A report to the County Council released Wednesday by county Auditor Tyler Benner concluded the Office of Housing and Community Development had “inadequate internal controls” over its affordable housing credits program.
“The Office of Housing and Community Development’s internal control system was ineffective in ensuring affordable housing credits were properly issued, controlled, and accounted for,” the audit found. “As a result, the Office of the County Auditor was unable to determine the total accounting of credits.”
“Basically, there’s nothing surprising there,” said North Kona Councilman Holeka Inaba, the council’s vice chairman whose September resolution requested the audit. “What I’ve known all along is there’s not a clear record of the affordable housing credits.
“And even with this audit, it’s not clear. One of the findings of this audit is that we don’t have a clear record.”
The county’s affordable housing policy — outlined in Chapter 11 of the Hawaii County Code — mandates the inclusion of affordable housing in certain developments. Developers who agree to build new affordable housing units in excess of any requirements imposed under county law may earn affordable housing credits. The credits can be transferred to other developers, who can use them to satisfy existing or future affordable housing requirements.
“Our review of the evidence showed that since the county’s affordable housing policy’s inception in 1988, OHCD issued at least 1,811 credits,” said a letter accompanying the report. “Six-hundred thirty-eight (35.2%) credits have been sold at least once. Historically, private credit sales have varied in price from as little as $5,000 to as much as $75,000 each. Since program inception, 335.8 credits have been redeemed for an average of 9.87 credits per year.”
The audit found 1,354.2 credits still in circulation.
Inaba’s resolution came after a former county housing official, Alan Scott Rudo, pleaded guilty in August to conspiracy to commit honest services wire fraud and admitted to taking about $1.8 million in bribes.
Three others — Hilo attorneys Paul Sulla Jr. and Gary Zamber plus Big Island businessman Rajesh Budhabhatti — were indicted in July by a federal grand jury. The feds allege the trio received affordable housing credits and land conveyances worth at least $10.98 million, with no intention of developing affordable housing. All three have pleaded not guilty to multiple charges punishable by up to 20 years in prison.
“While theft and loss can and do happen, the ability to conceal and deceive for a long time is symptomatic of inadequate internal controls. Decades of neglect in monitoring the program has left (OHCD) unable to evaluate its success,” the audit report states.
In addition, the audit report described the process outlined in Chapter 11 as “complex.”
“OHCD said that developers grow frustrated with the complexity of the overall process and want the easiest way to fulfill the obligation,” the report states. “Purchasing (affordable housing credits) has become the preferred method of satisfaction.”
Another obstacle in getting an accurate count of credits is that the state Department of Hawaiian Home Lands has its own affordable housing credits program. State law requires counties to recognize housing units developed by DHHL and issue the department affordable housing credits.
“Credits are transferable and can be applied within the same county in which the credits are earned,” the report states. “Counties are directed to issue credits on a one-for-one basis to DHHL for existing and future projects.”
The report said those credits “create obstacles for OHCD because issuance is beyond (OHCD’s) control and there is no mechanism to recognize credits continually.”
According to the report, in 2016 DHHL “built 42 affordable housing units, obtained 42 credits, and transferred those credits to a developer in exchange for building fencing around an endangered plant preserve near La‘i Opua Village, Phase 5.”
The report said noncash forms of payment for the credits “can circumvent competitive procurement, sidestep a program’s budget, carry tax implications, etc.”
The report then concluded the extent and effect of those complications “are beyond the scope of this audit.”
Inaba came to the same conclusion, saying that even if the county were to overhaul its system, “we couldn’t get rid of credits for DHHL.”
The report also made seven recommendations that it said, “if implemented in good faith,” would be beneficial to OHCD.
They include: clarifying applicable sections of County Code Chapter 11 to “make laws easier to understand”; establishing administrative rules to “help guide OHCD to effectively administer the county’s affordable housing policy”; updating and enforcing policies and procedures “to ensure consistency throughout the organization and with industry best practices”; increasing monitoring and policy oversight to “ensure OHCD’s internal control system operates effectively and efficiently”; segregating incompatible duties to “ensure one individual does not oversee key steps of the affordable housing process”; and providing training to “ensure that employees … are knowledgeable and will be held accountable.”
The Tribune-Herald reached out to OHCD Administrator Susan Kunz and DHHL, but neither responded in time for this story.
Email John Burnett at jburnett@hawaiitribune-herald.com.