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01-20-2015 - Item 16 - West Covina Housing Authority Annual Financial Report• City of West Covina Memorandum AGENDA ITEM NO 16 TO: Mayor and City Council DATE January 20, 2015 FROM: Tom Mauk Interim City Manager BY: Dennis Swink Interim Director of Finance SUBJECT: WEST COVINA HOUSING AUTHORITY ANNUAL FINANCIAL REPORT RECOMMENDATION: It is recommended the City Council receive and file this report. DISCUSSION: Recent changes in state law require the Housing Authority, as the Housing Successor, to prepare an annual report regarding the low -and moderate -income housing asset fund (Report) of the former West Covina Redevelopment Agency (RDA). The law also requires the completion of an independent audit of the low -and moderate -income housing asset fund (Fund). The attached annual report includes both the Report and the audit discussed above (Attachment A). Senate Bill 341 (SB 341), which is partly codified in Health and Safety Code Section 34176.1 and became effective on January 1, 2014, requires each housing successor that assumed the housing functions of a former redevelopment agency to post a report on its website that contains information regarding the low -and moderate -income housing asset fund (Fund) of the former redevelopment agency for the previous fiscal year. Each housing successor is also required to present this report to its governing body. In this case, the City Council designated the Community Development Commission (CDC) as the governing body of the Housing Authority. Because the CDC's membership is the City Council, the Housing Authority, as the housing successor, is required to present the Report on the Fund to the City Council pursuant to SB 341. In addition, the Housing Successor is required to conduct and provide to the City Council an independent financial audit (Audit) of the Fund. Similar to the above, the West Covina Housing Authority assumed the housing functions of the former RDA. The transfer of the functions included the transfer of formerly designated RDA low -and moderate -income housing funds together with any funds generated by former RDA housing assets. The funds must be maintained by the Housing Authority in a separate Fund and expended in accordance with Health and Safety Code section 34176.1 ("Section 34176.111). To ensure that the monies in the Fund are expended in accordance with the law, Section 34176.1(0 requires an independent financial audit of the Fund. SB 341 also requires annual reporting and website posting of additional housing information related to the Fund. As noted above, the CDC is the governing body of the Housing Authority and the City Council serves as the membership of the CDC. As a result, the Audit of the Fund is being presented to the City Council pursuant to SB 341. LEGAL REVIEW: The City Attorney's office has reviewed this staff report. FISCAL IMPACT: There is no immediate financial impact or budget action necessary as a result of the recommended action. P Prepared by: Dennis Swink Interim Director of Finance Reviewed and Approved by: kA Mike Lee Assistant City Manager/Community Development Commission Director 171 ATTACHMENT A WEST COVINA HOUSING REPORT AND AUDIT Attachment A HOUSING ANNUAL REPORT REGARDING THE LOW AND MODERATE INCOME HOUSING ASSET FUND FOR FISCAL YEAR 2013-2014 PURSUANT TO CALIFORNIA HEALTH AND SAFETY CODE SECTION 34176.1(f) FOR THE WEST COVINA COMMUNITY DEVELPOPMENT COMMISSION This Housing Successor Annual Report (Report) has been prepared pursuant to California Health and Safety Code Section 34176.1(f) and is dated as of June 30, 2014. This Report sets forth certain details of the Community Development Commission (Housing Successor) activities during fiscal year 2013-2014 (fiscal year). The purpose of this Report is to provide the governing body of the Housing Successor an annual report on the housing assets and activities of the Housing Successor under Part 1.85, Division 24 of the California Health and Safety Code, in particular sections 34176 and 34176.1 (Dissolution Law). This Report conforms with and is organized into sections I. through XI, inclusive, pursuant to Section 34176.1(f) of the Dissolution Law: I. Amount Deposited into LMIHAF: This section provides the total amount of funds deposited into the LMIHAF during the fiscal year. Any amounts deposited for items listed on the Recognized Obligation Payment Schedule (ROPS) must be distinguished from the other amounts deposited. A total of $478,010 was deposited into the LMIHAF during the fiscal year. Of the total funds deposited into the LMIHAF, a total of $0 was held for items listed on the ROPS. II. Ending Balance of LMIHAF: This section provides a statement of the balance in the LMIHAF as of the close of the fiscal year. Any amounts deposited for items listed on the ROPS must be distinguished from the other amounts deposited. At the close of the fiscal year, the ending balance in the LMIHAF was $3,205,687, of which $0 was held for items listed on the ROPS. III. Description of Expenditures from LMIHAF: The following is a description of expenditures from the LMIHAF by category: Monitoring & Administration Expenditures Fiscal Year $660,450 Homeless Prevention and Rapid Rehousing Services $0 Expenditures Housing Development Expenditures $0 ➢ Expenditures on Low Income Units ➢ Expenditures on Very -Low Income Units ➢ Expenditures on Extremely -Low Income Units ➢ Total Housing Development Expenditures Total LMIHAF Expenditures in Fiscal Year $660,450 IV. Statutory Value of Assets Owned by Housing Successor: This section provides the statutory value of real property owned by the Housing Successor, the value of loans and grants receivables, and the sum of these two amounts. Under the Dissolution Law and for purposes of this Report, the "statutory value of real property' means the value of properties formerly held by the former redevelopment agency as listed on the housing asset transfer schedule approved by the Department of Finance as listed in such schedule under Section 34176(a)(2), the value of the properties transferred to the Housing Successor pursuant to