HomeMy WebLinkAboutReview of Huntington Beach Downtown Business Improvement Dis UTY OF HUNTNGTON BEACH
City CouncH �nteroffice Communication
SUPPLEMENTAL
COMMUNICATION
TO: Honorable Mayor and City Council Members
Meeting Date:
FROM: Finance Commission
DATE: April 3, 2017
Agenda Item No.;
SUBJECT: Review of Huntington Beach Downtown Business Improvement District's (BID)
Financial Statements and Finance Commission Findings and Recommendations
Overview
At the February 21, 2017 City Council meeting, the City Council directed the Finance Commission
under Agenda Item No. 12, to review the past three (3) years of finances of the Huntington Beach
Downtown Business Improvement District (BID) and further, if necessary. They also directed the
Finance Commission to provide any findings to the City Council and the BID, and to provide any
recommendations within 60 days.
Appointment of Subcommittee
The Finance Commission appointed a Subcommittee to review the finances of the HB Downtown
BID at the February 22, 2017, Finance Commission meeting, comprised of the following members:
- Finance Commission Chair, Carol Woodworth
- Finance Commissioner, Ken Small
- Finance Commissioner, Ron Sterud
Downtown BID Financial Information
The Subcommittee met on March 1, 2017, to discuss the scope, methodology and approach to the
City Council request. After discussion, the Subcommittee requested additional documentation
from the BID. Attachment 1 contains the full list of the 100 documents reviewed by the
Subcommittee in determining their Findings and Recommendations. Please also note that the
Subcommittee reviewed three additional fiscal years (2011, 2012, and 2013) in addition to the
three years requested by the City Council, for a total of six years of financial information reviewed.
Additional Resources Contacted
In addition to reviewing the one hundred (100) separate documents itemized on Attachment 1, the
Subcommittee also contacted the following resources for additional information:
✓ City of Huntington Beach, Councilmember Liaison, Erik Peterson
✓ City of Huntington Beach, City Attorney, Michael Gates
✓ City of Huntington Beach, Chief Financial Officer, Lori Ann Farrell Harrison
✓ City of Huntington Beach, Deputy Director, Office of Business Development, Kellee Fritzal
✓ Melissa Knudtson, CPA (McGinty, Knudtson& Associates, LLP- Outside Accounting Firm)
✓ Steve Daniel, President BID
✓ Susan Welfringer, Downtown BID Manager
1
Sub-Committee and Finance Commission Meetings
The Findings and Recommendations provided herein are the result of deliberations conducted and
information reviewed at three separate Subcommittee meetings, and two public Finance
Commission meetings on this topic, for a total of five separate meetings regarding the BID's
finances. The public meetings were agendized per the Brown Act, open to the public, and held on
the following dates:
• February 22, 2017 - Finance Commission Regular Monthly Meeting
• March 22, 2017 - Finance Commission Regular Monthly Meeting
Findings and Recommendations
The Subcommittee has conducted an in depth review and analysis of the HB Downtown BID's
financial statements, bank statements, annual reports, tax returns, bylaws, maintenance contracts,
meeting minutes, employment contracts and other relevant information as itemized. The
Subcommittee conducted an extensive and comprehensive review of one hundred (100) separate
documents as delineated in Attachment 1.
Summary of Findings
Finding #1 - Based on the extensive and comprehensive review, the Finance Subcommittee found
no evidence of improper use of funds or hidden assets.
Finding #2 - The Downtown BID has grown to a size and complexity beyond its current business
structure.
To address these Findings, the Finance Commission offers the following Recommendations to
enhance the Downtown BID's Business Practices, and Financial Reporting and Controls:
Business Practices
1. Review and update BID Bylaws to consider terms for Board of Directors and Officers
resulting in fewer years served, fewer years served consecutively, and review the number
of board members.
2. Consider restructuring BID employee positions to include a BID Director (serves as
permanent board member) and an Administrative position and consult with City Attorney's
office regarding this change.
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Financial Reporting and Controls
3. BID should prepare consolidated financial statements including all funds from all sources.
(All bank accounts: HB Downtown BID, Surf City Nights, Maintenance Account, and
Investment Account).
