MOORLACH UPDATE — City of Inglewood — June 8, 2019

The city of Inglewood has just captured the spotlight of a diligent reporter and may become the new city of Bell. I say this as perceived public financial scandals are not pretty and abusing the public trust is disappointing to observe.

The OC Register provides an in depth look at recent financial decisions at this city in the piece below. The closing paragraphs remind everyone that our 482 city rankings for the year ended June 30, 2017 have this city at the bottom of the list (see MOORLACH UPDATE — City CAFR Rankings – Vol. 1 – February 7, 2018 and MOORLACH UPDATE — UNP Bottom Dwellers — April 7, 2018).

The similarities to the city of Bell bring back plenty of memories, so allow me to provide a sampling. On bond underwriters and gullible issuers, (see MOORLACH UPDATE — Proper Etiquette — December 4, 2012).

On above market salaries, (see MOORLACH UPDATE — OC Register — July 29, 2011 july 29, 2011 , MOORLACH UPDATE — Redistricting — June 8, 2011, MOORLACH UPDATE — MAP — September 2, 2010, and MOORLACH UPDATE — Posting/Fair/Pension Debate — August 10, 2010).

On reporters doing the heavy lifting and breaking the story, (see MOORLACH UPDATE — — August 11, 2010 ).

And, on the impacts to public employee defined benefit pension plans, (see MOORLACH UPDATE — Rollbacks — July 30, 2010).

Pension Obligation Bonds are a method of refinancing pension debt. It is a technique that I do not advise using. But, as it substitutes one debt with another, it does not require voter approval. It is proof that pension liabilities are a debt, not an estimate. Yet the ruling of the Los Angeles Appellate Court wrongly called it an estimate. It’s a shame that California’s Superior Court in Los Angeles County, the Los Angeles Appellate Court and the state’s Supreme Court Justices couldn’t make that connection a dozen years ago when I filed a lawsuit on the matter (see MOORLACH UPDATE — OIR/Retroactive Anniversary — July 20, 2012 ).

25th Anniversary Look Back

The Wednesday, June 8,1994 LA Times provided the election results from the evening before, Citron 121,484 votes (61%) and me at 76,923 votes (39%). An article was also written by Mark Platte and was titled “Citron Leads Nearly 2 to 1 Against 1st Opponent in 20 Years — Finance: Moorlach said he would consider himself victorious just for making the public aware of the way the incumbent invested public money.” Math continued to be a shortcoming for reporters. Here are two of the paragraphs:

“I win either way because [Citron’s portfolio] is so bad,” [Moorlach] said. “I feel we dealt with the issues. We ran a clean campaign. I have no regrets.”

Moorlach had gone so far as to suggest last week that Citron’s investment strategies have caused the portfolio to decline some $1.2 billion in the past five months alone.


How Inglewood sidestepped

voters when it took on millions

in debt to cover up a deficit,

then gave raises for executives

City defends the move, but experts say diverting money from pension obligation bonds is ‘wholly inappropriate,’ ‘potentially illegal’


The city of Inglewood took on $36 million in new debt in 2017 without voter approval to help plug a budget deficit, earmarked millions for future pet projects and then doled out bonuses and raises to top executives, the Southern California News Group has learned.

City officials defend their decision to dump most of the proceeds of a pension obligation bond into Inglewood’s general fund — rather than using it all to pay down pension liabilities — at a time when the city was staggering financially while awaiting a windfall from a new NFL stadium.

City Hall even boasted about Inglewood’s newfound fiscal strength in a press release and Mayor James Butts pointed to the surplus resulting from the bond money as evidence of his successful leadership during his reelection campaign in 2018.

After the cash infusion, the city’s executives received two 10 percent merit bonuses and a raise over a two-year period. Inglewood City Manager Artie Fields made an extra $51,508 in 2017, bringing his total salary and benefits to $472,680, according to payroll records provided by the city.

Police Chief Mark Fronterotta — the highest-salaried law enforcement chief in Southern California and one of the highest paid in the state — enjoyed a total compensation of $524,057.

Inglewood, which is roughly 51% Latino and 41% black, has a median household income of $44,377, according to the U.S. Census Bureau.