Section 34181(f), and the purchase price of property purchased by the Housing Successor. Further, the value of loans and grants receivable is included in the reported assets held in the LMIHAF. The following provides the statutory value of assets owned by the Housing Successor. Statutory Value of Real property $0 Value of Loans and Grants Receivable $ 21,463,232 Total Value of Housing Successor Assets $ 21,463,232 V. Description of Transfers: This section describes transfers, if any, to another housing successor agency made in previous fiscal year(s), including whether the funds are unencumbered and the status of projects, if any, for which the transferred LMIHAF will be used. The sole purpose of the transfers must be for the development of transit priority projects, permanent supportive housing, housing for agricultural employees or special needs housing. The Housing Successor did not make any LMIHAF transfers to other Housing Successor(s) under Section 34176.1(c) (2) during the fiscal year. • VI. Project Descriptions: This section describes any project for which the Housing Successor receives or holds property tax revenue pursuant to the ROPS and the status of that project. Project Name Status of Project Heritage Park Senior ` 'Monitoring of Housing.Compliance for 14 Multifamily` Apartments:; ' n Units (units are'sestricted for Senior Housing).,. ' Lark Ellen Village Monitoring of Housing Compliance for 121 Multifamily Units (88 units are restricted for Senior Housing). Mauna Loa Apartments -" ,Monitoring of,Housing Compliance for 12 Multifamily units The Promenade Monitoring of Housing Compliance for 124 Multifamily units. Senior Villas I, Moriitoringbf Housing Compliance for'85 Multifamily . Units (units are restricted'for Senior Housing) Senior Villas II Monitoring of Housing Compliance for 64 Multifamily Units (units are restricted for Senior Housing). Housing Preservation ''*"Administer`program, process'deniand payoffs, research L"oan Program ." ;' ," ,` deed, ancititle search, release of full reconveyan'cexand liens and recordation_. Housing Improvement Administer program, process demand payoffs, research Loan Program deed and title search, release of full reconveyance and liens and recordation. firstTime Homebuye Is '' `"Admmister`program,.process release of full- ' . Reconveyance; liens, and•recordatior Process , t, • a subordination agreement to allow for refinance. :. VII. Status of Compliance with Section 33334.16: Section 34176.1 provides that Section 33334.16 does not apply to interests in real property acquired by the Housing Successor on or after February 1, 2012; however, this Report presents a status update on the project related to such real property. With respect to interests in real property acquired by the former redevelopment agency prior to February 1, 2012, the time periods described in Section 33334.16 shall be deemed to have commenced on the date that the Department of Finance approved the property as a housing asset in the LMIHAF; thus, as to real property acquired by the former redevelopment agency now held by the Housing Successor in the LMIHAF, the Housing Successor must initiate activities consistent with the development of the real property for the purpose for which it was acquired within five years of the date the DOF approved such property as a housing asset. In furtherance thereof, the Housing Successor does not have any real property. Vill. Description of Outstanding Obligations under Section 33413: This section describes the outstanding inclusionary and replacement housing obligations, if any, under Section 33413 that remained outstanding prior to dissolution of the former redevelopment agency as of February 1, 2012 along with the Housing Successor's progress in meeting those prior obligations, if any, of the former redevelopment agency and how the Housing Successor's plans to meet unmet obligations, if any. Replacement Housing: According to the 2010-2014 Implementation Plan for the former redevelopment agency, no Section 33413(a) replacement housing obligations were transferred to the Housing Successor. The former redevelopment agency's Implementation Plans are posted on the City's website at http://westcovina.o re/de pa rtme nts/comm unity-development-commission/2010-2014- redevelo pment-implementation-plan Inclusionary/Production Housing: According to the 2010-2014 Implementation Plan for the former redevelopment agency, no Section 33413(b) inclusionary/production housing obligations were transferred to the Housing Successor. The former redevelopment agency's Implementation Plans are posted on the City's website at http://westcovina.org/departments/com m u n ity-development-com mission/2010-2014- redevelopment-implementation-plan IX. Income Test: This section provides the information required by Section 34176.1(a)(3)(B), or a description of expenditures by income restriction for a five year period, with the period beginning January 1, 2014 and whether the statutory thresholds have been met. However, reporting of the Income Test is not required until 2019. There is nothing to report at this time. X. Senior Housing Test: This section provides the percentage units of deed -restricted rental housing restricted to seniors and assisted individually or jointly by the Housing Successor, its former Redevelopment Agency, and its host jurisdiction within the previous ten years in relation to the aggregate number of units of deed -restricted rental housing assisted individually or jointly by the Housing Successor, its former Redevelopment Agency and its host jurisdiction within the same time period. For this Report the ten-year period reviewed is July 1, 2004 through July 1, 2014. The following provides the Housing Successor's Senior Housing Test- Reporting requirements for Implementation Plans pursuant to CRL Section 33490 (a)(2)(C)(iv): 251 Assisted Senior Rental Units 420 Total Assisted Rental Units 60% Senior Housing Percentage LI XI. Excess Surplus Test: This section provides the amount of excess surplus (unencumbered funds) in the LMIHAF, exceeding one million or the aggregate amount deposited in the fund