Denver Affordable Housing Performance Audit

Transcription

1 Denver Affordable Housing Performance Audit November 2014 Audit Services Division City and County of Denver Dennis J. Gallagher Auditor

2 The Auditor of the City and County of Denver is independently elected by the citizens of Denver. He is responsible for examining and evaluating the operations of City agencies for the purpose of ensuring the proper and efficient use of City resources and providing other audit services and information to City Council, the Mayor and the public to improve all aspects of Denver s government. He also chairs the City s Audit Committee. The Audit Committee is chaired by the Auditor and consists of seven members. The Audit Committee assists the Auditor in his oversight responsibilities of the integrity of the City s finances and operations, including the integrity of the City s financial statements. The Audit Committee is structured in a manner that ensures the independent oversight of City operations, thereby enhancing citizen confidence and avoiding any appearance of a conflict of interest. Audit Committee Dennis Gallagher, Chair Maurice Goodgaine Leslie Mitchell Rudolfo Payan Robert Bishop Jeffrey Hart Timothy O Brien, Vice-Chair Audit Staff Audrey Donovan, Deputy Director, CIA, CGAP, CRMA Dawn Wiseman, Audit Supervisor, CRMA Anna Hansen, Lead Auditor Emily Owens, Senior Auditor, MPA Carl Halvorson, Senior Auditor You can obtain copies of this report by contacting us at: 201 West Colfax Avenue, Department 705 Denver CO, (720) Fax (720) Or download and view an electronic copy by visiting our website at: A

3 City and County of Denver 201 West Colfax Avenue, Department 705 Denver, Colorado FAX Dennis J. Gallagher Auditor November 20, 2014 Mr. Paul Washington, Executive Director Office of Economic Development City and County of Denver Dear Mr. Washington: Attached is the Auditor s Office Audit Services Division s report of their audit of Denver Affordable Housing. The purpose of the audit was to assess the Office of Economic Development s (OED) efforts to provide affordable housing in Denver. To accomplish this, auditors considered potential barriers to increasing Denver s supply of affordable housing, such as dwindling federal funds, and OED s strategy to overcome these barriers. This audit followed and was built upon work conducted during an inter-governmental collaborative audit led by the U.S. Government Accountability Office (GAO), in which the Auditor s Office participated. We appreciate the opportunity to join the GAO, and audit offices throughout the country, in a review of affordable housing, a policy matter of critical importance to Denver. The audit found that OED s recent efforts may alleviate its previous lack of emphasis on affordable housing. For example, OED issued a five-year housing plan in October 2014, the first such guiding document since the previous plan developed in 2008 that was not adopted or implemented by the previous mayoral administration. In addition, the new housing plan includes a variety of leading practices recommended by industry organizations and utilized by cities we benchmarked against during the audit. Further, OED s most recent strategic plan shows an increased emphasis on affordable housing projects and initiatives. However, OED could improve these plans through the use of additional affordable housing incentives as well as further emphasis on affordable housing in OED s strategic plan. Improvements in the amount of available funding for affordable housing are also possible through the dedication of more Community Development Block Grant (CDBG) funds to housing activities. OED has reduced the amount of CDBG funds used for housing since the former Division of Housing and Neighborhood Development was combined with other economic and workforce development divisions in Also, OED s spending decisions regarding CDBG funds consistently favor economic development over housing, a pattern contrary to the benchmark cities we reviewed. We encourage OED to ensure that the creation and preservation of affordable housing remains a high priority and to take advantage of the audit team s recommendations to that end. We thank you and your dedicated staff for your willingness to share your time and knowledge with the audit team during both of our housing audits. If you have any questions, please call Kip Memmott, Director of Audit Services, at To promote open, accountable, efficient and effective government by performing impartial reviews and other audit services that provide objective and useful information to improve decision making by management and the people. We will monitor and report on recommendations and progress towards their implementation.

4 Sincerely, Dennis J. Gallagher Auditor DJG/leo cc: Honorable Michael Hancock, Mayor Honorable Members of City Council Members of Audit Committee Ms. Cary Kennedy, Deputy Mayor, Chief Financial Officer Ms. Janice Sinden, Chief of Staff Mr. David P. Edinger, Chief Performance Officer Ms. Beth Machann, Controller Mr. Scott Martinez, City Attorney Ms. Janna Young, City Council Executive Staff Director Mr. L. Michael Henry, Staff Director, Board of Ethics Mr. Rick Padilla, OED Director Housing and Neighborhood Development To promote open, accountable, efficient and effective government by performing impartial reviews and other audit services that provide objective and useful information to improve decision making by management and the people. We will monitor and report on recommendations and progress towards their implementation.

