This audit was conducted pursuant to Resolution 05-285, CD1, Requesting the City Auditor to Audit the City’s Affordable Housing Program, which was adopted by the Honolulu City Council on Oct. 19, 2005.
The resolution requested the city auditor to review and assess the city’s use of affordable housing conditions in unilateral agreements, the adequacy of current staffing to monitor, administer, and enforce affordable housing conditions in unilateral agreements, and the appropriateness of the selling prices of affordable housing units developed under unilateral agreements.
During our preliminary review, we found that some of the issues identified in the resolution had been addressed by other government and industry groups in recent years. Rather than re-examine these issues, and due to limited resources, we chose to focus this audit on the city’s administration of in-lieu fees and application of excess affordable housing credits as they directly affect the number of affordable housing units actually built.
Background
During the 1970s local governments across the country began implementing “inclusionary zoning” or “inclusionary housing,” which required developers to set-aside a certain percentage of housing units for low- and moderate-income households within otherwise market-rate developments.
At the same time, the City and County of Honolulu began imposing various requirements on land use rezoning to ensure the production of affordable housing through “unilateral agreements” by ordinance. The city estimates that nearly 13,000 affordable housing units have been constructed for sale or rent under the affordable housing requirements imposed by unilateral agreement.
Since 1998, the city’s affordable housing program functions, which include monitoring unilateral agreement requirements, have been performed by the Department of Planning and Permitting. Prior to 1998, the former Department of Land Utilization and Department of Housing and Community Development administered the affordable housing program.
Under current departmental rules, developers have options in meeting affordable housing requirements imposed by unilateral agreements:
• Construct affordable housing units for sale or rent on the re-zoned project site.
• Construct affordable housing units for sale on property other than the re-zoned project site.
• Provide finished house lots for owner-builder efforts.
• Convey improved or unimproved land, on- or off-site, suitable for affordable housing construction.
• Contribute a cash or “in-lieu” fee based on a set formula.
In addition to the affordable housing options established by rule, the city may allow developers to utilize excess affordable housing credits earned under a unilateral agreement to meet affordable housing requirements imposed by another unilateral agreement.
Planning guidelines for O‘ahu’s future development and residential growth are established in the city’s General Plan, Sustainable Communities Plans, and Development Plans. For example, the general plan’s housing policies support financial and other incentives to encourage the private sector to build homes for low- and moderate-income residents, and to distribute low- and moderate-income housing fairly throughout the island.
The development and sustainable communities plans cover eight areas on O‘ahu: Central O‘ahu, Ewa, Primary Urban Center, East Honolulu, Ko‘olaupoko, Ko‘olauloa, North Shore, and Wai‘anae. Plans representing these eight areas also establish affordable housing goals and objectives.
Summary of Findings
- 1. The department of planning and permitting’s administration of unilateral agreements for affordable housing is inadequate. The department lacks a formal unilateral agreement monitoring program for affordable housing, does not maintain an accurate, verified inventory of affordable housing units built under unilateral agreements, and has not maintained historical data on unilateral agreements and its requirements.
- 2. In-lieu fee collections have not resulted in affordable housing benefits for the 80-120 percent of median income group. Since 1998, in-lieu fees have not been expended for affordable housing-related purposes. The Housing Development Special Fund, which holds in-lieu fees, is not specifically intended for the development of affordable housing and limits the city’s ability to expend in-lieu fees. Acceptance of in-lieu fees may be inconsistent with current general, development, and sustainable community plans related to affordable housing.
- 3. Accumulating and redeeming affordable housing credits are not formalized in ordinance or rule. The department of planning and permitting authorized developers to accumulate affordable housing credits contrary to city ordinance under a moratorium on affordable housing conditions. The department’s excess affordable housing credit application practices are generally consistent with general, development, and sustainable community plans related to affordable housing, but may conflict with the general plan's housing objective advocating diverse communities.
Finding 1: The Department of Planning and Permitting’s Administration of Unilateral Agreements in Affordable Housing is Inadequate
• We found that the department has not established an effective affordable housing unilateral agreement monitoring program. Because the department’s unilateral agreement administration is inconsistent and reactionary in nature, the department has not proactively verified developer compliance with unilateral agreement requirements.
• The department does not maintain an accurate, verified inventory of affordable housing. We found that planning and permitting staff rely on an affordable housing database that was last updated in 2000 and that poor record-keeping practices hamper the department’s ability to assess developer compliance. The department also reports unverified and flawed affordable housing data to the council and public.
• The department does not maintain historical affordable housing data. The department claims that since unilateral agreement conditions in affordable housing began in the 1970s, the city has constructed nearly 13,000 affordable housing units for sale or rent. However, the city is unable to provide data to verify this claim.
• Inadequate staffing is blamed for poor monitoring. The department notes that it assumed unilateral agreement monitoring responsibilities in 1998 as the result of a reorganization of city government. The department did not receive any additional staff or resources to take on this responsibility. Between 1999 and 2002, five staff persons were assigned to unilateral agreement monitoring. Currently, the department has one full-time staff person assigned to monitor unilateral agreements in affordable housing.
Finding 2: In-lieu Fee Collections Have Not Resulted in Affordable Housing Benefits as Intended
• Since 1998, no in-lieu fees were expended for affordable housing related purposes. Between FY1992-93 to FY2005-06, the city collected nearly $4.5 million in in-lieu fees. We found that at least $3.2 million in in-lieu fees from the former Housing Assistance Fund were directed into the city’s general fund instead of being spent on affordable housing initiatives. In 2004, the former budget and fiscal services director reported that the in-lieu fee balance was $391,371. By lapsing in-lieu fees from the Housing Assistance Fund and the Housing Development Special Fund into the general fund, the city adversely impacted the housing development special fund’s future effectiveness. We also found that there are no plans, goals, or objectives for spending in-lieu fees.
