(Dec. 13, 2015, 3:10 p.m., updated Dec. 14, 12:25 p.m.) -- On December 15, Long Beach Councilmembers will be asked to do what I believe no prudent company board of directors would do: to authorize a multi-million dollar transaction, carrying over four decades of binding obligations, on terms I expect an objective analysis would deem unwise, unbusinesslike and disadvantageous to the City and its taxpayers. It's a proposed action I believe the City frankly cannot afford.

In a series of 17 agendized items accompanied by a 137 page memo (linked here), city management wants Councilmembers to approve a complex transaction that would let a private firm become the City's Civic Center landlord for the firm's profit for over forty years and relegate the City to a tenant making annual escalating payments on terms I consider very unwise for the public.

The Council has ample reasons not to approve the items as handed to them by city management, and no Council could intelligently vote to approve all the items desired by management on one night.

A number of the seventeen collectively agendized items include complex embedded issues that deserve intelligent individual discussion. It disrespects Councilmembers, and the public, to pretend these can be properly discussed and approved in one-fell swoop. The fact that some inside City Hall think it's smart to schedule this major action at the height of the holiday period (the third time on this issue in three years) speaks volumes but regardless of the season, it's not transparent to bury serious individual issues amid voluminous collective items.

City management no longer stands by its foundational figure and its public words. On multiple occasions, city officials told the public that under the deal, the city wouldn't pay a penny more in 2013 dollars than it pays now, adjusted for inflation, and multiple news stories cited a $12.6 million sum in 2013 dollars. A few examples:

• "...[T]his model offers the City a levelized payment, adjusted for inflation, for Operations and Maintenance expenses for 40 years, to be included in the City's annual payment of $12.6 million adjusted for inflation." [Source: City staff memo to Council, Dec. 9, 2014, p. 10]
• "Ensure the City's cost to operate and maintain a new City Hall and Main Library are no greater than current costs, estimated in 2013 at $12.6 million, but including CPI increases." [Source: Civic Center "Historical Perspective and Update" at LBCC, Sept. 16, 2014]
• "Ensure the City's lease payments for the new City Hall and Main Library, including operations and maintenance (O&M),approximate current costs including annual CPI increases [Source: Civic Center Study Session November 11, 2014, p. 13.]

• "The P3 DBFOM procurement model offers an opportunity for the City to receive a new City Hall and Main Library, built to seismic standards more rigorous than current building codes, offering a 21st Century alternative to the current inefficient and functionally obsolete buildings, at a cost that mirrors the City's current cost, adjusted for inflation. Additionally, this model offers the City a levelized payment, adjusted for inflation, for Operations and Maintenance expenses for 40 years, to be included in the City's annual payment of $12.6 million adjusted for inflation. [Source: December 9, 2014 R-10 City Agenda Item re Civic Center, p. 10, paragraph 2.]

• Both P3 DBFOM proposals for the new Civic Center (the Project) provide for a total annual City Lease Payment amount of no more than $12.6 million, adjusted for inflation. The $12.6 million is the 2013 budget for the current City Hall, Main Library, Broadway and Lincoln Park garages and inclusive of rent for City off-site operations originally considered for moving into City Hall. As a result, the Lease Payments are budget-neutral and, based on the estimates, will not impact the City budget. [Source: December 9, 2014 R-10 City Agenda Item re Civic Center, p. 11.]

Management's agendizing memo now ditches its base $12.6 million base figure, saying the sum will now be roughly $14.5 million. "While City Council and staff's goal was to achieve an annual cost of $12.6 million in 2013 dollars, the Project, with all its enhancements, escalations and reallocations, is anticipated to cost $14.48 million in an annual Service Fee in 2013 dollars. This increase is not unreasonable considering the many changes to scope, reallocation of costs, and escalation costs, and will be manageable through future budget processes."

So much for being "budget neutral." And what excuses does management offer for ignoring "not one penny more" to generously boost by 15% the amount that will now be part of the foundational figure used to calculate forty-years of escalating taxpayer payments?

