The Next Question Is: What Advise, Counsel, and recommendations regarding Debt Financing were made in consultations between Tom Schwab and John Harper behind closed doors in private meetings. Then the Schwab or "Staff Recommendations" were rubber stamped by the City Council. Effectively, consulting with Schwab was consulting or giving advise to the City Council. There was a conflict. Investigation by a Grand Jury should be done in those consultations and transactions, including the transaction that resulted in Tom Schwab being the recipient of a RDA Low and Moderate Income House, paid for by the City, for which he later paid for and refinanced paying the city and only until recently was the RDA paid for the house. Was it Schwab's intention that the city keep his money and never pay back the RDA for the house he was not qualified to live in? Clearly the advise and council that Harper had been giving the City of Grand Terrace has not been in the Cities Interest, but in Tom Schwab's, and perhaps his own.
JOHN HARPER was Hired by Tom Schwab via the Discretion of his selection as the Manager and approved by City Council when they were presented a service contract and "Staff (Schwab) Recommendation". There was no competitive bid, nor were others considered by the City Council. It was common practice under Schwab Management to not have competitive bids for contracts for professional services and service/supplier contracts. Contractors knew they worked for Schwab, not the City Council or the Citizens of Grand Terrace or the City of Grand Terrace. JOHN HARPER is only the most visible of these contractors which were issued by Schwab's Personal Selection Process.
Former Council Member Jim Miller's first error in getting along with Schwab and then Berry, was to question in PUBLIC at a City Council Meeting, the contracting and bid process for Air Conditioning Repair or Replacement at City Hall. A sound management practice, yet it peeved Tom Schwab. From that point on Miller was targeted, entangled and then trapped. Steve Berry and Bea Cortez may have been the people who pulled the trap door's leaver, but it was Tom Schwab that set the trap, along with the lack of precautionary advise from none other than John Harper along the way. Harper should not sell bonds or be our City Attorney. If there is a replacement Attorney available one should be hired and the Harper contract ended.
John Harper presently serves as the City Attorney for Norco, Grand Terrace and General Counsel to the Trona Unified School District and the Rubidoux Community Services District.Alan Robert Burns is the City Attorney of the City of Fountain Valley and general counsel to the Costa Mesa Sanitary District, the Orange County Vector Control District, and the Home Gardens Sanitary District.
Grand Terrace Relieves City Attorney As Bond Counsel
Friday, April 15, 2011 San Bernardino County Sentinel
The city of Grand Terrace this week ended its controversial practice of employing its city attorney as bond council.
Since he was hired as Grand Terrace’s city attorney in the early 1990s, John Harper has served in the additional capacities of redevelopment agency attorney as well as bond counsel 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 buyer 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 former city manager Tom 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. Despite Schwab’s exodus as city manager in 2008, the Grand Terrace Redvelopment Agency’s project area’s boundaries remain coterminus with the Grand Terrace city limits.
A bond counsel is an attorney or law firm hired 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 for nearly two decades 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.
With a population of less than 13,000 and a land area of just over 3.5 square miles, Grand Terrace is the second smallest of the county’s 24 incorporated municipalites population wise and the smallest land-wise. For the three decades after its 1978 incorporation, Grand Terrace remained out of the limelight, avoiding the controversy and acrimony that dogged many of San Bernardino County’s other municipalities. In that time, Grand Terrace had been administered by just two city managers, Seth Armstead, who served from the city’s inception until 1989 and Schwab, who was hired as finance director in 1984 and succeeded Armstead five years later. For nineteen years, Schwab had been accepted as something of a benevolent dictator in Grand Terrace. While in most cities city managers run operations on a day to day basis but are nevertheless deemed to be answerable to the council, in Grand Terrace an important part of that dynamic was reversed and 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.
Schwab’s management of the city included his deft, but often unconventional, adaptation of the regulations applied to municipal governance in order for the city to make up for a major disadvantage that consisted of its meager population and relative dearth of commercial development, which left the city deprived of what for most cities is a major revenue source - sales tax.
