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HomeMy WebLinkAboutHuntington Beach City Attorney's August 24, 2017, Letter ofMichael E. Gates City Attorney Mike Vighotta Chief Assistant City Attorney August 24, 2017 CITY OF HUNTINGTON BEACH OFFICE OF THE CITY ATTORNEY P.O. Box 190 2000 Main Street Huntington Beach, California 92648 Telephone: (714) 536-5555 Facsimile: (714) 374-1590 Edmund G. Brown, Jr., Governor Michael Cohen, Director Kari Krogseng, Chief Counsel Amy Costa, Chief Dep. Director, Budget Eraina Ortega, Chief Dep. Director, Policy Justyn Howard, Program Budget Manager California Department of Finance 915 L. Street Sacramento, CA 95814-3706 Brian L. Williams Senior Trial Counsel Michelle Ditzhazy Deputy Community Prosecutor Paul D'Alessandro Assistant City Attorney Scott field Sr. Deputy City Attorney Neal Moore Sr. Deputy City Attorney Daniel K. Ohl Deputy City Attorney Re: Objections by the Department of Finance to the City of Huntington Beach's Oversight Board Actions Governor and Department of Finance: Please allow this letter to serve as the City of Huntington Beach's ("City") and the Successor Agency's reply to your May 17, 2017 letter regarding the Oversight Board's Resolutions Nos. 2017-15 through 2017-26, as well as your May 17, 2017 letter regarding the 2017-2018 Annual Recognized Obligation Payment Schedule (BOPS). To put it simply, the City and the Successor Agency ("Agency") were surprised by the California Department of Finance's ("DOF") May 171' letters outlining the DOF's denials in the May 17th DOF letters. After further review and consideration by the City Attorney's Office, we believe that the DOF's findings and denials are completely unjustified and without sound legal basis. By the City's calculations, approximately $72,000,000 is owed in reimbursements to the City from loans made to the former Redevelopment Agency ("RDA") stemming from the State's redevelopment program. Not only has the City, the Agency and Oversight Board followed all applicable laws in order to recover this money, the City, Agency and Oversight Board have met their burden of proof (overwhelmingly) with regard to, and in support of, its claims for reimbursement. 17-5852/164215/mv Re: Objections of Oversight Board Actions August 23, 2017 Page 2 After discussing the matter with the Mayor and members of the City Council and the Agency, the City and the Agency will not accept the DOF denials provided for in the May 17th DOF letters. You must know at this juncture that the City and Agency intend to recover every penny of the $72,000,000 in taxpayer money that the City can prove is being improperly withheld by the DOE To be clear, the DOF's denials were based upon an erroneous, arbitrary and capricious application of the law; the denials were contrary to the overwhelming evidence the City and Agency have already provided, and the denials were procedurally improper. The DOF did not adequately consider many key, relevant factors when it denied the Agency's Recognized Obligation Payment Schedule.' The DOF denials do not appear to be grounded in any sound legal analysis (as reflected in your May 17, 2017 letters), but instead, the DOF decisions appear to be based on individual determinations made by officers and employees of the DOF who clearly have no expertise in the DOF's obligations to honor repayment under the law (H & S Code). Perhaps more offensively, the DOF staff has usurped the role of Huntington Beach Successor Agency's Oversight Board; to wit, the DOF made its own findings as to the legitimacy of enforceable obligations, and stood in place of the Agency's Oversight Board, which was in direct contravention of the mandates of H & S Code Section 34191.4? As you know, H & S Code Section 34191.4(b)(2)(A) authorizes the Oversight Board to approve loans for money entered into between the former RDA and the City in which the City transferred money to the former RDA for use by the former RDA for a lawful purpose, and where the former RDA was obligated to repay the money it received pursuant to a required repayment schedule, and H & S Code Section 34191.4(b)(2)(B) authorizes the Oversight Board to approve loans pursuant to an agreement between the former RDA and City under which the City transferred real property to the former RDA for use for a lawful purpose, and where the former RDA was obligated to repay the City. H & S Code Section 34191.4(b) provides in part that upon application by the Successor Agency and approval by the Oversight Board, loan agreements entered into between the former RDA and the City shall be deemed enforceable obligations provided that the Oversight Board makes a finding that the loan was for legitimate redevelopment purposes. On January 25, 2017, Oversight Board Resolutions Nos. 2017-03 through 2017-14, inclusive (collectively, the "Original Resolutions"), found, among other things, that loans made by the City to the former RDA were enforceable obligations and were for legitimate redevelopment purposes. The Original Resolutions were submitted to the DOF for final approval with extensive back-up material and documentation to support the findings made The DOF did not demonstrate any rational connection between key factors, the choice made, and the purposes of the enabling legislation. (Coachella Valley Unified School Dist. v. State of California, (2009) 176 Cal.App.4th 93, 94.) 'Notably, H & S Code Section 34191.4 "sunset" in 2015, no longer applies and does not apply to these loans involving Huntington Beach. 