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f C, County of Hawaii te orJ4' J «Office of the County Auditor
County Auditor 120 Pauahi St., 309 :r' r
County of Hawaii Hilo, HI 96720 :I' A\ •M`
Office of the County Auditor F 808.961.8905 - f`
Ph 808.961.8386 i ............
www.Hawai`icounty.gov
February 1, 2023
Honorable Heather Kimball, Council Chair
and Members of the Hawaii County Council
Hawaii County Council
25 Aupuni Street
Hilo, Hawaii 96720
Dear Council Chair Kimball and Council Members,
In accordance with generally accepted government auditing standards and the Hawaii
County Charter Section 3-18(d)(2), the Office of the County Auditor conducts or causes
to be conducted: performance and/or financial audits of the funds, programs, services,
and operations of any county agency, executive agency, or program, as set forth by the
county auditor in an annual audit plan that shall be transmitted to the county council and
the mayor and file with the county clerk as a public record.
We have completed our engagement of the Affordable Housing Credits at the Office of
Housing and Community Development (OHCD). The objective was to evaluate the
internal controls, the efficient issuance and utilization of affordable housing credits,
compliance with Chapter 11 of the Hawaii County Code, and program efficacy.
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. 638 (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.
Summary of Affordable Housing Credits
Description Total Credits Redeemed Outstanding
Issued
Credits 1,811 335.8 1,354.2
Compiled Office of the County Auditor
Hawai`i County is an Equal Opportunity Provider and Employer
While not memorialized in writing, OHCD said historically, they were advised not to
interfere with private-party credit transactions. However, credits have significant potential
values. When used as intended, credits provide developers with a means to liquidity,
which in turn contributes to housing production. However, when bought and held, the lack
of liquidity means less overall capital investing in developments, and production suffers.
As public stewards, behaviors, actions, and decisions must be made in the public's best
interest. OHCD should have a solid understanding of credits' impact on production.
The program has underserved communities around the island. Excess credits are bought
and held for long periods rather than used to produce housing units. For OHCD to
successfully achieve its mission of providing affordable housing, foundational reforms
must accompany improvements to its internal control system.
While this audit discusses program deficiencies at length, our report intends to provide
OHCD with meaningful recommendations that, when implemented, will provide
department personnel, management, administration, elected officials, and the public with
reasonable assurance that the actual performance aligns with expectations.
Our report offers seven recommendations, including clarifying county code, establishing
administrative rules, updating and enforcing written policies and procedures, increasing
monitoring and program oversight, using technology as a monitoring tool, segregating
incompatible duties, and providing training.
In response to a draft of this report, management expressed general agreement with our
audit results. A copy of management's complete response can be found in Chapter 4.
We want to express our sincere appreciation to the Office of Housing and Community
Development for their assistance and cooperation during the audit process. We greatly
appreciate their valuable time and effort in providing us with information.
To improve government accountability and ensure audit recommendations are
implemented or resolved, we will continuously monitor the status of recommendations
using our remediation tracker. To view the department's status, visit us at:
https://www.Hawai`icounty.gov/our-county/legislative/office-of-the-county-aud itor.
If you have any questions or concerns about the status of the recommendations
discussed, feel free to contact me at 961-8386. Thank you.
Respectfully,
J, S,0„rwt
County Auditor
cc: Mitchell D. Roth, Mayor
Lee Lord, Managing Director
Jon Henricks, County Clerk
Susan Kunz, Housing Administrator
Harry Yada, Assistant Housing Administrator
Anne Bailey, Housing and Community Development Specialist VI
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Ir County of Hawaii r4:M'er Mel/1/(-i Office of the County Auditor o°. '+.;'
County Auditor 120 Pauahi St.. 309 t• '}`,
I County of Hawai'i Hilo, HI 96720 g' 4! `":11,•I;
Office of the County Auditor F 808.961.8905 '. '. 1.
Ph 808.961.8386 46;•N±!``'
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www.Hawai icountv.gov
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February 1, 2023
I
I Honorable Heather Kimball, Council Chair
and Members of the Hawaii County Council
Hawai`i County Council
I 25 Aupuni Street
Hilo, Hawai`i 96720
IDear Council Chair Kimball and Council Members,
In accordance with generally accepted government auditing standards and the Hawai`i
I County Charter Section 3-18(d)(2), the Office of the County Auditor conducts or causes
to be conducted: performance and/or financial audits of the funds, programs, services,
and operations of any county agency, executive agency, or program, as set forth by the
Icounty auditor in an annual audit plan that shall be transmitted to the county council and
the mayor and file with the county clerk as a public record.
IWe have completed our engagement of the Affordable Housing Credits at the Office of
Housing and Community Development (OHCD). The objective was to evaluate the
I internal controls, the efficient issuance and utilization of affordable housing credits,
compliance with Chapter 11 of the Hawaii County Code, and program efficacy.
IOur review of the evidence showed that since the County's Affordable Housing Policy's
inception in 1988, OHCD issued at least 1,811 credits. 638 (35.2%) credits have been
I 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.
I
I Summary of Afforr able Housing Credits
Description Total Credits Redeemed Outstanding
Issued
ICredits 1,811 335.8 1,354.2
Compiled Office of the County Auditor
I
Hawai`i County is an Equal Opportunity Provider and Employer
While not memorialized in writing, OHCD said historically, they were advised not to
interfere with private-party credit transactions. However, credits have significant potential
values. When used as intended, credits provide developers with a means to liquidity,
which in turn contributes to housing production. However, when bought and held. the lack
of liquidity means less overall capital investing in developments, and production suffers.
As public stewards, behaviors, actions, and decisions must be made in the public's best
interest. OHCD should have a solid understanding of credits' impact on production.
The program has underserved communities around the island. Excess credits are bought
and held for long periods rather than used to produce housing units. For OHCD to
successfully achieve its mission of providing affordable housing, foundational reforms
must accompany improvements to its internal control system.
While this audit discusses program deficiencies at length, our report intends to provide
OHCD with meaningful recommendations that, when implemented, will provide
department personnel, management, administration, elected officials, and the public with
reasonable assurance that the actual performance aligns with expectations.
Our report offers seven recommendations, including clarifying county code. establishing
administrative rules, updating and enforcing written policies and procedures, increasing
monitoring and program oversight, using technology as a monitoring tool, segregating
incompatible duties, and providing training.
In response to a draft of this report, management expressed general agreement with our
audit results. A copy of management's complete response can be found in Chapter 4.
We want to express our sincere appreciation to the Office of Housing and Community
Development for their assistance and cooperation during the audit process. We greatly
appreciate their valuable time and effort in providing us with information.
To improve government accountability and ensure audit recommendations are
implemented or resolved, we will continuously monitor the status of recommendations
using our remediation tracker. To view the department's status, visit us at:
https://www.Hawai`icounty.gov/our-county/legislative/office-of-the-county-auditor.
If you have any questions or concerns about the status of the recommendations
discussed, feel free to contact me at 961-8386. Thank you.
Respectfully,
47eve f. • eievwx,
County Auditor
cc: Mitchell D. Roth, Mayor
Lee Lord, Managing Director
Jon Henricks, County Clerk
Susan Kunz, Housing Administrator
Harry Yada, Assistant Housing Administrator
Anne Bailey, Housing and Community Development Specialist VI
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1 Table of Contents
1
Executive Summary 1
About Us 4
1 Chapter 1 Introduction 5
Objective, Scope. and Methodology 10
Noteworthy Events 11
1 Chapter 2 Audit Results 12
rResults of Comprehensive Accounting of Credits14
Visual Flow of Credits 19
Complex County Code 20
Recommendation 1 22
No Administrative Rules 24
Recommendation 2 24
1 Incomplete Written Policies and Procedures 27
Recommendation 3 28
1 Minimal Monitoring and Program Oversight 29
Recommendation 4 30
Recommendation 5 30
Insufficient Segregation of Duties 31
1 Recommendation 6 32
1 No Training 33
Recommendation 7 34
1
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Chapter 3 Fraud, Waste, and Abuse 35
Conclusion 37
Chapter 4 Management Response 39
Chapter 5 Attachments
Assignment of Affordable Housing Credits 43
Transfer of Affordable Housing Credits Letter 44
1
1 Executive Summary
I
The goal of the Office of Housing and Community Development (OHCD) is to provide for the
development of viable communities in Hawaii County by providing decent housing, suitable living
environments. and the expansion of economic opportunities. The OHCD's Community
Development Division is responsible for the planning, development. construction, and
management of assigned housing and community-related projects in Hawai'i County. OHCD's
Planning Branch administers the affordable housing policy, Hawaii County Code (HCC). Chapter
11, through processing affordable housing agreements on rezoning.
Hawaii County has a severe housing crisis. The lack of affordable housing often forces residents
to leave the state. Chapter 11, Hawaii County's Affordable Housing Policy. mandates the
inclusion of affordable housing in and throughout various market developments. The rezoning of
parcels triggers Chapter 11. Zoning is administered through Chapter 25, Article 5; Zoning
Districting Regulations.
rChapter 11 provides a means for developers to satisfy their affordable housing obligation through
seven options: developing finished lots, selling, or renting the required units on or off-site,
conveying land or infrastructure. or purchasing affordable housing credits. At approximately 44%,
purchasing has become the most often used method of satisfaction. See Table 3.
