Mello Roos Money Used to Pay Heartland Area 5 Property Taxes and Dave Dillon a Personal Computer.
The fax message sent to a Los Angeles bank demanding more than $135,000 from Beaumont city bond funds had a sense of urgency.
It came from Urban Logic Consultants, a private company under contract with the small Riverside County town that provided administrators for city engineering, planning and econonic development services.
It demanded that the bank “expedite the processing and deliver the check to Mr. Alan Kapanicas,” the city manager.
And the money was to pay property tax bills for the Heartland partnership, a Seattle-based landowner that was planning to build 1,224 homes on 420 acres at the west end of town – just days before the developer faced late fees.
Some 16 years later, the housing project still hasn’t been built.
The vast construction site just north of Highway 60 appears to have been graded long ago. But nature is taking it back, with shrubs and flowering annuals now rooted along deep ruts carved into the beige-colored earth by years of erosion.
The property tax expense illustrates what some citizens and city officials see as questionable uses of bond funds that occurred during the roughly two decades of Beaumont city administration under Kapanicas and the Urban Logic owners, Enest Egger, David Dillon, and Deepak Moorjani, who served, respectively, as the city’s planning, economic development and public works directors.
Bond funds are supposed to go for public works projects. But in Beaumont they appeared to have been tapped repeatedly for operational or non-capital expenses, city records show.
Kapanicas, Egger, Dillon, and Moorjani are now awaiting trial on multiple felony corruption charges that include embezzling bond funds by approving payments to their own companies.
A recent city-commissioned report found that since 1994 Urban Logic received at least $47 million in bond funds – for what their invoices described as engineering and project management services.
Meanwhile, between 1995 and 2011, General Government Management Services, a company created by Kapanicas and his wife, Diana, received $1.2 million, most for financial services related to preparing bonds to go to market and for managing the funds.
Attorneys for Dillon and Moorjani say all payments to Urban Logic were lawful and done with approvals from the City Council and other officials.
But other bond expenses are raising more questions as thousands of Beaumont residents remain on the hook for more than $200 million in bond debts they are paying off through special taxes known as Mello-Roos assessments.
Federal rules generally require that municipal bond funds be used for public works projects, such as streets, sewers, water works, parks and sidewalks, said Rick Teichert, a former treasurer for Moreno Valley, who also served as the top finance officer for the Orange County Transportation Authority and the Sacramento Public Library Authority.
Yet city records show that bond funds were used for what appear to be more general uses.
Such funds were used, for example, to buy laptop computers, including a $3,387 Dell Inspiron model that Dillon ordered from the manufacturer in Texas and had shipped to his office in Temecula, the records show.
The other bond expenditures included $66,863 for what city documents describe as a “lawn mower and trailer.”
And there was a $3,625 bill from a Capistrano Beach economics firm for preparing a PowerPoint representation used in 2008 by then-Mayor Brian DeForge for the state of the city address.
The presentation trumpeted the city’s successes, such as attracting big box retailers, like Best Buy and Bed, Bath and Beyond. One slide bragged of the city operating with “fiscal discipline.”
But getting complete accounting of how city bonds were spent remains elusive.
A city-commissioned report by the Orange-based Urban Futures consulting firm on bond spending made public this month found that $53.1 million in bond funds were transferred to other city accounts.
While city construction projects were paid for with this money, it remains unclear clear how much of it was used for public works, said Michael Busch, CEO of Urban Futures, in a June 7 presentation to City Council.
Many of the city’s requests for bond funds have vague descriptions of why the money is needed. Many city invoices for bond funds are simply for “administrative services.” And city and state audits show capital funds were repeatedly borrowed to cover city operational fund deficits.
What’s more clear is that bond funds were often used to cover expenses that developers normally pay for, according to the records.
These included the Seattle development firm’s property taxes, the costs of city building fees, and regional fees for transportation projects and habitat conservation. At least two bond withdrawals were to cover developer attorney bills – one for $35,000 and another for $67,345 – that had been initially sent to home builders.
Using bond funds to pay for regional transportation fees alone saved developers nearly $9,000 per house, making Beaumont a cheaper place to build. And developers made Beaumont the choice for thousands of new tract homes. Since the early 1990s, the town’s population nearly quadrupled to more than 40,000.
The issue of how bond money was spent is important because the interest on municipal bonds paid to investors is tax-exempt, allowing cities to pay lower interest rates. These lower financing costs give local government entities a break when building public facilities.
Beaumont’s bond spending is now under scrutiny.
City officials have disclosed that U.S. Securities and Exchange Commission, the agency that enforces laws governing the nation’s stock and bond markets, subpoenaed city records in April and initiated a formal investigation.
Beaumont City Councilman Lloyd White said he was not surprised that bond funds were spent on laptops, PowerPoints and property taxes.
“You’re finding the same kind of things we are finding in our own investigations, and we are trying to be transparent,” White said.
“My reaction is just more frustration,” added Beaumont Mayor Mike Lara.
“It is just a lack of control. We don’t have a clear picture what went on. But we have a lot of questions.”
Moorjani had signed the approval for bond withdrawals to pay for developer property taxes and attorney fees, as well as a laptop computer sent to the Urban Logic offices, city records show.
He could not be reached directly, but his Los Angeles-based attorney, Mark Werksman, declined to address questions about why Moorjani signed the bond spending requisitions, saying questions would arise again in court.
But Werksman said in an email that Moorjani has done nothing wrong.
“All his work was done openly and for the benefit of the City or in fulfillment of the City’s contractual obligations, and was approved by the City Council and other responsible City officials. His actions were lawful and appropriate, and he vigorously denies any wrongdoing.”
But using bond funds to pay a developer’s property taxes showed a public-financing program turned gone astray.
The development site, called the Heartland, is in a larger Community Facilities District the city created in 1993 to issue bonds to pay for streets, sidewalks, sewers and other public projects. And property owners agreed to make debt payments through special taxes until houses were built and sold.
But in 1999, bond funds were used to pay the special taxes needed to cover payments due on the very same bonds.
The housing development, first approved in 1994, has languished. The partnership managed by the Seattle-based Heartland Group sold the land in 2002 to Pacific Century Homes amid hopes it would finally get off the ground. But that company filed for bankruptcy in 2008.
The land is now owned by a partnership managed by Lehman Brothers Holdings in New York City.
Both the Riverside County District Attorney and the California state controller have criticized how the bond funds were handled. Bond funds were held in a bank account in Los Angeles and could be withdrawn under the approvals of Kapanicas and the Urban Logic officials, bypassing city coffers.
This meant the thousands of bond expenditures lacked scrutiny from the City Council and the public, prosecutors alleged in court papers. Dillon’s attorney, Paul Grech, counters that the City Council was in the loop.
Beaumont resident and city watchdog Judy Bingham said property tax payments and many other bond expenses needed daylight.
“They had such control over everything in this town, and they were free to do what they pleased, ” Bingham said. “And they never brought anything like this to the City Council.”