The city of San Diego wants to use a common, but convoluted financing mechanism to repair its roads and build other infrastructure. But it recently hit a legal snag. Here’s how the plan is supposed to work and why there’s a hang-up.

This is a lot in Skyline owned by the city of San Diego.

Photo by Jamie Scott Lytle
Photo by Jamie Scott Lytle

The city would like it to be a fire station someday. Right now, people who live in the neighborhood have a high risk for a delayed emergency response. A fire station would fix that.

To build the station, the city needs money. And the fire station is just one project the city wants. Right now, the city wants to build or fix $120 million worth of stuff.


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But it doesn’t have that kind of money — or any money really.

2015 Budget Deficit

So to get $120 million, the city’s decided to go to people who do have money. These guys.

Image via Shutterstock
Image via Shutterstock

Wall Street’s more than happy to loan the city some cash, provided the city’s willing to pay it back with interest. The state Constitution and the City Charter, though, have rules for cities who want to borrow money. They say that two-thirds of voters have to say yes beforehand.

Photo by Sam Hodgson
Photo by Sam Hodgson
Voting booths

City leaders don’t want to have to go to the voters every time they want to borrow money. It could take a while and, after all, voters might say no. A workaround is to get someone else to take out a loan on the city’s behalf. In this case, city leaders are turning to their pals at the Public Facilities Financing Authority of the City of San Diego.

You probably haven’t heard of the Public Facilities Financing Authority of the City of San Diego. It has nine board members.

Board-members

Those folks might look familiar. I’ll give you a hint. Here are all nine San Diego City Council members.

Council

The Public Facilities Financing Authority of the City of San Diego is essentially a shell entity of the city of San Diego. City Council members are the members of the authority’s board.

Financing authorities don’t have to go to voters when they borrow money. So far, so good. But financing authorities do need to have something to back their loans. Here’s where things get a little complicated.

The city decides to lease properties to the authority for basically nothing. The authority can then use the properties as collateral. For this loan, there are 16 properties on the list, including these:

Photos by (from left): the Lodge at Torrey Pines; Jamie Scott Lytle; Sam Hogson
Photos by (from left): the Lodge at Torrey Pines; Jamie Scott Lytle; Sam Hogson
From left: the Lodge at Torrey Pines, the city's fire communications center, the Mingei Museum

Then the city leases the same properties back from the authority. It pays the authority in rent an amount equal to whatever the annual bill is for the loan. That’s why this kind of loan is known as a “lease-leaseback” or “lease revenue.”

Now, the authority has the cash to make loan payments and the city gets the money it needs to build a fire station on a lot in Skyline. Here it is again:

Photo by Jamie Scott Lytle

This whole arrangement might strike you as a little weird. It struck this guy as weird.

Richard Rider

His name is Richard Rider and he’s a longtime San Diego libertarian activist. He thought this arrangement violated the state Constitution’s rules on borrowing money without a public vote. He sued in the mid-1990s when the city and San Diego’s port district tried to use this same kind of loan to expand the Convention Center. The people who work here eventually weighed in.

Photo by Steve Rhodes, via Creative Commons license
Photo by Steve Rhodes, via Creative Commons license

In a landmark 1998 ruling, the California Supreme Court said Rider was wrong.

Richard Rider X

The judges said the deal actually was a lease agreement, not simply an end-around to avoid the debt rules in the state Constitution and City Charter. They also said they realized what was going on.

Supreme Court

These days, these kinds of loans are common all over the state. State and local agencies borrowed more than $4.7 billion this way in 2013, according to state data.

The city started using these loans for infrastructure repairs in 2009. The money’s been used to do things like make over this stretch of A Street in Golden Hill, seen here in 2010 and today.

Photos by Sam Hodgson and Catherine Green
Photos by Sam Hodgson and Catherine Green

Remember, this loan is for $120 million to help build the Skyline fire station and pay for numerous other buildings and repairs. It’s the fourth loan the city has planned to use for infrastructure in recent years. And after the city got the first one, there have been no legal hitches.

Now, this guy has gotten involved.

Photo by Sam Hodgson
Photo by Sam Hodgson

He’s a lawyer named Cory Briggs. He’s sued the city a lot over the years. He’s threatened to sue over this loan. He argues the financing authority isn’t set up correctly, the city hasn’t identified a way to pay back the money and the city’s debt rules are more restrictive than the state’s. Briggs contends the loan violates the rules in the Constitution and Charter about borrowing money without a public vote.

The city isn’t happy. Here’s a section of a March 17 memo from Chief Financial Officer Mary Lewis to the City Council.

Mary Lewis Memo

So now we wait. And that means that this lot in Skyline will look like this for at least a little while longer.

