Beaumont Bond Counsel Stradling Yocca Response to Grand Jury

The City is Not “Missing Bond Money” and does Not believe there is a “Gap in Public Facilities and Services”.

City of Beaumont Bond Counsel Response to the Riverside County Grand Jury Request for CFD Documents by Stradling Yocca Carlson Rauth.

Dated December 3, 2018

Michael MdDonald


Grand Jury of the County of Riverside

Re: Grand Jury Request for Documents from the City of Beaumont

The City of Beaumont is pleased to provide information and materials confidentially to the Grand Jury’s request for documents dated October 30, 2018 which concerns, among other things, the City’s use and projected use of bond proceeds. As you are likely aware, the City of Beaumont has been impacted by a number of law enforcement and regulatory investigations over the last several years alleging financial improprieties by the City’s prior leadership. The city suspects that there may be a significant amount of misinformation being spread by certain members of the community about the City’s financial condition, the use of bond proceeds, and contractual commitments to developers. Accordingly, in additional to providing the requested materials, this letter includes background information concerning the community facilities district (“CFD”) bonds, details of certain related investigations and their outcomes and the City’s undertakings to improve its accounting procedures and controls. The City hopes this additional historical perspective will aid the Grand jury in its review of the requested documents.

I. Background Information

A. CFD 93-1 and Security for the Bonds

The Mello-Roos Community Facilities Act of 1982 was adopted by the Legislature to provide “an alternative method of financing certain public capital facilities and services, especially in developing areas and areas undergoing rehabilitation. The Mello Roos Act has been a useful tool for local agencies and developers to finance public infrastructure and services throughout California. Pursuant to the Mello-Roos Act, a CFD can be established by a local agency on its own behalf or on the behalf of a developer or landowner.

Within a CFD, a local agency may also designate a certain territory as an improvement area. With the approval of two-thirds of the eligible voters within the boundary of the CFD or Improvement Area, the CFD can authorize bonds to finance the acquisition or construction of public capital facilities and services.

In 1993 the City established CFD 93-1 a part of an overall strategy to finance and build the infrastructure necessary to allow for large scale residential development in the City. At the time of formation of CFD 93-1 as part of an overall strategy to finance and build the infrastructure necessary to allow for large scale residential development in the City. At the time of formation of CFD 93-1, the population of the City was under 11,000. In 2018, Beaumont’s population exceeds 48,000, primarily due to the development of neighborhoods within CFD 93-1.

In connection with the formation of CFD 93-1 and the Improvement Areas, the City identified the need for certain “Critical Facilities”, “Joint Facilities”, and “Individual Facilities”. Critical Facilities and Joint Facilities are generally large scale projects, such as significant transportation facilities (major arterial roads and interchanges), the sewer treatment plant, water and sewer system transmission lines and fire stations. Individual Facilities are frequently in-tract or “back-bone” improvements directly needed to allow development in the Improvement Area. For a variety of reasons, the CFD bonds were sold to the Beaumont Financing Authority which in turn sold he revenue bonds to the public. As described above, the CFD bonds are secured solely by a pledge and lien on the special taxes levied in the Improvement Area for which the CFD bonds were issued.

B. The Western Riverside Council of Governments (WRCOG)

The WRCOG is a joint powers agency that is comprised of the County of Riverside and 17 municipalities in the western part of the county. WRCOG was formed to address regional public issues such as air quality, solid waste and transportation infrastructure. The City joined WRCOG in the 1990’s.

In response to population growth and a growing need for additional regional transportation infrastructure, WRCOG developed and now administers the Transportation Uniform Mitigation Fees (“TUMF”) program to allow for a consistent transportation development fee that would be assessed on all new developments within the jurisdiction of the WRCOG members that ha adopted an ordinance requiring collection of TUMF from new developments.

