May 16, 2006

SUBJECT:  Request Approval of Budget Modification No. 22 to Refund $111,761 of Disallowed Costs to the City’s CDBG Line of Credit and to Appropriate an Equal Amount from the Line of Credit to Fund Public Works Projects 825130 Speed Radar Signs and 824061 In-Pavement Cross Walk Lights, Disencumber $86,994 from the Neighborhood Support/Education Project, and Amendment of the Consolidated Plan Action Plans for FY 2003/2004, FY 2004/2005 and FY 2005/2006

REPORT IN BRIEF

Approval is requested for Budget Modification No. 22 and for approval of amendments to the Consolidated Plan Action Plans for FY 2003/2004, FY 2004/2005 and FY 2005/2006. The U.S. Department of Housing and Urban Development (HUD) provided the City with the results of a program monitoring review that determined that the City had undertaken an activity during FY 2003/2004 and FY 2004/2005 that was ineligible, and HUD has partially disallowed costs that were incurred.  The ineligible costs were landscaping of private front yards in the Lakewood Village neighborhood and totaled $111,761 over a two-year timeframe.  The costs were determined ineligible because they did not occur in conjunction with qualified Community Development Block Grant (CDBG) supported rehabilitation of the properties.

HUD has provided the City with two options to offset the disallowed costs.  One option would involve repayment of the disallowed costs to the City’s CDBG line of credit and appropriating the repaid CDBG funds to current year projects that are eligible for CDBG funding.  The second option would require a review of City projects funded by the General Fund which were completed in the years the disallowed costs occurred, to determine which would be eligible for retroactive funding with CDBG funds.

Staff recommends the first option to ensure that the projects selected can meet all other CDBG requirements.  Approval of Budget Modification No. 22 would appropriate $111,761 from the City General Fund to repay the CDBG line of credit and appropriate CDBG funds in the amount of $70,000 to the Speed Radar Signs project and $41,761 to the In-Pavement Cross Walk Lights project in place of the Gas Tax funds currently budgeted.  This substitution of Gas Tax monies with CDBG funds relieves the General Fund.  This, in turn, allows more Gas Tax funds to be utilized for streets and road construction related expenditures currently funded by the General Fund.  Therefore, there is no fiscal impact on the General Fund.  This adjustment between the Gas Tax Fund and the General Fund will be reflected in the recommended FY 2006/07 Budget.  Staff also recommends to disencumber $86,994 in CDBG funds currently budgeted in the  Neighborhood Support/Education project to avoid further eligibility issues with CDBG funding. 

BACKGROUND

Sunnyvale has participated in the federal Community Development Block Grant (CDBG) Program since the first year of the program in 1975.  The City has also participated in the HOME Investment Partnerships Program (HOME) since it was enacted in 1990.

In 1995, the U.S. Department of Housing and Urban Development (HUD) adopted a new regulation requiring that the applications for funds from CDBG, HOME, Emergency Shelter Grant (ESG), and Housing Opportunities for Persons with AIDS (HOPWA) be consolidated into a single submission.  Only the CDBG and HOME programs are applicable in Sunnyvale.  This new plan is known as the Consolidated Plan, which must be submitted every five years.  Within the Consolidated Plan is an Action Plan, which must be updated and submitted on an annual basis. The Action Plan describes the City’s intended use of HUD funds for the coming year.  Council approves the Action Plan each May for the upcoming fiscal year.  Upon HUD approval of the Action Plan, HUD makes the funds available to the City through a line of credit.

The list of eligible activities for funding under CDBG regulations includes acquisition of real property; disposition; public facilities  and improvements; clearance; public services; interim assistance; relocation; loss of rental income, privately-owned utilities; rehabilitation; construction of housing, code enforcement; special economic development activities; micro enterprise assistance; special activities for CBDO’s (Community Based Development Organizations); homeownership assistance; planning and capacity building, and program administration costs.  An eligible activity must meet one of the national objectives of the program, and carrying out of the activity must benefit Low/Moderate income persons.  Finally, the costs of the activity must be considered and appear to be necessary and reasonable and in conformance with requirements of OMB Circulars A-87, and A-122.

Periodically, every two or more years, HUD staff will conduct an on-site program monitoring review.  The objective of the monitoring review is to determine program compliance with applicable CDBG and HOME statutory requirements and program regulations, as well as to provide technical assistance to improve program delivery, effectiveness and administrative efficiency.  HUD staff reviews files and records to determine compliance with applicable regulations including activity compliance with National Objectives and eligibility, visits completed projects, and discusses processes for program implementation with staff.

If an activity is determined to be ineligible, funds expended are then considered disallowed costs.  This determination will be reported as a finding in HUD’s summary of results of the program monitoring.  In its letter of January 20, 2006, to the City, (Attachment A), HUD reported on the program monitoring review conducted during August and September 2005 and found one activity funded under the CDBG Program to be ineligible.

The activity which was determined to be ineligible was front yard landscaping grants to property owners within Neighborhood Enhancement Program areas. The Neighborhood Enhancement Program was initiated by the City in August, 2002, to address unusually high concentrations of property maintenance problems in certain areas of the city. In its first year, the program was known as the Concentrated Code Enforcement Pilot Program, and was targeted on some 100 properties on two streets in Lakewood Village. The approach was to meet with residents and property owners in the area on a monthly basis, and to encourage them to voluntarily correct code violations and make other noticeable improvements to their properties so as to upgrade the entire area. Code enforcement was pursued only against those property owners who did not voluntarily comply. Incentives for compliance included “how to” lectures by paint contractors and landscape specialists, free paint for painting the exterior of homes and fences, and landscape grants for improving the landscaping of front yards and parkway strips (the area between the sidewalk on the curb). CDBG funds, in the approximate amount of $75,000 per year, were used to support the landscape grants.