4. All BID financial reporting including Treasurer's reports and reporting to the City should
be on a consolidated basis.
5. Reduce the reserve policy established in January 2017 from 1 year of operating expenses to
6 months.
6. Reconcile and finalize the inter-company loan to remove the $34,000 accounts receivable
and accounts payable balances on both the Surf City Nights and HB Downtown BID
operating accounts to remove any reporting uncertainty.
7. Re-evaluate the need for the investment account and determine the appropriate funding
level given the unmet security and maintenance needs.
8. All event budgets need to be approved by the BID Board of Directors before administering
by staff.
9. All contracts need to be signed by BID Director and Board of Directors' President to
enhance checks and balances.
10. Work with outside accounting firm to fully utilize QuickbooksO providing more efficient
and timely financial statement preparation and reporting.
11. Develop a policy to periodically audit all City BID (HB Downtown BID, Auto BID and
Visit HB BID) financial information using an auditor selected by the City of Huntington
Beach.
We would like to thank the City Council for this opportunity to review and comment on this
important project. It is our hope that these recommendations will be evaluated in the context of the
annual Fiscal Year 2017/18 Downtown BID Budget development and approval process.
Attachments
1. List of Documents Reviewed
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ATTACHMENT 1
LIST OF DOWNTOWN BID SUBCOMMITTEE DOCUMENTS REVIEWED
BID Documents and Other Documents
1. BID By-Laws dated April 2010
2. BID Letter to City Council dated February 13, 2017
3. Downtown BID Strategic Framework 2015-2017 Goals and Priorities
4. Employment Proposal for BID Manager
5. BID Manager Duties Updated 03.08.15
6. Administrative Assistant Job Purpose and Description 04.29.16
7. February 9, 2017 email correspondence from Kim Kramer to City Council
regarding Downtown BID
8. February 22, 2017 Call to Improve Downtown from the Downtown BID
Stakeholders (includes a petition signed by BID members)
Annual Reports
9. BID Annual Report 2013-14
10. BID Annual Report 2014-15
11. BID Annual Report 2015-16
Financial Statements
12. BID Financial Statement September 30, 2011
13. BID Financial Statement September 30, 2012
14. BID Financial Statement September 30, 2013
15. BID Financial Statement September 30, 2014
16. BID Financial Statement September 30, 2015
17. BID Financial Statement September 30, 2016
18. BID Financial Statement October 30, 2016
19. BID Financial Statement November 30, 2016
20. BID Financial Statement December 30, 2016
21. BID Financial Statement January 31, 2017
22. SCN Financial Statement September 30, 2011
23. SCN Financial Statement September 30, 2012
24. SCN Financial Statement September 30, 2013
25. SCN Financial Statement September 30, 2014
26. SCN Financial Statement September 30, 2015
27. SCN Financial Statement September 30, 2016
28. SCN Financial Statement October 30, 2016
29. SCN Financial Statement November 30, 2016
30. SCN Financial Statement December 30, 2016
31. SCN Financial Statement January 31, 2017
32. Accountant's Financial Review as provided to City Council as a continued
Public Hearing Item for Year Ending September 30, 2015
Bank Statements (Redacted)
33. BID Bank Statement dated September 30, 2015
34. BID Bank Statement dated September 30, 2016
1
ATTACHMENT 1
LIST OF DOWNTOWN BID SUBCOMMITTEE DOCUMENTS REVIEWED
35. BID Bank Statement dated December 31, 2015
36. BID Bank Statement dated December 31, 2016
37. SCN Bank Statement dated September 30, 2015
38. SCN Bank Statement dated September 30, 2016
