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City to fight $13M lawsuit

Posted: February 13, 2010 9:24 p.m.
Updated: February 14, 2010 4:55 a.m.
City officials are planning to appeal $20 million in lawsuit judgments that forced Santa Clarita to take out a bond using its City Hall building. Residents could be paying off the bond for decades.

The type of bond Santa Clarita used is popular among California cities, but taxpayer watchdog groups and some experts say it's a way for local governments to take on debt without asking permission of voters.

The lawsuit dates back to 2001, when Santa Clarita used its power of eminent domain to force a property owner in Saugus to sell a piece of land to the city. The city then built a stretch of Golden Valley Road, a key part of the cross-valley connector, on that land.

A jury in 2005 found the city's action drove down the value of the landowners' remaining property by about $13 million, and a Los Angeles Superior Court judge in 2007 ordered the city to deposit $13.3 million in a county holding account.

So how did the city come up with that kind of cash?

With a kind of financial acrobatics called a lease revenue bond: Santa Clarita leased City Hall to itself.

In other words, the city rented the building to one of its agencies - the Santa Clarita Public Financing Authority. The authority then rented City Hall back to the city to the tune of about $820,000 a year from the city's general fund, its main pot of discretionary money.

The authority uses the rent to claim a source of income so it can qualify to borrow money in the form of a bond.

The authority, which is run by the Santa Clarita City Council, sold that bond to Bank of America and is paying it back with its own rent.

"It's a very common structure," said Darren Hernandez, Santa Clarita deputy city manager. "It's completely legal. ... It's all completely explained and fully disclosed."

The city is paying off the bond for 27 more years and expects to pay $820,000 toward it in 2010, Hernandez said.

Meanwhile, City Manager Ken Pulskamp earlier this month announced an $817,000 budget deficit for next year.

Lease revenue bonds
City Hall is not collateral, and the city couldn't lose the property at 23920 Valencia Boulevard, even if it defaulted on the bond, Hernandez said. The bond, issued by Bank of America, is insured.

Should the city stop making payments on it, legal action would ensue to "compel the city to make lease payments," Hernandez said.

The city of Santa Clarita has two other lease revenue bonds.

The city began leasing its sewer system to itself in 1991 to pay for a $22.9 million bond to buy property, Hernandez said.

And it did the same with the Santa Clarita Sports Complex in December 2007 to finance a $15.5 million bond to have on hand for future property purchases for parks and open space, he said.

Hernandez said the January 2007 bond to pay off the lawsuit didn't dent the general fund, since the city had just finished paying off another debt at the same time.

The lawsuit
The lawsuit was brought on by the various property owners of the contaminated 996-acre former Whittaker-Bermite site, the hilly, undeveloped land south of Saugus Speedway.

The city took a relatively small piece of land on the northeastern edge of the property, the remainder of which is still largely undeveloped because it's contaminated by toxic chemicals used when the site was a munitions plant.

The city paid $558,000 for the property based on an appraisal. But the property owners, who said they were planning future development there, argued in court that the sliver taken by the city ruined their master plan.

A jury in Los Angeles County Superior Court agreed and, in 2005, a judge ruled the city had to pay $13.3 million to the property owners for "devaluation" that resulted from the eminent domain procedure, court documents state.

Last month, a judge ruled the city must eventually pay an additional $7 million for the property owners' attorneys' fees.

Controversy statewide
Lease revenue bonds are legal, but they're not without controversy.

The Howard Jarvis Taxpayers Association, a statewide taxpayer watchdog group, hopes to get a bill through the Legislature this year that would make such bonds illegal.

"The city ... shouldn't be going around (leasing) its city hall to alter egos in order to fund various repairs," said David Wolfe, the association's legislative director.

Residents should vote on long-term debts, since they'll be the ones paying them off, Wolfe said.

Sidestepping the people is just what makes these bonds so appealing, said University of Southern California public finance Professor Richard Little.

Lease revenue bonds became a popular option after California voters passed Proposition 13 in 1978, Little said. The 1978 initiative severely restricted property taxes, and therefore tied the hands of local governments.

"It takes borrowing out of the referendum process," he said. "You don't need to get approval. That's what makes them particularly attractive, because voters can be finicky when you ask them to approve more debt."

Hernandez said the lease-leaseback financing is an option often used by cities because of "how difficult it is to issue general obligation bonds," which require voter approval.

But the city's residents did have a chance to weigh in at least once in the process.

On Dec. 12, 2006, a public hearing of the Santa Clarita Public Finance Authority board of directors - also known as the Santa Clarita City Council - was held at the end of a regular City Council meeting.

No member of the public spoke on the item, which was adopted 4-0.

Members of the council at that time were Frank Ferry, Bob Kellar, Marsha McLean, Cameron Smyth and Laurene Weste.

What now?
City Attorney Carl Newton said the city will appeal the Superior Court's decision. The deadline for appealing is March 22, five days before the cross-valley connector's planned grand opening celebration.

In the meantime, the $13.3 million is with the Los Angeles County treasurer on deposit, collecting interest. Any interest earnings will go to the entity for whom it's being held, Newton said.

Starting March 27, motorists will be able to drive the cross-valley connector, which will link the Highway 14 freeway and Interstate 5 both ways between Golden Valley Road and Highway 126.


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