Report 2020-108 Recommendation 5 Responses

Report 2020-108: California's Housing Agencies: The State Must Overhaul Its Approach to Affordable Housing Development to Help Relieve Millions of Californians' Burdensome Housing Costs (Release Date: November 2020)

Recommendation #5 To: Tax Credit Allocation Committee, California

To ensure that the allocation of bonds aligns with the State's housing priorities and that its awards process is sufficiently transparent, the Tax Committee should, by May 2021, establish regulations to do the following:
- Consistently allocate bonds based on factors including demand for bond resources, use of previously allocated bonds, documented legislative priorities, and risk of allocated bonds being lost.
- Document and disclose annually in its public meetings and on its website the extent of any bonds lost, the purpose for which the bonds were allocated, and the rationale for the allocation.

Annual Follow-Up Agency Response From September 2023

The recommendation that CTCAC adopt regulations on bond allocation cannot be accomplished. CDLAC has sole jurisdiction over bond allocation. The Administrative Procedure Act (Gov. Code, section 11340 et seq.) identifies five standards for the Office of Administrative Law when reviewing regulations. Among those five standards is necessity, defined in Government Code section 11349(a) as "the record of the rulemaking proceeding demonstrates by substantial evidence the need for a regulation to effectuate the purpose of the statute...that the regulation implements, interprets, or makes specific, taking into account the totality of record." The Third District Court of Appeal in CA Forestry Assn. v. CA Fish & Game Commission ((2007) 156 Cal.App.4th 1535) opined on the necessity standard: "Specifically, a regulation can be understood as being necessary to effectuate the purpose of a statute (or other provision of law) if the statute itself is not entirely self-implementing. In other words, if the purpose of a statute cannot be fully effectuated without the promulgations of implementing regulations, then there is a "need for a regulation to effectuate the purpose of the statute," and the necessity standard is met by an implementing regulation..." (Id. At 1553-1554)Government Code section 8869.84 authorizes CDLAC, not CTCAC, to "at any time, before or after granting any allocations in any calendar year to any state agencies or local agencies, announce priorities or reservations of any part of the state ceiling not theretofore allocated either for certain categories of bonds or categories of issuers." If CDLAC were to adopt a regulation based on the State Auditor's recommendation, CDLAC's action would be in contravention to the necessity standard because the plain language of Government Code section 8869.84 is clear and unambiguous and is not in need of clarification by the executive branch to effectuate the purpose of a statute enacted by the legislative branch.

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

In our report, we made the recommendation that the Legislature should eliminate the Debit Limit Committee. Therefore, we made recommendations related to the Debt Limit Committee to the Tax Committee. Because the Legislature did not pass legislation to implement this recommendation, we expect the Debt Limit Committee, which was overseen by the same Executive Director as the Tax Committee during the audit, to implement this recommendation. In its previous annual response, the Debt Limit Committee indicated that it updated its regulations to include information about how it will allocate the remaining allocation at the end of the year. However, the regulation does not include how it will consistently allocate those bonds based on factors including demand for bond resources, use of previously allocated bonds, documented legislative priorities, and risk of allocated bonds being lost. Further, although the Debt Limit Committee has discussed in its public meetings and posted on its website information about remaining allocations, it should still revise its regulations to ensure that this practice continues.

Annual Follow-Up Agency Response From November 2022

The recommendation that CTCAC adopt regulations on bond allocation cannot be accomplished. CDLAC has sole jurisdiction over bond allocation. The Administrative Procedure Act (Gov. Code, section 11340 et seq.) identifies five standards for the Office of Administrative Law when reviewing regulations. Among those five standards is necessity, defined in Government Code section 11349(a) as "the record of the rulemaking proceeding demonstrates by substantial evidence the need for a regulation to effectuate the purpose of the statute...that the regulation implements, interprets, or makes specific, taking into account the totality of record." The Third District Court of Appeal in CA Forestry Assn. v. CA Fish & Game Commission ((2007) 156 Cal.App.4th 1535) opined on the necessity standard: "Specifically, a regulation can be understood as being necessary to effectuate the purpose of a statute (or other provision of law) if the statute itself is not entirely self-implementing. In other words, if the purpose of a statute cannot be fully effectuated without the promulgations of implementing regulations, then there is a "need for a regulation to effectuate the purpose of the statute," and the necessity standard is met by an implementing regulation..." (Id. At 1553-1554)Government Code section 8869.84 authorizes CDLAC, not CTCAC, to "at any time, before or after granting any allocations in any calendar year to any state agencies or local agencies, announce priorities or reservations of any part of the state ceiling not theretofore allocated either for certain categories of bonds or categories of issuers." If CDLAC were to adopt a regulation based on the State Auditor's recommendation, CDLAC's action would be in contravention to the necessity standard because the plain language of Government Code section 8869.84 is clear and unambiguous and is not in need of clarification by the executive branch to effectuate the purpose of a statute enacted by the legislative branch.