over the preceding four fiscal years if any, and the length of time that the Housing Successor has had excess surplus, and the Housing Successor's plan for eliminating the excess surplus, The LMIHAF does not have an excess surplus. WEST COVINA HOUSING AUTHORITY (A COMPONENT UNIT OF THE CITY OF WEST COVINA) FINANCIAL REPORT FOR THE YEAR ENDED JUNE 30, 2014 ►j WEST COVINA HOUSING AUTHORITY TABLE OF CONTENTS June 30, 2014 Page Number Independent Auditors' Report 1 Basic Financial Statements: Statement of Net Position and General Fund Balance Sheet 3 Statement of Activities and General Fund Statement of Revenues, Expenditures and Changes in Fund Balance 4 Notes to Basic Financial Statements 5 Required Supplementary Information: 17 Budgetary Comparison Schedule - General Fund 18 Note to Required Supplementary Information 19 Independent Auditors' Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards 20 Ll INDEPENDENT AUDITORS' REPORT The Board of Directors West Covina Housing Authority West Covina, California Report on the Financial Statements We have audited the accompanying financial statements of the governmental activity and the major fund of the West Covina Housing Authority (the Authority), (a component unit of the City of West Covina, California), as of and for the year ended June 30, 2014, and the related notes to the financial statements, which collectively comprise the Authority's basic financial statements as listed in the table of contents. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors' Responsibility Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America, the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the basic financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors' judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the Authority's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Authority's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. -1- 2875 Michelle Drive, Suite 300, Ti-vine, CA 92606 • Tel: 714.978.1300 • Fax: 714.978.7893 Qghe.r lntrneel in Orunge auul Sall Oiggo C'oenlie.r Opinions In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activity and the major fund of the Authority, as of June 30, 2014, and the changes in financial position for the year then ended in accordance with accounting principles generally accepted in the United States of America. As described more fully in Note la, the basic component unit financial statements present only the Authority and are not intended to present fairly the financial position and results of operations of the City of West Covina, California in conformity with accounting principles generally accepted in the United States of America. Other Matters Required Supplementary Information Management has not presented the management's discussion and analysis that accounting principles generally accepted in the United States of America require to be presented to supplement the basic financial statements. Such missing information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. Our opinion on the basic financial statements is not affected by this missing information. Accounting principles generally accepted in the United States of America require that the budgetary comparison schedule, listed in the table of contents as required supplementary information, be presented to supplement the basic financial statements. The budgetary comparison schedule and related note have been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements of the Authority or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the basic financial statements taken as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated December 23, 2014, on our consideration of the Authority's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Authority's internal control over financial reporting and compliance. ,(J;JL /LP Irvine, California December 23, 2014 -2- WEST COVINA HOUSING AUTHORITY STATEMENT OF NET POSITION AND GENERAL FUND BALANCE SHEET ASSETS Cash and investments Receivables: Interest Notes and loans Advances to Successor Agency Prepaids TOTAL ASSETS LIABILITIES ANC FUND BALANCE/NET POSITION LIABILITIES: Accounts payable Other accrued liabilities TOTAL LIABILITIE' FUND BALANCE/NET POSITION: Nonspendable: Prepaids Restricted for: Affordable housing June 30, 2014 Housing Statement of Authority Adjustments Net Position $ 3,205,687 $ $ 3,205,687 1,301 - 1,301 14,818,038 - 14,818,038 6,645,194 - 6,645,194 157,500 - 157,500 $ 24,827,720 $ - $ 24,827,720 $ 3,186 $ $ 3,186 7,496 7,496 10,682 10,682 157,500 (157,500) - 24,659,538 157,500 24,817,038 TOTAL FUND BALANCE/NET POSITION 24,817,038 24,817,038 TOTAL LIABILITIES ANE FUND BALANCE/NET POSITION $ 24,827,720 $ $ 24,827,720 See independent auditors' report and notes to basic financial statements. -3- WEST COVINA HOUSING AUTHORITY STATEMENT OF ACTIVITIES AND GENERAL FUND STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCE For the year ended June 30, 2014 REVENUES: Investment income Repayment of notes and loans TOTAL REVENUES EXPENDITURES: Current: Affordable housing TOTAL EXPENDITURES EXCESS OF REVENUES (UNDER) EXPENDITURES Housing Statement of Authority Adjustments Net Position $ 304,784 $ $ 304,784 26,543 26,543 331,327 331,327 660,449 660,449 660,449 660,449 (329,122) (329,122) FUND BALANCE/NET POSITION - BEGINNING OF YEAR, AS RESTATED 25,146,160 25,146,160 FUND BALANCE/NET POSITION - END OF YEAR $ 24,817,038 $ $ 24,817,038 See independent auditors' report and notes to basic financial statements. -4- 41 • WEST COVINA HOUSING AUTHORITY NOTES TO BASIC FINANCIAL STATEMENTS June 30, 2014 1. REPORTING ENTITY AND SIGNIFICANT ACCOUNTING POLICIES: The accounting policies of the West Covina Housing Authority (the Authority) conform to accounting principles generally accepted in the United States of America as applicable to governments. The Governmental Accounting Standards Board (GASB) is the accepted standard setting body for governmental accounting and financial reporting principles. The following is a summary of the Authority's significant accounting policies: a. Description of the Reporting Entity: On February 1, 2011, the