In July 2021 media outlets reported a fraud scheme committed by a now-former employee of the
Office of Housing and Community Development, questioning the efficacy of Chapter 11.
In September 2022, Hawaii County Council's Resolution No. 467-22 requested the Office of the
County Auditor conduct a performance audit. The audit sought to ensure the efficient issuance
and utilization of affordable housing credits. including a comprehensive accounting of all issued,
outstanding. transferred, or redeemed. and recommendations to enhance program controls,
efficiency, and effectiveness. We also evaluated Chapter 11 of the Hawaii County Code and
OHCD's written policies and procedures for implementing Chapter 11.
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 the department unable to evaluate its success.
Executive Summary I 1
I
Our audit found the following:
Li R
Compliance with Chapter 11 Improved Compliance with Chapter 11
o Pre-awarded and Over-awarded Worked with Corporation Counsel to
Credits develop a better understanding of the code
o Misinterpreted areas of the code Increased program oversight
o Internal Control Systems Program Clarified supervisor responsibilities
Oversight Segregated most incompatible duties
o Segregation of duties Formalized policies and procedures
Increased training
Written policies and procedures Improved records maintenance, including
o No Administrative Rules DHHL credits
o Vetting developers' qualifications Hired a consultant to analyze and make
o Contract monitoring of Affordable recommendations to amend Chapter 11 of
Housing Agreements (AHA) the Hawaii County CodeoMaintainingcompleterecordsof
credits
o Timely recognition of DHHL credits
Based on these conditions, we offer the following seven recommendations:
Clarify County Code
1. We recommend OHCD work with Hawaii County Council to revise applicable sections of
Chapter 11.
Establish Administrative Rules
2. We recommend OHCD establish administrative rules to effectively administer the County's
Affordable Housing Policy.
Update and Enforce Policies and Procedures
3. We recommend OHCD clarify and enforce policies and procedures to ensure consistency
throughout the department and industry best practices.
Increase Monitoring and Program Oversight
4. We recommend OHCD perform ongoing monitoring of their internal control system's design
and operating effectiveness as part of their operations.
5. We recommend OHCD use software and technology as a monitoring tool to improve managing
affordable housing agreements and credits.
Segregate Incompatible Duties
6. We recommend OHCD management separate incompatible duties. One individual should not
oversee key elements of the affordable housing process.
Provide Training
7. We recommend OHCD provide ongoing internal control training to employees involved in the
affordable housing process.
2 I Executive Summary
Conclusion
When our recommendations are implemented in good faith. OHCD can expect the following
benefits:
Clarify County Code
1. Clarifying applicable sections of Chapter 11 will make laws easier to understand and ensure
compliance.
Establish Administrative Rules
2. Establishing administrative rules will help guide OHCD to effectively administer the County's
Affordable Housing Policy.
Update and Enforce Policies and Procedures
3. Updating and enforcing policies and procedures will ensure consistency throughout the
organization and with industry best practices.
Increase Monitoring and Program Oversight
4. Ongoing monitoring will ensure OHCD's internal control system operates effectively and
efficiently as designed.
5. Using technology as a monitoring tool will improve managing affordable housing agreements
and credits.
Segregate Incompatible Duties
6. Segregating incompatible duties will ensure one individual does not oversee key steps of the
affordable housing process.
Provide Training
7. Ongoing training will ensure employees at all levels of the organization involved in the
affordable housing process are knowledgeable and will be held accountable.
We thank the Office of Housing and Community Development for their cooperation and efforts to
improve internal controls over their affordable housing program.
To improve government accountability and ensure audit recommendations are implemented or
resolved, we will continuously monitor the status of pending recommendations using our
remediation tracker. To view the status, visit us at: https://www.Hawaiicounty.gov/our-
county/legislative/office-of-the-county-auditor.
Executive Summary I 3
I
1 About Us
1
Mission
It is our mission to serve the Council and citizens of Hawaii County by promoting accountability,
fiscal integrity, and openness in local government. Through performance and/or financial audits
of County agencies and programs, the Office of the County Auditor examines the use of public
funds. evaluates operations and activities. and provides findings and recommendations to elected
officials and citizens in an objective manner. Our work is intended to assist County government
in its management of public resources. delivery of public services, and stewardship of public trust.
Audit Authority
Hawaii County Charter §3-18 establishes an independent audit function within the Legislative
Branch through the Office of the County Auditor.
Purpose
This engagement aims to evaluate affordable housing credits (AHC) issued, transferred,
redeemed, and outstanding through a comprehensive accounting of credits and testing of the
Office of Housing and Community Development's control environment.
Performance Audit Definition
Performance audits provide objective analysis. findings. and conclusions to assist management
and those charged with governance and oversight with, among other things. improving program
performance and operations. reducing costs. facilitating decision-making by parties responsible
for overseeing or initiating corrective action, and contributing to public accountability.
Our objective in performance auditingis to improvepublic servicesprovided bythe countyp
government. We do this by recommending specific actions to address the issues we raised and
by providing valuable information to the public, the administration. program leadership, the county
council, and the mayor.
1
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About Us 4
1 Chapter 1
Introduction
What is the primary function of OHCD?
The Office of Housing and Community Development (OHCD) administers the county's housing
fund. OHCD is responsible for the planning. administration, and operations of all the County of
Hawai`i's housing programs. Their mission is to provide for the development of viable communities
through decent housing, suitable living environments, and expanded economic opportunities.
OHCD's - Community Development Division, Planning Branch drafts and executes affordable
housing agreements.
The Office of Housing and Community Development is composed of five divisions and 14
branches:
Administrative Services
o Accounting, Technology, and Clerical Services
Community Development
o Development
o Planning
Community Engagement
o Homeless Program
o Community Services
Existing Housing
o Special Purpose Voucher Programs (Section 8), Housing Program, Planning,
Rental Assistance, and Support Services
Grants Management
o Grants Administration
o Workforce Development
Request for Performance Audit.
Beginning in July 2022, court documents and various media outlets reported a former Hawaii
County housing employee was charged with fraud and pleaded guilty after allegedly taking nearly
2M in bribery or kickbacks for approving specific affordable housing projects. Policy and
procedures were subsequently developed in response to this event.
In September 2022, Hawaii County Council's Resolution No. 467-22 (Draft 2) requested the
Office of the County Auditor conduct a performance audit to ensure the efficient issuance and
utilization of affordable housing credits that included a comprehensive accounting of all credits
issued outstanding. transferred, or redeemed, and recommendations to enhance program
controls. efficiency, and effectiveness.
Although OHCD has several programs that receive federal grants that are routinely audited, there
were no prior audits of the affordable housing program conducted. In addition to Council's request,
the Office of the County Auditor determined that a thorough examination of OHCD's affordable
housing processes, policies, procedures. and practices was warranted.
Introduction I 5
What is the County's Affordable Housing Policy?
In support of the county's ongoing efforts to provide adequate. affordable housing to its residents,
the Hawaii County Council established an affordable housing policy in 1998 through the adoption
of Ordinance No. 98-1. "The objectives of this affordable housing policy are to:
Implement the goals and policies of the county's general plan
Promote and assist private development of affordable housing for senior citizens and
qualified households
Use available governmental grants and funds in the development of affordable housing
and increase the capabilities of qualified households to obtain affordable housing
Support innovative, lower-cost approaches that may be used in the development of
affordable housing
Require large resort and industrial enterprises to address related affordable housing
needs as a condition of rezoning approvals based on current economic and housing
conditions".'
Why is affordable housing important?
The need for affordable housing is immense. and the lasting impact it can have on homeowners
and their families are undeniable2." A 2019 Hawaii Housing Planning Study reported Hawaii
County will need 10,7953 affordable housing units within the next five years (2020-2025).
Research shows that increasing access to affordable housing is the most cost-effective strategy
for reducing childhood poverty and increasing economic mobility in the United States.'
The lack of affordable housing is a significant challenge facing many residents of Hawaii,
including those in Hawaii County. To address this problem, the county legislated an affordable
housing policy requiring "residential developers to include affordable housing in their projects or
contribute to affordable housing off-site.-
The Office of Housing and Community Development (OHCD) — Planning Branch oversees and
implements the county's affordable housing policy requirements. also known as Chapter 11.
Through OHCD. the county enters into affordable housing agreements (AHA) with developers.
AHAs are signed by a developer. the county housing administrator. corporation counsel, and the
mayor.
1 County of Hawai'i General Plan 2005. https://www.planning.Hawai`icounty.gov/general-plan-community-
planning/gp/plan Date accessed 12-2-22(pg. 9-3).
2 Habitat for Humanity. Why is affordable housing important?httr s://www.habitat.org/stories/reinforcing-
importance-of-our-work Date accessed 11-21-22. 13SMS. Hawaii Housing Planning Study, 2019.Table 34 (pg. 40).
https://records.hawaiicounty.gov/WebLink/PDF/vrwv4zixdti2zreg5po2ghr0/8/2019%20Hawaii%20Housing%20Pla
nning%20Study.pdf Date accessed 12-27-22.
4 National Low Income Housing Coalition (NLIHC). Why do affordable homes matter?Record-breaking numbers of
families cannot afford decent place to call home.https://nlihc.org/explore-issues/why-we-
care#:"":text=Housing%20is%20the%20kev%20to,mobility%20in%20the%20United%20States. Date accessed 11-21-22.
rte,
6 I Introduction
1
Developers who agree to construct new affordable housing units in excess of any requirements
required under Chapter 11-15(a) may earn "excess credits." Initially, once the developer and
OHCD recognize excess credits, they can be transferred without the administrator's approval.