39. SCN Bank Statement dated December 31, 2015
40. SCN Bank Statement dated December 31, 2016
41. Maintenance Account Statement dated September 30, 2015
42. Maintenance Account Statement dated September 30, 2016
43. Maintenance Account Statement dated December 31, 2015
44. Maintenance Account Statement dated December 31, 2016
Tax Returns (Not for Public Distribution)
45. BID Tax Return for Year End 2013
46. BID Tax Return for Year End 2014
47. BID Tax Return for Year End 2015
Service Agreements
48. Service Contract for Malco Maintenance
49. Anticipated Expenses Malco Maintenance
50. Service Contract Surf City Nights
Minutes
51. 2013 BID Board Meeting Minutes 01/23/13
52. 2013 BID Board Meeting Minutes 02/20/13
53. 2013 BID Board Meeting Minutes 03/27/13
54. 2013 BID Board Meeting Minutes 04/17/13
55. 2013 BID Board Meeting Minutes 05/22/13
56. 2013 BID Board Meeting Minutes 06/19/13
57. 2013 BID Board Meeting Minutes 07/17/13
58. 2013 BID Board Meeting Minutes 08/21/13
59. 2013 BID Board Meeting Minutes 09/16/13
60. 2013 BID Board Meeting Minutes 11/07/13
61. 2013 BID Board Meeting Minutes 12/11/13
62. 2014 BID Board Meeting Minutes 01/22/14
63. 2014 BID Board Meeting Minutes 02/19/14
64. 2014 BID Board Meeting Minutes 03/28/14
65. 2014 BID Board Meeting Minutes 04/23/14
66. 2014 BID Board Meeting Notes 05/21/14
67. 2014 BID Board Meeting Minutes 06/25/14
68. 2014 BID Board Meeting Minutes 07/01/14
69. 2014 BID Board Meeting Minutes 08/20/14
70. 2014 BID Board Meeting Minutes 09/17/14
71. 2014 BID Board Meeting Minutes 10/15/14
72. 2014 BID Board Meeting Minutes 11/13/14
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ATTACHMENT 1
LIST OF DOWNTOWN BID SUBCOMMITTEE DOCUMENTS REVIEWED
73. 2014 BID Board Meeting Minutes 12/11/14
74. 2015 BID Board Meeting Minutes 01/08/15
75. 2015 BID Board Meeting Minutes 02/12/15
76. 2015 BID Board Meeting Minutes 03/12/15
77. 2015 BID Strategic Plan Special Meeting 03/25/15
78. 2015 BID Board Meeting Minutes 04/22/15
79. 2015 BID Board Meeting Minutes 05/13/15
80. 2015 BID Board Meeting Minutes 05/27/15
81. 2015 BID Board Meeting Minutes 06/10/15
82. 2015 BID Board Special Meeting 06/29/15
83. 2015 BID Board Meeting Minutes 07/15/15
84. 2051 BID Board Meeting Minutes 08/12/15
85. 2015 BID Board Meeting Minutes 09/09/15
86. 2015 BID Board Meeting Minutes 10/07/15
87. 2015 BID Board Meeting Minutes 12/17/15
88. 2016 BID Board Meeting Minutes 01/14/16
89. 2016 BID Board Meeting Minutes 02/17/16
90. 2016 BID Board Meeting Minutes 03/10/16
91. 2016 BID Board Meeting Minutes 04/12/16
92. 2016 BID Board Meeting Minutes 05/12/16
93. 2016 BID Board Meeting Minutes 06/09/16
94. 2016 BID Board Meeting Minutes 07/20/16 (Cancelled)
95. 2016 BID Board Meeting Minutes 08/11/16
96. 2016 BID Board Meeting Minutes 09/08/16
97. 2016 BID Board Meeting Minutes 10/13/16
98. 2016 BID Board Meeting Minutes 11/10/16
99. 2016-2017 BID Board Meeting Minutes 12/08/16
100. 2017 BID Board Meeting Minutes 01/19/17
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Downtown BID
1%.l
FINANCE COMMISSION
FINDINGS AND RECOMMENDATIONS
April 3, 2017
City Council Study Session
Downtown B I D
February 21, 2017 — City Council directed the Finance
Commission to review the past three years of finances of
the Huntington Beach Downtown Business Improvement
District ( BID), and further, if necessary.
The City Council also directed the Finance Commission to
provide any findings or recommendations to the City
Council and BID within 60 days .
Downtown BID
February 22, 2017 — The Finance Commission reviewed
the directive from the City Council and formally
approved a Subcommittee to meet and review the BID
financial information .
