The City of Morgan Hill and the local Economic Development Corporation have to return about $108 million worth of cash and property back to the city’s redevelopment successor agency, according to an audit review conducted by the California State Controller’s office.
The assets were transferred by the redevelopment agency to the two parties in a process that was not in accordance with the state law that shut down about 400 RDAs last year and required their liquidation to help pay for basic state- and locally-funded services, according to state Controller John Chiang’s report which was released Tuesday.
While city staff and the controller’s report say the city’s ability to regain its improperly transferred assets – which include the Centennial Recreation Center, Aquatics Center, public library and Community and Cultural Center – could be simply a matter of going through the authorized wind-down process, the EDC and state controller might end up in a prolonged legal battle over their differences in the interpretation of the state law.
About $14 million worth of property – including the Granada Theater, Downtown Mall, Royal Clothier building and former site of Simple Beverages – that the EDC hopes to revitalize is at stake in that potential legal battle.
“The state is interested in cash right now – not the long-term, and not redevelopment,” said City Councilman and EDC board chair Larry Carr. “The state would force the successor agency to sell those properties off – maybe for pennies on the dollar. The taxpayers would lose their investment in those properties ... and it would be difficult to have the kind of redevelopment in the downtown that the community was involved in pursuing.”
Specifically, the controller said about $89 million worth of improper transfers must be returned by the city, and about $20 million have to be returned by the EDC “immediately.” In all, the RDA made about $228 million in transfers to the city and EDC last year.
The City Council created the EDC last year and accepted the $20 million worth of assets from the RDA “to protect RDA resources from the elimination of the RDA,” the controller’s report said. At the time of the transfers, the EDC board consisted of all five City Council members.
In March 2012, the controller’s review noted, the EDC board changed its makeup and membership to consist of seven members, no more than two of whom could be City Council members, in order to create an “arm’s-length distance” between the two bodies. “However, there is no official signed documentation or resolution confirming the change,” the controller’s reported added.
City manager and EDC interim director Ed Tewes noted Thursday, while vacationing out of town, that an RDA “cleanup bill” – AB 1484 – that was approved by the state earlier this year could allow the city to redevelop the EDC properties after all via a “long-range asset management plan,” if they meet a list of conditions outlined in the bill.
The controller’s review is mandated by the state legislation, approved last year, that required all redevelopment agencies in California to cease operations as of Feb. 1.
The transfers of the properties and cash from the city’s former redevelopment agency were deemed improper by Chiang’s office, because they were made during a period in which such transactions were prohibited following the approval of the state’s RDA dissolution law. The law allows the state to “retroactively” invalidate transfers out of the RDA from Jan. 1, 2011 to Jan. 31, 2012, according to the controller’s report.
“As redevelopment agencies complete their wind-down, I hope that this provides an opportunity for local economic development to be re-imagined with a greater emphasis on measurable performance, efficiency and accountability,” Chiang said in a statement.
Anticipating the controller’s directive, the board of directors of the nonprofit EDC voted following a closed session last week to pursue a lawsuit “if necessary” to protect the EDC’s assets from seizure by the state or any other entity, Carr said.
These assets include most of the downtown properties purchased in 2008 by the RDA, plus about $4 million in RDA bond proceeds for the EDC’s operating costs.
When the RDA transferred these properties to the EDC last year, both parties’ intent was to use them to carry out the city’s “downtown specific plan” to redevelop the downtown with mixed-use retail, office and residential projects, and more parking.
At the time of the property and cash transfers, the state prohibited the RDA from conveying such assets to “a city, county or other public agency,” the controller’s report said.
But the Morgan Hill EDC is none of those, according to the EDC’s general counsel Gerald Ramiza. The EDC is an independent “nonprofit public benefit corporation,” with its own board of directors, meeting space, legal counsel and insurance policies, and it has “no affiliation to the city.”
“The controller says the EDC is the alter-ego of the city, and in the same manner they can claw back the transfers to the city, for instance,” Ramiza said. “Our position is, ‘What are you talking about?’ (The EDC) is not the city.”
That brings the EDC and the state to an “impasse,” Ramiza said.
Carr hopes the state and the EDC can reach an amiable agreement through negotiations outside of court, and said the legal costs for a negotiated solution are “money well spent.”
“We hope it doesn’t get to be a long, drawn-out costly endeavor,” Carr said.
Ramiza was contracted by the EDC for general counsel services through a contract between the nonprofit and his firm Burke, Williams and Sorensen, at a cost not to exceed $100,000 for the year as of May, when the maximum contract cost was bumped by the board from $50,000. Ramiza did not have an estimate of the total legal costs of litigation with the state, but said he would keep the EDC board up-to-date if and when the costs exceed the contract amount.
subhed: City can keep “governmental purpose” properties
When it comes to the $89 million in assets - mostly properties - that the controller said were improperly conveyed to the city, those will most likely end up back in the city’s hands. But they have to go through the complicated process set up by the state RDA wind-down law to ensure the properties have a legitimate “governmental purpose,” and that associated costs are appropriately calculated.
That process requires the redevelopment successor agency, which is controlled by the City Council, to hold onto the properties and cash until the oversight board – which consists of seven members representing different taxing agencies in the former RDA area, and which was also created by last year’s state law – considers the successor entity’s request to transfer or spend them.
Ultimately, all of the oversight board’s decisions require approval by the state department of finance.
The controller’s report released Tuesday said “the successor agency’s oversight board ... can return an asset or property to a local government if it serves a governmental purpose.”
In July, the oversight board reviewed a list of city properties that the city argues have a government purpose in line with the state law. These include the Aquatics Center, CRC, Morgan Hill Library, Outdoor Sports Center, Lori Escobar El Toro Youth Center, downtown parking lots and public road rights-of-way.
The oversight board will consider and likely approve these properties’ transfer to the city at its meeting next month, Tewes said.
The controller also agreed with the city that about $9 million in invalid cash transfers from the RDA last year were reserved for legitimate expenses, but this too must go through the oversight process.
The cash was transferred to reimburse the city for upcoming redevelopment related costs. These expenses include the rental of office and facility space, unemployment insurance claims by laid-off employees, unfunded RDA employee pension liabilities, and maintenance and replacement of city facilities.
“We’re pleased the controller recognized some of the cash transfers were for valid obligations,” said Tewes, who recently announced his resignation. His last day is in December. “Although we will need to return a portion attributable to future (expenses), the controller’s decision makes clear that those obligations are enforceable.”
The controller will conduct similar reviews of transfers made last year by all 402 former RDAs in California. The controller’s office chose Morgan Hill and Milpitas, which was also found to have made significant invalid transfers, as “pilots” for the ongoing process, according to controller’s office spokesman Jacob Roper.
The office wanted to start with two mid-sized cities, and selected two in the same county to minimize travel and staff costs, Roper said.
Morgan Hill oversight board chair and Santa Clara Valley Water District director Don Gage said the controller’s conclusions about Morgan Hill’s and Mipitas’ RDA transfers are “not surprising,” but it’s up to the DOF to determine the “rights and wrongs” of the wind-down actions.
“(Invalid transfers) is one of the problems we’re running into with all of them,” said Gage, who also sits on the oversight boards for Milpitas, San Jose and Santa Clara. “A lot of them were trying to maximize the RDA (last year), and putting their assets into areas where they could use it. Every one of the ones I have seen has done that. There’s going to be a lot of crying and blood-letting, but we have a job to do.”