Is Beaumont Bankrupt?

After hearing about the judge’s decision in the WRCOG (Western Regional Council of Governments) case that Beaumont must pay WRCOG $43 million plus interest, a number of people have asked me if Beaumont is bankrupt. Since the city has been evasive about their finances and won’t consider the audit of their internal controls I called for a year ago, it is hard to know.

Consider this, the city’s last audit they released in October 2013 for Fiscal year 2011-2012, (16 months after the close of the fiscal year) they showed a positive balance sheet of about 17 million. They got to this number after borrowing $2 million from the 2012-2013 budget and by carrying a $20 million Redevelopment Agency debt as an asset their own auditors believe is unlikely they will collect. Without the $20 million RDA accounting entry, the city was in the red by about $4 million at the end of the 2012 fiscal year. The auditors have been paid for the 2012-2013 audit but the city has not yet released it. Does the WRCOG judgment by the court push the city over the brink? The only one who knows the truth is our city manager and his staff and they aren’t talking?

The City’s representative indicated to the Press Enterprise that since the written decision won’t be released until later this week the litigation is still ongoing and they won’t comment. What can they say? They can say they are going to appeal and it is likely that is what we will hear. I have heard that his case may not be eligible for appeal. We should learn more tomorrow.

I believe the legal cost for this case so far is in excess of a quarter of a million dollars. I would think an appeal might cost as much, maybe even more, and take another 2 years. I also understand the interest rate the city will have to pay is 10%. Some quick math tells me after an appeal the city could be on the hook for a total close to $70 million.

Back to the question - Is Beaumont bankrupt? I think an argument can be made that the court decision just makes official something many critics believed and some insiders already knew.

If I understand the WRCOG case correctly, the city withheld developer TUMF (Transportation Uniform Mitigation Fee) from WRCOG in order for the city to go it alone on local projects. The court determined the fees should have been paid to WRCOG. The “he said, she said” story is interesting but not important after the court’s ruling. I think a basic understanding of TUMF is important in order to get a feel for what’s behind the case and why many of our neighboring cities don’t have a lot of respect for the way our City conducts their business.

The following is from the Riverside County Transportation Commission’s website,

When voters approved the extension of Measure A in 2002, they also approved an innovative program for western Riverside County, the Transportation Uniform Mitigation Fee or TUMF. Western Riverside County’s TUMF was patterned after a program by the same name in the Coachella Valley.

Under the TUMF, developers of residential, industrial, and commercial property pay a development fee to fund transportation projects that will be required as a result of the growth the projects create. The Western Riverside Council of Governments administers the TUMF.

The TUMF funds both local and regional arterial projects. Local area projects receive 48.1% of all funds and the funds are programmed in each of five “zones” proportionately to the fees paid. These zone projects are proposed by local jurisdictions.

RCTC implements the Regional Arterial Program, which was adopted in September 2004. The program consists of 24 projects located throughout western Riverside County. To date, three projects have been completed and three are under construction. RCTC receives 48.1% of all fees to fund these regional projects. The balance, 3.8%, is allocated to transit projects programmed by the Riverside Transit Agency.

The court is ordering the City of Beaumont to reimburse WRCOG for the money they illegally withheld. What do we do now? Where do we get the money? Well, the city, with some help from the developers, just authorized at least $75 million on new Mello-Roos fees for infrastructure for new developments. I think they are also getting another $25 million from the people in Four Seasons after they approve the new deal in their election. Kapanicas and his council have been very busy over the last month adding new Mello-Roos fees and it is hard to keep an accurate total, it may be more.

The problem with the bonds for the new developments is that until there are homes with taxpayers living in them, no one is going to buy the bonds. By the way, what do you think will happen to the city’s bond rating after the WRCOG ruling? They may need to reconsider their latest deals with the developers and raise the interest rates to convince bond investors to take on a higher risk. Unfortunately raising interest rates will make the developers’ new homes more expensive and less attractive to new home buyers. The developers will have to lower the home prices suppressing everyone else’s home values.

If the city has to use the money from the new developments – which they can’t get to for at least another year - along with Four Seasons’ new bonds, to pay the WRCOG settlement, how will the infrastructure for the developers’ new homes get built? Is this even allowed under the Mello-Roos laws, I doubt it. Maybe the developers should have been less dependent on working deals with the council and instead have been investing in the initial up front infrastructure by themselves? Hmm, who has been arguing this for some time now?

From the way I read the Mello-Roos laws, CFD fees are not supposed to pay for citywide projects. Projects which should have voter approval and should be paid for by all taxpayers, projects such as a desalination plant. Kapanicas and his consultants have been arguing that this is an appropriate use. If they decide to use the CFD money to reimburse WRCOG the $43 million plus interest, this means our CFD fees will be used for regional projects in other cities and throughout Riverside County. There is no way this is an appropriate or legal use of Mello-Roos laws. It would be entertaining to hear Kapanicas and the council members who follow him justify this as a bailout solution.

In my opinion the Council and the developers are getting what they deserve. The developers have been bank rolling the campaigns for council members for a long time. I’ve reviewed many of the council’s campaign finance forms and found the developers, and their favorite construction firms, have been contributing thousands of dollars every election cycle. There have been thousands in direct contributions to candidates and thousands more passed to four of the five current council members through the Pass Area Families For Good Government PAC (Political Action Committee). I haven’t found any contributions from PAFFGG to Councilman Castaldo and I haven’t pulled his records to look for contributions from developers because it was my understanding that he self-funded his campaign. The problem with the Council and developers getting what they deserve is that it takes us all down with them.

So where do we go from here? I don’t know, I’m not sure anyone does. I know City Manager Kapanicas and the City Attorney Joe Akulfi are going to recommend an appeal if this is allowed. This will drag out the process past the upcoming election. It will enable the council to claim there is still ongoing litigation and that the administration and council members, three who are up for re-election, are prevented from discussing the case and solutions for paying the settlement. It will increase the amount of interest we have to pay; 10% on $43 million every year will add up quickly.

One thing I do know is Beaumont isn’t going to be able to get out of this on our own, we are going to need help. We may need to work out a settlement agreement with WRCOG. We are going to have reach out and work with our neighbors to address our out of date interchanges and other transportation projects we desperately need. We still have a desalination problem that needs to be solved. The $60 million desalination plant and the $80 million Potrero logistic interchange will have to be put on hold. We can’t build enough warehouses to bring enough of the land speculators and logistic developers’ money to bail us out.

We have to end the “go it alone” strategy promoted by our City Manager and City Attorney that our council has been following for the last 20 years. We are going to need a new strategy. But ask yourself, will WRCOG, the RCTC, and the others we are going to need help from want to work with this council and this administration?