City Council activated the West Covina Housing Authority pursuant to the State of California Health and Safety Code, Section 33000, entitled "Community Redevelopment Law". The primary purpose of the Authority is to develop affordable housing for families of low and moderate income within the City of West Covina. The Authority is a component unit of the City of West Covina. The fund of the Authority has been included within the scope of the basic financial statements of the City because the City Council exercises oversight responsibility over the operations of the Authority. On December 29, 2011, the California Supreme Court upheld Assembly Bill X1 26 that provided for the dissolution of all redevelopment agencies in the State of California. As of February 1, 2012, the West Covina Community Development Commission (the Commission) was dissolved and the Housing Authority accepted the role as the Successor Housing Agency. The housing assets of the former Commission, and to the extent approved by the California Department of Finance, were transferred to the Authority, and continue the housing function of the former Commission. Only the fund of the Authority is included herein, therefore, these financial statements do not purport to represent the financial position or results of operations of the City of West Covina, California. b. Financial Statement Presentation: Government -Wide Financial Statements The Authority's Government -Wide Financial Statements include a Statement of Net Position and a Statement of Activities. These statements present summaries of the Governmental Activity for the Authority. See independent auditors' report. - 5 - WEST COVINA HOUSING AUTHORITY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2014 1. REPORTING ENTITY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): b. Financial Statement Presentation (Continued): Government -Wide Financial Statements (Continued) These statements are presented on an economic resources measurement focus and the accrual basis of accounting. Accordingly, all of the Authority's assets, deferred outflows of resources, liabilities and deferred inflows of resources, including capital assets as well as long-term debt, if any, are included in the accompanying Statement of Net Position. The Statement of Activities presents changes in net position. Under the accrual basis of accounting, revenues are recognized in the period in which they are earned while expenses are recognized in the period in which the liability is incurred. The Statement of Activities demonstrates the degree to which the direct expenses of a given function are offset by program revenues. Direct expenses are those that are clearly identifiable with a specific function. The types of transactions reported as program revenues for the Authority can be reported in three categories: 1. Charges for services, 2. Operating grants and contributions, and 3. Capital grants and contributions. Charges for services include revenues from customers or applicants who purchase, use, or directly benefit from goods, services, or privileges provided by a given function. Grants and contributions include revenues restricted to meeting the operational or capital requirements of a particular function. Taxes and other items not properly included among program revenues are reported instead as general revenues. Amounts paid to acquire capital assets are capitalized as assets in the government -wide financial statements, rather than reported as expenses. Proceeds of long-term debt are recorded as a liability in the government -wide financial statements, rather than as an other financing source. Amounts paid to reduce long-term indebtedness of the reporting government are reported as a reduction of the related liability, rather than as an expenditure. Governmental Fund Financial Statements Governmental Fund Financial Statements include a Balance Sheet and a Statement of Revenue, Expenditures, and Changes in Fund Balance for all major governmental funds. The Authority has presented its major fund that met the qualifications of GASB Statement No. 34. See independent auditors' report. -6- WEST COVINA HOUSING AUTHORITY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2014 1. REPORTING ENTITY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): b. Financial Statement Presentation (Continued): Governmental Fund Financial Statements (Continued) Governmental funds are accounted for on a spending or current financial resources measurement focus and the modified accrual basis of accounting. Accordingly, only current assets, deferred outflows of resources, current liabilities and deferred inflows of resources arc included on the Balance Sheet. The Statement of Revenues, Expenditures and Changes in Fund Balance presents increases (revenues and other financing sources) and decreases (expenditures and other financing uses) in fund balance. Under modified accrual basis of accounting, revenues are recognized in the accounting period in which they become both measurable and available to finance expenditures of the current period. Accordingly, revenues are recorded when received in cash, except for revenues subject to accrual (generally 60-days after year end) are recognized when due. The primary revenue source susceptible to accrual is investment income. Expenditures are generally recognized under the modified accrual basis of accounting when the related fund liability is incurred. The account of the Authority is organized on the basis of a fund, which is considered a separate accounting entity. The operations of the fund is accounted for with a separate set of self - balancing accounts that comprise its assets, deferred outflows of resources, liabilities, deferred inflows of resources, fund equity, revenues, and expenditures. Governmental resources are allocated to and accounted for in the individual find based upon the purposes for which they are to be spent and the means by which spending activities are controlled. The Authority reports the following major governmental fund: The General Fund is used to account for the Authority's financial resources received and used