“The City could easily afford to give employees raises that still do not bring them to parity for comparable cities of the level of economic development as Inglewood,” Fields said in an email.

However, the reversal of fortunes in the City of Champions was actually net loss, and, as a result, property owners will foot the bill for $109 million of debt — including $54 million in interest — over the next three decades.

‘Wrong on so many levels’

“This is wrong on so many levels,” said Jon Coupal, president of the Howard Jarvis Taxpayers Association. “To use this structure to pad the general fund strikes me as not only wholly inappropriate, but potentially illegal.”

Although the funds might help the city in the short term, taxpayers will feel the hit long after the politicians have left office, Coupal said.

Property owners in Inglewood will bear the brunt of those payments. The city charges 0.146 cents per $100 of assessed value to pay for its pension obligations, a rate that hasn’t changed since the tax was enacted in 1944.

Those taxes, meant to pay down the city’s pension costs, will pay 93 percent of the debt service on the new bond, even though nearly two-thirds of the money went into the general fund instead. Inglewood will have to pay the rest — about $17 million total — out of the general fund.

“It is basically diverting the tax revenue that would go to the pension fund to the bond,” said Jean-Pierre Aubry, associate director of state and local research at the Center for Retirement Research at Boston College. “So if the borrowed money isn’t going to the pension fund, the pension fund is getting shortchanged.”

Inglewood’s pension liability totaled $197 million in 2017, according to the city’s audited finances. City pension costs have climbed 78 percent in the past five years and are expected to grow to $36 million annually in the next five, according to its 2018-19 budget.

Sidestepping voters

In California, voters typically must approve new bonds and taxes in their communities. But that doesn’t apply to pension obligation bonds, a type of debt a city can take on to refinance its unfunded retirement liability into easier-to-manage installments.

Think of it like a consumer taking out a new credit card or a loan to pay down another one with a higher interest rate. In Inglewood’s case, the city opened a new credit card, used a small portion of the balance to refinance the old one, paid some bills and then put the rest in its savings account.

And just like that — nearly overnight — the city’s ailing financial outlook suddenly appeared rosy.

Despite the significance of what the city was doing, residents may have missed the City Council’s unanimous vote to issue the $53 million in pension obligation bonds in October 2017. The item was buried on a consent calendar — typically reserved for a group of routine, non-controversial items — and approved without discussion or a presentation.

About $16 million of the new money helped refinance an older pension obligation bond from 2005, allowing the city to cut its interest rate by about half a percent.

“The interest savings alone will cover the cost of the employee raises negotiated for FY 2018-2019,” Fields said.

The bulk of the bond proceeds — roughly $36 million — went into into Inglewood’s general fund through creative accounting that several experts on pension obligation bonds consider, at worst, illegal and, at best, a loophole that circumvented voters.

Vetted by city bond counsel

Fields, the city manager, counters that the bond is legal and was vetted by the city’s bond counsel. He expects future revenues from the new NFL stadium to cover any costs.

“This transaction was logistically and strategically wise and resulted in an interest payment savings of close to $6 million over the next two years,” Fields said in an email. “Our future cash flow projections from 2020-2021 (from the stadium project alone) forward far surpass any debt payments we have incurred.”

Indeed, Inglewood is undergoing a transformation spurred by a revitalized Forum concert venue, a new connection to the Metro rail system, the new $4.2 billion home for the Los Angeles Rams and Chargers, and potentially an arena for the Los Angeles Clippers. Property values have sharply increased, as have rents.

Inglewood projects the stadium alone could bring in more than $20 million annually once it opens in 2020, and hosts the Super Bowl in 2022.

How pension money landed in the general fund

To pull off its plan, Inglewood had to work around a law restricting the use of pension obligation bonds for anything other than pensions.

It did that by designating two-thirds of the $53 million bond proceeds a reimbursement for general fund payments it had already made to the California Public Employee Retirement System in 2016 and 2017.

TDB-L-BROKEINGLEWOOD-0601.jpg?fit=620%2C9999px&ssl=1Source: Inglewood’s Official Statement for the 2017 Pension Obligation Bonds

“The monies to the general fund were a reimbursement for legal pension expense,” Fields said in an email.