Developers or persons can use credits as well as excess credits to satisfy current or future
affordable housing requirements. OHCD may not recognize purchased credits in satisfaction of a
developer's obligations if it determines the preceding developer sold them without fulfilling an
initial obligation.
What are the Long-Term Effects of Housing Regulations?
The Economic Research Organization at the University of Hawaii (UHERO) produced Measuring
the Burden of Housing Regulation in Hawai`i5, a study of the impact of regulations on housing
markets across Hawaii's four counties using the Wharton Index survey as a basis to gauge where
Hawaii ranks in comparison to similar areas across the U.S. UHERO authors Bonham. Inafuku,
and Tyndall, compared counties to the nation's top 30 countries with the highest mean home
prices and found:
One of the factors that may explain Hawai'i's high home prices are government
regulations that limit the ability of the housing market to create the units necessary to meet
demand."
While clearly important to the production of new housing. regulatory barriers are difficult
to measure."
Reducing barriers to housing development is sometimes viewed as a handout for housing
developers."
Reforming and removing regulatory barriers to new housing production could significantly
contribute to new housing production and ultimately reduce the burden that high housing
costs place on local households and improve affordability in the state.'
5 The Economic Research Organization at the University of Hawaii (UHERO). Measuring the Burden of Housing Regulations in
Hawaii.April 2022. https://uhero.hawaii.edu/measuring-the-burden-of-housing-regulation-in-hawaii/Date accessed 11-4-22.
Introduction 7
Correlation of Wharton Index and Home Prices
ilnnrlulu County
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All Areas
Hawaii Counties
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Wharton Index
The figure shows the 1.043 counties inhere survey data is available.Home price data isfrom the 2020 American
Comnnmiy Surve'y5-lear estimates.
Figure 1: UHERO, Correlation of Wharton Index, Measuring the Burden of Housing Regulations in Hawaii
The Department of Hawaiian Home Lands (DHHL) Credits.
As a major landowner, the state can release land for housing projects. The Department of
Hawaiian Home Lands (DHHL) has become one of the largest affordable housing developers
throughout the state of Hawaii. The Hawaiian Homes Commission Act of 1920. as amended
HHCA), authorizes the DHHL to enter into project development agreements to develop available
lands for homestead projects.
DHHL created the Affordable Housing Credits Policy6 to provide guidelines for determining the
value of credits, clarifying terms and conditions applied, and subsequently transferred to other
entities pursuant to Act 141. Session Laws of Hawaii (SLH) 2009. which is codified in Hawai'i
Revised Statutes (HRS) 46-15.1 (b). Act 141 is effective [Repeal and reenactment on July 1.
2024. L2019. c80. §§1. 2.]
HRS 46-15.1(b) requires counties to recognize housing units developed by DHHL and issue
affordable housing credits to DHHL. Credits are transferable and can be applied within the same
county in which the credits are earned. Counties are directed to issue credits on a one-for-one
basis to DHHL for existing and future projects. Until HRS 46-15.1(b) is repealed or amended,
credits will continue to be a part of the affordable housing process.
DHHL credits create obstacles for OHCD because issuance is beyond the department's control,
and there is no mechanism to recognize credits continually.
6 Department of Hawai'ian Home Lands. HHC Affordable Housing Credits Policy. https://dhhl.Hawai'i.gov/hhc/hhc-
affordable-housing-credits-policy/(date accessed 1-29-22)
8 I Introduction
I
IDHHL credits don't have the same radius restrictions that county-originated projects have. This
contributes to turning localized credit availability imbalances into a countywide problem as credits
I could be used to fulfill obligations anywhere on the island of Hawaii. In one instance, 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,
I Phase 5 (2016). Several potential problems accompany non-cash forms of payment. For
example, it can circumvent competitive procurement. sidestep a project's budget. carry tax
implications, etc. The extent and effect are beyond the scope of this audit.
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Introduction I 9
Objective, Scope, and Methodology
Objective
To evaluate if internal controls at the Office of Housing and Community Development - Planning
Branch are adequate to ensure the efficient issuance and utilization of affordable housing credits
and compliance with Chapter 11 of the Hawaii County Code.
Scope
The audit will evaluate affordable housing credits (AHC) issued. transferred, redeemed, and
outstanding through a comprehensive accounting of credits and testing of OHCD's control
environment.
Developer projects that did not include credits in the affordable housing agreements were omitted
from the review.
The audit was conducted from September 2022 to January 2023.
Methodology
To accomplish our objective, we:
Developed an understanding of affordable housing credit policies. procedures,
processes, and practices
Assessed compliance with applicable laws and other relevant governance
Performed tests of controls and transactions over affordable housing agreements,
specifically credits issued, transferred. redeemed. and outstanding
Performed tests of the control environment
Conducted site visits to observe monitoring and oversight practices
Corroborated information with appropriate staff and personnel
Reviewed information pertinent to affordable housing credits
Noted exceptions and identified areas for improvements
Was mindful of potential fraud, waste, and abuse during the audit
We conducted this performance audit 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 objective.
Objective, Scope, and Methodology l 10
Noteworthy Events
We are pleased to report that the Office of Housing and Community Development (OHCD) has
begun to strengthen controls affecting its operations. We appreciate the cooperation exhibited by
OHCD to implement our recommendations. OHCD asserted they have:
Formalized most policies and procedures
Segregated most incompatible duties
Implemented independent monitoring to track credits
Increased program oversight
Improved records maintenance
Provided training for those responsible for affordable housing agreements and credits
Hired a consultant to analyze and make recommendations to amend Chapter 11 of the
Hawai'i County Code
Additionally, to improve transparency. the County Council proposed Bill 9 (January 2023),
requiring the housing administrator to:
Provide affordable housing agreements within thirty calendar days following the date of
execution
Quarterly reporting:
o A list of developers in possession of excess affordable housing credits and the
number of affordable housing credits each developer has earned, transferred,
redeemed, and remains in possession of as of the end of the quarterly reporting
period.
o A summary of the current affordable housing inventory.
o An accounting of significant actions taken under Chapter 11, but not limited to:
For sale. affordable housing units developed and sold
Finished affordable housing lots constructed and sold
Affordable housing rental units constructed and being rented
Developable land conveyed
Infrastructure conveyed
Affordable housing units resold. and
Density bonuses granted
We will follow up at the appropriate time to determine whether and to what extent all
recommendations have been completed.
11 I Noteworthy Events
Chapter 2
Audit Results
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. As a
result, the Office of the County Auditor was unable to determine the
total accounting of credits.
Internal controls are broadly defined as a process affected by management. Controls are
designed to provide reasonable assurances on the efficiency and effectiveness of program
operations, safeguarding and maintaining accountability of assets. reliability of financial reporting.
and compliance with applicable laws, policies, and procedures. Internal controls can help a
department achieve performance measures, prevent loss of resources. and protect the
department's reputation and the employees conducting the work. The department's internal
control system should include the following elements:
Accounting of Credits. Management should account for all credits issued, outstanding.
redeemed. and transferred, to maintain the accuracy and completeness of balances and
records.
Monitoring and Program Oversight. Management should document their review and
approval of critical tasks performed by employees. They should take prompt corrective
action when errors or discrepancies are discovered.
Segregation of Duties. Duties should be segregated amongst employees so that errors
and irregularities made by one employee are difficult to conceal. No single individual
should have complete control over consecutive phases of a process. Job duties should be
clearly defined and addressed.
Training. Training should ensure that prescribed policies, rules, and regulations are
followed and enforced. Effective corrective measures should be taken when deficiencies
are discovered.
Written Policies and Procedures. Policies and procedures should be approved by
management, inclusive of all aspects of operations, and be sufficiently detailed and
distributed to staff. In addition, ongoing monitoring is necessary to ensure policies,
procedures. and internal controls remain effective and efficient as operations change.
111AuditResults I 12
Adequate internal controls reduce the risk of fraud or theft and help provide reasonable assurance
that the county's objectives will be achieved. Internal controls are affected by the actions of
individuals within the county and written policies and procedures. By identifying gaps in policies
and procedures, management can identify where adequate controls need to be placed, where to
provide sufficient detail for new and existing procedures, and clarification of procedures so that
they are easier to follow and enforce.
The Department of Finance's Accounting Manual requires County departments and agencies to
establish internal control systems with the further responsibility of seeing that the internal controls
continue to function as designed.
Our audit evaluated OHCD's affordable housing processes over agreements and credits to
ensure the efficient issuance and use of commodities such as affordable housing credits that
includes a comprehensive accounting of credits issued, outstanding, transferred. or redeemed.
We found prior internal controls were generally inadequate and not operating according to best
practices to prevent, detect, and deter fraudulent transactions. (Figure 2)
While OHCD recently developed policies. procedures, and forms to help guide and better manage
its process, no projects have advanced to include the new materials. As such, we could not
determine if current internal controls have been strengthened to provide reasonable assurance
that the affordable housing process can be effectively managed. We will follow up at the
appropriate time to determine whether and to what extent all recommendations have been
implemented.
Figure 2: Summary of Internal Controls
OHCD Affordable Housing Was actual practice Was actual practice
Internal Control performed? performed?