...As a result of an appropriately extended outreach and education program, and development of the design performance requirements, the fixed price proposal that establishes the Project's cost and the City's Service Fee was updated and resubmitted more than one year after the initial response to the RFP. That extension in the time period resulted in an increase of construction costs related to escalation, including labor and materials. Additionally, the advancement of a basis of design and program development after the RFP was issued, the inclusion of community recommended design changes, and staff recommended enhancements to improve customer service, served to increase the cost of the Project. Lastly, re-allocation of ongoing Operations & Maintenance costs between the City and the Port was necessary to more accurately reflect the percentage participation of the Port occupancy within the entire Civic Center...

Some news outlets that repeated management's original $12.6 mil figure (in FY13 dollars) are now repeating management's "updated" $14+ million figure (in FY13 dollars.) But both sums are a fiscal fiction. So is the figure listed on the Dec. 15 agenda item (item #5) that states: "Authorize the City Manager to execute (i) a Project Agreement...subject to a maximum Service Fee increase of $500,000 annually...due to possible interest rate increases or any other reason" (my emphasis.) Up to a half million dollars more, generously embedded as part of the base fee on which four decades of annual escalating costs will be calculated, that taxpayers will have to pay "for any reason"? Would you sign this?

But the City won't be paying $15.8 or $16.3 million sum either. The figure LB taxpayers will begin paying when occupancy begins (anticipated by July 2019) for FY20 is estimated by management at $17.78 million. [Source: Dec. 15, 2015 agendizing memo, p. 32, Table 5.] [Management says it hopes to offset part of this cost with about $1 million (in FY16 dollars) by FY22 from private development of the now-public land that the City will give the developer/operator.]

It's noteworthy that management repeatedly describes future taxpayer costs in current or prior year dollars. This technique makes them appear smaller than they actually will be. LB taxpayers will ultimately have to pay the future costs in real dollars in real time. Management doesn't use current dollars to describe future costs of pensions and pay raises (and my understanding is that at about the time Civic Center costs will kick-in, pension costs are also expected to increase, inviting a perfect fiscal storm.)

Management initially claimed there'd be savings from gathering offsite offices onto the new Civic Center, but that's collapsed too. Taxpayer costs for several offsite offices will continue, thus continuing to cost (not save) about $1.32 million in FY13. Management includes that sum in what it calls "Other Annual Costs" that it estimates will amount to between $3.27 million (FY20) to $3.88 million (FY22.) [Dec. 15, 2015 memo, p. 33, Table 7.] So much for "not a penny more."

So what happens when we add the City's continuing costs to the annual escalating lease payments, all of which we'll have to pay?

Annual Cost to City for Maximum Service Fee and Continuing Cost

[Source: Continuing costs are cited from FY13 Civic Center line item Budget document. The Continuing Costs cited above aren't part of the annual landlord/developer/operator Project Service Fee and will continue to be obligations of the City and its taxpayers to provide and pay separately. Salaries, wages & benefits are included as the City has indicated that no city employees will lose their jobs when the new building is completed and maintenance and management are contracted out to the landlord/developer/operator; if the employees take open positions that aren't excess, savings might result.]

The millions of dollars that taxpayers will be sent to the landlord/developer/operator plus the millions in continuing costs are sums that taxpayers outside of downtown and in Council districts 3, 4, 5, 6, 7, 8 and 9 won't have to fix potholes, repair sidewalks or provide police or fire services where they live.

City staff portrays the P3 financing model as a way to save money, but there's scant evidence that this is true and credible evidence that it is untrue as applied locally just steps from the Civic Center. In November 2012, the non-partisan state Legislative Analysts Office issued a report concluding that the new Long Beach (L.A. County) courthouse cost as much as $160 million more than it would have under a traditional procurement approach. To view the LAO's independent report, click here. (Those who were part of the courthouse deal dispute the LAO's conclusions.)