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

In our report, we made the recommendation that the Legislature should eliminate the Debit Limit Committee. Therefore, we made recommendations related to the Debt Limit Committee to the Tax Committee. Because the Legislature did not pass legislation to implement this recommendation, we expect the Debt Limit Committee, which is overseen by the same Executive Director as the Tax Committee, to implement this recommendation. In its previous annual response, the Debt Limit Committee indicated that it updated its regulations to include information about how it will allocate the remaining allocation at the end of the year. However, the regulation does not include how it will consistently allocate those bonds based on factors including demand for bond resources, use of previously allocated bonds, documented legislative priorities, and risk of allocated bonds being lost. Further, although the Debt Limit Committee has discussed in its public meetings and posted on its website information about remaining allocations, it should still revise its regulations to ensure that this practice continues.

1-Year Agency Response

AB 83 requires CDLAC to submit to the Legislature an annual report of the prior year's activities that includes demand for bond resources, use of previously allocated bonds, documented legislative priorities, and risk of allocated bonds being lost. This is new legislation and the first report was published on April 1, 2021. CDLAC will adhere to the requirement and post this report on an annual basis. Remaining resources for debt limit allocation are posted on the CDLAC website and the documents are also part of public meetings held three times per year. In 2021 the public meetings were April 28, 2021, August 11, 2021, and December 8, 2021. To ensure that the allocation of bonds aligns with the State's housing priorities and that its awards process is sufficiently transparent, Secretary of California Business, Consumer Services, and Housing Agency on Affordable Housing, Lourdes Castro-Ramirez, gave a presentation at our public meeting to reiterate the State's housing priorities. These priorities align with CDLAC's regulations for allocating tax exempt bond authority. A demand survey is conducted every year and that information, as well as use of previously allocated bonds, documented legislative priorities, and risk of allocated bonds being lost is used when the Committee makes decisions during the last Committee meeting of the year to allocate remaining resources. That meeting will be held on December 8, 2021.

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

Although the Debt Limit Committee indicates that it updated its regulations to include information about how it will allocate the remaining allocation at the end of the year, the regulation does not include how it will consistently allocate those bonds based on factors including demand for bond resources, use of previously allocated bonds, documented legislative priorities, and risk of allocated bonds being lost. Further, although the Debt Limit Committee has discussed in its public meetings and posted on its website information about remaining allocations, it should still revise its regulations to ensure that this practice continues.

6-Month Agency Response

CDLAC adopted regulations on Dec 14, 2020 that introduced a self-scoring mechanism for a competitive system. Additional regulations were approved Feb 1, 2021 including State priorities of New Construction, homeless household designations, and aligned the CDLAC regulations with the CTCAC regulations. This will reach the best projects that meet the State's housing goals. Section 5230 underwent reform to align with new Pools created for the competitive rounds. This also tied into the ranking criteria and tiebreaker process. It addresses how remaining allocation is awarded in the final rounds. Additional changes were adopted at the Apr 28, 2021 Meeting for the ELI/VLI Set-aside requirements, to ensure the applications in a set-aside for extremely low and very low income households are utilized by those populations. Another change was an adjustment to the New Construction Geographic Apportionment. At the Dec 21, 2020 meeting an update of carryforward was presented that no bond allocation was lost in 2020. More updates were given Jan 15 and Apr 28, 2021. Staff collects carryforward updates from issuers to reconcile to CDLAC tracking records. At the Dec 21, 2020 meeting, policy around future allocation of carryforward was suggested and regulation changes were presented on Apr 28, 2021. The new regulations clarify processes to be certain carryforward is used on a first in first out basis consistent with Title 26 IRS Code section 146, therefore ensuring no lost allocation. These additional regulation changes were recommended and adopted at the Apr 28, 2021 Meeting. Staff created procedures to ensure carryforward is documented and disclosed annually in its public meetings and is displayed on its website to the extent of any bonds lost, the purpose for which the bonds were allocated, and the rationale for the allocation.

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

This recommendation will remain open because of the pending recommendation to the Legislature to eliminate the Debt Limit Committee and transfer its responsibilities to the Tax Committee.

60-Day Agency Response

We have rewritten our regulations with several months of open discussions with our Board and the stakeholders. We have also implemented a system to issue bonds based on a demand survey which ensures allocating bonds on a demand for resources, use of previously allocated bonds, documented legislative priorities, and risk of bonds being lost. We document and disclose on our website the extent and purpose for which bonds were allocated, and no bonds have been lost.

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

This recommendation will remain open because of the pending recommendation to the Legislature to eliminate the Debt Limit Committee and transfer its responsibilities to the Tax Committee.

All Recommendations in 2020-108

Agency responses received are posted verbatim.