in developing affordable housing for families of low and moderate income. c. New Accounting Pronouncements: Current Year Standards: GASB 66 - "Technical Corrections, an amendment of GASB Statement No. 10 and Statement No. 62 ", required to be implemented in the current fiscal year did not impact the Authority. GASB 70 - "Accounting and Financial Reporting for Nonexchange Financial Guarantees", required to be implemented in the current fiscal year did not impact the Authority. See independent auditors' report. -7- E WEST COVINA HOUSING AUTHORITY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2014 1. REPORTING ENTITY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): c. New Accounting Pronouncements (Continued): Pending Accounting Standards: GASB has issued the following statements which may impact the Authority's financial reporting requirements in the future: • GASB 68 - "Accounting and Financial Reporting for Pensions, an amendment of GASB Statement No. 27", effective for the fiscal years beginning after June 15, 2014. • GASB 69 - "Government Combinations and Disposals of Government Operations", effective for periods beginning after December 15, 2013. • GASB 71 - "Pension Transition for Contributions Made Subsequent to the Measurement Date, an Amendment of GASB Statement No. 68", effective for periods beginning after June 15, 2014. d. Cash and Investments: Investments are reported in the accompanying balance sheet at fair value. Changes in fair value that occur during a fiscal year are recognized as investment income for that fiscal year. Investment income includes interest earnings, changes in fair value, and any gains or losses realized upon the liquidation, maturity, or sale of investments. Cash and investments are pooled with other City of West Covina funds for investment purposes, with interest being allocated quarterly to all funds legally requiring allocation and to other various funds at the direction of management based on average month -end pooled funds cash and investment balances. Interest income for cash and investments excluded from pooled cash is credited directly to the related fund. Investment policies applicable to the Authority's fund are those of the City of West Covina and are included in the notes to the City's basic financial statements. e. Deferred Outflows/Inflows of Resources: In addition to assets, the statement of net position and the governmental fund balance sheet will sometimes report a separate section for deferred outflows of resources. This separate financial statement element, deferred outflows of resources, represents a consumption of net position that applies to future periods and so will not be recognized as an outflow of resources (expenditure) until that time. The Authority does not have any applicable deferred outflows of resources. See independent auditors' report. -8- WEST COVINA HOUSING AUTHORITY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2014 1. REPORTING ENTITY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): e. Deferred Outflows/Inflows of Resources (Continued): In addition to liabilities, the statement of net position and the governmental fund balance sheet will sometimes report a separate section for deferred inflows of resources. This separate financial statement element, deferred inflows of resources, represents an acquisition of net position that applies to future periods and will not be recognized as an inflow of resources (revenue) until that time. The Authority does not have any applicable deferred inflows of resources. f. Classification of Net Position and Governmental Fund Balances: Net Position Classifications In the government -wide financial statements, net position is classified in the following categories: Investment in Capital Assets - This category groups all capital assets into one component of net position. Accumulated depreciation on these assets reduces this category. Restricted Net Position - This category presents external restrictions imposed by creditors, grantors, contributors or laws or regulations of other governments and restrictions imposed by law through constitutional provisions or enabling legislation. Unrestricted Net Position - This category represents the net position of the Authority that is not restricted for any project or other purpose. Net Position Flow Assumption Sometimes the Authority will fund outlays for a particular purpose from both restricted (e.g., restricted bond or grant proceeds) and unrestricted resources. In order to calculate the amounts to report as restricted - net position and unrestricted - net position in the government -wide fund financial statements, a flow assumption must be made about the order in which the resources are considered to be applied. It is the Authority's practice to consider restricted - net position to have been depleted before unrestricted - net position is applied See independent auditors' report. • WEST COVINA HOUSING AUTHORITY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2014 1. REPORTING ENTITY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): f. Classification of Net Position and Governmental Fund Balances: Governmental Fund Balance Classifications The fund balances reported on the fund statements consist of the following categories: Nonspendable Fund Balance - This classification includes amounts that cannot be spent because they are either (a) not in spendable form or (b) legally or contractually required to be maintained intact. Restricted Fund Balance - This classification includes amounts that can be spent only for specific purposes stipulated by constitution, external resource providers or through enabling legislation. Committed Fund Balance - This classification includes amounts that have been limited to specific purposes through adoption of an ordinance by the City Council, the highest level of decision making authority of the Authority. These commitments may be changed or lifted but only by the same formal action that was used to impose the constraint originally. City Council action to commit fund balance must occur within the fiscal reporting period while the amount