5 City and County of Denver Dennis J. Gallagher Auditor 201 West Colfax Avenue, Department 705 Denver, Colorado FAX AUDITOR S REPORT We have completed an audit of Denver Affordable Housing. The purpose of the audit was to assess the Office of Economic Development s (OED) efforts to provide affordable housing in Denver. To accomplish this, auditors considered potential barriers to increasing Denver s supply of affordable housing, such as reduced federal funding, and OED s strategy to overcome these barriers. This audit followed and was built-upon work conducted during an inter-governmental collaborative audit led by the U.S. Government Accountability Office (GAO), in which the Auditor s Office participated. This collaborative audit focused on rental assistance programs utilized by the federal government and a variety of state and local governmental entities. This performance audit is authorized pursuant to the City and County of Denver Charter, Article V, Part 2, Section 1, General Powers and Duties of Auditor, and was conducted in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. The audit found that OED s recent planning efforts demonstrate an increased emphasis on affordable housing; however, further improvements in OED s planning and funding decisions would benefit affordable housing initiatives in Denver. Although an increased emphasis on housing in OED s strategic plans and the issuance of a new five-year housing plan are positive steps that could help alleviate Denver s shortage of affordable housing, additional funding is needed. As such, OED could dedicate more of its Community Development Block Grant (CDBG) funds to housing rather than to economic development activities. Although CDBG is only one of several federal and local funding resources available to OED, it is the largest source of funding from the U.S. Department of Housing and Urban Development (HUD) and all benchmark cities we contacted use more CDBG funds for housing than economic development. We extend our appreciation to the Office of Economic Development and the personnel who assisted and cooperated with us during both audits. Audit Services Division Kip Memmott, MA, CGAP, CRMA Director of Audit Services To promote open, accountable, efficient and effective government by performing impartial reviews and other audit services that provide objective and useful information to improve decision making by management and the people. We will monitor and report on recommendations and progress towards their implementation.

6 City and County of Denver Audit Services Division REPORT HIGHLIGHTS Denver Affordable Housing November 2014 The audit assessed the Office of Economic Development s efforts to provide affordable housing in Denver. Background The Office of Economic Development (OED) includes four main divisions Housing and Neighborhoods (Housing), Workforce Development, Business Development, and Small Business Opportunity. Through its Housing division OED provides direct support to eligible renters and homeowners and provides gap financing for affordable housing developers. To accomplish this, OED coordinates with a variety of partners including the federal and state governments, local agencies, Denver Housing Authority, Denver Urban Renewal Authority, for profit and non profit developers, and a variety of non profit organizations. To increase Denver s supply of affordable housing, which has not kept pace with demand, the Mayor announced a 3x5 Initiative in 2013, which charged the City with creating 3,000 affordable units by Purpose The audit assessed OED s efforts to provide affordable housing in Denver. To accomplish this, auditors considered potential barriers to increasing Denver s supply of affordable housing, such as dwindling federal funds, and OED s strategy to overcome these barriers. Highlights The audit found that recent efforts may alleviate OED s previous lack of emphasis on affordable housing. OED recently issued a fiveyear housing plan, to be followed by annual action plans documenting specific actions and outcomes for each year. Prior to this, OED did not have an official guiding document for its affordable housing activities. The plan includes a variety of leading practices including actions to streamline the application process for developers. Also, OED s strategic plan, JumpStart, demonstrates a gradual increase in the visibility of affordable housing projects and initiatives since However, auditors identified opportunities for OED to improve its housing plan and future strategic plans and to increase funding resources for affordable housing. First, certain leading practices such as tax abatements could be worthwhile additions to the plan. In addition, focusing the housing section of OED s future strategic plans on affordable housing initiatives only would demonstrate an increased emphasis on this critical need for affordable housing. Finally, OED could dedicate more Community Development and Block Grant (CDBG) funds to housing activities rather than economic development. A trend analysis of OED s CDBG spending since 1999 shows a notable decrease in CDBG spending on housing since 2004 when the Division of Housing and Neighborhood Development was combined with other divisions to form OED. Furthermore, a comparison of OED s CDBG spending to that of benchmark cities illustrated that other cities consistently dedicate CDBG funding to housing rather than economic development. For a complete copy of this report, visit Or Contact the Auditor s Office at

7 TABLE OF CONTENTS INTRODUCTION & BACKGROUND 1 SCOPE 14 OBJECTIVE 14 METHODOLOGY 14 FINDING 16 Recent Efforts May Help Alleviate the Office of Economic Development s Previous Lack of Emphasis on Affordable Housing 16 RECOMMENDATIONS 35 APPENDICES 36 Appendix A: Glossary 36 Appendix B: CDBG Spending OED and Benchmark Cities 39 Appendix C: Other Cities Organizational Structures 41 AGENCY RESPONSE 43