Before 2022 After 2022
Accounting of Affordable Housing No In Process
Credits (AHC)
Compliance with applicable Insufficient No r
governance No new projects
available to test
Monitoring and Program Oversight No In Process
Segregations of Duties No In Process
Training Insufficient In Process
Written Policies and Procedures No No
No new projects
available to test
See Attachments 1 and 2
Figure 2: Summary of Internal Controls, compiled Office of the County Auditor
13 I Audit Results
Results of Comprehensive Accounting of Credits
Overview
The Office of Housing and Community Development (OHCD) maintains its affordable housing
documents in its department's Laserfiche repository or document management system. In
October 2018. two of OHCD's five server drivers failed simultaneously, resulting in data loss.
While some information was recovered through backups. OHCD has spent four years working to
recover lost data. Some scanned data will never be recovered because the original documents
were shredded. In June 2022, OHCD said they believed they had an accurate accounting of
approximately 1,042 credits recorded. Two worksheets detailing only "excess credit" transactions
Table 1a and Table 1 b)7 were prepared at the request of a Hawaii County Councilmember and
published. We found two calculation errors in OHCD's credit register tables:
The beginning excess credit balance should be 1.402 credits (Table 1 a)
1,250 starting balance is missing 2 entries:
0 5 credits for DJAT, LLC.
0 147 credits for NHICORAM. Inc.
The ending excess credit balance should be 1.089 (Table 1 b)
1,042 is missing 1 entry:
0 47 credits for Bridge Aina Lea
In August 2022, management began internal audits, including maintaining a complete credit
register and rescanning available records. Both efforts remained ongoing during the audit period.
Through the creation of AHAs, credits are recognized as either running with the land and are part
of a committed obligation to fulfill a proposed project or may be identified as excess credits when
more units are built than the code requires. Historically, OHCD has not recognized committed
obligation-type credits as having been awarded because, theoretically. they are restricted from
resale and are committed to a project. In some cases. credit calculations are not addressed.
Audit Activity
We relied on and assessed the information provided by OHCD to gain an understanding of their
affordable housing program. We observed files did not have a standardized format, which
generally provides a reasonable basis for quality control. We conducted tests of controls and
transactions to and from source data. We observed some information was missing and
incomplete, resulting in variances in the total count. In addition, some credits may be in the
process of being transferred or redeemed.
Results
As of January 2023. our reconciliation found at least 1.811 credits from October 1988 to current.
See Table 2 for a comprehensive accounting of credits.
Big Island Now. Resolution Seeks Performance Audit of Marred County Housing Agency.July 26, 2022.
https://bigislandnow.com/2022/07/26/resolution-seeks-performance-audit-of-marred-county-housing-agency/.
Audit Results I 14
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Table 2: Our reconciliation found at least 1,811, credits from October 1988 to current.
Table 2. Comprehensive Accounting of Credits
Count Initial Developer Obtained Sold Purchase Redeemed Outstanding
1 AAA Development, LLC 522 0 0 0 522
2 Armstrong Companies LLC 0 18 42 0 24
3 Big Island Housing 0 0 22 0 22
Foundation
4 Bridge Aina Lea, LLC 0 0 47 0 47
5 Chalon International 98 21 0 7 70
6 CL&D Nine, LLC 0 0 2 2 0
7 CLW Hawaii Investments, LLC 0 0 1 1 0 Y
8 D.R. Horton Schuler Homes, 0 6 30 0 24
LLC
9 DePonte Brothers 2 0 0 2 0
10 D H H L 149 42 0 0 107
11 DJAT, LLC 9 5 0 4 0
12 GBH-Kai Maluna, LLC 0 24 24 0 0
13 Gentry Pacific, Ltd. 0 0 5 5 0
14 Glori Nani Mau, LLC 0 0 5 5 0
15 Hawaiian Island Real Estate 0 0 41 0 41
LLC
16 Hanaula Village Partners, LLC 0 0 7 7 0
17 HICDC 89 15 0 0 74
18 HILCO IP Services, LLC 0 20 20 0 0
19 Hilo One, Inc. 0 0 6 6 0
20 Hualalai Health, LLC 0 0 23 0 23
21 Jon Gomes &Associates 5 5 0 0 0
22 Kahaolino Partners, LLC 0 0 7 7 0
23 Kohala Aina Partners, LLC 0 0 21 21 0
24 Kona Country Club Inc. 0 0 6 0 6
25 Kona Three, LLC 0 0 67 0 67
26 Kukui Development, LLC 0 0 5 5 0 1
27 KW Kohanaiki, LLC 0 0 100 100 0
28 Lanihau Properties, LLC 192 0 0 32 160
29 Lava Kuakini, LLC 10 7 0 0 3
30 Luna Loa Development, LLC 212 216 4 0 0
31 Moaniala Holdings, LLC 0 0 30 29 1
sir
32 NHICORAM, Inc. 147 147 0 0 0
Table 2: Comprehensive Accounting of Credits, compiled Office of the County Auditor
s
iimi
17 I Audit Results
r
I
ITable 2 continued.
I c_.able 2: Compretlensive Accounting..of Credits
Count Initial Developer Obtained Sold Purchase Redeemed Outstanding
33 Parker Ranch, Inc. 105 0 0 20.8 84.2
1 34 Pinn Bros Construction, Inc. 0 0 12 0 12
35 Plant-Mason Family Trust 0 0 2 0 2
I
36 Redwood Capital Finance Co 0 0 4 0 4
RCFC)
37 Renaissance Development, 4 0 3 7 0
I LLC
38 RJL, LLC 6 0 0 6 0
39 Ronald A. Brown 0 46 46 0 0
1 40 RS10 Kalaoa LLC 3 0 0 0 3
41 SCD Kona 108 LLC 0 0 10 0 10
I
42 Seascape Development, LLC 54 54 0 0 0
43 Suffolk Investment, LLC 0 10 50 0 40
44 Ulu Wehi Properties 0 0 2 2 0
I 45 Volcano Fairway 0 0 8 8 0
Development Corp
46 WB KD Acquisitions, LLC 0 0 8 0 8
I47 West View Development, LLC 104 95 0 9 0
48 Westpro Development, Inc. 50 50 0 0 0
I
49 White Hat Development 50 0 0 50 0
Subtotal 1,811 781 660 335.8 1,354.2
Table 2: Comprehensive Accounting of Credits, compiled Office of the County Auditor
Additional information can be accessed on our website, where we house an interactive
dashboard, Auditor Dashboard (Ctrl + Click), compiled courtesy of the Office of the County
IAuditor.
Auditor Notes:
I
Although not defined on OHCD's policies and procedures, we determined the following definitions:
Obtained: Includes unfulfilled obligations, credits awarded. pre-awarded, awarded as "bonus credits" (credits issued
prior to Chapter 11). In exchange for conveyance of land or gifted and does not necessarily indicate successful project
completion.
I
Sold: Includes credits sold, transferred, confiscated, dissolved, or brokered.
Purchased: Includes credits purchased, unfulfilled obligations, and awarded through civil judgments from another
developer or broker: Redeemed: Includes credits recouped on projects to satisfy development obligations.
Outstanding: Includes those credits available for existing or future projects.
ISold should equal purchased. Committed obligations, seized, and adjustments account for the difference (781 and
660). For sold, 781 + 67 Kona Three (commitment to purchase) = 848. For purchase, 660 +45 (US Marshal Seizure),
143 Luna Loa credits dissolved =848.
I The status of some projects may be pending administrative review by the Office of the
Corporation Counsel and is subject to change.
I
I
Audit Results I 18
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Complex County Code
Overview
The purpose of Chapter 11, the County's Affordable Housing. requires residential, industrial. and
hotel projects to include affordable housing in their developments or contribute to affordable
housing off-site. Chapter 11 is complex. Elements include rezoning triggers, satisfaction methods,
credit awards based on Area Median Income (AMI) scales. and short and long-term monitoring
obligations related to sales. conveyance. buyers, rentals, eligibility, and resales.
OHCD said that developers grow frustrated with the complexity of the overall process and want
the easiest way to fulfill the obligation. Purchasing has become the preferred method of
satisfaction.
Audit Activity
We gained an understanding of Chapter 11 requirements and reviewed and compared affordable
housing agreements (AHA). re-zone ordinances, OHCD's Affordable Housing Credit Transfer
Register. and other supporting documents. Initially, we examined 70 developers. or 100% of the
population, provided by OHCD. We removed projects based on non-executed agreements,
missing project details. or credits not mentioned. These conditions resulted in an adjustment to
the population totaling 49 developers and 56 projects.
Table 3 - Methods of Satisfaction
Unknown
11% onsite
Construct and sell units
In Lieu Fee 15%
1%
1 Construct and sell
affordable lots
17%
Construct and sell
affordable units offsite
1
0%
Construct and rent
Purchase credits from units within a 15 mile
another developer Convey developable radius
44% property to the county, 8/°
Convey Infrastructure 15-mi.radius
0% 4%
Table 3: Methods of Satisfaction, compiled Office of the County Auditor
I
Audit Results I 20
In 24 cases, executed AHAs were missing from project files (40.7%). Of the remaining projects.
we noted four instances where required signatures were missing.
We note 22 instances where the Bureau of Conveyance (BOC) recordation could not be
confirmed between missing AHAs or incomplete project files. (37.3%) Furthermore, we noted 12
instances of AHA were not recorded with the BOC.
