The Miracle in Redondo

If you did a side by side comparison of Redondo Beach and other similar cities and looked at the negative impacts of the Great Recession, I believe RB would look pretty good. My non-scientific evaluation of the years from 2009 to this past year shows cuts to jobs, salaries, benefits and services were more severe in many other cities.

Some people in city government would attribute that difference to better management. I noticed something different. I saw a unique loan program between Redondo Beach and the state of California. It was unique in that the state seemed to be largely unaware or unconcerned it was loaning the city money. Another thing that made it unique was the fact neither party expected the loan to be paid back. That’s what made it a miracle.

I wrote the article below a while ago, which is why some of the information is dated. The material is factual and the time between when it was written and now hasn’t changed any of those facts.

I had hoped to see it in print but it was turned down by the L. A. Times, Daily Breeze and other publications. Maybe there’s nothing there. Maybe I’m blowing it all out of proportion. My intention then as now was to make the information public and let my fellow citizens decide whether the issues should cause concern for our community. Publishing it here completes that process.

I apologize for all the words but they were all necessary to tell the story.

Harry Munns

Redondo Beach, January 2014

Longtime community activist Gary Ohst resigned midway through his second term as a Redondo Beach Budget and Finance Commissioner in December 2010. Ohst’s departure came as no surprise to observers of the city’s political processes. Gary Ohst had spent the previous four years warning city officials about what he perceived as the city’s abuse of funds generated in and around King Harbor.

“I believed that pulling money out of the harbor enterprise was not a sustainable activity and that the city is not meeting its fiduciary responsibility under the Tidelands Trust.” Ohst said.

In 1915 the state of California deeded the land west of the high water mark to the city of Redondo Beach. It was to be held in trust for the people of the state. The beach, the submerged land and the land that was created to build King Harbor belong to the people of California, not the city of Redondo Beach. The city has been given the right to develop and manage that land on behalf of everyone in California. The original document and amendments that were added in 1971 became known as the Tidelands Trust.

The harbor and adjacent land generate millions of dollars for the city every year. According to figures released by the city, property, sales and transient occupancy taxes amounted to more than $4,000,000 in fiscal year 2009-2010. Another $10,000,000 came from various sources such as rent for apartments, boat slips and offices, among others.

One of the main provisions of the Tidelands Trust states that the money generated in the Tidelands be reinvested in the Tidelands. The deed allows the city of Redondo Beach to manage the finances. The Tidelands Trust also mandates the creation and maintenance of an Uplands Fund for income and expense generated by the land adjacent to the harbor Tidelands, referred to as the Uplands. The Tidelands and Uplands together are called the Harbor Enterprise.

“One of the goals I had set was to improve the disclosure and financial reporting of the finances of the harbor to get at the root of the problem why there was never any money.” Ohst said.

He discovered that the city takes 100% of the $4,000,000(+-) property, sales and transient occupancy tax revenue and deposits it in the general fund. It isn’t accounted for as harbor revenue and it doesn’t directly offset any harbor expenses. It’s just considered revenue that’s generated within the city and it is used to pay for things the city needs just like the taxes people pay on their homes go to things like street maintenance and trash removal.

The city charges the Harbor Enterprise for goods and services it supplies for harbor operations over and above what the harbor property would get just by paying its taxes. They break down the expenses according to the department that supplied the goods and/or services and the extent to which either the Uplands or the Tidelands benefited from the expenditure. For example, in fiscal year 2009/10, the Tidelands and Uplands each paid the City Attorney’s office $41,752 in personnel charges.

The $10,000,000 generated from rent and other sources covers capital improvements and operating expenses. Renovation of the bathrooms at Seaside Lagoon and resurfacing the wooden portion of the pier are examples of capital improvements funded by the Harbor Enterprise funds.

I’m pretty sure no home or business owners outside the harbor got a bill for City Attorney services, although in theory that office did work on behalf of every household and business. I’d also suggest that some homes, businesses and areas of the city got more services than others yet everyone except the state of California (Harbor Enterprise) paid the same amount. It just came out of their taxes.

In addition to Personnel and Capital Improvements, Redondo Beach breaks down the fees it levies on the Harbor Enterprise by Maintenance & Operations, Internal Service Fees (ISF) and Capital Outlay.

Ohst published a detailed analysis of Redondo’s harbor finances and compared the data to other southern California harbors. The report reveals that between fiscal year 2001/02 and 2009/10 charges for Redondo Internal Services increased from about $330,000 to more than $2,000,000 for essentially the same goods and services.

Ohst’s report indicates that charges for items such as Personnel and Capital Improvements fluctuate year to year. He found no logical explanation for a 650% increase in Internal Service Fees over a 9 year period. When asked by the Harbor Commission in 2010 to predict the amount Redondo Beach would extract from the Harbor Funds in coming years, City Manager Bill Workman predicted it would decrease because, “we probably won’t need as much”.

There you have it. When the city of Redondo Beach needs more money, it takes that money from the people of California. That’s a great deal for the city. It must make Redondo the envy of most other cities in an era of declining tax and fee revenue. But it has to make you wonder whether the state would feel the same way about the deal California is getting.

