RDA 2.0 – A Really Bad Idea!

On Friday morning, August 2nd, the Development Committee met with only one real item on their agenda. “Enhanced Infrastructure Financing Districts (EFIDs) with presentation by Staff and Larry Kosmont, Kosmont Companies. The presentation from Kosmont, centered around “How do you capture vitality and quality of life in a digital economy?” However a good dose of “state mandates fear” formed the foundation upon which the presentation was built.

Let’s get to the heart of the matter.

There appears to be a growing interest in rejuvenating an old idea, redevelopment. This new… call it RDA 2.0… is a rebirth of tax increment financing for local/regional projects.

Managed by Brea’s Public Financing Authority, new redevelopment districts would be created, property taxes frozen and new “redevelopment” bonds issued to finance some sort of infrastructure projects.

No public vote is required to create these new “enhanced infrastructure financing” districts!

The mantra “no new taxes” is repeated over and over as if that will lull us into a false sense of trust and comfort.

Look, when the property values are reassessed and the taxes unfrozen, the properties will be paying at a much higher rate and the difference will be used to retire the bond debt.

What about this suggests no new taxes?

So, where are these new EIFDs?

The report listed: Central Park Village, Brea Place (Hines), Aera Energy Brea 265, 2830 East Orbiter (adjacent property owned by firm of Planning Commissioner James McGrade), Embassy Retail Court, Brea Mall, Brea Plaza, Former Improv, Gaslight Square, Regal Theatres, Mercury Lane Residential, Downtown hotel, Brea Community Center, Brea Library, and Suzuki Motor of America.

To me, 90% of these properties are either doing quite well as is or they’re in various stages of development… not even yet completed. And the United States Bankruptcy Court confirmed American Suzuki’s plan of liquidation (Chapter 11) on February 28, 2013.

The first city/county EIFD tax increment partnership is the Placentia Old Town district. Over 300 acres with taxes frozen at $365 million and anticipated to be unfrozen at $460 million. For what?

Kosmont lists the following: $22M net fiscal impact to City; $15M to County; 1,600+ housing units; 3,900+ construction jobs; $800M+ construction period economic output; 1,150+ permanent jobs; $164M+ in annual ongoing economic output.

Prove it.

Here is what Kosmont proposes to do in Brea: Kosmont to evaluate: Project and land use review; EIFD boundary alternatives; infrastructure improvements required; Tax increment funding capacity / complementary sources; Orange County cooperation; Implementation strategy and roadmap.

Kosmont proposed timing: Feasibility evaluation – 2 to 3 months; District formation activities – 6 to 12 months.

Stop the madness!

Not a whisper about seeking public review or approval.

In December 2011, the California Supreme Court upheld the complete elimination of redevelopment agencies and TIF along with it. The legal wrangling that followed is complicated and not worth going into detail here.

Suffice it to say Redevelopment was terminated for good reasons. Why, just 8 years later, has it suddenly become a good idea again?

Nothing in life is free.

They try and seduce us with parks and community projects. But where’s the money come from? From schools and our pockets!

From the mid-seventies through 2011 Brea built a boatload of RDA projects. Some were on private land and made reasonable use of the tax increment. Many, like the Civic Center, Community Center, Senior Center, Sports Park and Rails-to-Trails were on public land for which no tax increment existed!

District borders were repeatedly expanded, bonds were repeatedly refinanced and cash was created at every opportunity. Hell, they even tricked us into passing the Paramedic’s Tax, almost half of which never paid for a single thing related to emergency medical services.

No one in city hall can give you an accurate price for one single project. The web of financing hijinks was so complicated they’ve lost all comprehension of what they pulled off for over 40 years. Millions upon millions.

You know what really hurts? We still owe $193,871,104 million dollars which we’ll be paying off all the way through June 2036.

Revenue is down, expenses are ever on the increase, we’re hovering on the edge of unbalanced budgets for several years to come.

Now is not the time to start some fiscal boondoggle, proven to be a failure years ago. Especially if it does little more than provide job security to a handful of city planners having a tough time justifying their jobs anymore.

Tax increment financing (TIF) is no way to defray the cost of urban revitalization… assuming that’s what we want to do in the first place.

Gateway Center: Kiss Your Assets Goodbye.

In October 1991 the Gateway Center at Brea Blvd. and Imperial was launched as one of Brea’s first RDA projects. On March 7, 2017 the City Council, acting as the Successor Agency, terminated 100% of the city’s interests in the center in exchange for a check in the amount of $7.8 million dollars.

But wait… there’s more. Brea had to pass this revenue on to the Orange County Auditor-Controller to pay off all taxing entities (other agencies having a right to a portion of the proceeds). The City netted only $1.2 million. I’ll explain later where it went.

Not such a good deal.

In simple terms, staff provided Council with their recommendations, backed by just a 5 page Memorandum by Keyser-Marston, extolling what a great deal this was.

Since 2012 we’ve received an average of $354K annually from rental income (subject to the same pay off to all taxing entities). This one time payout would generate around 3.5 years income.

Instead, why didn’t we opt to continue collecting annual rent? Our participation agreement ran another 30 years… until 2048. Rents would have more than doubled by then but Keyser-Marston left that out.

What staff and Keyser-Marston also failed to disclose to Council was that we had a 25% equity stake in the Gateway Center. It would be triggered by either a refinancing or a sale (full or partial) of the property.

In 2005 Watt-Craig Associates Limited Partnership, per the timeline provided by staff, “sold majority stake in ownership to AFL-CIO Building Investment Trust (AFL-CIO) but continues to retain a small portion of the partnership interest.”

Staff’s claim, when pressed on the matter, is that only a 100% sale would trigger a payout to the city. Watt-Craig retained a 1% stake in Gateway. Who was the rocket scientist that thought this was okay and that we should walk away from around $16.2 million?