Before 2019, we observed questionable internal control practices:
No periodic reports were submitted pursuant to Hawaii County Code Section 11-19
Reports by the housing administrator
Partial and/or early release based on verbal or written requests without performing an
independent verification
3 instances, erroneously used critical housing need determination
c 2 instances. 15-mile restriction
c 1 instance. 30-mile waiver
1 instance, applied housing subsidy in-lieu of Chapter 11-5(1-7)
7 developers were pre-awarded credits
6 developers resold, pre-awarded credits
4 developers resold pre-awarded credits without affordable units constructed
W/1111,Credits Pte--Awarded and Resold
Developer Pre-Awarded Re-Sold Affordable
by OHCD Units
Constructed
AM Development Yes No Yes
HICDC Yes Yes Yes
Lava Kuakini Yes Yes No
Luna Loa Yes Yes No
Seascape Yes Yes Yes
Suffolk Yes Yes No
West View Yes Yes No
Auditor Note: Assessment based on a review of Affordable Housing Agreements and aerial maps.
21 I Audit Results
I
I 2 instances of credit over-awards:
IchraditqamAwarded
Developer Credits to be Credits Difference
I Seascape
Awarded Awarded
43 54 14
AAA+ 488 522 34
IAuditor Note:Assessment is based on the number of affordable units built, not on the Affordable Housing Agreement.
As required by HRS 46-15. (b) all counties recognize housing units developed and credits issued
I by DHHL. Other jurisdictions use a combination of in-lieu fees and land conveyance to satisfy all
or a portion of housing obligations. Hawaii County is the only county within the State of Hawaii
that awards `excess" credits and does not charge in-lieu fees.
IExample of Methods of Satisfactio
Jurisdiction In-Lieu Fees Land Conveyance
City & County of Honolulu Yes Yes
County of Hawai'i No Yes
ICounty of Kauai Yes Yes
County of Maui Yes Yes
I Auditor Note: Fees/in-lieu fees or land conveyance based on a comparable City and County Code and Administrative
Rules review.
Cause of the Condition
A complicated Chapter 11 and a lack of systems to manage and maintain developments
Iincreased OHCD's risk of misinterpretations and non-compliance.
I Effect of the Condition
OHCD misinterpreted and did not always consistently comply with Chapter 11.
IFinding 1 Complex County Code
Recommendation 1: Clarify County CodeIWerecommendOHCDworkwithHawaiiCounty Council to revise applicable sections of Chapter 11.
including the following elements:
I
Section 11-2(5). Objectives.
o Account for future conditions
Section 11-3. Definitions.
I o Define "eligible applicant."
Other Hawaii counties currently use language predicated on HRS
I
Audit Results I 22
Sections 11-5(a) (1:7) Satisfaction of affordable housing requirements.
o Replace ineffective methods with straightforward options.
o Establish limits on credit's ability to satisfy project obligations.
Consider methods used by other Hawaii counties to satisfy workforce
housing projects
o Create incentive structures to participate that is financially viable for the developer
while not being overly generous and can be administered fairly. reasonably, and
consistently. This can include items like:
Expedited permitting
Other low-risk incentives, as determined by the department
Section 11-5(c) (1:12) Satisfaction of affordable housing requirements.
o Discontinue ineffective calculations of credits earned
Section 11-5(d)(1)(A)(B), (2)(A)(B) Satisfaction of affordable housing requirements.
c Discontinue ineffective housing percentage requirements
o Consider an in-lieu fee matrix where amounts paid mirror the desired housing
composition
Section 11-9(a)(b)(c)(d)(e)(f) Sale of lots and units.
o Consider the department's capacity to monitor, follow and enforce this code
section and revise it as necessary
Section 11-10. Buyer of finished lots.
o Consider the department's capacity to monitor, follow and enforce this code
section and revise it as necessary
Section 11-11(b). Rental units.
o Consider lengthening the period under which rental prices on the units shall be
under controlled pricing
Section 11-15(a)(b)(c)(d)(e)(f). Transfer of excess credits.
o Discontinue ineffective excess credit transfer policies and replace them with
policies designed to manage and maintain the chain-of-custody
Section 11-19. Reports by the housing administrator.
o Re-establish language, making reports by the housing administrator to Council
compulsory. For continuity of credit balances over time. each report should include
the ending balances of the agreed-upon data points reported in the last reporting
period and all subsequent changes that bring the data points currently.
Applicable new section
o Create incentive structures to participate that is financially viable for the developer
while not being overly generous and can be administered fairly, reasonably, and
consistently. Some examples include:
Expedited permitting
Other low-risk incentives, as determined by the department
23 I Audit Results
I
No Administrative Rules
Overview
Rules are created to regulate behavior, ensure compliance. and maintain discipline throughout
the organization. Rules are promulgated to help the agency fulfill its purpose. Once adopted,
administrative rules have the force and effect of the law. In contrast, management-formulated
policies guide the decision-making processes and ensure uniformity and consistency.
There are at least three laws authorizing OHCD management to establish rules:
Hawaii County Code, Chapter 11-18 Adoption of rules
Hawaii Revised Statutes Section 46-15.1(c)(6) Housing: county powers
Hawaii Administrative Procedure Act, Chapter 91. Hawaii Revised Statutes, as amended,
establishes the method by which rules and consequences can be created
Audit Activity
We reviewed the following criteria to benchmark the adoption of rules:
HRS 201 H Hawaii Housing Finance and Development Corporation
HRS 201 H-32 Definitions
7A Administrative Rules for the Kauai County Housing Agency
Sections 1.3(e)(g)(q) Definitions
Section 2.2 Confirmation of Applicability
Subchapter 4 Workforce Housing Agreement
Department of Planning and Permitting City and County of Honolulu
Title 20 Administrative Rules 201 H Housing Program Rules
Section 20-25-7 Eligible Applicant
Section 20-25-12 Development Agreement
Rules to Implement City's Affordable Housing Requirements Effective March 31, 2019
Section 1-9 Contracts
We found OHCD does not have administrative rules to effectively administer Chapter 11.
Cause of the Condition
Management did not establish rules to effectively administer Chapter 11.
Effect of the Condition
OHCD had questionable practices and variances between projects.
Finding 2: No Administrative Rules
Recommendation 2: Establish Administrative Rules
We recommend OHCD establish administrative rules to effectively administer the County's
Affordable Housing Policy.
1
Audit Results I 24
Administrative Rules should include but not be limited to the following:
Define Developer, Eligible Developer, and Project.
o Developer. A landowner or authorized agent of a landowner of real property that:
Seeks any County approval for the development or subdivision of real
property;
Apply to the county for a State Land use district boundary amendment. a
zoning district boundary amendment, or an applicable amendment
Obtain from the County a State Land Use district boundary amendment or
zoning district boundary amendment but has not yet satisfied an existing
housing condition. or the county has not yet executed a written housing
agreement specifying the means to satisfy all or any portion of an existing
housing condition.
c Eligible Developer. Any person. association, partnership, or cooperative.
including limited-equity housing cooperatives as defined in Chapter 201H. firm.
nonprofit or for-profit entity. or public agency determined by OHCD:
To be qualified by experience. financial responsibility, and support
construction housing of the described type and of the magnitude of the
given project.
To have submitted plans for a housing project adequately meeting
objectives of Chapter 201H. HRS, the maintenance of aesthetic values in
the project's locale, and the requirements of all applicable environmental
statutes and rules.
To meet all other requirements the county deems to be just and
reasonable, such as:
To be licensed or otherwise authorized by all applicable laws to do
business in the State of Hawaii.
To have reasonable experience in the type of work it proposes.
To obtain control of the project site.
Project. The lots or parcels and any development are included and approved in a
developer's application for zoning or building permit, subdivision or consolidation.
State Land Use district boundary amendment, zoning amendment, or applicable
amendments.
OHCD should develop definitions to align with actual affordable housing policies. procedures. and
practices.
25 I Audit Results
Drafting of Affordable Housing Agreement (AHA). The agreement should include:
General
Use standardized templates with permission-restricted access.
Project specifications - OHCD's subject matter expert
c The purpose of the agreement.
A description of the role and responsibilities of OHCD, the developer, and other
parties to the agreement.
c The number of units for each household Area Median Income (AMI) category and
a minimum period during which the affordability will be maintained.
Sales or rental periods for affordable housing units, which specify procedures for
the release of units from affordable housing requirements should units not be sold
or rented following the expiration of the sales or rental periods.
o If applicable, payment of in-lieu fees or provision of in-lieu land
o Resale restrictions may include buy-back provisions, shared equity. and
encumbrances.
Enforcement elements - Corporation Counsel subject matter expert(s)
1 Standard clauses for indemnity, severability, termination, assignability. breach,
and remedy.
o The right to enforce the agreement should be granted to the county. The county
should have strong performance, enforcement, and recourse clauses. The
contract should be subject to the approval of the Corporation Counsel of the
County as to form and legality.
By establishing written rules. management could better achieve its mission of providing affordable
housing units and comply with the County's Affordable Housing Policy.
I
I
Audit Results I 26
I
I
Incomplete Written Policies and Procedures
Overview
The Government Accountability Office's Green Book recommends establishing written policies
and procedures to document internal controls and responsibilities. "Internal control comprises the
plans, methods, policies, and procedures used to fulfill the entity's mission, strategic plan. goals,
and objectives. Internal control serves as the first line of defense in safeguarding assets. In short,
internal control helps managers achieve desired results through effective stewardship of public
resources$." Developing written departmental policies and procedures is an effective way to
maintain a robust internal control system.