committed may be subsequently determined. Assigned Fund Balance - This classification includes amounts that are intended to be used by the Authority for specific purposes through the City Council budgetary actions but do not meet the criteria to be classified as restricted or committed. Unassigned Fund Balance - This classification is used only to report a deficit balance resulting from overspending for specific purposes for which amounts had been restricted, committed or assigned. When an expenditure is incurred for purposes for which both restricted and unrestricted fund balances are available, the Authority's policy is to apply restricted fund balance first. When an expenditure is incurred for purposes for which committed, assigned or unassigned fund balances are available, the Authority's policy is to apply committed fund balance first, then assigned fund balance, and finally unassigned fund balance. See independent auditors' report. -10- E WEST COVINA HOUSING AUTHORITY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2014 1. REPORTING ENTITY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): g. Use of Estimates: The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenditures/expenses during the reporting period. Actual results could differ from those estimates. 2. CASH AND INVESTMENTS: Cash and Investments Cash and investments as of June 30, 2014 are classified in the accompanying financial statements as follows: Statement of Net Position: Cash and investments $ 3.205.687 Cash and investments as of June 30, 2014 consist of the following: Equity in City investment pool $ 3.205.687 Equity in the Cash and Investment Pool of the City of West Covina The Authority has no separate bank accounts or investments other than in its equity in the cash and investment pool managed by the City of West Covina. The Authority is a voluntary participant in that pool. This pool is governed by and under the regulatory oversight of the Investment Policy adopted by the City Council of the City of West Covina. The Authority has not adopted an investment policy separate from that of the City of West Covina. The fair value of the Authority's investment in this pool is reported in the accompanying financial statements at amounts based upon the Authority's pro-rata share of the fair value calculated by the City for the entire City portfolio. The balance available for withdrawal is based on the accounting records maintained by the City, which are recorded at the estimated fair value. See independent auditors' report. • WEST COVINA HOUSING AUTHORITY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2014 2. CASH AND INVESTMENTS (CONTINUED): Investments Authorized by the California Government Code and the City's Investment Policy for the Authority The table below identifies the investment types that are authorized for the Authority by the California Government Code and the City's investment policy. The table also identifies certain provisions of the California Government Code (or the City's investment policy, if more restrictive) that address interest rate risk, credit risk, and concentration of credit risk. This table does not address investments of debt proceeds held by fiscal agent that are govemed by the provisions of debt agreements of the City, rather than the general provisions of the California Government Code or the City's investment policy. Investment Types Authorized by State Law Local Agency Bonds U.S. Treasury Obligations U.S. Government Sponsored Agency Securities Banker's Acceptances Commercial Paper Negotiable Certificates of Deposit Repurchase Agreements Medium -Term Notes Mutual Funds Time Certificates of Deposit Money Market Mutual Funds County Pooled Investment Funds Local Agency Investment Fund Authorized Maximum Maximum by Investment Maximum Percentage Investment Policy Maturity * of Portfolio * in One Issuer No N/A None None Yes 5 years None None Yes 5 years None None Yes 180 days 40% 30% Yes 270 days 40% 10% Yes 5 years 30% 30% Yes 100 days 20% 20% Yes 5 years 30% 30% No N/A N/A N/A Yes 5 years 25% 25% Yes N/A 20% 10% Yes N/A None None Yes N/A None None * - Based on state law requirements or investment policy requirements, whichever is more restrictive. See independent auditors' report. 12- 0 • WEST COVINA HOUSING AUTHORITY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2014 2. CASH AND INVESTMENTS (CONTINUED): Disclosures Relating to Interest Rate Risk Interest rate risk is the risk that changes in market interest rates will adversely affect the fair value of an investment. Generally, the longer the maturity of an investment, the greater the sensitivity of its fair value to changes in market interest rates. One of the ways that the Authority manages its exposure to interest rate risk is by purchasing a combination of shorter tern and longer term investments and by timing cash flows from maturities so that a portion of the portfolio is maturing or coming close to maturity evenly over time as necessary to provide the cash flow and liquidity needed for operations. Disclosures Relating to Credit Risk Generally, credit risk is the risk that an issuer of an investment will not fulfill its obligation to the holder of the investment. This is measured by the assignment of a rating by a nationally recognized statistical rating organization. Custodial Credit Risk Custodial credit risk for deposits is the risk that, in the event of the failure of a depository financial institution, a government will not be able to recover its deposits or will not be able to recover collateral securities that are in the possession of an outside party. The custodial credit risk for investments is the risk that, in the event of the failure of the counterparty (e.g., broker -dealer) to a transaction, a government will not be able to recover the value of its investment or collateral securities that are in the possession of another party. The California Government Code and the City's investment policy do not contain legal or policy requirements that would limit the exposure to custodial credit risk for deposits or investments, other than the following provision for