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9 INTRODUCTION & BACKGROUND The federal government defines housing as affordable when housing costs such as mortgage, rent, and utilities do not consume more than 30 percent of household income. 1 However, Denver and many other cities across the United States do not have an ample supply of housing that meets this criteria for low-income households. Both government and non-government entities have played a role in shaping the landscape of affordable housing. The federal government has been working to address the issue since the early 1900s by creating agencies, programs, and funding streams to address affordable housing shortages. State and local governments have also established programs and distributed funding for affordable housing activities. Finally, private and non-profit developers Globeville Homes and other organizations are involved by planning and constructing affordable housing options. In Denver, Globeville Affordable Housing both the Mayor s Office and the City s Office of Economic Development (OED) have instituted programs and initiatives aimed at addressing the City s shortage of affordable housing. Affordable Housing in the United States The U.S. Department of Housing and Urban Development (HUD) uses income limits to define those in need of affordable housing as a percentage of area median income (AMI) by using several measures: 2 Low Income A household earning no more than 80 percent AMI Very Low Income A household earning no more than 50 percent AMI Extremely Low Income A household earning no more than 30 percent AMI Worst Case Needs Renters earning no more than 50 percent AMI who do not receive government housing assistance and dedicate more than half of the household s income to rent or who live in severely inadequate conditions 3 1 Affordable housing defined by the U.S. Department of Housing and Urban Development (HUD). Website accessed September 29, 2014, 2 HUD uses the median income for households in metropolitan and non metropolitan areas to calculate income limits for eligibility in a variety of housing programs. A median divides the income distribution into two equal parts: one half of the cases falling below the median income and one half above the median. HUD estimates the median family income for an area in the current year and adjusts that amount according to family size and Consumer Price Index so that family incomes may be expressed as a percentage of the area median income. For example, a family's income may equal 80 percent of the area median income, a common maximum income level for participation in HUD programs. Page 1

10 To represent Denver s affordable housing needs, OED has adapted HUD s affordable housing categories by developing its own tool a continuum of housing that defines income levels according to AMI. Critical Needs (up to 30 percent AMI) This category includes the homeless and chronically homeless population. Workforce Rental (30 to 80 percent AMI) This category includes the workforce population, such as dishwashers, teaching assistants, bank tellers, and public school teachers. Workforce Homeownership (60 to 120 percent of AMI) This category addresses the housing needs of the workforce seeking to buy a house. This population includes community health workers, police officers, and IT user support staff. Providing affordable housing and housing assistance to families has a multiplier effect the measure of the ripple effect that an activity has on its surrounding environment not only to the surrounding economy but also to social factors such as health outcomes, standards of living, livability, education, and the environment. Research shows that the development of affordable housing increases spending and boosts employment in the surrounding economy. 4 For example, during the development of affordable housing, the local economy benefits directly from those funds spent by the developer to buy materials, supplies, and labor. When housing is affordable, low-income families those earning no more than 80 percent AMI are able to dedicate more of their income to provide for their family s needs, including food and medical care. 3 Income limits defined by the U.S. Department of Housing and Urban Development; websites accessed September 30, 2014, The Role of Affordable Housing in Creating Jobs and Stimulating Local Economic Development: A Review of the Literature, Center for Housing Policy, accessed October 1, City and County of Denver Page 2

11 History of Federal Involvement in Affordable Housing Considering the importance of affordable housing, the federal government has a long history of undertaking initiatives and programs to address the demand for more affordable housing accessible to a broad spectrum of Americans. To alleviate some of the housing hardships caused by historic events such as the Great Depression and World War II, the federal government has been striving to make housing more affordable for low-income individuals and households. Early 20 th Century Between 1929 and 1942, to alleviate some of the housing hardships caused by the Great Depression, the federal government instituted construction and finance programs. Additionally, an act of Congress in 1934 created the Federal Housing Administration (FHA), a federal agency that made homeownership more affordable and accessible to a larger segment of the population by establishing mortgage insurance programs. A few years later, an assessment of the nation s housing stock revealed a very limited supply of housing and quality issues such as the lack of hot water and pervasive decay. As a result, Congress enacted the U.S. Housing Act in 1937 to address these housing issues. Additionally, in 1937, FHA instituted the Federal National Mortgage Association, also known as Fannie Mae, a federally chartered enterprise owned by private stockholders. The entity was charged with the mission of purchasing residential mortgages and converting them into investments. By purchasing mortgages, Fannie Mae would provide the funds that lenders could loan to potential homebuyers. 5 The National Housing Agency (NHA), which was established in 1942 to handle housing programs, was replaced one year later by the Housing and Home Finance Agency (HFA), which was later replaced by HUD. Mid-20 th Century After World War II, cities across the nation experienced migrations from urban areas to the suburbs leaving behind declining cities, dilapidated neighborhoods, and ever-growing blight. 6 This situation prompted the establishment of federal programs with the purpose of improving urban infrastructure and rehabilitating blighted areas of city neighborhoods. In the late 1940s, Congress established the federal urban redevelopment program in Title I of the Housing Act of Over the next twenty years, planners, mayors, and the public implemented plans to revitalize the nation s cities. Early Title I projects focused on residential affordable housing; however, as a greater amount of federal dollars could be used for commercial redevelopment, residential projects decreased. 5 HUD Glossary, U.S. Department of Housing and Urban Development website, accessed September 29, 2014, 6 An area is considered blighted when, in its current condition and use, it does not show signs of reasonable growth of its community. Signs of blight include, among others, lack of decent housing, inadequate public improvements or utilities, faulty or inadequate street layout, deteriorating structures, and buildings that are unsafe and unhealthy for the community. Denver Urban Renewal Authority website, accessed September 30, 2014, dura/citizens guide tourban renewal/section 1 redevelopment and dura.html. Page 3

