% cap. Finally, the City is required to spend all or most of its CDBG allocation each year and have no more than 1.5% of funds remaining on May 2nd of each year (“timeliness deadline”) or HUD may penalize with a smaller allocation of funding in ensuing years.
HOME funds, unlike CDBG, can be directed specifically to construction of new housing units, as well as rehabilitation of existing ones, and all HOME funds must benefit low- to moderate-income households. Administrative costs are limited to 10% of the HOME allocation, and HUD requires HOME grantees to set aside a minimum of 15% towards activities to be carried out by a Community Housing Development Organization (CHDO), which can also be directed to construction of rental housing units. Other eligible uses of HOME funds include homeowner rehabilitation, homebuyer activities (acquisition, new construction, or rehabilitation), and tenant-based rental assistance (TBRA) activities.
Recommendations for Funding
To avoid repetitive information, please refer to the March 16, 2026, Administrative Report included as Attachment 3, for information regarding the applying organizations.
Attachment 1 provides the final breakdown of planned project funding utilizing the 2026 CDBG and HOME allocations, estimated program income to be received during the program year, and all unencumbered prior year funds that are not being directed to a previously approved project (carryover funding). This attachment keeps to the four recommended Public Services projects that were presented by staff at the March 16th meeting and has been prepared as “Option 1.”
Attachment 2 provides an alternatively suggested funding strategy for Public Services projects, and includes a fifth project proposed by Youth for Christ Central Valley for a youth program for income-eligible 11-19 year old city residents. This attachment was prepared specifically to address only public service project funding.
For both Options, all other projects using CDBG and HOME funding remain unchanged, as does the Activity Delivery Cost (ADC) amount that is being set aside to implement all four (or five in Option #2) of the public service projects.
Factors to Consider
Staff recommends that the following factors be taken under consideration for making an informed decision regarding award of 2026 project funding:
1. Community Needs Assessment Survey - in weighing all of the proposed public service projects in terms of their potential positive impact to the community, all five proposed projects hit either the top or the third levels of the “Top 3 Overall Greatest Needs” responses given by the community (#1: job training, skills development, money management programs; and #3: homeless services, prevention, and housing solutions). While all five programs would no doubt be beneficial and worthwhile, the difficulty lies in the amount of time that Housing staff spends on implementation and administration of public service programs, particularly with new organizations and programs that require substantially more time spent with technical assistance and other guidance to help carry out their objectives. More experienced repeat or returning organizations generally need less project management and guidance.
2. CDBG Timeliness Responsibilities - the City did not meet HUD’s May 2, 2026, CDBG Timeliness deadline this Spring, due to combined delays affected by the HUD office shutdowns in Fall/Winter 2025, which also contributed to the City not having access to CDBG and HOME funding until mid-January 2026. Backlogged infrastructure projects have resulted, and their completion during PY2026 must be prioritized to avoid repeated noncompliance. To meet the annual May 2 Timeliness Test, current HUD regulations require that the City must not have more than 1.5% of its current CDBG allocation unexpended by that day. There is currently a pending HUD rule change that may soften this regulation and its penalties in the future, if implemented.
3. Current Workload and Staff Capacity - Housing and Engineering staff have two public infrastructure/parks projects to implement and expend CDBG funding on this coming year. Supplemental funding to an existing/approved project (like the Joe Herb Park project) can be spent faster than creating an entirely new project, which requires added time to complete and obtain environmental reviews and clearances. Over the coming year, Housing’s three staff members will be working extremely hard to implement projects and complete backlogged tasks that will include the above-mentioned, as well as the implementing the stalled Habitat for Humanity East Main reconstruction/rehab project and finishing the development of comprehensive Policy and Procedures for all HUD-related processes as required by HUD to meet several different compliance standards. Each additional public service program awarded strains staff’s capacity to effectively and thoroughly manage each project.
4. Activity Delivery Costs to Fund the Housing Division staff - HUD allows the Housing Division staff to charge direct “activity delivery” (ADC) hours towards the cost of implementing infrastructure, housing rehabilitation, certain new construction projects, and public service projects. The Housing Division is currently fully staffed at three positions and has historically received no budgeted funds from the General Fund, due to its exclusive dependance on the allowed direct ADC hours, 15% de minimis indirect cost charges, and the 20% CDBG and 10% HOME administration allowances.
5. Prior Efficiency of Acquisition with Rehab Projects - This type of program has been consistently repeated with partners Sierra Saving Grace (and the Merced Rescue Mission) since 2016 and has had multiple layers of success and positive impact at a relatively low cost per unit, as well as being able to efficiently expend the awarded CDBG funds - important in helping the City to meet its CDBG Timeliness responsibilities with HUD. Each project has housed and provided individualized case management services to homeless, transitional, chronically homeless, and extremely low- to moderate-income individuals and families, and with affordability requirements on the properties for 30 years, guarantees low rents for these tenants long-term while preserving the City’s existing housing stock and eliminating Code Enforcement involvement with these previously blighted and noncompliant properties. Further, the City’s acquisition with rehabilitation program model has been highlighted to other jurisdictions by HUD itself, specifically regarding how to successfully, efficiently, creatively, and compliantly expend CDBG funds towards the creation of affordable housing.