Conservatively, the Gateway Center is worth about $80 million… you do the math. Termination of the city’s interest robbed us of $20 million if the property sold today.

Who knows how much our equity would be worth if we simply let it ride?

You can fool some of the people…

Did no one on Council see these red flags? No, because they assumed staff had provided the full scoop. The deception of Council was anchored in their belief that the property owner, Watt-Craig Associates LP, had opened the discussion of a termination agreement.

Not so, even though the staff report, the Keyser-Marston memorandum, the fancy always to be trusted PowerPoint presentation and the Successor Agency Resolution SA 2017-02 all stated otherwise, “The Owner is proposing the buyout of the Successor Agency’s interest…”

It was disclosed, early last week, that this process was initiated by our Director of Development, David Crabtree, presumably at the suggestion of City Manager Bill Gallardo. It was also disclosed that protracted negotiations followed which lead to staff’s recommendations.

From where I sit, this smacks of premeditation and reinforces the notion that this was all fabricated to generate the revenue needed to balance an otherwise upside-down budget (see below).

I’ve made a series of thorough CPRA requests for all communications and documents relating to the termination of our participation in the Gateway Center project. The City’s initial response last week overlooked numerous responsive documents and the City Clerk, Lillian Harris-Neal, has promised to provide them as quickly as she can.

gatewayFollow the money.

You can’t. As is the custom, the revenue was dumped into the General fund where it vanished into thin air. Well, sort of.

It had been determined that the FY2016-17 budget, thanks to declining sales tax revenue, was coming up short somewhere between $800K and $1M – an alarming dilemma for a city that had “always” balanced it’s budget.

Subsequently, unanticipated revenue miraculously offset the shortfall and… voila, the budget was balanced after all. I can’t help but wonder how many preceding “balanced” budgets benefitted from similar fiscal skullduggery.

A couple more scary thoughts.

Not one of Brea’s commissions or committees has a resident member with expertise in commercial real estate or the taxing authorities.

Staff has been careful to keep City Treasurer Rios, Planning Commissioners McGrade and Ullrich (both with deep experience in commercial real estate and the taxing authorities) as much in the dark as they have Council.

We own Embassy Suites and lease land. Staff is contemplating to sell off another “legacy “ asset!

Where does this leave us today?

In deep shite. We have a new budget about to be proposed in the face of continued revenue decline.

Cuts have been made, without clear validation as to how and where considering that the city’s “soft cost” approach to accounting fails to consider labor as a cost.

Many fees have been increased thanks to the city’s ability to calculate labor and overhead down to an hourly rate.

Hang on… am I the only one who sees the contradiction? The city needs to convert to a true cost accounting system and to stop trying to solve the reduced income situation by handing is off to taxpayers to pony up even more.

Time to put on the brakes!

A FY2018-19 operating budget would go into effect in about 47 days. I’ve seen no report from that new fancy special strategic budget oversight committee.

The City Treasurer, Rick Rios, who has leveraged California statutes governing the authority and scope of responsibilities of an elected City Treasurer to reconstitute the office’s role as fiscal watchdog, has yet to see a single page of a proposed budget.

It’s time to put a halt to City Staff’s Ready-Fire-Aim approach to managing city business.

I suggest that Council approves a 30 day emergency stay by employing the proposed operating budget for the month of June only.

This breathing room will allow for Council to give staff more finite instruction, for the Budget Oversight Committee to actually do some oversight and give the City Treasurer the time and opportunity to do the job we elected him to do.

rock the boat

Malfeasance: Brea’s Status Quo?

In the weeks ahead, breaking news regarding several cases of fiscal misconduct will be finding their way into public discussion. The egregious nature of several will likely lead to widespread use of the term malfeasance.

Let’s take caution in our choice of words to be certain we characterize people and their actions clearly and fairly. An exact definition of malfeasance (in office) is difficult: there is no single legal consensus definition.

Malfeasance is generally defined as “a wrongful act which the actor has no legal right to do.” Many courts find malfeasance (in office) where there is “ignorance, inattention, or malice”, which implies no intent or knowledge is required.

Much of what we’ll hear, however, will probably trigger accusations of malfeasance.

Truth: the final frontier.

I’ve invested literally hundreds of hours pouring over a vast array of communications, agendas, minutes, resolutions, staff and consultant’s reports, spreadsheets and financial records from both the city and from Orange County.

I’m not alone. Several others, equally curious about Brea’s past fiscal practices and current fiscal policies, have invested similar time and energy… and come to similar conclusions.

What has been common practice in the past has cost Brea the loss of significant assets and revenue sources and has placed an undue burden upon tax payers to meet unconscionably large financial obligations well into the future.

There is clear evidence, going back several decades, of both ignorance and inattention to detail contributing to the failure of Council members to exercise the full due diligence their office and those who’ve elected them demand.

Malfeasance… I believe so. Malice… not so much. Let me explain.

I’ll point the finger…

Repeatedly it has been found that Council member’s information packets come up well short of including a full set of facts. Consistently, the missing information helps lead Council to forgone conclusions staff has predetermined are preferable.

Again and again it appears that staff has usurped the visionary role and authority of Council. While the evidence of malfeasance is frighteningly clear, at least to me and those digging into these matters, a couple of critical questions remain unanswered.

Obviously staff has the means and opportunity to play fast and loose with Brea’s financial future. What’s missing is motive. Why would our city staff, highly educated… the best and the brightest, do what they’ve done and to what end?

What’s next?

We may never find any answer to why and what for but we can cast a bright light upon this nightmare in the hopes that today’s Council will find the courage to challenge history and change the future.

malfeasance