12 Late 20 th Century In 1965, Congress elevated federal housing programs to a cabinetlevel agency of the federal government by creating HUD. 7 Additionally, in 1970, Congress chartered the Federal Home Loan Mortgage Corporation, also known as Freddie Mac, and charged the agency with the mission of stabilizing the nation s residential mortgage markets and increasing opportunities for homeownership and affordable rental housing. 8 In 1974, Congress enacted the Community Development Block Grant (CDBG) program. The CDBG program sought to give jurisdictions more options when using federal funds. Recipient cities had broad discretion in how they used federal funds, but the chief beneficiaries were supposed to be low-income residents. Cities could allocate these funds to tackle slum and blighted areas but the grants could also fund a range of programs and services, including neighborhood centers, non-profit economic development plans, building code enforcement, energy conservation, and numerous other public works and public services. 9 Through the Tax Reform Act of 1986, the Department of the Treasury s Internal Revenue Service was given a role in affordable housing development by creating the Low Income Housing Tax Credit (LIHTC) Program, which provides tax credits to developers interested in developing affordable rental housing. That same act codified the use of private activity bonds for housing finance, authorizing the use of such bonds for the development of housing for homeownership, as well as the development of multifamily rental housing. 10 Early 21 st Century In response to the Great Recession that began in 2008, Congress enacted the American Recovery and Reinvestment Act (Recovery Act) in 2009 with the intent of providing a stimulus to the U.S. economy. The Recovery Act included, among other programs, additional funds for the Neighborhood Stabilization Program for the redevelopment of abandoned and foreclosed residential properties. Additionally, to assist homeowners experiencing hardships in their mortgage payments and at risk of foreclosure, the U.S. Treasury Department and HUD administered a series of programs, including: The Home Affordable Modification Program to lower monthly mortgage payments to 31 percent of their verified monthly gross income 7 HUD Historical Background, U.S. Department of Housing and Urban Development website, accessed September 23, 2014, 8 About Freddie Mac, Freddie Mac website, accessed September 26, 2014, 9 Urban Renewal In Denver Performance Audit, City and County of Denver s website, accessed September 22, 2014, pdf. 10 Private activity bonds are tax exempt bonds that can be used for housing purposes including financing new construction or acquisition, rehabilitation of housing for low income residents, and mortgages for low income homebuyers. Additionally, any housing project that is financed through tax exempt private activity bonds, serves families with incomes below 60 percent of the area median income, and meets other eligibility criteria qualifies automatically for the four percent LIHTC. City and County of Denver Page 4

13 The Principal Reduction Alternative program to encourage lenders to lower the amount owed from those homeowners with homes worth less than the amount they owe Home Affordable Refinance Program to help homeowners, current on their mortgage payments, to refinance into a new, more affordable mortgage. 11 The Recovery Act also provided funds for programs that assist the homeless population with housing and employment needs. As the economy and the housing market recover from these recent challenges, a variety of entities play a role in ongoing efforts to provide housing for the low-income population. Participants in Affordable Housing Programs Federal, state, and local agencies, quasi-governmental entities, and housing developers all participate in the production of affordable housing in Denver. Federal Level U.S. Department of Housing and Urban Development (HUD) HUD s mission is to create strong, sustainable, inclusive communities and quality affordable homes for all. 12 As the housing and urban development arm of the federal government, HUD oversees several programs that Affordable Housing Participants HUD DOH, CHFA OED, DHA For-Profit and Non- Profit developers focus on home ownership, low-income housing assistance, homelessness, aid for distressed neighborhoods, and housing development. Several federal funding streams provide significant funding to state and local governments for affordable housing and other community initiatives. HOME Investment Partnerships Program (HOME) Provides formula grants to states and localities to fund a wide range of housing activities, including building and rehabilitating affordable housing or providing direct rental assistance to lowincome residents. 13 HOME is the largest federal block grant to state and local governments designed specifically to develop affordable housing for low-income households Avoiding Foreclosure, U.S. Department of Housing and Urban Development website, accessed September 30, 2014, 12 HUD Mission, U.S. Department of Housing and Urban Development website, accessed September 24, 2014, 13 Specific formulas are used to calculate award amounts for these federal funds. 14 HUD Exchange, U.S. Department of Housing and Urban Development website, accessed September 30, 2014, Block grants are a type of financial aid that the federal government provides to state and local governments. Block grants are typically for a specific amount of funding aimed to assist the governments in addressing broad issues such as community development, social services, or law enforcement. Robert J. Dilger, Eugene Boyd, Block Grants: Perspectives and Controversies, Congressional Research Service, accessed October 7, 2014, Page 5