The Subcommittee met on several occasions to conduct
an in depth review and analysis of the BID's financial
information .
2
Downtown BID
The Subcommittee analyzed and reviewed a variety of
documents for the HB Downtown BID including :
Bank Statements Meeting Minutes
Financial Statements BID Bylaws
Annual Reports Employment Contracts
Service Agreements
Tax Returns
Downtown BID Strategic Goals and Priorities
Surf City Night Financial Statements and Agreements
3
Additional Resources Contacted
City of Huntington Beach
Erik Peterson, City Councilmember
Michael Gates, City Attorney
Kellee Fritzal, Deputy Director, Office of Business
Development
Lori Ann Farrell Harrison, Chief Financial Officer
Steve Daniel, Downtown BID President
Susan Welfringer, Downtown BID Manager
Melissa Knudtson, CPA, McGinty, Knudtson & Associates, LLP
FINDINGS AND RECOMMENDED ACTIONS
FINDINGS :
1 ) Based on the extensive and comprehensive review, the
Finance Subcommittee found no evidence of improper
use of funds or hidden assets.
2) The Downtown BID has grown to a size and complexity
beyond its current business structure.
5
FINDINGS AND RECOMMENDED ACTIONS
RECOMMENDED ACTIONS :
To address the findings, the Finance Commission offers the
following recommendations to enhance the Downtown BID's
Business Practices, and Financial Reporting and Controls :
6
RECOMMENDED ACTIONS
Business Practices :
1 ) Review and update BID Bylaws to consider terms for
Board of Directors and Officers resulting in fewer years
served, fewer years served consecutively, and review the
number of board members .
2 ) Consider restructuring BID employee positions to include
a BID Director ( serves as permanent board member) and an
Administrative position , and consult with City Attorney's
office regarding this change .
RECOMMENDED ACTIONS
Financial Reporting and Controls
3 ) BID should prepare consolidated financial staternents
including all funds from all sources, ( i . e ., all bank accounts —
HB Downtown BID, Surf City Nights, Maintenance Account
and Investment Account) .
4 ) All BID financial reporting including Treasurer's reports
and reporting to the City should be on a consolidated basis .
4.
RECOMMENDED ACTIONS
Financial Reporting and Controls
5 ) Reduce the reserve policy established in January 2017
from 1 year of operating expenses to 6 months.
6) Reconcile and finalize the inter-company loan to remove
the $ 34,000 accounts receivable and accounts payable
balances on both the Surf City Nights and HB Downtown BID
operating accounts to remove any reporting uncertainty.
le 9
RECOMMENDED ACTIONS
Financial Reporting and Controls
7) Re-evaluate the need for the investment account and
determine the appropriate funding level given the unmet
security and maintenance needs.
8 ) All event budgets need to be approved by the BID Board
of Directors before administering by staff.
io
RECOMMENDED ACTIONS
Financial Reporting and Controls
9 ) All contracts need to be signed by the BID Director and
Board of Directors' President to enhance checks and
balances.
10) Work with outside accounting firm to fully utilize
Quickbooks providing more efficient and timely financial
statement preparation and reporting .
11
RECOMMENDED ACTIONS
Financial Reporting and Controls
11 ) Develop a policy to periodically audit all City BIDS ( HB
Downtown BID, Auto BID and Visit HB BID ) financial
information using an auditor selected by the City of
Huntington Beach .
QUESTIONS ?
From: Kenneth Small [mailto:kws0867@gmail.com]
Sent: Thursday, March 30, 2017 9:40 AM
To: CITY COUNCIL
Cc: Carol Woodworth; Loadsman, Mary; Ron Sterud
Subject: April 3 City Council Study Session
Unfortunately, I will not be able to attend the City Council/Finance Commission Study Session
on April 3 due to a planned trip. As a member of the Finance Commission Sub-Committee that
studied the Downtown BID issues and prepared the findings and recommendations that were
adopted by the Finance Commission, I wanted to say I strongly support those recommendations.