17-5852/162085/mv Re: Objections of Oversight Board Actions August 23, 2017 Page 3 by the Oversight Board, including audited Comprehensive Annual Financial Reports with the related loan repayments due to the City from 1983 to present, audited Component Unit Financial Reports with the loan amounts to be repaid by the former RDA to the City from 1987 to present, applicable Requests for Council Action, Operative Agreements for the loans, and other pertinent information from 1983 forward. The DOF denied the Original Resolutions in a determination letter dated March 11, 2017 and returned them to the Oversight Board for reconsideration. Following receipt of DOF's March 11, 2017 determination letter, the City searched for any and all information supporting the loans described in the Original Resolutions including the retrieval of historical financial data related to the loans. Historical pre-2000 general ledger data was retrieved by City's Information Systems staff and compiled by City's Finance staff including the restoration of old servers and backup tapes, conversion of tapes to a text -readable format followed by a subsequent conversation to SQL servers to filter and obtain the relevant historical data. The City presented this additional data to the DOF. On April 10, 2017, DOF issued a determination letter for ROPS 17-18 denying the ROPS line items which correspond to the Original Resolutions stating that the Agency was not able to provide documentation supporting these items as loans pursuant to H & S Code Section 34191.4(b). The DOF erroneously alleges that the Agency was unable to support the outstanding principal balance of the loans and until the Agency provides documentation to support the nature of the loan, the individual amounts transferred from the City to the Agency, and the repayments made, these loans will not qualify for repayment. Notably, the State law does not provide for a "counter -determination" by the DOF as to the Oversight Board findings. (H & S Code Section 34191.4(b).) On April 13, 2017, the Oversight Board, by OB Resolutions No. 2017-15 through 2017- 26, inclusive (collectively, the "Subsequent Resolutions"), again found, among other things, that loans made by the City to the former RDA were enforceable obligations and were for legitimate redevelopment purposes. In connection with the Subsequent Resolutions, the Agency provided to DOF sworn statements from Robert Sedlak, the City's former Accounting Manager, and Behzad Zamanian, Chief Information Officer, detailing the data retrieval process going back 25 years and accounting methodologies for the former RDA. In addition, the Agency provided additional supporting documentation in the form of the historical general ledger data, re -sorted audited financial statements supporting the revised balances, operative agreements, recorded grant deeds for the property transfers and other supporting documentation, as applicable. The Agency also participated in a meet and confer with DOF on April 26, 2017 in accordance with H & S Code Section 34177(o). [The ROPS 17-18 line items which were denied which correspond to the Original Resolutions also correspond to the loans in the Subsequent Resolutions.] During the in -person meet and confer, City staff provided a detailed presentation to DOF staff describing and explaining the additional supporting documentation provided by the Agency to DOF in connection with the Subsequent Resolutions, which was contained in 14 binders. 17-5852/162085/mv Re: Objections of Oversight Board Actions August 23, 2017 Page 4 The Oversight Board determines the eligibility of loans in three areas: loans where money was transferred from the City to the former RDA for a lawful purpose and the former RDA is obligated to repay the money; agreements where the City transferred real property to the former RDA for use by the former RDA for a lawful purpose and the former RDA is obligated pay the City for the property; and third party contracts for infrastructure (there are no loans of this third type identified in any of the Oversight Board Resolutions). The Agency has currently identified 12 such eligible loans, the Oversight Board has made the required findings and extensive supporting documentation has been provided to DOR The extensive supporting documentation that the City already provided to the DOF proves that loans for money were, in fact, actually entered into between the City and the former RDA and the City transferred money to the former RDA for a lawful purpose. Additionally, agreements were entered into by the City and the former RDA to transfer real property interests to the former RDA for a lawful purpose, and the former RDA was obligated to pay the City for the real property interest. The extensive supporting documentation also proves the repayment of a portion of some of the loans and the remaining balances. The Agency provided additional supporting documentation in the form of the historical general ledger data, re -sorted audited financial statements supporting the revised balances, operative agreements, recorded grant deeds for the property transfers California Public Employees Retirement System Agreements and other supporting documentation, clearly demonstrating the valid repayment obligations. In response to the detailed presentation by the City, the DOF replied in the May 17, 2017 letter regarding the Subsequent Resolutions that pursuant to H & S Code Section 34179(h), the DOF completed its review of the Oversight Board Subsequent Resolutions, and based on the review and application of the law, the