In making his adaptation, Schwab made creative use of the city’s redevelopment authority. That strategy included using redevelopment money not to eliminate blight or build infrastructure to make way for economic development but rather as a source of revenue. With the concurrence of Harper and the approval of the city council, Schwab routinely borrowed money from the redevelopment agency and put it into the city’s general fund to pay for operations.
In 2008, Schwab was felled by a subdural hematoma and a stroke, a medical condition so serious he was put on leave and replaced by his understudy, then-assistant city manager Steve Berry.
Berry’s short-lived tenure as acting city manager proved disastrous, brought on by the intensification in scrutiny his promotion prompted, which led to revelations about his having moonlighted as a development consultant in neighboring Loma Linda while he was assistant city manager, 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.
Berry attempted to short circuit that, using his position to dredge up and leak documents pertaining to Schwab’s management policies. Ultimately, Schwab retired for keeps in June 2009, but one month later the city council fired Berry. He was ultimately replaced by Betsy Adams, who had been an assistant city manager in Moreno Valley.
Questions about the fashion in which Schwab ran the redevelopment agency which surfaced during Berry’s tenure as interim manager intensifed 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 sales tax-generating commercial development, 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 city council 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 approach to governance. After Berry’s departure, finance director Bernie Simon served a short stint as interim city manager until Betsy Adams was hired as city manager.
In assessing the practice of utilizing the city attorney as bond counsel that was in place when she arrived in Grand Terrace, Adams said she could not say with certainty whether past members of the counsel fully understood the implication and significance of the arrangement involved in Harper’s triple role as city attorney, redevelopment attorney and bond counsel.
“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.”
Just after the election last November, she said she was not sure if the present council at that time fully grasped how Harper’s triple role might be compromising the quality of advice the council was receiving with regard to bond financing and possible bond issuances. “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 explaiined to them, but as to whether they understand that detail or not, I am not 100 percent certain".
Adams indicated she considered it "incumbent on me" to 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.
There has been considerable turnover on the council from the time the city last issued bonds.
Gone is former mayor Maryetta Ferre, former councilwoman Bea Cortes and former councilman Jim Miller. Ferré has been replaced as mayor by Walt Stanckiewitz, who was first elected to the council in 2008. Cortes was replaced by Bernardo Sandoval. Darcy McNaboe replaced Miller. And Gene Hays was chosen to replace Stanckiewitz as councilman when he was elevated to mayor.
This week, based on a recommendation by Grand Terrace Community and Economic Development Director Joyce Powers that was backed by Adams, the council ended the redevelopment agency’s contract with Harper as bond counsel and hired the firm of Stradling, Yocca, Carlson & Roth to serve as “special counsel for redevelopment agency financing.”
Prior to making the change, according to Powers, the city put out a request for bids from, in Powers words, “legal firms that specialize in agency financing. The intent was to identify the most qualified firm able to forecast potential obstacles and outcomes to ensure an expedited process, preferably with experience in both bond issuance and private debt placement.”
Five responses were received. Those were Murphy and Associates of Sacramento; Jones Hall of San Francisco; Stradling Yocca Carlson & Roth of Newport Beach; Best Best & Krieger of Riverside; and Harper’s firm, Harper & Burns of Orange.
Reportedly, Harper’s firm was the low bidder for the contract.
“We were not bound to take the low bid,” mayor Stanckiewitz said. “We felt it was in the best interest of the city to go with a firm that had no conflict with regard to any other services rendered for the city.”
In her report to the council, Powers wrote, “Staff has reviewed the information provided and listed references. All of the responding firms have experience with agency bonding. Based on a management team analysis, staff recommends Stradling Yocca Carlson & Roth (SYCR), a firm with experience in private placement financing. In addition, SYCR is in the top ten ranked legal firms in the United States for these services. The quantity of financing transactions indicates extensive successful service.”
Harper previously told the Sentinel he saw no conflict in an arrangement whereby a city attorney fills the roles of redevelopment attorney and bond counsel in the same jurisdiction simultaneously. He said that practice is not unheard of and involves many reputable lawyers and law firms. “They’re just all providing legal services,” Harper said. “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. 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 had not profited 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.