I, like the other sub-committee members, do not believe there was any information to indicate
that the Downtown BID Board was in any way dishonest or that there was any attempt to hide
funds. However, the complexity of the Downtown BID and events downtown has outgrown the
current structure, and changes that should have been incorporated during the growth phase have
not been incorporated. The recommendations of the Finance Commission, if adopted by the City
Council, should provide a solution for the current problems. I would also like to say that the
credibility of the findings and recommendations was significantly enhanced based on the
involvement of my two co-sub-committee members. Carol Woodworth, and Ron Sterud are both
incredibly talented people with a great deal of experience in financial management issues, and
they both worked very hard on the findings and recommendations.
Lastly, I know there have been many complaints about the conduct and actions of the Downtown
BID Board. Some of the comments and complaints may be justified. However, for the most part
the complaints come from a group of individuals who are quick to complain, but are slow to
actually invest any of their time to work to make things better. To those individuals, I say
volunteer to run for the board, attend a monthly board meeting, provide positive, proactive input
rather than complain after the fact. To those, outside of the downtown business group, who have
complained, I say just because mistakes have been made does not necessarily indicate the
Downtown BID Board has in any way been dishonest. We found no evidence of any conspiracy
or any intent to do anything improper.
SUPPLEMENTAL
COMMUNICATION
Medng Date: y_ 3 - 17
Agenda Item No.,
April 3, 2017
To: City Council
cc: City Manager, City Attorney, Assistant City Manager,
Dear City Council,
On February 21, 2017, the Huntington Beach City Council instructed the City's Finance
Commission to "review the past three (3) years of finances of the Downtown BID and
further if they deem necessary [and] return to the City Council and the BID any findings
and recommendations."This action was taken in response to "some concerns about the
Downtown Business Improvement District (BID) finances" These concerns were raised
by me and others over the last several months regarding alleged financial improprieties
by the Downtown BID.
The Finance Commission met on February 22, 2017 and designated a three-person
subcommittee to review the Downtown BID finances and report back to the full Finance
Commission their findings and recommendations, which they did on March 22, 2017.
The purpose of this letter is to address those findings and recommendations, in
particular, the finding that, after an "extensive and comprehensive revievg the
subcommittee found no evidence of improper use of funds or hidden assets regarding the
Downtown BID."This letter will address both of these issues, discuss some of the Finance
Commission recommendations, and then provide three additional recommendations for
City Council consideration.
CASE OF HIDDEN ASSETS . . .
The Downtown BID is a 501c6 nonprofit organization which serves as the Advisory Board
to the Huntington Beach City Council for the Downtown Business District. It was
established by ordinance in 2004 under the State of California Parking and Business
Improvement Area Law of 1989. Under this law, an Annual Report is required to be filed
for each fiscal year for which assessments are to be levied and collected. It is a
reasonable expectation that these Annual Reports contain accurate and complete
financial data.
For a period of five years (2012-2016), it is alleged that the Downtown BID published
misleading and incomplete financial data in their Annual Reports. It is further alleged that
the Downtown BID provided misleading and incomplete financial data to the City Council
on September 8, 2015 during the BID's annual public hearing for review and renewal.
These actions understated the BID's cash assets (or cash reserves) and concealed nearly
three hundred thousand dollars from public disclosure. This was done by maintaining
two sets of financial books with an undisclosed"off-the-books"bank account. Over
this period of time, the BID Annual Reports became less transparent r i finances
AP
Agenda Item No.• ✓ S /
Page 2 of 7
and cash reserves. Starting with the 2012 Annual Report, cash reserves data was
removed from the Annual Report Balance Sheet even though cash reserves existed at
that time and were growing each year. In 2016, the Balance Sheet itself was removed from
the Annual Report entirely. These actions were the mechanisms by which nearly three
hundred thousand dollars of cash assets were:
• Not disclosed to the City Council that is charged with oversight and approval of the
annual assessments each year,
• Not disclosed to the BID membership who pays annual assessments each year to
financially support the Downtown BID, and
• Not disclosed to the public who financially subsidizes the BID each year through public
funds allocated in the municipal budget.