14 Community Development Block Grant (CDBG) Funds local housing and community development activities. Enacted in 1974 through the Housing and Community Development Act, CDBG is a dual formula federal grant. 15 Unlike other funding sources such as HOME, which can only be used for specific purposes, recipients of CDBG funds have discretion in how to use these monies. Neighborhood Stabilization Program (NSP) Provides funding for the purchase and redevelopment of foreclosed homes or residential properties that will be used to house individuals or families whose incomes do not exceed 50 percent AMI. States, local governments, and non-profit entities awarded NSP funds are required to use at least 25 percent of the funds for these purposes. 16 Housing Opportunities for Persons with AIDS Program (HOPWA) Dedicates federal funds to the housing needs of people living with HIV/AIDS. The recipients of these federal funds, such as local governments, work in partnership with nonprofit organizations and housing agencies to provide housing assistance to individuals and families living with HIV/AIDS. Emergency Solutions Grants Program (ESG) Provides funds to support critical services related to emergency shelter operations, rehabilitation and conversion of buildings to emergency shelters, street outreach, and short- and medium-term rental assistance. 17 It also supports housing relocation assistance for people who are homeless or on the verge of becoming homeless. Funds are awarded to eligible entities, including states, municipalities, and counties. 18 State Level The Colorado Division of Housing The State of Colorado s Department of Local Affairs includes the Division of Housing (DOH), which was created by statute in 1970 to improve access of all Coloradans to affordable housing. The Division provides state and federal funding to private housing developers, housing authorities, and local governments to increase the inventory of affordable housing. Specifically, DOH provides gap financing by awarding federal and state funds and grants for the acquisition, rehabilitation, and new construction of affordable housing HUD determines the amount of CDBG funds by applying a statutory dual formula, which uses several objective measures of community needs, including the extent of poverty, population, age of housing, and population growth lag in comparison to other metropolitan areas, U.S. Department of Housing and Urban Development website, accessed September 30, 2014, 16 NSP1 was initiated in 2008 through the Housing and Economic Recovery Act; the American Recovery and Reinvestment Act of 2009 authorized NSP2; NSP3 was authorized under the 2010 Dodd Frank Act to provide a third round of neighborhood stabilization funds to all states and select governments. 17 Short term rental assistance is rent assistance provided for three months or less. Medium term rental assistance applies to rent assistance for more than three months and less than twenty four months. 24 C.F.R (2012). 18 Emergency Solutions Grants (ESG) Program, U.S. Department of Housing and Urban Development website, accessed September 30, 2014, 11.pdf. 19 When developers are unable to secure funds necessary to build affordable housing, DOH and OED offer financing to developers to fill the gap between the total project cost and developer s current funding. City and County of Denver Page 6

15 DOH offers Housing Choice Voucher rental assistance statewide through local housing authorities and non-profit service organizations. 20 It also administers federal homelessness prevention and rental assistance programs, including the Homelessness Prevention and Rapid Rehousing Program, ESG, and HOPWA. 21 In addition to the federal funding streams, including HOME, CDBG, and ESG, the state uses the following funding tools for affordable housing: Housing Development Grant Fund Housing Development Loan Fund Colorado Housing Investment Fund 22 Colorado Housing and Finance Authority (CHFA) The Colorado Housing and Finance Authority (CHFA) is a significant financing entity for affordable housing in Colorado. Not only does it award low-income housing tax credits to housing developers but it also provides direct loans to finance affordable housing projects. It also offers education classes on homeownership and business lending for non-profit and for-profit businesses such as manufacturers and fresh food grocers. The LIHTC Program provides developers with an incentive to build affordable housing. The developers can sell the tax credits to investors, which raises additional capital for their qualified housing project, thus reducing the money that the developer would otherwise have to borrow. Each year, the Internal Revenue Service allocates housing tax credits to designated state agencies. 9 Percent Tax Credit CHFA award the 9 percent tax credit based on a competitive process. A limited number of these credits are available; for instance, only thirteen Colorado projects received a 9 percent tax credit thus far in 2014, of which only three are located in Denver. Generally, the 9 percent tax credit covers half of a project s costs. 4 Percent Tax Credit Unlike the 9 percent tax credit, the allocation of the 4 percent tax credit is based on a non-competitive process. However, only those projects receiving federal funds are eligible for the 4 percent tax credit. The 4 percent tax credit typically covers one-fourth of a project s costs. 23 Local Level Office of Economic Development OED s mission is the advancement of economic prosperity for the City, its businesses, its neighborhoods, and its citizens. To accomplish this mission, OED works in partnership with other governmental and community partners to 20 The Housing Choice Voucher (HCV), previously known as the Section 8 Housing Choice Voucher Program, is funded by HUD and is administered by Public Housing Authorities, such as the Denver Housing Authority, to provide rental assistance to very low income households through vouchers. These vouchers allow very low income households to choose and lease housing in the private market. 21 Division of Housing, State of Colorado website, accessed September 30, 2014, State of Colorado's Division of Housing. 22 See Appendix A for more information about these funds. 23 Online Guide to State and Local Housing Policy, Housing Policy website, accessed September 24, 2014, Page 7

