West Sac Passes Controller's Redevelopment Test; Hercules Still Struggling With Aftermath of Scandal

 

West Sacramento has become the first city to emerge unscathed from a redevelopment audit by the State Controller’s Office. Meanwhile, the Bay Area city of Hercules finds its asset transfers caught in the crossfire of a variety of other problems, including alleged long-term mismanagement of the redevelopment agency.

West Sacramento was the fourth city to have its 2011 asset transfers audited by Controller John Chiang’s office. In general, Chiang’s audits have found that redevelopment agencies transferred government facilities to cities in 2011 – rather than letting the successor agency do that – and also have transferred redevelopment project assets to the city or a city-created economic development group.

Like many cities around the state, West Sacramento – located just across the Sacramento River from the State Capitol – transferred most of its redevelopment agency’s assets to the city in 2011. Chiang’s office found in November that all of West Sacramento’s $77 million in asset transfers were legal. Chiang’s office said the city should have turned 12 parcels with zero book value involved in that transfer over to the successor agency – but West Sacramento’s oversight board subsequently approved the city’s retention of those properties, so West Sacramento got a clean bill of health overall.

The first two – Morgan Hill and Milpitas – got whacked for transferring redevelopment assets to a newly created economic development entity controlled by the city. Milpitas’s response was more hard-line than Morgan Hill’s, though Morgan Hill is suing over the economic development entity. The third – Hercules – was criticized for transferring several critical redevelopment parcels to the city. Chiang’s office had previously found mismanagement in the redevelopment agency prior to 2011.

Hercules

The Hercules situation is messy because of an underlying financial scandal and other factors.

In January, the city and the RDA were sued by their bond insurer, Ambac, when it became clear that the RDA would miss a bond payment on February 1 – the same day that the RDA was scheduled to go out of business. Subsequently, the city settled the lawsuit with, among other things, a promise to sell two RDA properties, Parcel C and Victoria Crescent, that had been transferred to the city by the RDA in 2011. It was clear that, without the legal settlement, Hercules would have had to declare bankruptcy.

Further scandal erupted in September, when an audit by Chiang’s office revealed that the city had misspent or otherwise not properly accounted for $50 million in RDA expenditures between 2007 and 2010. The audit specifically called out the city’s former city manager – apparently Nelson Oliva – whose private consulting firm received $3 million to run various housing programs during this period, including $2 million from the RDA’s housing setside fund, apparently without competitive bid. Many other irregularities were also found, including failure to pay ERAF funds and poor documentation (no appraisals, for example) for four properties the RDA purchased during this time, including Victoria Crescent. The city subsequently sued Oliva and his three daughters, seeking to recover the $3 million.

In November, Chiang’s office found that $35 million of the $124 million in assets transferred from the city to the RDA were improper. These included about $4 million in cash and, apparently, about $30 million in the form of three pieces of property – Sycamore Crossing and the two parcels the city is compelled to sell to settle the Ambac suit, Victoria Crescent, and Parcel C. Chiang’s report does not specify these three properties but the City Council ordered the transfer of these three properties at its meeting on November 13, five days after Chiang’s audit came out.

Chiang’s office also knocked Hercules for not turning out $15 million in affordable housing assets, but the city claimed this was related to a dispute over who would be the successor agency. Hercules declined to serve as the successor agency for housing and waited all summer while the Contra Costa County Housing Authority – the default entity under AB 1x 26 – determined whether to accept the role of successor agency for housing purposes. The Housing Authority eventually declined and Hercules claimed it did not know who to transfer the assets to.

Milpitas

In August, Chiang’s office found that $147 million of the $175 million in assets transferred in 2011 were not permitted and recommended that these assets be transferred to the successor agency. Of these, about $97 million were government facilities and public works assets transferred to the city, including the Milpitas Civic Center, valued by the city at $30 million. About $50 million, including $37 million in investment funds, was transferred to the Milpitas Economic Development Corp., a newly created entity.

Milpitas responded by saying that the assets transferred to the city were governmental assets built, at least in part, with redevelopment funds as was permitted under the redevelopment law. Regarding the assets transferred to the economic development entity, Milpitas claimed that it is a separate entity and the city cannot compel the corporation to surrender assets to the successor agency.

In its counter-response, Chiang’s office said that it was up to the oversight committee to determine which government facilities to transfer and noted that the economic development corporation was set up by the city and the City Council serves as its board.

Morgan Hill

Also in August, Chiang’s office virtually identical fault with transfers in Morgan Hill as its found in Milpitas. Chiang found that $108 million of the $228 million in assets transferred in 2011 were not permitted and recommended that these assets be transferred to the successor agency. Of these, about $88 million were public facilities transferred to the city, including the city library and a variety of sports and recreation complexes. The other $20 million in assets were downtown redevelopment assets, including a parking garage, parking lots, and a theater, which were transferred to the Morgan Hill Economic Development Corp. – which, as in Milpitas, was a new entity created in response to the possible end of redevelopment.

Unlike Milpitas, the city agreed to turn the city assets over to the successor agency. The Morgan Hill Economic Development Corp., however, was another story.

The EDC was created by the city on March 2, 2011, specifically to carry on the work of the RDA. But the city tried to create an arms-length relationship with the EDC. The boundaries were the entire city, not just the old redevelopment project area. The EDC’s initial board of directors was the City Council; but on March 7, the EDC met and changed the by-laws so that a majority of its board members were not City Councilmembers. The RDA had initially transferred the downtown assest to the city, but ater in March, the city transferred these assets back to the RDA, which immediately transferred to the EDC.

In its response, the city argued vigorously that the EDC was beyond the city’s control, but Chiang’s office didn’t buy it, saying that at the time of the asset transfer the EDC board still consisted of the City Council. In September, the Morgan Hill City Council decided to sue the state on the issue of the economic development entity.