By misrepresenting financial information in the BID Annual Reports, the City Council was
denied their right to properly conduct the city's fiduciary obligation to the BID members
and the public. Additionally, the BID members were denied their right to properly
determine whether or not to file a protest of their annual assessments. One can only
imagine what the City Council and/or the BID members might have done if they knew the
BID was sitting on nearly three years of BID assessments.
There are reasons to believe that the City of Huntington Beach is encouraged to dismiss
these allegations without proper investigation nor public transparency.The review of the
Downtown BID finances by the City's Finance Commission determined that there was"no
evidence of hidden assets regarding the Downtown BID"Yet, in the presentation by the
three-person subcommittee of the Finance Commission, there was no discussion in this
regard, no production of documents to refute the allegations, and no information
presented as to how this conclusion was reached. Please consider the following
information which was not presented by the subcommittee at the March 22nd Finance
Commission meeting.
On September 8, 2015, the City Council voted to approve the BID assessments for the
next fiscal year as part of the BID's annual review process. This was a continuation
meeting from August 17, 2015 at which time three City Council members asked the BID
to return to the next City Council meeting (on September 8th) with complete and audited
financial documents.They did this, but unfortunately, the financial documents presented
by the BID on September 8th were neither complete nor audited. At that meeting, cash
assets were disclosed to the City Council at $106,477, yet there were additional cash
assets of $185,911 that were not disclosed. One year later, these undisclosed cash
assets increased by 36% to $253,314 and continued to increase each year. Revenue
from the weekly Surf City Nights event was reported at $100,000, yet there were
additional cash assets of $56,973 that were not disclosed. This information was.fully
documented and shared in several one-hour presentations with City officials, downtown
business owners, and other interested persons.
Page 3 of 7
In light of this information, how did the Finance Subcommittee determine that there was
"no evidence of hidden assets" and under what basis did the Finance Commission vote
to support the subcommittee when there was no discussion in this regard, no production
of documents to refute the allegations, and no information presented as to how this
conclusion was reached.
As with most controversies, there is generally a denial of allegations, but never a denial of
facts.This is a conundrum. In the case of the Finance Commission, it is believed that
the subcommittee limited their review by wrongly associating the word"hidden"with
"deliberate intent:'thereby ignoring the facts.To my knowledge, no such allegations of
"deliberate intent" have ever been made. Yet, for years, critical financial information has
been hidden from the City Council, the BID members and the public, with serious negative
consequences. I would challenge the Finance Commission to refute the facts.
I would also challenge the Finance Commission to defend their assertion of an"extensive
and comprehensive review"when critical documents were never examined relating to the
allegations of hidden assets and other financial improprieties. These documents would
include, but not be limited to, the California Parking and Business Improvement Area Law
of 1989, section 36500 et seq., under which the Downtown BID operates as the Advisory
Board to the City Council. I would suggest an "extensive and comprehensive review" of
section 36533 which discusses requirements for disclosure in the Annual Reports of cash
reserves and non-assessment funds, such as those from Surf City Nights.
The list of documents would also include, but not be limited to, Huntington Beach City
Ordinance 3661 which first established the BID in 2004. 1 would suggest an "extensive
and comprehensive review" of Section 9 which discusses requirements regarding
benefits to BID members and restrictions on the use of member assessments.
A FAIR HEARING TO CONSIDER ALL SIDES.
During a meeting in early 2016 with City officials on an unrelated matter, I inadvertently
discovered some discrepancies with the Downtown BID finances. As a business owner, I
recognized there might be a problem which prompted me to look further.Working with the
City Attorney's office through the California Public Records Act, I reviewed hundreds of
documents regarding Downtown BID finances dating back to the formation of the BID in
2004. Over a 10 month period, I met with city officials, City Council members, BID board
members, downtown business owners, accountants and attorneys. I prepared dozens of
reports, analyses, letters and emails and attended every relevant public meeting since
October 13, 2016 and then presented my findings in several one-hour presentations to
City officials, downtown business owners, and other interested persons.