16 increase job opportunities, provide business assistance, develop a skilled workforce, and provide housing options and redevelop neighborhoods. OED operates with an annual budget of approximately $46 million, of which approximately $4 million (8 percent) comes from the City s General Fund and $42 million (92 percent) is provided by OED s special revenue funds. 24 As part of its housing programs, OED manages activities related to both housing rental and homeownership assistance. Specifically, OED engages in two types of activities related to rental assistance. The Rental Development Program includes activities such as the acquisition, rehabilitation, or new construction of rental housing. The second program is the Tenant-Based Rental Assistance Program (TBRA), which provides housing vouchers to households earning 50 percent or less AMI. The two main sources that fund this program are HOME and HOPWA. TBRA is a temporary program to be utilized by renters for no more than twenty-four months. In addition to housing programs related to rental assistance, OED is involved in homeownership efforts such as providing pre-purchasing counseling to potential home buyers and the Metro Mortgage Assistance Plus Program, which offers low-income homeowners a 4 percent grant to cover down payment and closing costs. 25 In response to the problem of low-income residents being unable to afford homes in close proximity to their places of work, City Council approved an Inclusionary Housing Ordinance (IHO) in 2002 with the intent of increasing the supply of workforce housing by adding below-market-rate homes for Denver wage earners. 26 Jefferson Terrace Affordable Housing for Seniors Denver Human Services Denver Human Services (DHS) provides assistance and protection and prevention services to Denver s most vulnerable residents. Assistance programs serve eligible Denver residents in financial need and include support such as cash and medical benefits, child care, child support, energy assistance, and rental assistance. Protection and prevention services are provided via child, youth, and adult protection programs, along with community focused programming including veterans services, homeless services, and drug awareness campaigns. Additionally, one of DHS strategies is to increase accessibility of support services and housing to the City s homeless population. For this purpose, DHS contributed approximately $1.5 million to OED s new revolving loan fund to be used for affordable housing projects Special revenue funds are made up of proceeds received from revenue sources such as federal, state, local, and private grants. These funds are restricted to expenditures for specific purposes. 25 See Appendix A for more information about this housing program. 26 See Appendix A for more information about the IHO. 27 The creation of the Revolving Housing Fund is an action outlined in OED s 5 Year Housing Plan and will be capitalized by a $3 million allocation from the General Fund budget in 2014 with plans to increase the fund with an additional $3 to $5 million in leveraged investments. The fund will be used to finance the construction and preservation of workforce rental housing. City and County of Denver Page 8

17 Denver Housing Authority Denver Housing Authority (DHA) is a local quasi-municipal entity, which provides financing and assistance in the affordable housing arena in partnership with the City, the state, and HUD. 28 While DHA receives HUD funding directly for the Public Housing and Housing Choice Voucher (HCV) programs it administers, DHA also acts as an affordable housing developer and can apply for funding from OED. Other funding sources for DHA come from federal, state, and local programs, including workforce grants from the U.S. Department of Labor and foundation grants. DHA primarily funds direct services, such as job development and resident programming. Housing Developers For-profit developers build housing in the City and can apply for low-interest loans from the City, DHA, CHFA, and private lenders when they build new or rehabilitate existing rental and for-sale affordable housing units. Specifically, developers can utilize funds to offset costs for land acquisition and for construction so long as they designate a certain percentage of the housing units as affordable. 29 Non-profit developers, including charity and quasi-government entities, partner with the City to increase affordable housing production. Brothers Redevelopment, Colorado Housing Assistance, Del Norte Neighborhood Development, NEWSED Community Development, and Northeast Denver Housing are some of the non-profit agencies that work in partnership with the City. 30 Affordable Housing in Denver Based on the provisions of Executive Order 28, promulgated in 2004, OED consists of an Executive Director who is appointed by and reports to the Mayor and four main divisions including Small Business Opportunity, Workforce Development, Business Development, and Housing and Neighborhood. 28 A Quasi Municipal corporation is an entity, such as a county or school district, that has not been incorporated by a state, but that performs some functions of a corporation. As a quasi municipal corporation, DHA is independent from the City, although the Denver Mayor appoints DHA s Board of Commissioners and City Council approves the Board. DHA administers HUD housing programs including Public Housing and the Housing Choice Voucher Program. 29 Developer Assistance, Office of Economic Development website, accessed September 18, 2014, OED Website Housing Assistance Website accessed September 19, Ibid. Page 9

