Report 2018-112 Recommendation 13 Responses

Report 2018-112: California Department of Veterans Affairs and Department of General Services: The Departments' Mismanagement of the Veterans Home Properties Has Not Served the Veterans' Best Interests and Has Been Detrimental to the State (Release Date: January 2019)

Recommendation #13 To: General Services, Department of

To ensure that it can justify the rental rates it approves, DGS should document its assessment of market value and market rent for all veterans home property leases before leasing the property. It should set rental rates equivalent to fair market rent in all cases except those in which it accepts improvements to the property or services to the veterans in exchange for reduced or waived rent. In the cases of reduced or waived rent, DGS should document a calculation of the value of the property improvements or services and reduce the rent by an amount equal to the calculated values.

Annual Follow-Up Agency Response From October 2020

As noted in the prior response, DGS is working on renewing a lease at the Veteran's home. However, the COVID-19 pandemic has impacted those negotiations and it has taken longer to execute the agreement. However, DGS expects the lease to be finalized by the end of December 2020. The lease will be consistent with the RESD Policy Bulletins 18-04, 18-05, and 18-06 describing DGS' policy on establishment of rental rates at and below fair market value and the use of in-lieu benefits. It will also show the documentation standards described in RESD Policy Bulletin 18-11.

California State Auditor's Assessment of Annual Follow-Up Status: Fully Implemented

DGS's policies describe the process that DGS will follow to determine fair market value, and the requirements that state departments must follow when requesting reduced rent for in-lieu benefits. After submitting its updated response to this recommendation, DGS provided evidence that it is implementing these policies. Specifically, DGS demonstrated that it had determined the fair market rent for a property at the Yountville veteran's home prior to leasing the property. It also provided evidence of the calculation of the value of the in-lieu benefits that the lessee would provide to the veterans home, and DGS's corresponding reduction of that rental amount. Because DGS demonstrated that it has begun implementing its policies, we consider this recommendation fully implemented.

1-Year Agency Response

DGS' State Owned Leasing and Development (SOLD) has updated its file documentation standards, as outlined in RESD Policy Bulleting 18-11, to include documentation that shows how fair market value rents were calculated. RESD Policy Bulletins 18-04, 18-05, and 18-06 describe DGS' policy on the establishment of rental rates at and below fair market value and the use of in-lieu benefits. DGS is currently in the process of renewing a lease at the Veterans home in Yountville, which will be the first example of a completed lease (new or renewal) at the Home since the audit.

California State Auditor's Assessment of 1-Year Status: Partially Implemented

DGS's policies describe the process that DGS will follow to determine fair market value, and the requirements that state departments must follow when requesting reduced rent for in-lieu benefits. We will reserve assessing this recommendation as fully implemented until DGS provides evidence that it has applied these policies when leasing veterans home property.

6-Month Agency Response

SOLD has updated its file documentation, as outlined in RESD Policy Bulleting 18-11, to include documentation that shows how fair market value rents were calculated. While we are currently in the process of renewing a lease at the Veterans home in Yountville, we do not yet have an example of any completed lease (new or renewal) at the Home.

California State Auditor's Assessment of 6-Month Status: Pending

60-Day Agency Response

DGS issued the Real Estate Services Division (RESD) Policy Bulletins 18-04, 18-05, and 18-06 in July 2018. These bulletins describe DGS' policy on the establishment of rental rates at and below fair market value and the use of in-lieu benefits. DGS is documenting the files to ensure compliance and has issued RESD Policy Bulletin 18-11 to ensure consistent and appropriate documentation of all the State Owned Leasing and Development (SOLD) leases. As future CalVet lease requests are processed, the policy bulletins will be applied.

California State Auditor's Assessment of 60-Day Status: Pending

All Recommendations in 2018-112

Agency responses received are posted verbatim.