GT City Attorney’s Triple Dipping Under Scrutiny
Friday, November 19, 2010
San Bernardino County Sentinel
After two years of being buffeted by controversy and scandal, the city of Grand Terrace is on the brink of yet another public embarrassment, this time involving the questionable practice of allowing its city attorney to triple-dip and enrich himself by providing legal advice on financing arrangements that included bond issuances in which he had a personal financial interest.
For thirty years, the city of Grand Terrace had quietly avoided the controversy and acrimony that dogged many of San Bernardino County’s other municipalities. With a population of less than 13,000, it is the second least populous of the county’s 24 incorporated cities and townships. From its founding in 1978 until 2008, it had just two city managers, Seth Armstead and Tom Schwab.
Schwab, who had been elevated to the city manager’s post in 1989 after serving a five-year stint as the city’s finance director, was accepted as something of a benevolent dictator over the town, which covers a mere 3.5 square miles. In most cities, at least officially, the city manager is answerable to the city council, which dictates policy and instructs him or her on the overarching goals envisioned for the community. Typically, the city manager is given autonomy to run things on a day-to-day basis, but only at the pleasure of the city council, or at least a majority of the city council. In Grand Terrace under Schwab, however, an important part of the dynamic between the city council and the city manager had been reversed. Rather, it was the council that took its direction from Schwab, who regularly previewed the city council meeting agenda with each of the council members and choreographed ahead of time the often unanimous votes in favor of the policies and management strategies he had devised.
One of Schwab’s decisions was to hire John Harper as city attorney in the early 1990s. Part and parcel with Harper’s function as city attorney was to serve in thecounsel on those occasions when the city issues bonds to undertake financing of municipal projects.
Redevelopment agencies exist as adjuncts to municipal governments and are intended to serve as a means of reducing blight and promoting economic development. Traditionally and by the rule of law, redevelopment agencies create redevelopment project areas that are generally limited to portions of the city that have fallen into a state of general disrepair, dilapidation or blight. Under state law, redevelopment agencies have the authority to utilize a host of financing mechanisms to carry out their programs. One of those mechanisms is to issue, i.e., sell, bonds. The proceeds of those bonds are then used to undertake projects to reclaim blighted land and transform it into developable property. The increase in the value of that property results in increased property tax revenue, which is then committed to repaying the bond buyers at a set percentage of the value of the bonds – typically in the five to eight percent range – over a predetermined period – typically 25 to 35 years. In some cases, where the property has been redeveloped into commercial projects, a portion of the sales tax generated at the businesses therein will be utilized to make payments to the bond holders.
As city attorney and as redevelopment attorney, part of Harper’s function has been to advise the city council on the advisability and legality of certain redevelopment strategies and projects. Nearly all California cities have redevelopment agencies. Grand Terrace, is, if not unique, very rare among California municipalities, in that under Schwab’s leadership and in conjunction with Harper’s legal guidance, the redevelopment agency has been extended to cover not just those portions of town that meet the legal definition or even common definition of blight, but the entirety of the city.
In issuing the bonds, cities/redevelopment agencies typically employ a bond counsel, an attorney or law firm to provide a legal opinion that the issuer is authorized to issue the bonds in question and that the city/redevelopment agency has met all legal requirements necessary for issuance of and paying the interest on the proposed securities. Bond counsels are typically paid a percentage of the bonds issued – usually between one quarter percent to one half percent of the entire bond issuance. In this way, a bond counsel would receive a fee of $25,000 to $50,000 on a bond sale of $10 million.
In the case of Grand Terrace, Harper has served as bond counsel, in addition to his roles as city attorney and redevelopment attorney.
The majority of Grand Terrace residents have been entirely oblivious to this arrangement. Indeed, over the years, many of its city council members have failed to fully understand the situation or comprehend its implication, but instead relied upon Schwab’s assurance that it represented no problem or potential complication for the city.
But many people familiar with municipal governance and its principles believe circumstances such as that involving Harper represent an inherent conflict of interest that redounds to the detriment of taxpayers. Indeed, the practice of having a city attorney serve as the same city’s general redevelopment attorney to advise the city council on potential bond issues and then be paid again as the city's bond counsel, getting a percentage of the value of bonds he or she has helped prepare for sale was somewhat more common historically than it is now. But over the last 20 to 25 years, most, if not all, California cities have moved away from having an individual lawyer, or even different lawyers from the same law firm, handle the overlapping duties of city attorney, redevelopment attorney and bond counsel.
Critics of common municipal practices, reformists and some lawyers maintain that city attorneys should not be able to participate in the formation of bond issues for either the city they work for or its redevelopment agency and then receive additional pay or fees to serve as bond counsel for the same issues, on the grounds that the advice the lawyer will provide in the first role creates income for him or her in the second role.