None of the experts consulted for this story had heard of a city reimbursing its general fund through a pension obligation bond. Some cities, they say, have used pension obligation bonds to fund future payments to CalPERS.

Fields said it was “irrelevant” whether anyone else was familiar with bonds being spent in such a way.

The bond’s insurance company, Assured Guaranty, referred questions to the city’s bond counsel, Brian Quint. He did not return a call for comment.

Inglewood, which has experienced budget deficits in three of the past six years, has been accused in the past of shifting funds from other accounts to prop up its struggling general fund.

In 2016, a former accountant sued Inglewood, claiming she was fired from City Hall for blowing the whistle on a series of accounting irregularities while the city was pursuing the NFL.

Barbara Ohno alleged the city “regularly and knowingly fostered, ordered and engaged in faulty financial and accounting practices, fraudulent regulatory reporting, and reclassification of costs to depict a favorable, but false, financial picture of the city’s general fund and overall fiscal responsibility,” the lawsuit said.

The city denied the claim and the lawsuit was settled in 2017.

Pension bonds are risky

Pension obligation bonds can be risky even when used properly, according to Jeffrey Michael, an economist and director of the center for business and policy research at University of the Pacific. Michael studied the city of Stockton’s failures when it went bankrupt in 2013. At the time, the city owed more than $100 million toward such bonds.

The central California city issued its bonds in 2007 at the top of the market, Michael said. When the recession hit, the bonds lost half their value overnight.

Inglewood’s decision to issue pension obligation bonds is concerning because cities across the state are struggling to deal with skyrocketing annual payments to CalPERS, Michael said.

“It raises a question of what they’re going to do in the next year and the year after that,” he said.

Inglewood’s plan for the bond money

Inglewood spent part of the bond money paying down a projected $11 million deficit in fiscal year 2017-18, then moved the rest of the bond money — about $25 million — into its reserves after calling it a surplus. City officials say they now expect to end the current fiscal year with a $56,000 surplus, in part due to the savings from refinancing earlier pension obligation bonds from 2005.

Oddly, Inglewood had about $19 million in reserves that could have covered the deficit without taking on new debt. Fields said the city didn’t need the money, but instead it made a cash-flow decision that will allow the city to put $2 million toward a first-time home-buyer program, replace its aged police fleet, repair the roofs on city facilities, renovate the main library, put money aside for affordable housing subsidies, and improve the city’s “cash reserve position.”

Fields insists the money is not new debt, though the city’s own budget lists it as “debt issued.” The city now has $60 million in unobligated reserve funds, he said.

“The city will easily be able to retire the bond issue and pay down its pension unfunded liability going forward,” he said.

An accountant, a pension researcher, an economist and the president of a taxpayers association all separately agreed that the bond money should not be considered reserves because it is a debt that will need to be paid off.

Voters should have a say

Inglewood should have asked voters to approve a general obligation bond if the purpose was to infuse the general fund, said Marcia Fritz, a retired certified public accountant and president of the California Foundation for Fiscal Responsibility.

“Calling it a pension obligation bond is how they’re getting out of having a vote (of the people), because pension obligation bonds, by law, are for refinancing an existing debt, and an existing debt is not the money sitting in your bank account,” Fritz said. “It is one thing to try to get a vote and it’s another thing to hide it on a consent calendar.”

Fritz reviewed the city’s official statement for the bond and a draft of Inglewood’s Comprehensive Annual Financial Report for fiscal year 2017-18 for this story. The budget documents show Inglewood is living beyond its means and the bond money allows the city to conceal it, she said.

“I don’t think it’s a valid debt,” she said. “I think someone broke the law here. It should be challenged.”

The city’s total unrestricted net position — the value between its assets and liabilities — was negative $388.7 million in 2017.

Last year, California Sen. John Moorlach created a per-capita ranking of the financial soundness of 482 cities by dividing their unrestricted net position by the number of residents. Moorlach created the list because many cities are facing insolvency “mainly due to unfunded pension liabilities,” he said.

Inglewood ranked near the bottom at No. 471 out 482.


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