18 OED works with the Mayor, the business community, and neighborhoods to attract, create, and retain jobs, and to facilitate the development of housing and other projects needed to support job growth. Division of Housing and Neighborhood Development The Division of Housing and Neighborhood Development serves as the City s federally designated entity to administer CDBG, HOME, and other federal, state, and local funding sources related to housing and community development. This function is accomplished through providing funds and assistance for non-profit facility development, neighborhood programs, and the building and redevelopment of affordable housing units. To achieve these goals, the Division utilizes two main funding sources. OED uses HUD funds and funds generated by loan repayments, or program income, to leverage public and private funds with the intent of encouraging and stimulating investments in the City s neighborhoods, businesses, and housing supply. The following four teams carry out this work: The Housing Team Partners with non-profit and for-profit developers to promote affordable and workforce housing development The Neighborhood Team Provides funds for neighborhood redevelopment and services The Lending and Investment Team Provides loans to small businesses and underwrites all OED loans provided for business, neighborhood, and housing projects The Support and Data Analysis Team Collects all program and outcome performance data and ensures compliance with federal and local requirements and with the usage of federal and local funds City and County of Denver Page 10

19 The 2014 budget recommended funding of $20.3 million from the Special Revenue Fund for the Division of Housing and Neighborhood Development. For more information on OED s other divisions, see Appendix A. Strategic Planning for Affordable Housing OED engages in strategic planning for affordable housing, which has become a more pressing issue in recent years. Various market analyses show reduced availability of rental and for-sale homes in Denver. Specifically, the number of renter households earning less than $20,000 that were unable to find affordable housing increased between 2005 and Also, fewer for-sale properties valued at less than $200,000 were available in 2011 compared to OED recently finalized a new housing plan in an effort to address the shortage of affordable housing in the City. In addition, affordable housing has attracted the attention of the mayoral administration, which prompted the announcement of the Mayor s 3x5 Initiative that strives to increase the supply of affordable housing in Denver. In the 2014 Budget, the Mayor announced that he would dedicate $3 million of General Fund monies as seed capital to develop a housing fund for the construction and preservation of affordable and workforce housing. Previous Housing Plan This report was the result of a series of recommendations that a Housing Task Force, convened by former Mayor John Hickenlooper in January 2006, proposed after studying affordable housing in Denver. This forty-person Task Force was convened to create a ten-year housing plan for the City that would cover the wide spectrum of housing needs that the City was facing. The plan included three overarching priorities for the City: to increase Denver s supply of affordable and workforce housing, to build and preserve vibrant neighborhoods, and to establish a framework for long-term success. However, the resulting Denver Housing Plan was not implemented. New Housing Plan In early 2012, Mayor Michael Hancock organized a subsequent Housing Task Force charged with developing recommendations to help shape future housing policies. After analyzing the City s housing inventory, current policies, and housing needs, the Task Force presented seven final recommendations aimed at improving Denver s affordable housing supply and strategy. 32 Later that year, the Mayor convened a Mayor s Housing Advisory Committee (Advisory Committee) to drive the Housing Plan (Plan) development and approval process. 33 In late 2014, the Advisory Committee submitted Denver s new five-year Plan, which incorporates the recommendations from the 2012 Housing Task Force and input obtained from the housing development community and the public. The new Plan is designed to be a living document that can be updated as needed. Elements of the Plan will be implemented 31 Market analyses were conducted by BBC Research and Consulting to inform the development of OED s new housing plan. 32 Task Force recommendations include the creation of a dedicated funding stream, revisions to the Inclusionary Housing Ordinance, a strong focus on creation and preservation of affordable housing, a greater alignment with the Colorado Housing and Finance Authority and the Colorado Division of Housing, new or renovated affordable housing in Transit Oriented Developments, adopting a formal but flexible housing plan that aligns with Task Force core values, and creating an advisory committee to assist in goal setting and annual reviews of the housing plan. 33 The Mayor s Housing Advisory Committee consisted of seven members: three at large members appointed by the Mayor, and one member each from the Community Housing Development Organization (CHDO) community, the Denver Housing Authority, the Colorado Housing and Finance Authority, and the Colorado Division of Housing. Page 11