Subsequent Resolutions, including findings that loans made by the City to the former RDA were for legitimate redevelopment purposes, and approving the loans as enforceable obligations and the schedule for repayment of said loans, were also denied by the DOF. The rationale for the denials was again that the Agency was unable to provide documentation supporting the Subsequent Resolutions. The reasons included, but were not limited to, the following: The Agency was unable to provide accounting records to support the transfer of money from the City to the former RDA. The Agency was unable to provide agreements to support the obligation to repay the loans. The Agency was unable to support the loans as transfers of money or transfers of interest in real property. The Agency was unable to support the outstanding principal balance of the loans. The Agency was unable to substantiate periodic amounts loaned by the City as well as the amounts periodically repaid by the Agency. DOF stated that City Resolutions, former RDA Resolutions, Requests for City Council Action reports, Requests for City/Redevelopment Agency Action reports, and Requests for Redevelopment Agency Action reports provided were insufficient to support the loans pursuant to H & S Code Section 34191.4(b)(2)(A). The rationale by the DOF's denials extend to these additional findings: 17-5852/162085/mv Re: Objections of Oversight Board Actions August 23, 2017 Page 5 Oversight Board Resolution No. 2017-06: Loan #1 in the amount of $22,400,000 requires documentation to support the extension of the loan; payment was required to be made within the 1998 calendar year unless extended by City. Oversight Board Resolution No. 2017-25: There is evidence of a property transfer from the City to former RDA (Grant Deed). However, the former RDA did not provide documentation to support the former RDA's obligation to pay the City. There is a promissory note in the amount of $5,170,931. However, the note is secured by the former RDA's pledge of set aside funds, and the sole recourse of the City shall be the exercise of its rights against set aside funds, which no longer exist. There is no language in the Health and Safety Code that allows the DOF to question the validity of the Subsequent Resolutions and/or findings made by the Oversight Board regarding the loans in this way. The Agency has provided audited financial statements, operative agreements, recorded grant deeds, promissory notes, and other substantive financial data/ which evidences that the loans satisfy the requirements of"loan agreements" under H & S Code Section 34191.4(2)(A) and (B), as applicable. According to the law, these determinations are made by the Oversight Board, not the DOF. The administrative findings made by the Oversight Board are presumed valid unless otherwise a determination is made that the Oversight Board determination was arbitrary and capricious. (Coachella Valley Unified School Dist. v. State of California, (2009) 176 Cal.AppAth 93, 94.) In this case, the reasons for denial are unfounded and not based upon any evidence, but instead, based upon the arbitrary request for documentation that in some cases does not exist in the form the DOF is requiring. To further illustrate the DOF's arbitrary findings for "denial," in the May 17, 2017 letter from DOF regarding "2017-18 Annual Recognized Obligation Payment Schedule," the DOF contends that in another letter dated the same day (May 171'; Subject: Objection of Oversight Board Actions), the DOF denied the Oversight Board Resolutions 2017-15 through 2017-26. However these two letters are incongruous. The May 17`� letter regarding "Objection of Oversight Board Actions" does not make mention of any "denial" but rather, returns the Resolutions to the Oversight Board for further reconsideration. There is no explanation for the incongruity among the two letters bearing the same date. In summary, the decisions reflected in the May 17s' letters demonstrate an effort by the DOF staff to disregard the California Health and Safety Code, and such decisions by the DOF amount to an intentional interference of performance of existing contracts. (Applied Equipment Corp. v. Litton Saudi Arabia Ltd., (1994) 7 Cal. 4th 503, 507.) These DOF decisions are, frankly, tantamount to tortious conduct, i.e., DOF employees unilaterally refusing to provide repayment even though the DOF, the City and the Agency are contractually and statutorily obligated to do so under the circumstances. In addition, the DOF refusal to recognize these enforceable obligations to Huntington Beach represent a present, specific and substantial impairment of existing agreements between the City, the former RDA and third parties. (City of Petaluma v. Chen (2015) 238 Cal.AppAth 1430.) 17-5852/162085/mv Re: Objections of Oversight Board Actions August 23, 2017 Page 6 Based upon the foregoing, the City of Huntington Beach and the Agency hereby requests that the DOF reconsider its findings and determinations as reflected in the DOF's May 17'h letters, and approve the Subsequent Resolutions and the ROPS 17-18 line items which correspond to the Subsequent Resolutions. Please advise by the close of business on September 8, 2017 whether the DOF will to reconsider its position regarding the denials involving the Oversight Board Resolutions and/or the Annual Recognized Obligation Payment Schedule. Failure of the DOF to reconsider will cause the City and the Agency to consider all its options, including filing lawsuits. Sincerely, KAEL E. GATES Attorney 17-5852/162085/mv