Photo by Jamie Scott Lytle

    This article relates to: Emergency Response Times, Government, Infrastructure, News, Share

    Written by Liam Dillon

    Liam Dillon is senior reporter and assistant editor for Voice of San Diego. He leads VOSD’s investigations and writes about how regular people interact with local government. What should he write about next? Please contact him directly at liam.dillon@voiceofsandiego.org or 619.550.5663.

    14 comments
    George in BayHo
    George in BayHo subscriber

    How about this ... Raise the Hotel Tax to 18% and use the new revenue for infrastructure, beaches, playgrounds and parks.  Maybe even build a fire station.

    Richard Ross
    Richard Ross subscribermember

    So let me see ...as responsible parents we are to teach our children to save money so they can afford to buy something but our governments can circumvent this and take out multiple large loans far into the future so our children are saddled with paying thames back....thanks a lot to our corrupt judges opinions.

    Bit-watcher
    Bit-watcher subscriber

    Liam,


    Thanks for the cogent explanation.  Nicely done!

    Richard Rider
    Richard Rider subscribermember

    Legal or not legal, these convoluted arrangements to avoid a vote of the electorate constitute policy that's just plain wrong.  Bad form and all that.

    A good example of unintended bad consequences was the revenue bonds issued to renovate Jack Murphy (now Qualcomm) Stadium.  While revenue bonds are different than these convention center bonds, the goal is the same -- to avoid a vote of the people.  

    The "stadium authority" was a ruse.  The three officers were the city attorney, the city manager and the city AUDITOR.  In essence, the "agency" consisted of a folder in Jack McGrory's desk drawer.  The city council would meet in the AM, decide what it wanted done, and later in the day the "agency" would meet in McGrory's office (or the office of the city attorney) and they'd rubber stamp whatever the city council had decided that morning. Yet the courts upheld this con job as an independent entity.  

    This revenue bond vote-dodging shell game incorporated the infamous 1997 San Diego Charger ticket guarantee. Chargers got their stadium renovated with taxpayer bonds - but in addition the city guaranteed the 60,000 per game general admission tickets -- paying the Chargers for the unsold tickets -- even for exhibition games. Through some odd quirks in the contact, the Chargers could actually make over 85% more NOT selling a ticket than selling one. 

    Remember the Charger ticket guarantee? In essence, the city paid the Chargers to field LOSING teams! During the 7 years of the deal, the city paid out tens of millions of dollars for the unsold tickets, while the BEST Charger season win-loss record was 8-8.


    Incredibly, after a disastrous 1-15 season, the Chargers RAISED ticket prices 15%! Higher prices + lousy teams = fewer tickets sold = higher subsidy payments = greater profit.


    The only good news is that the San Diego voters today is MUCH more suspicious of Charger subsidy deals, and hence the chance of them getting a new subsidized stadium is quite "iffy" -- ruse or otherwise.

    William Smith
    William Smith subscribermember

    Municipal lease financing has been common since at least the late 1940's, and is hardly novel.  Its legality was upheld once again in the Convention Center case.  Many very popular municipal public works projects statewide would not exist without it.  Assuming the Charter with regard to financing has not been amended since the Convention Center case, the City, after a validating action, should have no legal problem issuing these bonds.  Whether this is a good idea financially is another question, but one best addressed by those charged with forming public policy, the City Council.


    .

    Chris Wood
    Chris Wood subscriber

    @William Smith  “…one best addressed by those charged with forming public policy, the City Council….”


    Is “public” policy formed by the public or dictated by city council?


    pub·lic pol·i·cy

    noun

    1. the principles, often unwritten, on which social laws are based.


    2.LAW

    the principle that injury to the public good is a basis for denying the legality of a contract or other transaction.


    SDGIS
    SDGIS subscribermember

    Great story.  What happens if the  Public Facilities Financing Authority of the City of San Diego defaults on the loan?

    SDGIS
    SDGIS subscribermember

    @Liam Dillon @Richard Rider  Seriously. Do we have any idea what will happen if they default? Are they personally responsible? Is there any precedence here?

    Chris Brewster
    Chris Brewster subscribermember

    Mr. Dillon: Nicely explained. Thank you. Reminds me of the movie Chinatown.

    TJ Apple
    TJ Apple subscribermember

    Great job Liam, thank for dumbing this down so I can understand .

    Matty Azure
    Matty Azure subscriber

    Love all the pictures.

    Signed,

    Worth 1k words

    Libi Uremovic
    Libi Uremovic subscriber

    this is the most ridiculous of  bond debt scams - it is the equivalent of  telling the bank you plan to make your car payment with the additional revenue you'll earn by charging yourself rent ever time you use your kitchen..... 


    the only way to stop government corruption is to pull their books and count the money because they will not stop themselves ...read about government corruption found all over the state of cali - http://www.libionline.net/