Under a prior City Council and administration, the City failed to pay the TUMF and WRCOG initiated litigation. In 2014, the court awarded WRCOG a $43 million judgement and the City appealed. With interest and attorneys’ fees, the judgement ultimately exceeded $60 million. It was under these conditions that a new Council was elected and thereafter replaced the City’s longstanding City Manger, Finance Director, City Attorney, Police Chief, and others. In 2017, the new City Council and administration dismissed the City’s appeal of the WRCOG judgment – [LIE] and entered into a settlement with WRCOG wherein the City and WRCOG agree to jointly pursue certain third parties for damages caused to the City during the time that the prior administration and City Council were in control of the City. As described more fully in response to Item 4 of the Grand Jury’s Request for Documents, recoveries from third party litigation efforts are shared between the City and WRCOG pursuant to a tiered formula.

C. The Criminal Investigations

In April, 2015, the Federal Bureau of Investigation and local authorities conducted a raid on Beaumont’s City Hall and the offices of Urban Logic Consultants Group, the City’s long-term planning, engineering, and economic development consultant. The raids sparked an immediate investigation by the City into the activities of the long-time City Manager, Alan Kapanicas, and his administration. The City;’s investigative efforts were extensive and spanned more than 20 years of the City’s historical practices.

In addition to conducting its own investigation, the City committed to fully cooperating with all legal and regulatory authorities who commenced investigations into the City’s past practices. As facts came to light, the City understood that it had been victimized and appreciated the assistance of law enforcement to bring justice to a community left in economic uncertainty. As set forth in detail below, the criminal investigation ultimately resulted in the guilty pleas of former City officials and several Urban Logic principals.

The pleas included multiple felonies such as (a) embezzlement of pubic funds, 9b) misappropriation of public funds, and (c) conflict of interest, as well as the misdemeanor offense of (i) conspiracy to commit theft, and (ii) failure to perform the duties of a public officer. While the defendants where charged with embezzlement and misappropriation, neither the complaint, the District Attorney’s allegations nor the plea agreements suggest that the fraudulent scheme resulted in the direct theft of any bond proceeds. Instead, the evidence adduced by the District Attorney establishes that:

  1. Certain members of the City’s former leadership directed development fees paid by third party developers to City coffers for use on City projects (to be constructed by or under the supervision of Urban Logic to defendants’ personal benefit), rather than to the TUMF program as required and directed by the City Council.
  2. Certain members of the City’s former leadership entered into contracts in which they had a financial conflict of interest. Some of the these contracts involved payments drawn from bond proceeds.
  3. Certain members of the City’s former leadership authorized issuance of loans without interest appropriated documentation or City Council approval to various public safety employees of the City, all of which loans were repaid to the City in full.
  4. Certain members of the City’s former leadership engaged in a scheme to increase sales tax revenues to the City by allowing a third party business to utilize the Beaumont Finance Authority’s resale permit in order to redirect the point of sale of certain large-dollar purchases, and the sales tax resulting therefrom, to the City. This scheme resulted in thousands of dollars being billed to and paid by the City on behalf of Beaumont Electric, without Council approval, interest paid to the City or any form of deadline for repayment being imposed on Beaumont Electric.

While these actions were illegal, they did not result in any missing bond funds.

D. The SEC Investigation

On August 23, 2017, the United States Securities and Exchange Commission Issued an Order against the Beaumont Finance Authority following an investigation into, among other things, the BFA’s compliance with its annual continuing disclosure obligations related to certain bond offerings, Beaumont cooperated fully with the SEC investigation, According to the SEC Order, to which the BFA consented, the BFA neither admitted nor denied the allegations in the complaint and was not required to pay any financial penalties.

The SEC Order imposed compliance undertakings and the Beaumont Financing Authority consented to the entry of a Cease-and-Desist Order. In accordance with the compliance undertakings, the City adopted policies and procedures to improve the accounting controls for bond proceeds. These policies are produced in response to Item 6 of the Grand Jury’s Request for Documents. The City Council and City staff also received training on these enhanced accounting protocols. Moreover, as part of the SEC Order, the BFA shall disclose the terms of the settlement in any official statement for a bond offering for the next five years.

In addition to the settlement with the BFA, the SEC issued enforcement proceedings against O’Connor & Company Securities Inc. and Anthony Weatherbee, the BFA’s underwriters, and the BFA’s former executive director, Alan Kapanicas. As set forth in connection with item 10 of the Grand Jury’s Request for Documents, the City is providing copies of the relevant SEC Orders.