I appreciate that the response to the allegations I presented to City officials and others
helped spur this current review by the Finance Commission.However, I am concerned that
I was denied a request (twice) to make this same presentation to the Finance
Commission.Additionally, I was not permitted to meet with the Finance Subcommittee nor
any individual subcommittee members. I was never contacted by the subcommittee during
Page 4 of 7
their review process to provide information, EVEN THOUGH the BID president and BID
manager were contacted for this purpose. I was told by the Finance Commission Chair
that these were private discussions, not documented, and not part of the public record.
Other well-known citizens with pertinent information of financial improprieties by the
Downtown BID, whose names were provided to the Finance Commission, were also not
contacted. In the interest of due diligence and transparency, restricting the review of
BID finances to one "side" only is not a balanced process and does not serve the
best interests of the City Council the BID members nor the public.
California public meeting laws require public officials to provide fair hearing and
consider all sides of an issue. California public meeting laws also require fair hearing
without prejudice or bias.This brings us to the next concern.
A FAIR HEARING WITHOUT PREJUDICE OR BIAS.
On January 17, 2017, just one month prior to the City Council action directing the
Finance Commission review of BID finances, one of the Finance Commissioners publicly
discussed their personal opinions regarding BID finances on a Huntington Beach
community Facebook group.This Commissioner stated their opinion that the allegations
regarding the Downtown BID were false, and publicly defended and supported the BID
with respect to the specific issue of hidden assets. Coincidentally, on January 19, 2017,
just two days after stating their opinions publicly, this same Finance Commissioner was
officially appointed, by the BID president, to chair a newly formed BID Ad Hoc Committee.
While I applaud this resident's community service as an appointee on the Finance
Commission, these revelations of predisposed bias and conflict of interest bring into
question the impartiality of this Commissioner's participation in the three-person Finance
Subcommittee, as well as the subcommittee's process and conclusions.
IMPROPER O . . .
After an "extensive and comprehensive review," as stated by the Finance Commission,
"the subcommittee found no evidence of improper use of funds ... regarding the
Downtown BID" Unfortunately, this is not the case. For the sake of brevity, only three
specific examples will be cited.
PAYROLL.
On January 9, 2015, the BID entered into a contract with a payroll company to provide
payroll services for one employee at a cost of$10,738 per year.The going rate is about
500 per year. Not one of the nine BID board member questioned this expense at the
time it was approved, nor did they question the ongoing monthly payroll budget which
was continually understated by 40% as compared to the actual cost. I brought this to the
attention of the BID in October, 2016 as an improper use of BID funds. This was not
corrected until February, 2017 after wasting more than $20,000 over a period of 26
months. There is no official record and no official minutes documenting this corrective
action and no vote by the BID board of directors.As far as the public record is concerned,
this never happened.
Page 5 of 7
BREITLING AIR SHOW.
On October 13, 2016, the BID board of directors voted to approve a $5,000 expenditure
to support the Breitling Air Show.This was done despite the fact that there would be no
specific benefit for their investment, otherwise known as ROL After the event, there was
some controversy as to whether the Breitling Air Show was beneficial or detrimental to
the Downtown merchants, but one thing is for certain. The $5,000 investment had no
impact either way, and the return on investment for the Downtown BID was zero,
representing yet another improper use of BID funds.
HUNTINGTON BEACH SANDS MAGAZINE.
For years, the Downtown BID has been spending $10,000 a year on a full page ad in the
Sands Magazine, which is a publication of the City's Parks and Recreation Department.
This single advertisement represents 25% of the BID's annual marketing budget. Normally,
this might be considered a proper use of BID funds, however, this money is spent every
year without any evaluation as to a Return on Investment (ROI).This is a common
practice for all BID marketing and all event expenditures with the exception of Surf
City Nights which is a fund-raiser for the BID.
Additionally, there is no established criteria nor checklist prior to spending BID funds as to
how these expenditures will serve the BID mission which is to improve the downtown
economy.These are standard procedures for any organization, especially a nonprofit public
agency funded in part by membership assessments and with the obligation to provide a
benefit to those members. The need for a thorough ROI evaluation was specifically
requested by three City Council members at the 2015 City Council meeting previously
mentioned. Clearly, this is an ongoing problem and an improper use of BID funds.
RECOMMENDED ACTIONS . . .