• The housing development special fund is not specifically intended for the development of affordable housing. The purpose of the fund is the development of housing for sale or rent, with no specific reference to affordable housing. Thus, the city cannot be assured that in-lieu fees will be used for affordable housing purposes. We also found that no specific agency is tasked to monitor, plan, or expend in-lieu fees collected from developers. As a result, in-lieu fees may have been expended for purposes other than housing.
• The current framework for the collection of in-lieu fees is inadequate for significant development of affordable housing for sale or rent. With a current balance of $820,000, the housing development special fund cannot develop a significant amount of affordable housing for sale or rent. We also found that communities affected by zoning changes do not directly benefit from in-lieu fee collections. Hawai‘i county amended its in-lieu fee program due to the lack of affordable housing units built.
• The acceptance of in-lieu fees may be inconsistent with current general, development, and sustainable community plans related to the construction of affordable housing units. We found that compliance with general, development, and sustainable communities plans related to affordable housing is not documented. Limitations on the use of in-lieu fees do not support the plans’ affordable housing objectives.
Finding 3: The Department of Planning and Permitting’s Authorization and Application of Excess Affordable Housing Credits Lack Accountability
• Accumulating and redeeming excess affordable housing credits are not formalized in ordinance or rule. In practice, the planning and permitting department credits developers for affordable housing construction that exceeds the minimum required under unilateral agreements. These excess credits may be used to satisfy future affordable housing requirements. We found, however, that affordable housing credits are not tracked to determine a developer’s balance, sale, or redemption of excess affordable housing credits. Unlike the City and County of Honolulu, Hawai‘i and Maui counties codify the use of affordable housing credits.
• The department authorized developers to accumulate excess affordable housing credits contrary to city ordinance under a moratorium on affordable housing conditions. We found that Ordinance 99-51 provided relief to developers during a market downturn. The ordinance placed a moratorium on affordable housing conditions imposed by the city so that developers could sell their affordable housing inventory and meet unilateral agreement requirements. However, the planning and permitting department allowed developers to bank affordable housing credits in excess of the minimum requirements imposed by unilateral agreement. Redemption of excess credits earned during the moratorium may conflict with the intent of the city’s affordable housing program.
• The department’s excess affordable housing credit practices may conflict with the general plan’s housing objective advocating diverse communities. Incentives to construct more affordable housing units are consistent with general, development, and sustainable communities plans provisions in affordable housing. However, application of excess credits may conflict with the general plan’s housing objective that encourages the fair distribution of low- and moderate-income housing throughout the island.
Recommendations and Response
We made several recommendations to the Department of Planning and Permitting to improve its effectiveness and efficiency in administering unilateral agreements for affordable housing. We recommended that the department establish formal policies and procedures for administering unilateral agreements, including monitoring requirements.
We also suggested that the department maintain a matrix or database with accurate, verifiable data, including historical data of all affordable housing units built under unilateral agreements.
In addition, we recommended that the department amend its rules by establishing an in-lieu fee formula that is consistent with established goals and objectives, and by proposing a framework for the accrual and application of excess affordable housing credits. We also suggested that the department establish procedures to document how the delivery options exercised by developers conform to general, development, or sustainable community plan provisions related to affordable housing.
Additionally, we urged the department to report verified affordable housing data in its annual report to the council as required by city ordinance. Finally, we recommended that the department evaluate its staffing allocation for unilateral agreement monitoring and to ensure compliance with future unilateral agreement provisions.
We also recommended that the Honolulu City Council consider amending Section 6-46.2, Revised Ordinances of Honolulu, to specify that in-lieu fees deposited into the Housing Development Special Fund shall be used for affordable housing-related purposes, to clarify and expand the use of in-lieu fees, and to designate a city agency to monitor, plan, and expend in-lieu fees. We also recommended that the council consider further review of the housing development special fund’s expenditures.
In its response to our draft report, the Department of Planning and Permitting expressed concerns that confidential copies of the draft report were provided to others outside of the department and mayor’s office, that the audit was inconsistent with the original intent of Resolution 05-285, CD1, and that the draft report contained errors and inaccuracies. We note that some of the department’s comments, presented as errors or inaccuracies, were clarifying information that enhanced the report, but did not have a substantive effect on the audit findings and recommendations.
In other instances, the department commented on issues outside the scope of this audit. We also noted that some of the purported errors and inaccuracies were based on information provided to us by department staff or the result of information that the department failed to disclose to us during fieldwork. In those instances, the additional information did not have a material effect on our audit findings. However, we acknowledge the validity of some of the department’s comments and have amended the final report to ensure accuracy and clarity.
Finally, the department concurred with the following problems revealed in our audit report: that staffing shortages and competing priorities have resulted in the department using subdivision application or building permit review for unilateral agreement compliance instead of monitoring annual reports; that the state of documentation, archiving, and retrieval of documentation is a challenge; that the backlog in reviews and certifications of developer’s submittals for affordable housing credits have been reduced; and that the departmental rules used for administering the affordable housing agreements need to be updated.
The department also provided several comments on substantive issues that merited a response. For these issues, we explained that information we reviewed supported a contrary view or that data was not provided to us during fieldwork. We also note that the Department of Budget and Fiscal Services declined to submit a separate response to our draft audit report and instead relied on the planning and permitting department to respond on its behalf.
Les Tanaka is the auditor for the City & County of Honolulu.
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