More than two decades ago, a handful of consultants devised a strategy to revitalize the small Riverside County city of Beaumont by encumbering future residents with bond debt.
Working as consulting city administrators, they created a special tax district that nearly encompassed the entire city. In the years that followed, with the blessing of the City Council, they went to the bond market more than 30 times to borrow more than $300 million, ostensibly for public projects.
City officials trumpeted the strategy as a responsible way to keep up with growth. New and improved roads, waterworks, parks and other amenities were in place before moving vans arrived as the city’s population quickly quadrupled to more than 40,000 people.
But the flaws in that strategy became apparent this week when the men landed in jail, charged with multiple felony counts of embezzlement, conflicts of interest, and misappropriation of public funds.
As they issued the bonds, the men also directed portions of the money to companies they created shortly after they began working for Beaumont.
The more bond debt the city incurred, the more money the men made, public records show.
The man in control of the bond funds was former City Manager Alan C. Kapanicas, who also served as executive director of the entity the city created to take bonds, city records show.
General Government Management Services, a company created and owned by Kapanicas and his wife, Diana, billed the bond funds for at least $1.2 million between 1996 and 2009, according to a review of more than 3,000 bond-fund withdraw requests.
Kapanicas, acting as a city official, repeatedly approved payments to his own company, city records show. Checks would be sent from Union Bank, the bond trustee, to homes the couple owned in either Murrieta or Rancho Mirage – also listed as the addresses for their company.
Much larger sums – at least $43.2 million – went to Urban Logic Consultants between 1994 and 2012. The principals of Urban Logic, Ernest A. Egger; David W. Dillon and Deepak Moorjani, served respectively as the city planning, economic development and public works directors.
Moorjani, acting as public works director, signed off on payments to Urban Logic from bond construction funds for engineering work, the records show. Money then would be wired to the Urban Logic account at Union Bank.
In court papers publicly released Wednesday, Riverside County district Attorney senior investigator Michael Gavin said Dillon and Egger also signed off on bond payments to their company.
William K. Aylward, the city’s former finance director and a certified public accountant, received more than $160,000 in bond funds when he served as contract-account manager between 2000 and 2008, city records show.
The bond-spending records, released in dribbles by the city since last summer, did not provide a complete picture of bond spending but did show how bond funds became a lucrative and consistent source of revenue for these former city officials, who are among seven defendants charged Tuesday in the District Attorney’s sweeping Beaumont corruption probe.
Other major bond-fund earners were the city’s long time financial consultant, Ron Gunn, who had offices in Huntington Beach, but whose last mailing address was a post office box in the Puget Sound community of Olalla near Seattle. He received fees totaling at least $2.2 million.
And Beaumont’s bond attorneys, the Laguna Hills law firm of McFairlin & Anderson, made at least $2.8 million.
Gunn and the bond attorneys have not been accused of any wrongdoing or charged with any crimes.
The city’s bond transactions remain the subject of a formal investigation by the U.S. Securities and Exchange Commission, which polices the nation’s stock and bond markets. On April 22, the commission served subpoenas at Beaumont City Hall.
Beaumont released the subpoenas to the public on Wednesday, May 18.
Kapanicas, contacted by telephone in late April, declined to comment on the bond spending.
Moorjani, the former public works director, did not return a message left last week with a family member. Bond attorneys George W. McFarlin and James F. Anderson did not respond to a message left with a receptionist at their offices.
Egger, Dillon, Alyward, and Gunn did not return telephone voice-mail messages.
Roger Berg, who served on the City Council between 1993 and 2014, defended Kapanicas and the Urban Logic officials in an interview last week.
The men, Berg said, simply followed a debt-financing plan approved by the City Council that was needed to accommodate explosive growth and modernized what had been the city’s crumbling roads, and water-delivery and sewage systems.
And the plan worked, he said. Beaumont grew responsibility and now has a larger tax base.
Berg acknowledged that Kapanicas and Urban Logic officials advised the City Council about when to issue bonds and how much should be borrowed, knowing that their companies would later earn fees from the bond proceeds.
Berg compared the situation to getting advice from an attorney about whether to pursue a lawsuit, knowing that the lawyer stood to make more money later by litigating the lawsuit.
“They made money,” Berg said of the bond work. “But they worked hard for it. They earned it.”