deposits: The California Government Code requires that a financial institution secure deposits made by state or local governmental units by pledging securities in an undivided collateral pool held by a depository regulated under state law (unless so waived by the governmental unit). The market value of the pledged securities in the collateral pool must equal at least 110% of the total amount deposited by the public agencies. California law also allows financial institutions to secure the Authority's deposits by pledging first trust deed mortgage notes having a value of 150% of the secured public deposits. At June 30, 2014, the City's investment pool deposits (bank balances) were insured by the Federal Deposit Insurance Corporation or collateralized as required under California Law. Sec independent auditors' report. - 13 - • 9 WEST COVINA HOUSING AUTHORITY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2014 2. CASH AND INVESTMENTS (CONTINUED): Disclosures Relating to Interest Rate Risk, Credit Risk and Custodial Credit Risk Additional disclosures related to interest rate risk, credit risk and custodial credit risk are available in the City of West Covina's Comprehensive Annual Financial Report. 3. NOTES AND LOANS RECEIVABLE: As of June 30, 2014, the following notes and loans receivable were outstanding: Housing rehabilitation First time home buyers Housing preservation program Lark Ellen Towers Executive Lodge Apartments Home improvement program Total $ 391,295 344,058 756,635 5,856,285 6,345,889 1,123,876 $ 14.818.038 Several housing rehabilitation loans totaling $391,295 have been made to qualified applicants using Community Development Block Grants received by the City and housing set -aside funds of the former Commission's redevelopment activities. These loans bear interest up to 5% and are repaid when title to the property changes. The Authority has loans to first-time home buyers totaling $344,058. Loans are secured by second trust deeds and bear interest at 5%. Principal and interest are deferred for five years and are due monthly in years 6 through 30. There were 20 individual loans outstanding at June 30, 2014 ranging from $10,090 to $22,450. The Authority also has housing preservation loans to qualified applicants using housing set -aside funds totaling $756,635. Principal and interest are deferred for ten years; after the tenth year loans bear interest at 5%. Loans are repaid after the tenth year or when title to the property changes. There were 89 individual loans outstanding at June 30, 2014 ranging from $205 to $10,050. In May 1997, the Commission loaned 54,270,000 to Lark Ellen Towers. The loan was transferred to the Authority from the dissolved former Commission. The loan is secured by a deed of trust. The loan accrues interest at 3% per annum and requires annual payments equal to the maximum of $35,000 or 50% of net profits earned by the project. The outstanding principal and accrued interest at June 30, 2014 is $5,856,285. See independent auditors' report. -14- WEST COVINA HOUSING AUTHORITY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2014 3. NOTES AND LOANS RECEIVABLE (CONTINUED): In April 1998, the Commission loaned $5,622,300 to Executive Lodge Apartments Limited Partnership (Promenade Apartments project). The loan was transferred to the Authority from the dissolved former Commission. The loan is secured by a deed of trust. The loan accrues interest at 3% per annum requires annual payments equal to 80% of net profits earned by the project. The outstanding principal and accrued interest at June 30, 2014 is $6,345,889. Several housing improvement loans totaling $1,123,876 have been made to qualified applicants. Loans are secured by second trust deeds. 4. ADVANCES TO THE SUCCESSOR AGENCY OF THE CITY OF WEST COVINA As a result of the dissolution, the advances were transferred to the Housing Authority. At June 30, 2014 the outstanding receivable side of these advances was as follows: (a) In May 2010, the Commission made an advance of $6,529,308 from its housing assets to satisfy the Commission's Supplemental Educational Revenue Augmentation Fund (SERAF) obligation as allowed by Assembly Bill ABX4-26. The advance bears no interest and must be repaid by June 30, 2015. In May 2011, the Commission made an advance of $1,344,269 from its housing assets to satisfy the Commission's Supplemental Educational Revenue Augmentation Fund (SERAF) obligation as allowed by Assembly Bill ABX4-26. The advance bears no interest and must be repaid by June 30, 2016. The outstanding balance at June 30, 2014 was $5,025,194. On February 1, 2012, these advance receivables were transferred to the Authority. (b) The General Fund of the City of West Covina has made several advances to the Commission totaling $8,100,000 for administrative and capital improvement construction costs. Eighty percent (80%) of the balance is reported in the General Fund and the remaining twenty percent (20%) balance is reported in the West Covina Housing Authority. With regard to repayment of the SERAF Advances, repayment is authorized to begin is the 2014-15 fiscal year, and annual repayment is capped pursuant to a statutory formula. Successor Agency and Housing Authority management believes, in consultation with legal counsel, that the SERAF Advances are enforceable obligations payable by the Successor Agency under the Dissolution Act's repayment restrictions. Therefore, the Housing Authority has not recorded an allowance for uncollectible advances. That said, the Dissolution Act is a complicated statutory scheme and the State and local agency implementation thereof has been the subject of substantial dispute and litigation. As such, repayment of the SERAF Advances cannot be guaranteed. See independent auditors' report. 