The Finance Commission was charged with the responsibility to"review the past three (3)
years of finances of the Downtown BID and further if they deem necessary [and] return to
the City Council and the BID any findings and recommendations"This action was taken in
response to "some concerns about the Downtown Business Improvement District (BID)
finances" These concerns were raised my me and others over the last several months
regarding alleged financial improprieties.Some of the recommendations are shown below:
1) "Review and update BID By laws to consider terms for Board of Directors and
Officers resulting in fewer years served, fewer years served consecutively, and
review the number of board members:'
I would recommend a clarification by the Finance Commission as to how this relates to
a review of BID finances. I would also recommend the Finance Commission source the
genesis of this recommendation as it seems more political than financial.
Page 6 of 7
2) "Consider restructuring BID employee positions to include a BID Director
(serves as permanent board member) and Admin position, and consult with City
Attorney's office regarding this change."
Same as above.
3)"BID should prepare consolidated financial statements including all funds from
all sources. (ie. All bank accounts, SCN, BID, Maintenance Acct, Investment Acct)"
Separate financial statements for different profit centers are very commonly used and
recommended for ease of business management. An additional consolidated financial
statement is recommended for purposes of reporting to those that might need to see only
an overview of the entire organization.
4) "All BID financial reporting including Treasurer's reports and reporting to the
City should be on a consolidated basis.
Same as above.
5)"Reduce the reserve policy established in January 2017 from 1 year of operating
expenses to 6 months."
A reserve policy is a "Rainy Day Fund" established to keep an organization operational
in the event of an unexpected decrease in revenue and/or increase in expenses. It may
also be used as a savings account for pre-identified projects requiring a large
expenditure. I would recommend a clarification of the formula used by the Finance
Committee to determine that six months is the proper threshold.
ADDITIONAL ECO DA [ S . . .
The controversy regarding the Downtown BID will continue until these allegations of
financial improprieties are fully resolved. It is my opinion that the City should remove the
spectre of "politics"from any future attempts at resolution by hiring outside independent
and professional consultants. In this regard, the folloWng recommendations are
submitted for City Council consideration.
1) HIRE AN OUTSIDE AUDITOR to evaluate allegations of financial improprieties by the
Downtown BID to include, but not be limited to, the allegations stated here, as well as
other allegations regarding conflicts of interest and election im prop rieties.The outside
auditor should also review compliance regarding the Downtown BID's status as a
nonprofit tax-exempt organization, specifically with respect to Surf City Nights. Their
findings should be provided to the City Council, the BID board of directors, and the public.
2) HIRE OUTSIDE LEGAL COUNSEL to evaluate the BID's compliance.with the
California Parking and Business Improvement Area Law of 1989, specifically sections
36533(b)(5) and 36533(b)(6). These sections pertain to requirements for disclosure of
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cash reserves and non-assessment revenue such as that from Surf City Nights. This
outside legal council should also evaluate the procedure for a disestablishment hearing
should the BID be found in noncompliance of these sections.This outside legal counsel
should also review compliance with City Ordinance 3661 which established the
Downtown BID in 2004. Particular attention should be paid to Section 9 regarding
benefits to BID members and restrictions on the use of member assessments. Their
findings should be provided to the City Council, the BID board of directors, and the public.
3) DETERMINE THE DISPOSITION FOR UNDISCLOSED CASH ASSETS.WHEREAS
the BID failed to advise the BID members of their rights to file a protest of their annual
assessments; WHEREAS the BID concealed nearly three hundred thousand dollars of
cash assets from the BID members; and WHEREAS that money still exists and has not
been spent to improve the downtown economy, it is recommended that these funds be
frozen pending such time as the allegations of financial improprieties are resolved. If the
allegations are confirmed, then as a fair resolution for BID members, it is recommended
that all funds, over and above those disclosed in the 2016-2017 BID Annual Report
(approximately three years of BID assessments), be returned to the BID members. It
should be suggested that BID members may, at their individual discretion, accept or
decline this refund, or any portion thereof.
Respectfully submitted,
Kim Kramer
Huntington Beach Citizen
cc: Downtown BID Board of Directors
City Finance Commission