Additional Considerations - Council Direction Provided at the March 16, 2026
At the March 16th First Public Hearing, Council’s comments centered around the current need for youth programs that help to reduce gang violence and teen delinquency, through mentorship, life skills training, and career guidance and development.
Three out of four Councilmembers expressed they would like to see the Youth for Christ Central Valley project included in the public service project awards. For this reason, Option #2 was prepared for Council consideration. With Option #2, organizations will receive approximately 75% of their requested funding. Option #1 provides them more - approximately 83.5% - however, provides no funding to the Youth for Christ Central Valley youth program.
For both options, Housing ADC remains the same - note that adding a fifth program will strain these administrative resource and may result in the need to supplement staffing costs from other City funds. Housing ADC was increased from the 6% estimate presented in the March 16th estimated budget to an 8.7% ADC estimate to better fund the Division’s anticipated work efforts towards public service project implementation.
Comment from Council also noted the desire to supplement the 2025 Joe Herb Park project with funding for lighting improvements; so, this is now listed where the previous “TBD” CDBG project was at the first public hearing in March.
Section 108 - Fire Station 56
Additionally, funding for the planned new Station 56 fire station in North Merced to service the northward growth of the City was discussed at the March 16th Council meeting. As noted by staff, there have been internal discussions this Spring regarding the strong potential to use available Section 108 funding to fill the gap needed to construct the new station.
This funding is a HUD-provided source available to Entitlement Cities (like Merced) under the CDBG Regulations found at 24 CFR Part M - Loan Guarantees (Sections 570.700 thru 570.712). Therefore, projects being considered for Section 108 funding are subject to all HUD requirements, including procurement, environmental compliance, National Objective, and income eligibility.
Housing and Planning staff will soon choose and begin working with an environmental consultant to begin the federal Part 58 National Environmental Policy Act (NEPA) and California Environmental Quality Act (CEQA) review processes for the Station 56 project, in order to concurrently conduct the citizen participation and application process required to receive Section 108 funding. Staff cannot select a consultant until contracts approved recently by Council through the Environmental Consultant RFQ are fully executed.
As the public-facing discussions regarding Section 108 funding have not occurred until very recently and were not sufficiently mentioned in the Public Review draft of the 2026 Annual Plan for the required 30-day comment period, Housing staff will also soon begin a separate citizen participation and input process that will satisfy HUD requirements, as it also requires a public comment period. Staff cannot proceed with an application until after this citizen participation process is completed.
Available Funding and CDBG Public Services 15% Cap
Attachments 1 and 2 have been prepared and calculated as of April 24, 2026, using actual figures for CDBG and HOME PY2025 program income, which will become “prior year program income” for the purposes of the PY2026 Annual Plan. For the months of May and June and for the remaining days of April, very conservative estimates for program income expected to be received through June 30, 2026, have been used to calculate the public services cap shown on the attachments. The public service cap is calculated using the following formula and current figures as of 4/24/26: PY2026 allocation $1,045,361 + PY2025 program income $253,731.84 x 15% = $194,863.92 (rounded down from 1,000th decimal place to not exceed allowance).
Currently unencumbered CDBG and HOME amounts that are not already set aside for a project will be brought over into the next year as “carryover” funds. Currently, these funds equal $206,711.38 (CDBG) and $287,990.56 (HOME).
Before submitting the Annual Plan to HUD, Housing staff will recalculate available CDBG and HOME funding using the latest actual program income and carryover figures and low estimates.
The total available funding is $1,360,072.38 of CDBG and $800,355.66 of HOME funding.
Of special note, all of the available HOME funding through the end of PY2023 is now conditionally committed to the Linc Housing affordable housing project on I Street, Merced, and has been factored into the figures used for carryover funding.
Citizen Participation and Outreach Efforts To-Date
Attachment 3 explains the extent of citizen participation and outreach efforts that had been performed as of March 16, 2026, first public hearing.
For a total of thirty-one days, from March 23, 2026, to April 22, 2026, the Public Draft of the 2026 Annual Action Plan was posted for public review and comment, which meets and exceeds the minimum 30 days that the plan was required to be made available. No comments were received by the Housing Division.
The City is required to hold two public hearings during the year in association with the Annual Action Plan preparation process. The second public hearing was publicly noticed to be held on May18, 2026; however, the draft plan was not yet in an approval-ready state. As such, the public hearing was opened and continued to June 1, 2026, Council meeting.
IMPACT ON CITY RESOURCES
No budget appropriation action is required until Grant Agreement with HUD is executed (after AAP submittal and acceptance by HUD).
The Housing Division will likely need additional support from the General Fund (or other available fund, such as Fund 1020) to supplement Housing Administration for the 2026-27 Fiscal Year, should the stated CDBG and HOME grant funding budgeted in the plan not fully cover staffing and other administrative costs.
ATTACHMENTS
1. Option 1 - AAP Budget With Recommended Public Service Funding
2. Option 2 - Other Suggested Public Service Funding
3. Admin Report - March 16, 2026
4. Admin Report - May 18, 2026
5. Final Draft for Approval - 2026 Annual Action Plan
6. Presentation
7. Draft Resolution