The Office of Housing and Community Development (OHCD) had limited policies and procedures
Attachment 1 and 2) in August 2019. Policies and procedures were subsequently developed
when fraud was found. Detailed policies and procedures for implementing Chapter 11 were
created in August 2022.
1 Best practices recommend that management evaluate written policies and procedures annually
and update them periodically. At the county. it is also a requirement for each department and
agency to be responsible for creating and maintaining its policies and procedures. One example
of an adequate system of internal controls can be found in the Department of Finance's
Accounting Manual9.
An organization's management should incorporate controls into written policies and procedures.
These policies and procedures should cover all aspects of operations, be sufficiently detailed,
and be distributed to staff. In addition. ongoing monitoring is necessary to ensure policies and
procedures, and internal controls remain effective and efficient as operations change.
The Department of Finance's Accounting Manual defines:
Control Environment. The collective effect of various factors on establishing, enhancing,
or mitigating the effectiveness of specific policies and procedures. Including:
o Management philosophy and operating style
1 o Organizational structure
o Methods of assigning authority and responsibility
O Managing control methods
o The internal audit functions
Control Procedures. In addition to the control environment and accounting system,
management has established policies and procedures to achieve its objectives.
s United States Government Accountability Office. Standards for Internal Control in the Federal Government
Green Book) Definition of Internal Control OV1.03, pg. 5 (Date accessed 1-29-22)
Accounting Manual Part 1 County of Hawaii Department of Finance. Departmental Internal Control Systems.June
7, 1999.
1
Audit Results I 27
OHCD's internal control system should be designed to include the following:
Timely Reconciliation. Existing procedures do not address the timely reconciliation of
AHC. Policies and procedures should require timely reconciliation. adjustments. and
administrative reviews.
Close Out Process. Existing procedures do not address the close-out process. Policies
and procedures should require a close-out process to verify deliverables and credits.
Management Review. Existing procedures do not detail management's review and
oversight. Policies and procedures should establish role expectations for management at
all stages of the review process to ensure compliance with Chapter 11.
Fraud Reporting Procedures. Existing procedures do not address fraud reporting.
Policies and procedures should require a fraud reporting process to aid in detecting and
preventing fraud. By providing fraud reporting procedures. everyone within the department
will be aware of the fraud risk policy, including types of fraud and the consequences
associated with them. If fraud or theft does occur, the records cannot easily be taken,
destroyed. or modified. Fraud reporting procedures act as a strong deterrent. Employees
will be better educated to identify possible signs of fraud or theft and how to report red
flags.
Audit Activity
To determine if policies and procedures were followed and enforced. we compared written policies
and procedures to best practices and found:
No new projects were available during the audit to test compliance with new procedures
Policies and procedures were not written until August 2022
2022 forms do not align with OHCD's current practices
Insufficient monitoring practices
Monitoring procedures not sufficiently addressed in policies and procedures
By identifying gaps in written guidance, management can identify where effective controls need
to be placed, where to provide sufficient detail for new and existing procedures, and clarify unclear
procedures.
Cause of the Condition
Management did not provide clear expectations through written policies and procedures.
Effect of the Condition
The lack of policies and procedures promoted weak internal controls.
Finding 3: Incomplete Written Policies and Procedures
Recommendation 3: Update and Enforce Policies and Procedures
We recommend OHCD clarify and enforce policies and procedures to ensure consistency
throughout the department and industry best practices.
28 I Audit Results
1
111 Minimal Monitoring and Program Oversight
Overview
Monitoring is a key component of internal control. Unmonitored controls deteriorate over time.
When monitoring is designed and implemented appropriately, organizations are more likely to
identify and correct problems on a timely basis. Ongoing monitoring can occur during daily
operations. including regular management and supervisory activities involving comparisons,
analysis. reconciliations, and other routine activities.
Management must ensure all documents prepared by their office are authentic. accurate, and
complete. Knowledgeable persons with proper authority and subject matter expertise should
perform various levels of review and approval. A thorough examination of the processes will help
with accuracy, completeness. and timeliness.
Ongoing monitoring and review by management can determine the following:
Prescribed policies, rules. and regulations are being carried out as intended
Changes in operations have not made the procedures inefficient or obsolete
Effective corrective measures are being taken promptly when deficiencies are discovered
Technology could help the county streamline the management of various affordable housing
processes and identify potential red flags. Better use of technology. including software, document
portals, or data visualizations. could improve current practices of managing agreements,
affordability periods, and credits through data management and analysis, monitoring controls, and
query reports.
1
Audit Activity
To determine if there was sufficient program oversight. we evaluated OHCD's monitoring
practices. and control environment, conducted site visits, interviewed appropriate staff. compared
current practices to written policies, procedures, and flowcharts, and found:
Existing 2022 procedures do not sufficiently address management's role in reviewing
agreements and credits.
Prior to September 2022, affordable housing agreements and credits were not routinely
monitored by management.
OHCD does not have a complete accounting of affordable housing credits issued
1 outstanding. transferred. or redeemed.
OHCD management said before December 2018. a housing specialist worked
independently without much supervision. Management also said they depended on this
person's prior professional expertise.
1
Audit Results I 29
Insufficient contract monitoring to ensure compliance with:
o 4 required signatures to execute a contract
o Contract terms and conditions
o Rental and sale details
o Recordation with Bureau of Conveyance. State of Hawaii
Cause of the Condition
Management trusted but did not verify the work compiled or scrutinize the final contract,
creating an opportunity for fraud
Management reviews of the affordable housing agreement were inadequate to ensure
compliance with Chapter 11
The practice of issuing and tracking credits was ineffective. resulting in errors and
irregularities
Effect of the Condition
Employees learn to exploit weaknesses in the control environment.
OHCD did not prioritize the vital role management oversight plays in quality control.
The system was ineffective at safeguarding credits and ensuring credits were properly
issued. controlled, and accounted for.
Finding 4 and 5: Minimal Monitoring and Program Oversight
Recommendation 4: Increase Monitoring and Program Oversight
We recommend OHCD perform ongoing monitoring of their internal control system's design and
operating effectiveness as part of their operations. Continuous monitoring includes reviews of:
Adjustments and discrepancies
Reconciliations of credit inventory
Regular management and supervisory activities
Comparisons
Final AHA
Other routine activities
Recommendation 5: Use Software and Technology
We recommend OHCD use software and technology as a monitoring tool to improve managing
affordable housing agreements and credits.
30 Audit Results
Insufficient Segregation of Duties
Overview
Segregation of duties is a key internal control. Its primary objective is to minimize risk by ensuring
that no employee or group can have complete control or be solely responsible for multiple steps
in a process. Generally. the primary incompatible duties that need to be segregated are:
Authorizing transactions
Processing and recording transactions
Reviewing transactions
Handling any related assets, including commodities
Reconciliations
Other control activities, when applicable
Knowledgeable personnel should be involved in drafting affordable housing contracts,
authorization or approval, and reconciliation of affordable housing credits. No single individual
should have complete control over consecutive phases of a process.
When duties cannot be segregated due to the small size of the division. compensating controls
should be considered. These compensating controls should include monitoring activities such as
a performance review of the AHA deliverables.
Audit Activity
To verify segregation of duties, we reviewed flowcharts, conducted site visits, interviewed
appropriate staff, compared current practices to written policies and procedures. and found:
Before December 2018. there was limited segregation of duties.
Existing 2022 procedures still place the responsibility of multiple steps with the housing
specialist. This increases the risk exposure to the employee.
While we acknowledge the existing 2022 procedures do provide some segregation of
duties. we found that housing specialist duties are defined and specific, while
management duties are unclear.
1
I
Audit Results I 31
Cause of the Condition
One individual had control over multiple steps. The same individual compiles. drafts. revises.
routes. files, and monitors projects.
Effect of the Condition
Employee(s) learn to exploit weaknesses in the control environment.
Finding 6: Insufficient Segregation of Duties
Recommendation 6: Segregate Incompatible Duties
We recommend OHCD management separate incompatible duties. One individual should not
oversee key elements of the affordable housing process. Compensating controls should be
implemented to reduce the risk if duties cannot be sufficiently segregated.
32 I Audit Results
111 No Training
Overview
Training gives employees a better understanding of their responsibilities and the knowledge and
skills they need to do their job. Training leads to better processes, builds confidence, and
improves overall performance. Ongoing training enables organizations to further strengthen their
employees' skills and increases knowledge where it is lacking. "Ongoing training can be
considered the best insurance policy against all sorts of the inevitable changes and the
unforeseeable needs that arise in your organization from time to time."10
Training has several benefits. including:
Increases
o Accountability
o Competency
o Productivity and performance
o Uniformity of work processes
Communicates role expectations
Improves
IC Compliance
o Work culture
Protects
c. County from liability
o Employees from error and omissions
Additionally. the County's Code of Ethics (Hawai`i County Code, Chp. 2, Art. 15. Sections 2-79,
2-83, and 2-84) prescribes standards of conduct for the guidance of County officers and
employees as well as prohibiting certain conduct. County employees are not allowed to use or
attempt to use their official position to secure or grant unwarranted privileges. exemptions,
advantages. contracts, or treatment, for themselves or others.