He said using consultants as Beaumont city administrators was part of a larger effort to run the city like a business, which cut the city’s personnel costs and prevented employee layoffs during hard economic times.
Contacted on Wednesday, a day after the charges were filed, Berg said that the district attorney may have information that was never shared with him.
BIG IDEA
Kapanicas’ hourly work started in 1993 when he was an employee of BSI Consultants, then based in San Diego, and he first served as a consulting administrative director for Beaumont. He was named city manager in 1995, the same year he formed General Government Management Services.
Around the same time, Dave Dillon and Ernest A. Egger formed Urban Logic as they led an ambitious effort to revitalize the city by imposing special taxes called Mello-Roos assessments on the city’s future residents. Those taxes allowed them to issue dozens of bonds, putting residents on the hook for hundreds of millions of dollars in debt.
Mello-Roos financing is typically used to pay for streets, sidewalks and other public works within a particular development. And bond debt payments are covered by assessments on houses in the development.
But Beaumont took Mello-Roos financing to unprecedented levels.
“We put together a citywide community facilities district with a massive bonded indebtedness structure, so that we could address the needs of the city as the city developed,” Dillon said when testifying in 2014 in a lawsuit brought by the Western Riverside Council of Governments (WRCOG).
(In its suit, the agency successfully argued that Beaumont failed to pay its fair share of regional transportation fees and won a $53 million judgment against the city. The case is under appeal.)
Creating a citywide district had never been done before, both Dillon and Kapanicas acknowledged in court.
Kapanicas said his municipal expertise allowed him to determine a “fair share” each property owner should pay in further property taxes to pay off the bonds.
“That’s the reason I had come to the city,” Kapanicas said under oath. “They needed a tax guy.”
They then ran up the bond-fund credit line.
Between 1993 and 2014, they issued debt on the bond market at least 32 times, creating business opportunities for their companies.
Calculations by Kapanicas’ company of much future home owners would have to pay in special taxes were included in at least 21 voluminous official statements that went to prospective bond investors. His company stopped getting bond funds in 2011 when he became a city employee and was no longer a consulting city manager paid through his company.
But Urban Logic continued to make bond money preparing engineering reports that were needed before bonds could be issued.
Hundreds of thousands of dollars in fees were paid each time the city took on more debt.
Consider a 2003 bond issuance for $21.4 million.
The bonds were set up to include “expense” and “cost of issuance” funds that totaled $960,000 that would be divided up by attorneys, consultants and other professionals shortly after bonds were sold to investors.
Records show that Kapanicas’ company received $100,000 for “special tax” services for the four improvement areas. This was on top of the compensation he received as city manager.
Urban Logic, meanwhile, received $145,000 for “formation costs” and “engineering.”
Gunn, the financial advisor, made the most money. His fees were $171,525 for “consulting service,” which included $6,000 for his expenses, city records show. And the bond attorneys, McFarlin & Anderson, got $156,050.
Four years later, Gunn received another $192,987 and the bond attorneys received $16,320 when the 2003 bonds were refinanced. And Kapanicas’ company was paid $14,900 for special tax consulting work.
Once the bonds were issued, Kapancas’ company also billed the bond fund for financial services, tracking bond-fund interest, performing disclosure duties and other financial services.
Meanwhile, Urban Logic, was paid millions of dollars from bond construction funds, to be compensated for engineering work throughout the city.
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, said issuing many relatively small bonds meant more bond money went to consulting fees and less to the public projects.
Many Beaumont bonds ranged from $1.7 million to $22.8 million.
Teichert also said that most bond issues don’t have a special tax consultant, the role played by Kapanicas. Tax calculations are normally done by engineering firms or bond attorneys, he said.
He added it was unusual for the same professionals to issue debt over a period of two decades. It’s more prudent to periodically open such work to competitive proposals to keep costs down.
In documents filed Wednesday in Riverside County Superior Court Riverside County District Attorney’s Office senior investigator Michael Gavin said the corruption case defendants created their own consultancy company and controlled payments to that firm without city oversight.
Gavin noted the unusual scope of Beaumont’s community facilities district, which “encompasses nearly the entire city and has an approval for $655 million of bonded indebtedness to build out the entirety of Beaumont.”
Gavin said the defendants worked out a way to keep the City Council from overseeing payments coming out of the bond accounts.
The Urban Logic “principals signed off on payments to their own company,” he said.
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