Our report below follows-up on an in depth/perspective story first reported March 15 by LBReport.com.
(April 2, 2007) -- A Deputy City Auditor under now-former City Auditor Gary Burroughs concluded by February 2006 (and perhaps earlier) that the Long Beach Museum of Art Foundation, a private non-profit entity used by City Hall to manage and operate the publicly-owned LB Museum of Art, had violated its City Hall pledge agreement (regarding taxpayer-backed bonds approved by the City Council in 1999 to expand and renovate the museum) by using money from the Foundation's capital campaign to pay operating expenses.
[The LB Museum of Art at 2300 E. Ocean Blvd. is unrelated to the Museum of Latin American Art on Alamitos Ave.]
A City Auditor's office written report by Deputy City Auditor Janet Suter also cited storage of city assets off-site and not properly secured to ensure protection from theft or deterioration; a video collection not cataloged and not shown in five years as required by the Foundation's lease with the city; failure to complete a computer database of museum artwork and failure to prepare and submit annual reports and budgets to City Hall.
The report also noted that City Hall staff failed to pass the annual cost of property insurance (roughly $6,900 per year) on to the Museum Foundation as required under the bond-related Pledge agreement.
Instead of highlighting these conclusions in ways likely to prompt serious Council discussion or public attention, on January 13, 2006 then-Auditor Burroughs asked City Clerk Larry Herrera to place the report on the Council's February 7, 2006 "consent calendar" -- a list of items for which no Council or public discussion is anticipated unless requested by a Councilmember or a member of the public.
In addition, then-Auditor Burroughs asked Clerk Herrera to agendize the item simply as "Long Beach Museum of Art Contract Review" with a recommended action of "Receive and File" [take no further action].
The Deputy City Auditor's report, presented on behalf of Auditor Burroughs' office, was addressed to City Manager Jerry Miller, Director of Financial Management Mike Killebrew, Parks & Recd Director Phil Hester and Community Development Director Pat West.
In the report, Deputy City Auditor Suter wrote that "the [LB Museum of Art] Foundation has violated their Pledge Agreement to the City by utilizing $670,000 derived from their capital campaign (and required for the repayment of bonds secured by the City) to fund operations. The Foundation has used funds from this account over the last four years without obtaining written approval from the City and without developing a plan to restore these funds."
However a transmittal letter by Auditor Burroughs to then-Mayor Beverly O'Neill and then-Councilmembers said simply: "Transmitted herewith is a report on the results of a contract compliance and internal control review of the Long Beach Museum of Art Foundation. RECOMMENDED ACTION: Receive and file."
In September 1999, on motion by then-Councilman Frank Colonna, the City Council approved selling roughly $3 million in taxpayer-backed bonds to finance expansion and renovation of the LB Museum of Art. At the time, then-city management indicated the Museum Foundation had a plan to repay the bonds by 2004 but also informed the Council that if this didn't occur, LB taxpayers would ultimately be responsible to pay the sum by a 2009 deadline.
The Council unanimously approved the transaction...without requiring explicit Council or public oversight despite the potential LB taxpayer exposure.
The Deputy Auditor's report noted that the bonds were marketed in October 1999 and structured with a Pledge Agreement by the Foundation to raise monies for repayment of the bonds. The report stated in pertinent part:
While the City is responsible for payment of the bonds, the deal included a Pledge Agreement between the Foundation and the City of Long Beach. The Pledge Agreement states that the Foundation will deposit 50% of monies collected through their Capital Campaign into a Pledged Account to be spent as follows: (1) to pay interest/expenses of the bonds, (2) to pay costs of the improvements in an amount not to exceed $1 million, and (3) to prepay base rental payments on behalf of the City (i.e. to be applied to redemption of the bonds). The intention and expectation of the parties to this transaction was that when the bonds were payable in 2009, the Foundation would have raised sufficient monies to pay for the bonds in full. Financial statements from the Foundation for fiscal year 2000 outlines [sic] the intent of the parties and even includes a schedule of annual payments to the bond redemption account. Subsequent financial statements continue to include information on the intent of the parties to have total principal and interest payments on the bonds be covered by monies raised through the capital campaign; however, the schedule for payments to the bond redemption account is no longer included.
Review of Foundation Accounting Records indicate a total of $5.5 million has been collected through Capital Campaign efforts as of September 2004. Of that, $3.8 million has been spent toward the capital project, leaving a balance of $1.6 million. According to these records, $670,000 has been "borrowed" from these funds to pay for operations over the last several years. While the Foundation obtained letters from donors approving the temporary use of these funds for operations; they have not obtained written approval from the City of Long Beach for the diversion of funds and have not devised a plan for return of the funds.
Recommendation:
Management concurs that the Foundation has violated the Pledge Agreement. The City had previously been notified of this violation and, consistent with the Pledge, acknowledged and concurred with the Foundation that, post 9-11, charitable giving was significantly redirected to recovery efforts in New York, seriously affecting the Foundation's budget. City and Foundation recognized the need to use these funds, with the full intent of repayment over time, and compliance with the Foundation's obligation to fund the Bond payment in 2009. City and Foundation staff have identified a need to devise a plan for repayment and, in the near term, intend to establish a plan to achieve this goal.