15- 0 WEST COVINA HOUSING AUTHORITY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2014 5. RECENT CHANGES IN LEGISLATION AFFECTING CALIFORNIA REDEVELOPMENT AGENCIES: On June 29, 2011, Assembly Bills I 26 (the "Dissolution Act") and I 27 were enacted as part of the fiscal year 2011-12 state budget package, which dissolved the redevelopment agency. On June 27, 2012, as part of the fiscal year 2012-13 state budget package, the Legislature passed and the Governor signed AB 1484, which made technical and substantive amendments to the Dissolution Act based on experience to -date at the state and local level in implementing the Dissolution Act. The Dissolution Act allowed the sponsoring community that formed the Dissolved RDA to elect to assume the housing functions and take over the certain housing assets of the Dissolved RDA. If the sponsoring community does not elect to become the Successor Housing Agency and assume the Dissolved RDA's housing functions, such housing functions and all related housing assets will be transferred to the local housing authority in the jurisdiction. AB 1484 modified and provided some clarifications on the treatment of housing assets under the Dissolution Act. The West Covina Housing Authority elected on January 17, 2012 to serve as the Housing Successor Agency. After the date of dissolution, the housing assets, obligations, and activities of the Dissolved RDA have been transferred and are reported in the Authority. The State Controller of the State of California has been directed to review the propriety of any transfers of assets between Dissolved RDA and other public bodies that occurred after January 1, 2011. If the public body that received such transfers is not contractually committed to a third party for the expenditure or encumbrance of those assets, the State Controller is required to order the available assets to be transferred to the public body designated as the successor agency. The State Controller completed its review on December 11, 2013 and did not identify any unallowable transfers of assets that occurred during the audit between the former RDA, the City or other public agencies that had not already been corrected by the City. 6. RESTATEMENT OF FUND BALANCE/NET POSITION: The Rind balance/net position of the special revenue fund/governmental activities was increased by $14,841,307 to $25,146,160 as a result of eliminating unavailable revenues related to notes receivable. 7. SUBSEQUENT EVENTS: In preparing these financial statements, the Authority has evaluated events and transactions for potential recognition or disclosure through December 23, 2014, the date the financial statements were available to be issued. See independent auditors' report. -16- REQUIRED SUPPLEMENTARY INFORMATION -17- WEST COVINA HOUSING AUTHORITY STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCE - BUDGET AND ACTUAL WEST COVINA HOUSING AUTHORITY GENERAL FUND For the year ended June 30, 2014 Variance with Final Budget Budgeted Amounts Positive Original Final Actual (Negative) REVENUES: Investment income $ 7,000 $ 7,000 S 304,784 $ 297,784 Repayment of notes and loans 315,000 315,000 26,543 (288,457) TOTAL REVENUES 322,000 322,000 331,327 9,327 EXPENDITURES: Current: Affordable housing 547,404 547,404 660,449 (113,045) EXCESS OF REVENUES OVER (UNDER) EXPENDITURES (225,404) (225,404) (329,122) (103,718) FUND BALANCE - BEGINNING OF YEAR, AS RESTATED 25,146,160 25,146,160 25,146,160 - FUND BALANCE - END OF YEAR $ 24,920,756 $ 24,920,756 $ 24,817,038 $ (103,718) See independent auditors' report. M WEST COVINA HOUSING AUTHORITY NOTE TO REQUIRED SUPPLEMENTARY INFORMATION June 30, 2014 1. BUDGETARY DATA: The annual budget adopted by the City Council provides for the general operation of the Authority. The annual budget is adopted in summary by the City Council in June of each year. The resolution sets a combined appropriation of the fund for the operation of the Authority. The City Manager is authorized to transfer budgeted amounts between departments to ensure adequate and proper standards of service. Budgetary revisions, including supplemental appropriations which increase appropriations, must be approved by the City Council. The budgetary level of control is at the fund level. The budgeted figures used in the financial statements' budget to actual comparisons are the final amended amounts. The budget is formally integrated into the accounting system and employed as a management control device during the year. Budgets for governmental fund types are adopted on a basis consistent with generally accepted accounting principles. Operating appropriations lapse at the end of the fiscal year. See independent auditors' report. 19- • 0 INDEPENDENT AUDITORS' REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT A UDITING STANDARDS The Board of Directors West Covina Housing Authority West Covina, California We have audited, in accordance with the auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statements of the governmental activity and the major fund of the West Covina Housing Authority (the Authority), (a component unit of the City of West Covina, California), as of and for the year ended June 30, 2014, and the related notes to the financial statements, which collectively comprise the Authority's basic financial statements and have issued our report thereon dated December 23, 2014. Internal Control over Financial Reporting In planning and performing our audit of the financial statements, we considered the Authority's internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Authority's internal control. Accordingly, we do not express an opinion on the effectiveness of the Authority's internal control. A deficiencv in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the Authority's financial statements will not be prevented, or detected and corrected on a timely basis. Asignificant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. -20- 2875 Michelle Drive, Suite 300, Irvine, CA 92606 • Tel: 714.978.1300 • Fax: 714.978.7893 Qgires batted in Orange und.tian Diego Coianier • Compliance and Other Matters As part of obtaining reasonable assurance about whether the Authority's financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the Authority's internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Authority's internal control and compliance. Accordingly, this communication is not suitable for any other purpose. ,, ,lpLIe�l Irvine, California December 23, 2014 -21-