Such prohibited conduct includes but is not limited to:
Accepting, receiving, or soliciting compensation or other consideration for the performance
of the officer's or employee's official duties or responsibilities except as provided by law.
Using County property, facilities, equipment. time, or personnel for private business or for
any purpose other than for a public purpose.
I
1°The Importance of Training. https://seismic.com/enablement-explainers/the-importance-of-training/date
accessed 11-30-2022
Audit Results I 33
County employees are not allowed to acquire financial interests in any business or other
undertaking that they have reason to believe may be directly involved in official action to
be taken by them.
Similarly. County employees are not allowed to take any official action directly affecting:
c A business or other undertaking in which they have a substantial financial interest.
c A private undertaking in which they are engaged as a consultant.
Audit Activity
To determine if OHCD provided sufficient training, we reviewed policies and procedures.
interviewed appropriate staff conducted site visits. made observations, and found:
Because there were limited written policies and procedures. training schedules were not
addressed.
AHA's were not reviewed or monitored for completeness and accuracy.
Housing specialist uses prior approved AHA as a basis for drafting contracts.
Cause of the Condition
Because management relied on one employee and did not provide continuous training, there
were many problems that went undetected. and AHA's were not appropriately reviewed for
completeness and accuracy.
Effect of the Condition
A former government employee used their official position to circumvent the department's internal
control system.
Finding 7: No Training
Recommendation 7: Provide Training
We recommend OHCD provide ongoing training to employees involved in affordable housing.
including specialized training to support competency.
34 I Audit Results
Chapter 3
Fraud, Waste, and Abuse
What is Fraud?
Fraud" is any activity that relies on deception to achieve a gain. Fraud becomes a crime when it
is a "knowing misrepresentation of the truth or concealment of a material fact to induce to act to
his or her detriment" (Black's Law Dictionary). In other words, if you lie in order to deprive a person
or organization of their money or property, you're committing fraud.'" (ACFE)
How is Fraud Different from Theft?
Theft is taking something that belongs to someone else without their consent. Fraud is using
deceit or trickery to gain an advantage or unfair profit. To be convicted of fraud, the deception
must be proven as intentional. Typically, fraud is used to get money or something of value to
which the person would not typically get access. "Ultimately, the biggest difference between fraud
and theft is that fraudsters will work to ensure that the deceived person does not find out they
have been duped. As long as the person does not realize they have been deceived, no case can
be made regarding intentional fraud.'
Fraud Triangle.
Generally, why some people commit
fraud is known as the Fraud Triangle.
The Fraud Triangle hypothesizes that if
all three components are present:
financial pressure. opportunity. and
rationalization, a person is very likely to Q,
pursuepursue fraudulent activities. o`
o a
J
Q 4.(' (1) ,42 .;.1a for. -
Graphic: Fraud Triangle, courtesy Office of the County Auditor
11 Fraud 101:What is Fraud?https://www.acfe.com/fraud-resources/fraud-101-what-is-
fraud#:—:text=The%20Fraud%20Triangle%20hypothesizes%20that,likely%20to%20pursue%20fraudulent%20activiti
es.(Date accessed 11-30-22)
12 The Difference Between Fraud and Theft. https://www.felonydefenseattorney.com/blog/2021/01/the-
difference-between-fraud-and-theft/(date accessed 11-30-22)
Fraud, Waste, and Abuse 135
As a practice, we remain mindful and document instances of fraud. waste. and abuse within the
scope of the audit objective and not specifically Countywide.
Management reported actual fraud. ongoing investigations and pending litigation. We will work
with corporation counsel or appropriate law enforcement if it impacts the audit results.
We noted internal controls deficiencies and instances of non-compliance with provisions of
Hawai'i County Code Chapter 11 Affordable Housing Policy and Affordable Housing Agreements
contracts). See Chapter 2. Audit Results.
36 I Fraud, Waste, and Abuse
1
Conclusion
We appreciate the Office of Housing and Community Development's commitment to continual
improvement, providing fair housing and equal housing opportunities consistent with public
expectations.
We thank the Office of Housing and Community Development for unrestricted access to sites,
information personnel, and cooperation throughout the audit. Their cooperation was exceptional.
When our recommendations are implemented in good faith, OHCD can expect the following
benefits:
Clarify County Code
1. Clarifying applicable sections of Chapter 11 will make laws easier to understand and ensure
compliance.
Establish Administrative Rules
2. Establishing administrative rules will help guide OHCD authority to effectively administer the
County's Affordable Housing Policy.
Update and Enforce Policies and Procedures
3. Updating and enforcing policies and procedures will ensure consistency throughout the
organization and with industry best practices.
Increase Monitoring and Program Oversight
4. Ongoing monitoring will ensure OHCD's internal control system operates effectively and
efficiently as designed.
5. Using technology as a monitoring tool will improve managing affordable housing agreements
and credits.
Segregate Incompatible Duties
6. Segregating incompatible duties will ensure one individual does not oversee key
steps/elements of the affordable housing process.
Provide Training
7• Ongoing training will ensure employees at all levels of the organization involved in the
affordable housing process are knowledgeable and will be held accountable.
To improve government accountability and ensure audit recommendations are implemented or
resolved, we will continuously monitor the status of pending recommendations using our
remediation tracker. To view the status, visit us at: https://www.hawaiicounty.gov/our-
county/legislative/office-of-the-county-auditor.
Conclusion I 37
In closing, the improper use of government resources or positions is often discovered thanks to employees
and the public, and we encourage you to report concerns through our fraud and whistleblower hotlines:
Fraud and waste hotline: (808) 480-8213
Whistleblower hotline: (808) 480-8279
Email: concern(a hawaiicounty.gov
all
Fax: (808) 961-8905
Mail: Office of the County Auditor, 120 Pauahi St., Hilo, HI 96720 111
To access the complaints directory:
https://www.hawaiicounty.gov/our-county/legislative/office-of-the-county-auditor/inquiry-and-complaint
Submit a claim:
https://www.hawaiicounty.gov/our-county/legislative/office-of-the-county-auditor/inquiry-and-
complaint/intake-form
I
1
I
38 I Conclusion
1
Chapter 4
1 Management Response
1 Mitchell D.R•tb
Mayor jP!:'"'"v, Susan K.Rua.
lounng Admtnhstrator
Lee E.lard 1:Managing Director r+• Harry M.Yada
N'
Assistant!lousing Administrator
Robert H.Command
Deputy Managing Director
County of Hawaii
Office of Housing and Community Development
1990 Kino'olc Street,Suite 102 • Hilo.Haw•ai'i 96720 • (SOR)961-8379 • Fax(808)9614685
Exisling Housing:(808)959.4642 • Fax(808)959-9308
Kona: (808)323.4300 • Fax(808)323-4301
January 30,2023
MEMORANDUM
TO: Tyler Benner
Hawaii County
y
Aud for
FROM: Susan K. ' ^„r!:
Housing :.• ' istrat
SUBJECT: RESPONSE TO THE COUNTY AUDITOR'S REPORT ON THE
OFFICE OF HOUSING AND COMMUNITY DEVELOPMENT
AFFORDABLE HOUSING CREDITS
rrrraInt rrr•r••r••r••r•r••••r••MHrrr r••••r•K••r•rr••••rr•••••r•rrm•r•H••r•
The Office of Housing and Community Development(OHCD)would like to express our sincere
appreciation for the audit staff and their cooperation and consideration during the entire process.
OHCD is generally in agreement with the conclusions and recommendations contained in the
report. We take this opportunity to specifically address each recommendation and our current
and planned efforts in implementation.
MANAGEMENT RESPONSE TO AUDIT RECOMMENDATIONS
Clarify County Code
i• Recommendation 1. We recommend Hawaii County revise applicable sections of
Chapter 11.
Management Response to Recommendation 1
OHCD concurs with this recommendation.
1 OHCD has already engaged a consultant to conduct a review of Chapter I 1 of the
Hawaii County Code and to provide recommendations for changes. The final report of
the consultant should be available within the next two months which can be shared with
1 2275a6m) A
OPPO tnMO11SiNin
1
Management Response I 39
Tyler Benner
Hawaii County Auditor
January 31, 2023 IPage2
the public and County Council. It should be emphasized that authority to make any
changes to Chapter 11 rests with the County Council.
Establish Administrative Rules
Recommendation 2. We recommend OHCD establish administrative rules to give itself
the authority to administer the County's Affordable Housing Policy effectively.
Management Response to Recommendation 2.
OHCD concurs with this recommendation on the establishment of administrative rules.
Upon the completion of the consultant's report on Chapter 11 and any changes to Chapter 11
that may be approved by the County Council as a result of this audit, OHCD will diligently
pursue the establishment of administrative rules pursuant to the process specified in Chapter
91, HRS.
Update and Enforce Policies and Procedures
Recommendation 3. We recommend OHCD clarify and enforce policies and procedures
to ensure consistency throughout the department and industry best practices.
Management Response to Recommendation 3.
OHCD concurs with this recommendation.
Prior to the audit, OHCD had already begun to establish written policies and procedures
together with flow charts to document workflow on all processes associated with the
implementation of Chapter 11. OHCD will revise these accordingly upon any changes to
Chapter 11 by the County Council and with the administrative rules that are established.
OHCD will continue to update and enforce any and all established policies and
procedures on a regular basis.