E. Current Financial Condition of the City

While materially unrelated to bond proceeds, the ouster of the Alan Kapanicas administration revealed a material deficit in the City’s operating budget. Over the last three years, the City has undertaken significant efforts under a fiscal workout plan. Aided by the resolution of many investigations, the settlement with WRCOG, and Beaumont’s overall conservative fiscal management, the City is now reporting a cash, service and budget stability in 2018. See Mayor Carroll’s 2018 State of the City Address.

II. Responses to the Grand Jury’s Request for Documents

On behalf of the City of Beaumont, please see enclosed documents in response to the Grand Jury Subpoena dates November 1, 2018.

  1. Copies of all CFD bond contracts between the City and the Developers from the last six years.

The City dos not level its agreements with developers as “CFD bond contracts”. The City interprets the Grand Jury requests to be seeking acquisition or fee credit agreements, reimbursement agreements, and development agreements between the City and Developers that involve bond proceeds for the last six years.

2. A list and dollar amounts of all projects funded with CFD money since January 2015.

For the Grand Jury’s convenience, the City has create the following table which summarizes the City’s major capital projects funded with bond proceeds since January 2015. While the city has undertaken best efforts to ensure the accuracy of these figures, please note that the City does not maintain its financial data in this format and has compiled the information below from a variety of independent sources specifically for this response.

3. Information on any CFD interest money shifted to other projects beyond new development.

The City is not aware of instances where CFD bond funds were transferred or reallocate for purposes beyond new project development or for paying costs associated with the issuance of the bonds.

4. A declaration of planned usage of money received from lawsuits against former city employees convicted on CFD fraud.

The City and WRCOG entered into a settlement in April, 2017 to resolve the City’s past failures to remit TUMF to WRCOG. Pursuant to section 1.3.4 of the Settlement Agreement., the parties agree to joint recovery efforts against third parties. Specifically, WRCOG agreed to pursue third party claims and to represent the City’s interests.

Under the Settlement Agreement, recoveries from third-party litigation claims are shared between WRCOG and the City as follows:

First $9,000,000: 100% to WRCOG

$9,000,001 to $12,000,000: 85% to WRCOG and 15% to the City

$12,000,001 to $18,000,000: 65% to WRCOG and 35% to the City

$18,000,001 and above: 50% to WRCOG and 50% to the City

Any funds received under this agreement by the City would not be bond proceeds; however, the City has not yet officially determined how any potential proceeds received pursuant to the WRCOG settlement shall be expended. We understand that the current intent of the City management is to use the proceeds on Capital Improvement projects.

5. How does the city plan to fill in the gap in public facilities and services due to the missing bond money?

As explained above, although former City officials may of misdirected certain bond process by failing to pay the required TUMF, the City is not “missing bond money”. Rather, the City understand that bond proceeds were used for capital projects. Additionally, it is important to note that the required infrastructure within each improvement area for which bonds have been issued has been sufficiently completed to permit full buildout of the homes within these improvement areas.

Accordingly, the City does not believe there is a “gap in public facilities and services”.

6. A copy of any policy developed to preserve bond funds in the future.

The Policies and Procedures Manual concerning bond proceeds for the City’s Financial Department is provided..

7. A copy pf the reconciliation report done by Webb and Associates of projected bond losses due to theft of prior city employees.

The City did not retain Webb and Associates to prepare a reconciliation report, and to the City’s knowledge, Webb and Associates has not prepared any such report. As part of its due diligence following law enforcement’s search of City Hall, the new City Council and administration hired UFI – Urban Futures – to prepare a report entitled “An Update on the Accounting and Fund Reconciliation Project fort the City’s Communities Facilities District Bond Funds”. UFI reviewed approximately 68,500 pages and spent more than 1,200 hours analyzing the City’s bond expenditures, and ultimately accounted for $258,099,800 in bond expenditures. The report was issued on June 7. 2016.

8. Disclosure of all developer or subcontractor money donated to council member campaigns during the 2016-2018 elections.

9. A copy of the original Master Development Agreement.

There is no document entitled Master Development Agreement for the City of Beaumont nor was there a single developer with which to enter into a Master Development Agreement.

10. The findings of the securities and exchange commission of Beaumont CFD bonds.