The proposed agreement requires a Project Labor Agreement that will apply "to all of the civic elements...including City Hall, the Main Library, Port Building and Lincoln Park" but "the Private Development Sites will not be required to include a Project Labor Agreement." [Source: Dec. 15, 2015 management memo, p. 17.] (However any hotel/hospitality uses developed on the private sites will require a "labor peace agreement" between the project company and "a union in the Long Beach area representing hospitality industry employees."

The Port of Long Beach is making a different deal than the City in agreeing to put its new HQ in the new Civic Center. The Port is financing its own building and paying the developer to build a building that it will own when built and perform partial maintenance services. The Port will have a fixed interest rate loan for their building that will never increase. No cost of living adjustments and No interest rate increases. They will also sell land and use cash in addition to the revenue bond to finance the Project. The City could also use a bond to finance their building (which could require voter approval; what a concept) and sell land to finance a new project. In contrast, the City (apparently afraid of a vote of the people on what it proposes) will be paying escalating multi-million dollar sums each year to let a private firm become the City's Civic Center landlord for forty years, relegating the City to the status of a tenant for decades. By the time the City finally gets the building, it will be roughly as old as LB's current City Hall is now.

Due in part to taxpayer-unfriendly legislation, sought by city officials and supported by LB-area state Senators Lara, Nguyen and Assemblyman O'Donnell, LB taxpayers will be paying the City's new landlord for more than "about 35 years" as management originally stated and will instead be paying for over 40 years. I estimate the additional taxpayer cost for each additional five year term above 35 years is in the range of at least $150 million.

[Dec. 14 update] A draft of the proposed Project Agreement (lease contract), dated Dec. 4, is at the end of management's attached items (Exhibit F, items 14, 15 and 16), publicly released at the end of the Dec. 7 business day; it's also on a separate webpage for the project. Disclosing a proposed contract before it's signed is an improvement from usual city practice. A link to the full document is here. On my quick review, some numbers appear to be missing but I honestly need more time to review this; allowing only a few days for Councilmembers and taxpayers to review 750+ draft pages is a tall order.

On a transaction of this magnitude, one of the largest in the history of Long Beach, no Councilmember should consider voting for approval until he or she -- and their taxpaying constituents -- has a reasonable opportunity to review the full, completed contract before it's signed. [end Dec. 14 update]

When I was growing up, the difference between what officials said and the facts was called a "credibility gap." Today, when management says things that may turn out differently than promised, management calls them "general risks and uncertainties." I list some of them below in management's own words:

...Other annual costs and one-time costs could vary from estimates. Most of the other annual costs identified in this report are estimates, as are all the one-time costs. The accuracy of those estimates varies. A few examples (not an inclusive list) of these costs include:

• ...Possessory Interest Tax (a form of property tax) on the Civic Center: The tax is assumed to be zero, as that is, by far, the most likely result; but there is some uncertainty as to the position of the Country Tax Assessor because of the P3 structure of the Project and the unwillingness of the Assessor to provide a tax assessment opinion prior to the execution of the Project Agreement.

• There is a $500,000 allowance for any costs that may be required to bring the Lincoln Garage up to Code should that be required. Any costs above that are City costs....

• Service level and utility costs could impact the Service Fee. The annual Service Fee will be impacted by any higher than projected electricity and gas usage, higher utility rates, and by any services used (such as security services) above that contracted with PECP.

• The construction cost is guaranteed, as long as the Project starts on time and relief events (such as surprise environmental findings) do not occur. However, both the rapid process for the design of the building, which helped to lower construction costs by minimizing the impact of inflation, and the fact that the building is not yet fully designed, may increase the risk that the City will decide to make design changes after the Project Agreement has been approved. There is a $4.5 million contingency built into the Project, specifically for design changes by the City. However, it is possible that this will not be enough. If that is the case, the City Council would then need to consider additional appropriations from onetime funds to cover additional City-directed change orders.