Increase Monitoring ProgramgandOversight
Recommendation 4. We recommend OHCD perform ongoing monitoring of their
design system and operating effectiveness of their internal control system as part of their
ordinary course of operations.
Management Response to Recommendation 4.
OHCD concurs with this recommendation.
OHCD will establish ongoing monitoring and program oversight in its implementation of
Chapter 11. OHCD will regularly evaluate the effectiveness and efficiency of such
ongoing monitoring and oversight and will implement changes/improvements as
appropriate.
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40 1 Management Response
Tyler Benner
Hawai`i County Auditor
January 31,2023
Page 3
Recommendation 5. We recommend OHCD use Software and Technology as a
monitoring tool and improve managing affordable housing agreements and credits.
Management Response to Recommendation 5.
OHCD concurs with this recommendation with reservations.
In accordance with the audit's recommendation, OHCD will look into software options
within the limits of available resources and in consideration of any revisions to Chapter
11. OHCD is currently researching various records management systems to allow for
tracking of documents associated with its various processes.
Segregate Incompatible Duties.
Recommendation 6. We recommend management separate incompatible duties. One
individual should not oversee key elements of the affordable housing process.
Management Response to Recommendation 6.
OHCD concurs with this recommendation.
OHCD has begun to separate duties by establishing policies, procedures, flow charts and
internal controls that will ensure that all processes involve separate staff reviews and will
1 continue to update these processes in accordance with any changes to Chapter 11 and
consistent with administrative rules that are established.
Providing Training
Recommendation 7. We recommend OHCD provide ongoing internal control training
to employees involved in the affordable housing process.
Management Response to Recommendation 7.
OHCD concurs with this recommendation.
OHCD will ensure that its employees are allowed to attend appropriate training sessions
that are regularly provided by the County such as ethics training.
Through its bi-weekly staff meetings,the Community Development Division staff share
the status of various assigned projects island-wide.
Through these bi-weekly meetings, OHCD will schedule regular training sessions to train
staff on differing aspects of Chapter 11,related administrative rules and any changes to
its policies and procedures.
Based on the Audit Report, it is clear that the system of Affordable Housing Credits is complex
and difficult to understand without knowledge of its history dating back prior to the
Management Response I 41
Tyler Benner
Hawaii County Auditor
January 31,2023
Page 4
establishment of Chapter 11. Prior to Chapter 11,developers that constructed affordable housing IunitsbeyondanyrequirementsbytheLandUseCommissionorCountyrezoningactions,were
provided"bonus credits"that could be utilized to fulfill requirements on future development of
their other properties. These "bonus credits"were typically granted to large landowners and
were not marketable or transferrable to other developers for value.
Upon the initial establishment of Chapter 11, affordable housing requirements were imposed at
the time of rezoning and developers were provided several options to meet their requirements
including building the required affordable housing units or pay an in-lieu fee to fulfill their
obligation. Subsequent changes to Chapter 11 eliminated the in-lieu fee option and established
the concept of"excess credits". These provided an incentive for developers to build more than
their required number of affordable housing units as well as providing a mechanism for
rewarding non-profit developers for their development of affordable housing units through the
sale of these"excess credits"for other developers to fulfill their affordable housing
requirements.
Adding to this complexity,the State Legislature established by statute, HRS 46-15.1(b),the
requirement that the Department of Hawaiian Home Lands be provided credits on a"one for
one"basis, regardless of AMI, for all housing units developed by their program. These credits
were similar to"excess credits"that provided a financial benefit to DHHL through the sale of
these credits to developers to fulfill their own affordable housing requirements.1
The Audit Report makes a clear recommendation that the County needs to make significant
changes to Chapter 11 and the current system of credits. OHCD agrees with the Audit Report
and will work with the consultant that is already on contract for a review of Chapter 11 and
ensure that the Audit Report's recommendations are considered before finalizing their review
and suggested changes to Chapter 11.
OHCD has enjoyed working with you and your staff in the preparation of this audit and looks
forward to the improvements that will result from the implementation of its recommendations.
42 I Management Response
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Chapter 5
Attachments
Attachment 1: OHCD Written Policies and Procedures.
ASSIGNMENT OF AFFORDABLE HOUSING CREDITS
EXISTING POLICIES AND PROCEDURES — EFFECTIVE 08/29/2019
To complete the Assignment of Affordable Housing Credit(s) ("Assignment") the following
steps shall be completed:
1. The Assignor shall provide an accounting of Credits to the Housing Administrator before
the Assignment.
2. The OHCD shall verify the Assignor has Credits available to assign to another party.
3. The Assignor and Assignee shall provide a Corporate Resolution or Bylaws for signing
authority of contracts on behalf of the Corporation or LLC to the Housing Administrator.
4. The Assignor and Assignee shall complete the attached Assignment of Affordable
Housing Credit ("Assignment') Form, and attach all required Exhibits,and all Corporate
Resolutions.
5. The Assignor shall submit an original copy of the Assignmcnt to the
Housing Administrator to approve and execute.
6. The Housing Administrator shall return the executed Assignment within five (5) working
days via Certified Mail, Receipt Requested to the Assignor.
7. The Assignor shall record the Assignment with the Bureau of Conveyance(BOC)or
Land Court of the State of Hawaii as applicable within thirty(30)days of its execution by
all parties effective upon execution. Failure to record the Assignment within thirty (30)
days will void this transaction.
8. The Assignor shall provide an accounting of Credits after the Assignment is recorded
with the State of Hawaii Bureau of Conveyance to OHCD within (10) days.
111 9. The Assignor shall return a true copy of the recorded Assignment with the BOC within
ten (10) working days via Certified Mail, Receipt Requested to the Housing
Administrator.
Source: Office of Housing and Community Development
111
Attachment 1 143
Attachment 2: OHCD Transfer of Affordable Housing Credits Letter.
Harr)KimWayor o;".,_
o.
L Nell S.Gyotaku
Housing Administrator
Wil(Aube
Managing Direct.Duaae Hosaka
Assistant Housing Administrator
Barbara J.Keno*i a,
Deputy Managing Ihrector
County of Hawaii
Office of Housing and Community Development
1990 Kino'ok Street.Suite 102 • Hilo,Haw'u'i 96720 • (80B)9614379 • Fax 1808)961.8685
Existing Housing (803)959-x642 • Fax(808)959-9308
Kona. (808)323-4300 • Fax(808)323.4301
September 9,2022
Via Electronic Mail
Developer Name EXISTING PROCEDURES
Title S.A\IPLF. l.l:FUER
Entity Address EFFECTIVE 8'29.'2019)
Luigi
Re: Transfer of Affordable Housing Credits
Dear Developer:
The Office of Housing and Community Development(OHCD)has received your email request
dated X/XI20XX regarding selling and transferring Affordable Housing Credits("Credits")
earned in the County of Hawaii("County")to another party and the proper assignment form
required by the OHCD to file and effectuate the sale and transfer of Credits.
To complete the Assignment of Affordable Housing Credit(s)("Assignment")the following
steps shall be completed:
I. The Assignor shall provide an accounting of Credits to the Housing Administrator before
the Assignment.
2. The OHCD shall verity the Assignor has Credits available to assign to another party.
3. The Assignor and Assignee shall provide a Corporate Resolution or Bylaws for signing
authority of contracts on behalf ofthe Corporation or LLC to the Housing Administrator_
4. The Assignor and Assignee shall complete the attached Assignment of Affordable
Housing Credit("Assignment")Form,and attach all required Exhibits,and all Corporate
Resolutions.
5. The Assignor shall submit an original copy of the Assignment to the
Housing Administrator to approve and execute.
COCA!.HOUSING
t I d'k HAW AI'I COUNTY IS AN EQUAL
OPPORTUNITY PROVIDER AND
EMPLOYER"
Source: Office of Housing and Community Development
Attachment 2 I 44
Attachment 2: continued. 1
September 9,2022
Page 2
6. The Housing Administrator shall return the executed Assignment within five(5)working
days via Certified Mail,Receipt Requested to the Assignor.
7. The Assignor shall record the Assignment with the Bureau of Conveyance(BOC)or
Land Court of the State of Hawaii as applicable within thirty(30)days of its execution by 111allpartieseffectiveuponexecution. Failure to record the Assignment within thirty(30)
days will void this transaction.
R The Assignor shall provide an accounting of Credits aAer the. Assignment is recorded
with the State of Hawaii Bureau of Conveyance to OHCD within(10)days.
9. The Assignor shall return a true copy of the recorded Assignment with the BOC within
ten(10)working days via Certified Mail,Receipt Requested to the Housing
Administrator.
As always,should you have any questions with regard to these procedures please do not hesitate
to contact our office.Thank you.
Very Truly Yours.
Housing Administrator
Enc.
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11
Source: Office of Housing and Community Development J
45 I Attachment 2
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County of Hawai'iTir,y .jeiviier Office of the County Auditor oM•''
County Auditor
120 Pauahi St., 309 or•
Hilo, HI 96720
808.961.8386 •:\• .• • • .•./.
www.Hawai'icountv.gov
The Office of the County Auditor is tasked with promoting accountability,fiscal integrity, and openness in local
government. Our work is intended to assist County government in its management of public resources,delivery of
public services, and stewardship of public trust. Copies of this audit report can be obtained by contacting the Office
of the County Auditor or visiting our website: https://www.hawaiicountv.gov/our-county/legislative/office-of-the-
county-auditor/audit-reports 3
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