Ohst examined finances for Santa Barbara, Ventura, Channel Islands, Dana Point and Oceanside harbors. ISF charges ranged from a low of $00.00 in Ventura to a high of $1,808,923 in Oceanside. At first glance, Oceanside parallels Redondo Beach’s FY 2009/10 ISF charges, which totaled $2,036,117.

ISF charges get paid into the other cites’ general funds, just like they do in Redondo. Something different happens in the other cities that doesn’t happen here. Their general funds pay money to their harbors. For example, Oceanside pays its harbor nearly $3,000,000 in subsidies from its general fund. That money offsets the ISF charges making the net ISF charge to the city a negative number. Oceanside’s harbor makes money on its financial relationship with the city.

Redondo Beach pays no subsidy to the Harbor Enterprise from the General Fund. The money flows only one way, from the harbor to the city. Ohst points out that by calculating ISF charges for all 5 harbors he used in his comparison, the total ISF charges as a percentage of total revenue is actually less than zero.

In other words, as a group, the other harbors pay nothing to their host cities for Internal Services. Redondo Beach charges its harbor enterprise 20% of the harbor’s gross revenue for Internal Services.

City Manager Bill Workman told the Harbor Commission at the commission’s March meeting, “Tidelands money is Redondo Beach money.”  If that was true, why would the Tidelands Trust document posted on the city’s web site devote more than a page to the permitted uses of revenue generated in the Tidelands? If it’s our money, shouldn’t we be able to use it any way we want?

The document allows the city to use Tidelands money for construction and maintenance of facilities that support a small boat harbor. It includes provisions for an airport or heliport. The Tidelands Trust contains clear references to protection of wildlife habitat and facilities that serve the public. It even covers advertising.

It does not specifically cover some of the expenses it currently pays such as subsidies to salaries for city staff, which amounted to nearly $3,000,000 in non-ISF charges to the Harbor Enterprise in FY 2009/10. The only apparent justification for these charges is found in Sec. 9 (J.) “For the acquisition of property and the rendition of services reasonably necessary to the carrying out of the uses and purposes described in this section…”

Does the fiscal year 2010/11 payment of $20,000 on a line item called Mayor and City Council meet that definition? I’m pretty sure no other tax-paying entity in the city got a bill for services performed by the mayor and council. The harbor got one.

Workman also claimed that the harbor finances have been audited and that the city passed the audits. Not exactly.

In 2006 the California State Lands Commission (CSLC) staff presented a financial management audit report to the commission. It had been spurred by a complaint from Jess Money, a Redondo Beach citizen.

Money claimed that, “During FY 2002-2003 and FY 2003-2004 funds were illegally transferred from the tidelands fund to the City’s general fund and to the Community Redevelopment Agency.”  Those were the first two years that the amounts of money debited to the harbor enterprise for Internal Services jumped from around $330,000 to more than $1,000,000.

The CSLC staff report concludes that, “CSLC staff reviewed the City’s method for determining cost allocations and found no evidence that funds were being transferred illegally.”

The year after the report was presented to the CSLC the amount of money transferred from the harbor enterprise to the Redondo Beach general fund went from $1,100,000 to $1,900,000, a jump of nearly 45%. The following two years it rose to more than $2,000,000 and it stayed there.

Those levels have not been tested by a CSLC audit. In essenc,e the city is saying that State Lands was OK with the jump from less than half a million to more than $1,000,000 so that means the city has permission to double those charges again.

That’s like a kid saying, I went to bed at 8 last year. My parents said I can stay up until 9 this year. That means I can stay up until 10 next year. In a few years I won’t have to sleep at all. Most adults and eventually most kids recognize the defect in that logic.

When city officials refer to an affirmative outcome from a state audit, they’re talking about CSLC scrutiny of two years, nearly a decade ago. The state does not conduct audits on any pre-arranged schedule. Ohst believes that an audit of current fees Redondo Beach charges the Harbor Enterprise would yield considerably different results.

He also takes issue with the city’s apparent belief that by failing to find errors in the city’s accounting practices in FYs 2002/04, the CSLC gave Redondo Beach the green light to nearly double the amount it charges the citizens of California for Internal Services.

The city council formed an audit sub-committee in response to questions about misuse of harbor funds posed by Ohst and others. The sub-committee retained a CPA firm, Mayer, Hoffman, McCann.

The report presented to the mayor and council was titled, “Independent Accountants’ Report on Appying(sp) Agreed-Upon Procedures”. It said, in part, “The firm was asked to Review the city’s cost allocation plan for fiscal years 2007-08 as it relates to the Harbor Tidelands and Harbor Uplands Funds.”

This was not an audit. In fact, the word “audit” only appears once in the final report. In the third to last paragraph the accountants state, “We were not engaged to, and did not, conduct an audit…”

When asked to comment on Gary Ohst’s report, Mr. Workman referred the matter to Harbor Business and Transit Director, Pete Carmichael. He replied. “His (Ohst’s) proposed methodologies do not conform with standard municipal accounting practices.  The city has had multiple audits of our budget practices in the harbor by both independent outside auditors as well as extensive audit by the State Lands Commission.  These audits have confirmed that the city's finance practices as they relate to the harbor meet accepted accounting principles.”

In fact, a CSLC audit of two years before the huge spike in charges and a private auditing firm report that states it did not conduct an audit, strongly suggest that statement is false.

For the People, By the City

You can see a full-text version of this article at http://www.buildingthebestredondo.com