• There is uncertainty with regard to Center Block development timing, what the development will consist of, and the associated tax revenue. The development revenue that will result from development will help offset Civic Center costs and is expected to be significant, about $1 million a year (FY 16 $), inflation adjusted. The actual amount received could be more or less, depending on what type of development occurs.

• The City is responsible for any major improvements to existing garages. The Broadway and Lincoln Park garages are over 30 years old and will need significant improvements over time. This would be a cost even without a new Civic Center.

• The City has earthquake damage responsibility. However, the new Civic Center buildings are designed to be earthquake resilient and to allow quick restoration of operations after an earthquake.

• Inflationary increases. The Service Fee the City pays to PECP increases annually. The increase is only 35% based on the actual annual inflation rate with the remaining 65% based on a fixed rate of 2.18% annually. This means that the Service Fee payments (exclusive of the energy portion) have more protection from higher inflation, but they do not increase as slowly as might be expected in a lower inflation environment. All of the financial models, including the numbers in this analysis, assume an annual CPI rate of 2.4%. While inflation is currently lower than that, the 2.4% represents a general expectation of the inflation rate in the future.

[Source: Dec. 15, 2015 management agendizing memo, p. 37-39]

Based on figures in city documents (reflecting their own caveats), I estimate that the City's Upfront Cost for the New Civic Center transaction to be whopping $63.19 million. My calculation:

[Source: Jensen calculation based on figures contained in tables in Dec. 15, 2015 management agenda item.]

The $63.19 million put up by City is in contrast to the $21.02 million put up by the landlord/developer/operator investors.) [Source for developer equity share: Dec. 15, 2015 city management memo, Table 1, p. 29.]

To my calculations, I add this context. My figures are based on figures in city documents. Management's 41 page narrative and its 137 page accompanying memo reflect the work of teams of well paid consultants who had weeks and months to wordsmith their text and fiddle with their figures. I was paid nothing. City management gave taxpayers (and presumably Councilmembers) only a matter of days since the end of the business day on December 7 to read and analyze voluminous contentions.

For an individual taxpayer, the disproportionate nature of this task is truly daunting. It has consumed time that I could have spent with my family approaching the holidays. While some may try to quibble with my contentions, I have chosen to take on this task because I genuinely care about this city.

Long Beach Councilmembers at least have taxpayer paid staff and direct access to city management. They can see that the deal as originally presented differs from what they are being offered. They can see what they and their predecessors weren't told. They should be able to grasp that this City simply won't be able to afford what's being proposed now.

Councilmembers have choices. Management acknowledges: "If the City does not execute the Project Agreement (i.e., Financial Close does not occur), PECP will be owed $4 million. This is the same amount previously anticipated (inclusive of the stipend for submitting a compliant proposal) under the ENA [Exclusive Negotiating Agreement] currently in effect."

The Council has had and continues to have multiple other options. These are beyond the scope of my comments here.

I happen to agree that the Civic Center property could be better used than it is now, but that doesn't mean Councilmembers should vote for a bad deal for taxpayers. Early on, this writer spotted serious issues in the proposed transaction and said so. Some initially declined to acknowledge these issues but they are painfully evident now.

Saying "no" to a bad deal isn't wrong and in this case I believe it's the right thing to do. It would have cost less if previous and some current Councilmembers had done so earlier, but it will still save the City tens of millions of dollars that LB taxpayers in Council districts citywide will end up spending for few blocks of downtown extravagance. Those who vote yes, despite the warnings they've been given, will create an indelible stain on their records that will pursue them in their future plans; I do believe their vote will visibly drain Long Beach taxpayers citywide of millions of dollars for needed city services.

And yes, management's agendizing memo adds: "Once Financial Close occurs, termination by the City may not be financially viable."`

Note: An earlier version of this piece indicated that the proposed contract wasn't online. It is; the text above is revised accordingly and includes a link to the draft.

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