In some cases where a city attorney has persisted in functioning in the multiple roles, legal challenges have been launched. Legal rulings as to the legality of the arrangements have been mixed, with some judges finding that such dual roles represent a conflict under the state’s conflict-of-interest statutes. There have been other findings to the effect that the practice, while inadvisable, is not technically illegal. In practically all cases where the practice has been challenged, it has been discontinued.
In Grand Terrace, Harper remains one of the last city attorneys in the state still functioning as redevelopment attorney and bond counsel in the same jurisdiction. The existing city council, consisting of four members at present because of the resignation of councilman Jim Miller earlier this year, has continued to tolerate Harper serving in the triple capacity. On November 2, however, city residents tossed out longtime councilwoman Bea Cortes in favor of reformist candidate Bernardo Sandoval. At the same election, planning commissioner Darcy McNaboe was selected to serve out the two years remaining on Miller’s unfinished term. Mayor Maryetta Ferré, who had been one of Schwab’s strongest supporters, opted not to run for reelection this year. She was replaced by councilman Walt Stanckiewitz, who has been one of the most vociferous of Schwab’s critics.
Over the last two years, events have transpired to shed some degree of discredit on the Schwab regime. In June 2008, Schwab was felled by a subdural hematoma, which put him entirely out of commission. His hand-picked second in command, assistant city manager Steve Berry was elevated to acting city manager. But Berry’s sojourn into the limelight proved disastrous, with revelations about his having moonlighted as a development consultant in neighboring Loma Linda while he was assistant city manager attending his tenure as the city’s top administrator, which was then followed by the surfacing of a sheriff’s department report documenting an embezzlement he had involved himself in shortly after Schwab hired him as his assistant. An effort to bring Schwab, whose health appeared to be returning, back as city manager took place in the spring of 2009. Ultimately, Schwab retired, for good in June 2009, but one month later the city council fired Berry. He was ultimately replaced by Betsy Adams, an assistant city manager in Moreno Valley.
Questions about the fashion in which Schwab ran the redevelopment agency surfaced during the first several months of Adams’ tour of duty as city manager. In response to questions about the policies perpetrated under his watch, Schwab sought to explain their rationale. Noting that the city was strapped for revenue because of its relative lack of size and commercial development, which would generate sales tax revenue, Schwab explained that he utilized the redevelopment agency to provide the wherewithal to finance normal operations through borrowing that would eventually be forgiven.
"My intention was to borrow it and never pay it back," Schwab said of the money taken out of the redevelopment agency. "When the redevelopment agency expired, the debt would expire with it." Schwab said the redevelopment agency was chartered for a set number of years and then would fade into oblivion. The city would then have the option of chartering a new redevelopment agency or going on without one. With the closing out of the existing agency, any money owed to it would become a moot issue, Schwab reasoned.
Schwab insisted that he had explained to the counsel the strategy he was using in borrowing from the redevelopment agency to shore up the city’s general fund.
“They were told about it,” Schwab said. “Whether they understood it is another question.”
That created a firestorm of controversy, leading to a questioning of the manner in which Schwab, in the words of one critic “was robbing Peter to pay Paul.” Included in that criticism was Harper’s acquiescence in Schwab’s programs.
Adams acknowledged that Harper officially functioning in the capacity of city attorney, redevelopment agency attorney and bond counsel.
“That is historically correct in Grand Terrace,” she said. “Our city attorney is the city’s redevelopment attorney and in the past he has served as bond counsel.”
Adams said she could not say with certainty whether the members of the counsel fully understood the implication and significance of the arrangement involved in Harper’s triple role.
“I’m not sure clearly what level of information they would have received about a conflict of interest prior to my getting here,” she said. “I’m not sure what they were or were not advised of in the past.”
Nor did she know, she said, if the council had now come to an understanding of the situation. “There may be a general awareness of the roles of the city attorney, but since the city has not issued bonds for a few years, I am not sure how nuanced their understanding is on that subject. I assume Mr. Harper’s role was explained to them at the time, but as to whether they understand that detail or not, I am not 100 percent certain.” She indicated that in the event another bond issuance is contemplated in the future, she will inform the council that Harper stands to make money on top of his normal legal fees if the bonds are issued and he is serving as bond counsel.
“If we were to issue bonds, it would be incumbent upon me to bring that to their attention,” she said.
Adams said the issue of whether Harper should be allowed to remain in all three capacities was not one the city was seriously examining at the present time.
“That’s not a current issue with the council,” she said. “The city is not looking to issue bonds any time soon. If something like that were to come forward, that might be something the council would look at. But that is something that is more of a council decision than something the city manager is involved in.”
Adams acknowledged that “There are people out there saying there should be a separation of those responsibilities [city attorney, redevelopment agency and bond counsel].” And she said hiring three different attorneys to fill those three roles “is the current trend. There should probably be a separation of duties in some cases and having that separation would be part of the inherent checks and balance people are expecting in their local government. Questions about conflict of interest are fair questions.”