As for required annual reports and budgets not provided to the City, the Auditor's reported recommended, "City management should develop procedures to ensure the required reports are submitted and reviewed by staff." The report describes Management's response as follows:
Management concurs with the Auditor's recommendation. City staff have met with the Foundation on a number of occasions beginning on July 13, 2005 to discuss, among other items, annual reporting to the City. On October 25, 2005, as required in the Agreement to Manage Art Collection [for which city taxpayers paid over $500,000 in FYs 04 and 05], the Foundation submitted its Annual Report for fiscal year ending September 30, 2005, including a financial report. City staff will continue to monitor performance to ensure compliance.
As to City Hall failing to pass on to the Museum Foundation a charge amounting to nearly $6,900 a year for property insurance, the Deputy City Auditor indicated city staff wasn't familiar with the contract's insurance requirements (which include property insurance, workers comp, Fine Arts insurance and an Honesty Bond). "As such, city staff had not obtained copies of insurance policies and reviewed them for sufficiency," the report said.
The report added that Management "concurs with the Auditor's recommendation that procedures to ensure periodic review of insurance adequacy be implemented. Additionally, City staff will ensure that the proportionate allocation of property insurance expense be reimbursed by the Foundation."
The report also noted that under a separate "Agreement to Manage Art Collection," the Museum of Art Foundation receives a base level of annual monetary support from LB city taxpayers. In FYs 03, 04 and 05, those LB taxpayer-paid sums were $645,585, $571,000 and $569,000.
When the Auditor's office report appeared on the Council's Feb. 7, 2006 consent calendar -- agendized by the then-Auditor as a dull-sounding contract review item -- the Council voted to "receive and file" it without any discussion.
[The item was further eclipsed by the resignation of 2nd district Councilman Dan Baker early in the Council meeting. In the wake of Baker's exit, some Councilmembers (Colonna, Reyes Uranga and Gabelich) were temporarily not in the Chamber for the item. The Council vote to receive and file the report as part of the consent calendar was 5-0 [Yes: B,. Lowenthal, O'Donnell, Kell, Richardson, Lerch; No: None; Absent: Baker, Colonna, Reyes Uranga, Gabelich].
A year later, Councilman Colonna and City Auditor Burroughs are no longer at City Hall. However the issues remain...and resurfaced publicly in a separate context at LB's non-elected Redevelopment Agency Board.
On February 5, 2007, RDA/city staff agendized item on the RDA board's agenda which acknowledged -- but didn't discuss in detail -- the Museum Foundation's apparent inability to repay the bond debt by 2004 as was previously planned.
Instead, city/RDA staff proposed that the obligation be paid by letting a private firm build and install six electronic message signs along freeways in Redevelopment-adjacent parts of the city. The firm would share its ad revenue with City Hall...and RDA/city staff recommended that City Hall use its share to repay the Museum's bond debt and also provide a continuing funds for LB arts and cultural groups to be dispensed through the privately run, non-profit LB Arts Council.
[I]t is recommended that the City use the revenue generated by the electronic signage to retire the $3.1 million bond obligation of the Long Beach Museum of Art (LBMA) and to serve as an ongoing funding source for the Arts Council for Long Beach (Arts Council) for grants to arts organizations and artists in Long Beach.
The LBMA bond obligation of $3.1 million comes due in 2009. The LBMA has been paying approximately $100,000 annual interest on the principal since 2000.
The city staff/RDA proposal has ignited a separate polarizing, divisive controversy. Some neighborhood activists (and one RDA boardmember) have likened the electronic signs to City Hall-invited blight. Meanwhile, some art supporters have endorsed City Hall's plan which could provide their groups a continuing stream of revenue from the signs.
The private firm, which would build and operate the electronic signs at its expense, says its proposal (which city management reviewed in a formal RFP process) makes sense on the merits. It says the signs would provide City Hall with estimated sales tax revenue roughly equivalent to three "Home Depot" size retailers (totaling $1.5 million annually). It says its message boards use state of the art technology that direct light away from adjoining neighbors...and freeway advertising is a powerful communication tool that provides an ideal way to market LB to OC-L.A. area commuters as a desirable visitor destination.
The RDA board instructed staff to get input from advisory Project Area Committees before bringing the item back for further action...and the sign proposal has yet to reach the City Council.
To date, the City Council has not pursued the issues cited by the former Auditor's office at the Art Museum. [The former Auditor didn't recommend Council action, but that doesn't preclude the Council from undertaking such action.]
The Council has also declined to date to confront the broader issue of bond debt funding advised by former city management and approved by former Councils...which turned management of public assets over to private, non-profit entities and ultimately imposed LB taxpayer costs without serious public or Council oversight.
Similar mechanisms were used by LB City Hall at two other LB public assets: the Aquarium and the Queen Mary.
LBReport.com sought but was unable to obtain information or comment from the LB Museum of Art in connection with our March 15 report. We remain open to reporting these if and when they are received.
LBReport.com has learned that LB's new City Auditor, Laura Doud, has begun a new audit of the Art Museum's operations...at the request of the Museum Foundation.
Through a City Auditor's office spokesperson, City Auditor Doud's office indicates an audit was requested by the Museum Foundation in January 2007.
The City Auditor's office indicates its new audit is expected to be comprehensive and encompass matters ranging from art inventory to fiscal items...and is proceeding.
