Finding 554298 (2023-005)

Finding 2023-005 - Replacement Reserve Withdrawals – Neighborhood Stabilization Program, Assistance Listing Number 14.256: Statement of Condition Withdrawals in the amount of $26,000 were made from the replacement reserve account for the Projects acquired with Neighborhood Stabilization Program funds were used to cover operating cash flow needs during the year ended December 31, 2023. Criteria According to the County of San Diego Department of Housing and Community Development (the “County”) Regulatory Agreements, disbursements from the replacement reserve accounts may only be made to fund Project expenses with the approval of the County. Effect Solutions for Change was not in compliance with the terms of the County Regulatory Agreements during the year and the replacement reserve accounts had a deficient balance of $30,693 at December 31, 2023. Cause Solutions for Change used funds from the replacement reserve account to cover operating cash flow needs. Recommendation Replacement reserves should be repaid. Future withdrawals should not be used without the approval of the County. Management Response Acknowledgment of Findings: Management acknowledges and agrees with this audit finding. Withdrawals totaling $26,000 were made from the Replacement Reserve Account to support the Project. For over 15 years, Solutions for Change has consistently met this obligation through private-sector donations. However, extraordinary challenges beyond our control limited our ability to do so in this period, necessitating the use of reserve funds. Cause Analysis: Management has conducted an in-depth analysis of the factors leading to this finding and determined that the primary cause is directly related to California’s Housing First mandate. This state-imposed approach significantly reduces funding opportunities for nonprofits that operate accountability-based, self-sufficiency-driven housing models. Under Housing First, funding is restricted to programs that do not require job placement, sobriety, or self-improvement interventions, which are essential elements of Solutions for Change’s proven approach. This policy shift has resulted in decreased access to public funding, forcing a greater reliance on private donations. In response, we made the strategic decision to uphold our core values despite financial uncertainties. Corrective Action Plan: To restore the Replacement Reserve Account, the Board of Directors has approved a comprehensive divestment strategy, including the sale of privately owned real estate controlled by the nonprofit. The proceeds from this sale will fully replenish the Replacement Reserve Account in the amount of $30,693. • Planned Sale Timeline: Between June and November 2025 • Full Restoration of Replacement Reserve: By December 1, 2025 This restoration effort is part of a multi-year strategic recovery plan that incorporates a private-sector initiative called “Bridge to Freedom.” In addition, the Board is exploring alternative funding streams to ensure financial stability while maintaining program integrity. Commitment to Financial Responsibility: Solutions for Change remains fully committed to responsible financial management and long-term sustainability. We will continue to implement strategic measures to secure financial stability while staying true to our mission of solving family homelessness through transformative, self-sustaining solutions.