20 using an annual Action Plan, to be released each year, that establishes the tools and expected outcomes of OED s affordable housing activities. Mayor s 3x5 Initiative In July 2013, during his State of the City address, Mayor Hancock challenged the Denver housing community to develop, rehabilitate, and preserve 3,000 affordable and workforce housing units over the next five years, or by OED Strategic Plans Under the current administration, OED began issuing annual strategic plans, titled JumpStart. These plans guide the activities of the seven main activity areas within OED that encompass business recruitment and lending, small business advocacy, workforce development, housing, and strategic lending and projects. Local Funding Instruments for Affordable Housing As federal funding for affordable housing has been steadily declining over the past decade, cities, counties, and states across the country have been faced with determining how to meet their affordable housing needs. To bridge the funding gap, municipalities utilize local funding instruments such as tax levies, trust funds, bonds, and city and county fees to provide for or supplement programs that are dedicated to assisting specific groups of citizens. Table 1 summarizes examples of popular local funding instruments for affordable housing. Table 1: Local Funding Source Examples Funding Source Tax Levy Local Trust Fund Municipal Bonds General Fund Tax Increment Financing Inclusionary Funds and Density Bonus Programs Definition A property tax assessed by a local government. The tax is based on the value of the owned property, the assessment rate, and the millage rate. A fund established by governmental entities that dedicates funding for a specific program or initiative. Bonds are forms of debt issued by governmental entities to finance capital projects and to fund daily operations. The general fund is the main operating fund for a City. Its main revenue sources generally include sales and use taxes, fines, and fees. Tax increment financing is a mechanism to capture the net new or incremental taxes that are created when a vacant or underutilized property is redeveloped. These revenues are then used to help finance the redevelopment project. Inclusionary funds and density bonus programs are tools used by governmental entities to collect fees from developers that opt out of including affordable housing units in developments. Source: Information compiled by auditors using the following sources of information: Denvergov.org; housingtrustfund.org; renewdenver.org; and housingpolicy.org. Municipalities can designate portions of local taxes, such as property taxes, to fund specific functions. These targeted taxes, also known as mill levies, are established under City and County of Denver Page 12

21 constitutional guidelines and approved by local authorities. In Denver, the Mayor and City Council approve the tax rate. For instance, Denver Human Services is a recipient of a tax levy dedicated to social services. Bonds are another funding tool for local governments. Bonds, a form of debt, enable governments to fund capital projects, such as schools and highways, or other high-cost initiatives. Various types of bonds can be utilized, including general obligation and revenue bonds, each with different requirements. For example, general obligation bonds must be approved by voters whereas revenue bonds do not. In Denver, voters approved a series of general obligation bonds through the 2007 Better Denver Bond Program. The program provided $550 million for infrastructure and cultural facilities construction and improvements. Trust funds can provide supplemental funding for specific programs such as affordable housing. Typically, housing trust funds are established by cities or counties and used in accordance with enabling legislation or an ordinance that dedicates local funds for affordable housing needs. Local funding sources could include developer fees, redevelopment tax increment funds, occupancy tax, property tax, and bond revenue. Generating funding from a local source provides greater spending flexibility. Municipalities can also allocate funds from their general funds to affordable housing programs. In the 2014 budget, Denver s Mayor Michael Hancock dedicated, for the first time, General Fund monies to benefit affordable housing. Page 13

22 SCOPE The audit focused on the Office of Economic Development s (OED) efforts to provide affordable housing in Denver. OBJECTIVE The audit addressed two objectives. The first objective was to evaluate funding and organizational barriers that may impact OED s ability to provide affordable housing. The second objective was to assess what strategies OED is utilizing to overcome these barriers. METHODOLOGY We applied various methodologies during the audit process to gather and analyze information pertinent to the audit scope and to assist with developing and testing the audit objectives. The audit steps included the following: Interviewing key employees and management from OED to gain an understanding of affordable housing in the City and County of Denver Interviewing HUD officials regarding the funding formula used when allocating grants to states and municipalities Researching information related to affordable housing programs, including: Programs offered to the citizens of the City and County of Denver Types of dedicated local funding sources Affordable housing programs used by other cities similar to Denver Academic and professional sources regarding affordable housing industry practices, strategies, barriers, and challenges Analyzing OED s Housing and Neighborhood Division s funding streams and expenditures to understand how affordable housing initiatives are funded Analyzing HUD data trends regarding funds allocated to Denver and other municipalities Analyzing OED Strategic Plans for measureable outcomes and the tracking of the initiatives outlined in the plans Attending OED community outreach meetings regarding the draft of the current five-year housing plan Conducting telephone interviews, performing research, and surveying officials from other municipalities to gain an understanding of their affordable housing City and County of Denver Page 14