Adams indicated that the conflict of interest between the city attorney and the redevelopment agency attorney might be insubstantial enough in a city the size of Grand Terrace to ignore, given the added expense hiring a second redevelopment agency attorney might entail.
“We are a very small city,” she said. “I would say I have not seen a conflict so far. In our city the redevelopment agency project area is the same as the city boundaries, which is not typical. It could become very expensive for Grand Terrace to have duplicate attorneys, from that perspective.”
But there might be grounds to relieve the city attorney of his role as bond counsel, Adams said.
“I think that just since something has always been done one way, that doesn’t mean it would have to be done that way again, especially since there is a heightened awareness of a conflict of interest not only actual but perceived. We have a new council coming in December. They may opt to take a look at that at some time in the future.”
Harper said that he did not think the issue was one of tremendous moment in Grand Terrace.
“As far as I know, that hasn’t come up with the current council and I don’t know if it will come up with the new council when it is seated,” he said. “We’ll see.”
There is no trend afoot statewide to separate the functions and remunerations of city attorneys from redevelopment attorneys or bond counsels, he said.
“That isn’t my perception,” Harper said. “They’re just all providing legal services. I don’t know of a city attorney who doesn’t serve as redevelopment agency council if he has that line of expertise. There is no conflict. The two agencies [municipal and redevelopment] are headed by the same board. The city council is the redevelopment agency board.”
Harper referenced numerous other cities where one individual or one law firm serves in all three capacities. “Look at Temecula, Lake Elsinore, Murrietta, Colton,” he said. “They all use the same firm or the same attorney in those ways. If you look at all the cities represented by Best, Best & Krieger, in all of them the firm serves as redevelopment counsel and as bond counsel. Cities make use of their lawyer if they have the expertise to be bond counsel. Not every lawyer can be bond counsel. You have to have a nationally recognized bond counsel. It is not something a lawyer can just decide to do.”
With regard to the practice of a city attorney participating as an advisor in the formation of bond issues for the city or redevelopment agency and then receiving a percentage of the bond issuance while serving in the role of bond counsel, Harper said, “I think that is inappropriate.”
He insisted, however, that he does not profit in that way in his capacity as Grand Terrace’s bond counsel.
“I don’t make recommendations to the city council on whether to make
financings,” he said. “They have outside consultants who assist them in doing that. If they decide to make an issuance, I will help them on that, but otherwise, I do not recommend
financings.”
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From the Email InBox:Dear
Gramps:
This blog and it's readers pointed out this conflict of interest long ago., (including city documents) It is good that it is finally being addressed in a more public venue and that perhaps a practice and procedure correction can be made.
Mr. Harper who sold the bonds should have been more deliberate in his communications with the City Council Members when he attended the meetings where Mr.
Schwab was pitching his recommendations to Lend Money from the RDA to the City with the intention of never paying it back. Mr. Harper is supposed to work for the City and not Mr
Schwab. He should have informed the City Council that the
Schwab Recommended use of the Bond Provided Funds would be a misuse of funds and possibly a criminal act of Fraud at the Federal Level. His failure to do this must be recognized as either collusion in the "Loan with out intent to Repay", (Some would call that Fraud), or incompetence and disregard for his fiduciary responsibility to the City of Grand Terrace, and to the Bond Holders.
Mr. Harper will revert to his old reasoning, well he only answers questions put to him and does not feel obligated to advise the council of potential problems unless he has been asked a direct question. This has been the justification in the past when his lack or improper legal advise was provided to the City Council, in support of a
Schwab Recommendation.
The City of Grand Terrace does not need to be caught up in a future case of Bond Financing Fraud, even if we can't avoid what potential risks we have been guided into in the past. Thanks to the Efforts of Betsy Adams there may be hope of not repeating the same questionable practices of the past.
The current Municipal Bond Market is so bad that it is unlikely given the past use of Bonds GT would be able to sell bonds at this time.
Former GT Employee
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Dear Gramps:
Some people may say, oh well it isn't all that much money that he got by tripple dipping. However, for many of us "Common Folk" an extra 50,0000 laying around would be a real boost to our personal economies.
The real issue should be that Mr. Harper has been acting like Mr. Schwab's personal attorney not the City Attorney or the RDA's Attorney, all these years. His advise has been actually subversive and or adverse to the City Council's authority and the city's interest.
He should have advised the City Council to relieve (Fired) both Schwab and Berry with Cause of their Terminations over the Covered up Embezzelment Investigation, just to name one issue where his legal advise could have saved 100,'s of thousands of dollars.
His client Mr. Schwab has moved on, perhaps the City should find a new attorney and a new bond representative. I'm just saying.
Blue Mtn Dude