The Pilot Program proved so successful that it became an on-going activity known as the Neighborhood Enhancement Program. To date, three enhancement areas, containing 483 properties, have been completed, and a fourth, involving 208 properties, is underway. The overall success of the program is measured through a city-wide windshield survey of residential property maintenance. A survey in March of 2001 showed that 35% of the properties in District 2, which includes Lakewood Village, had more than one code violation; a similar survey in June, 2005, showed that the multiple code violation rate in District 2 had been reduced to 18%.

The January 20, 2006, letter from HUD stated:

“The Lakewood Village Neighborhood Enhancement Program is a viable effort which has proven successful in deterring the decline of this neighborhood, and the City’s goals to improve the area are being achieved. Unfortunately, certain costs paid with CDBG funds have been determined not eligible by HUD, namely landscaping of private front yards”. 

The letter went on to explain that funding of improvements to the sidewalk and parkway strips were eligible costs, because they were considered public improvements within the public right-of-way. However, funding for the landscaping of private front yards would be eligible only if it was part of a loan to a qualified homeowner to rehabilitate their property.

EXISTING POLICY

The Consolidated Plan describes the City’s housing needs and market conditions.  It is a Five-Year Strategy establishing priorities and identifying resources anticipated to be available to address the City’s priority needs.  The Consolidated corresponds with the City’s Housing and Community Revitalization Sub-Element which contains a number of goals and policies related to affordable housing in the community. 

Goal A: Foster the expansion of housing supply to provide greater opportunities for current and future residents within limits imposed by environmental, social, fiscal, and land use constraints.

Goal B:   Move toward a local balance of jobs and housing.

Goal C:    Ensure a high quality living and working environment.

Goal D: Maintain diversity in tenure, type, size, and location of housing to permit a range of individual choices for all current residents and those expected to become city residents.

Goal E:  Maintain and increase housing units affordable to households of all income levels and ages.

Goal F: Improve Housing conditions for people with special needs.

Goal G: Provide equal opportunity for housing for all people regardless of their ethnicity, race, religion, marital status, disability, gender, sexual orientation or age.

Goal H: Continue to maintain a working relationship with residential developers, lenders, real estate agents, brokers, and others in the private sector to help implement housing policies.

Goal I: Ensure compatibility of federal, State, regional, and countywide housing programs with local policies and needs.

Fiscal Management Policy 7.1B.6 - Capital Improvement Funding: Use all available funding sources to finance capital improvement projects consistent with City priorities.

DISCUSSION

The expenditures of CDBG funds over the past two years which HUD determined to be ineligible total $111,761.  HUD presented the City with two options to correct the finding of ineligibility.  The first would be to return the $111,761 to the City’s CDBG line of credit.  This requires a direct wire transfer of funds to the U.S. Treasury, and thereby increases the amount of funds available to the City to allocate and expend on current and future CDBG-eligible projects.  This method allows the City to offset the increase to the fund with CDBG-eligible public improvement projects budgeted this year.

The second option is to offset the amount of funds used for ineligible activities with eligible public improvements that were completed and paid for with General Fund during the years in which the disallowed costs occurred.

Staff has worked with the Department of Public Works staff to identify all completed projects and any current year projects which, although budgeted with General Fund or Gas Tax Funds are eligible for CDBG funding.  Both General Fund and Gas Tax Fund projects were reviewed due to the inter-related nature of the two funds.  Staff was unable to identify any prior year completed projects that were eligible and could easily be used to offset the disallowed costs.  Staff was able to identify several capital projects scheduled for completion this year that meet the CDBG eligibility criteria and could be used to offset the disallowed costs.  These projects include: 825130 Speed Radar Signs for School Areas, with locations on Morse, Henderson, Dunford, Sunnyvale, Bernardo, Pastoria, Washington and Olive; and 824061 In-Pavement Crosswalk Warning Lights. These specific projects are located within, and primarily serve areas of the city which qualify for CDBG funding based on population of low and moderate income (See map of qualifying areas, Attachment B.)

FISCAL IMPACT

Approval of Budget Modification Number 22 would appropriate $111,761 in General Fund monies to reimburse the CDBG line of credit for disallowed expenditures related to Lakewood Village Neighborhood Enhancement Project.  It would also appropriate CDBG funds in the amount of $70,000 to the Speed Radar Signs project and $41,761 to the In-Pavement Cross Walk Lights project in place of the Gas Tax funds currently budgeted,   This Budget Modification does not increase the budget for these projects; it substitutes Gas Tax monies with CDBG funds to offset the cost to the City.  This, in turn, allows more Gas Tax funds to be utilized for streets and road construction related expenditures currently funded by the General Fund.  Therefore, there is no fiscal impact on the General Fund.  This adjustment between the Gas Tax Fund and the General Fund will be reflected in the recommended FY 2006/07 Budget.

Staff also recommends to disencumber funds currently budgeted in the Neighborhood Support/Education project. The disencumbered funds will be returned to the CDBG 20 Year Resource Allocation Plan Reserve. The Neighborhood Enhancement Program will continue to refer homeowners, who qualify, for participation in the CDBG Housing Improvement Program to rehabilitate their homes and landscaping. 

Conclusion

HUD determined that the City has incurred expenditures for ineligible activities, and has provided two options to the City to address their finding of disallowed costs.