(May 27, 2009) -- In a disclosure that was inconsistent with written materials and came to light only after a podium inquiry from LBReport.com, city management indicated at the May 26 meeting of the City Council's Budget Oversight Committee that despite management efforts, there's currently no plan in place to avoid having LB taxpayers pay a $3 million debt bond that the LB Museum of Art Foundation was supposed to pay over the past ten years and hasn't.

Photo source: City of LB website

If allowed to occur by a Council majority, on or about Sept. 1 LB's deficit-strapped General Fund will shrink by $3 million, a sum LB taxpayers were not supposed to pay. The sum was budgeted by the Council in Sept. 2008 as part of City Hall's FY09 budget with City Manager Pat West's assurance that the City was pursuing ways to avoid having taxpayers pay the sum.

LBReport.com provides unedited audio below of what city management told the Council Committee...and what the Council Committee said in response.

The taxpayer exposure on the Museum of Art item (the result of a 1999 Council action detailed below) wasn't agendized for discussion by the Budget Oversight Committee. It was mentioned on the next to last page of an agendized item discussing an "Optimization Matrix." On page 10 of that agendized item were "Efficiency Initiatives," one of which was to "develop financing strategies regarding an upcoming Museum of Art's $3 million upcoming bond payment" with the following "implementation status":

"At present, the City is working to receive a loan from Farmers and Merchants Bank to utilize the loan in FY 09," the item said.

LBReport.com, which first reported the taxpayer exposure in detail in March 2007 and has continued to follow the issue, happened to spot the Museum-debt mention while covering the Committee meeting. When Committee chair DeLong invited Committee discussion on the larger agenda item, there was none. When DeLong invited public comment, LBReport.com publisher Bill Pearl rose and went to the Council Chamber podium to ask if management had additional information about Museum debt item so that LBReport.com could publish it.

Several seconds of silence followed. Committee chair DeLong asked if management preferred to respond immediately (publicly at the Committee meeting) or later (privately).

Director of Financial Management Lori Ann Farrell [whose office we've learned wasn't directly involved in handling the Museum debt] chose to respond publicly. Ms. Farrell gave LB taxpayers, the press and Council Committee members an unflinching representation of the debt's current status.

LBReport.com provides unedited audio of what Ms. Farrell said...and how Council Budget Committee members responded. To hear what took place, click here.

Taxpayer exposure for the $3+ million Art Museum Foundation debt stems from a Sept. 14, 1999 Council action that let the Foundation -- a privately run non-profit entity with which City Hall has contracted to operate and manage the city-owned Museum -- use $3.1 million from a LB taxpayer-backed bond to expand the city-owned facility.

In a Sept. 1999 agendizing memo, now-former city management told the Council and the public that the Long Beach Museum of Art's goal was to repay the bonds by 2004...but also made clear that LB's General Fund would be obligated to pay the debt by 2009 if the Museum didn't.

At the Sept. 1999 Council meeting, then-3rd district Councilman Frank Colonna, in whose district the museum is located, made a motion to approve the transaction. He urged unanimity by the Council in approving the arrangement, calling it a "community partnership." He also suggested (and the Council agreed) to dispense with a treasurer's report on the subject.

Councilman Colonna's motion carried 8-0 (Yes: Oropeza, Baker, Colonna, Kell, Topsy-Elvord, Grabinski, Kellogg and Shultz; Absent: Roosevelt).

LBReport.com provides the text of then-city management's memo along with archival audio of the Sept. 1999 Council meeting. The materials speak for themselves.

The audio runs just over four minutes (with applause). We provide it in full (minus a museum rep's address which we removed). To hear it, click here.

In its Sept. 1999 memo recommending that the Council incur potential taxpayer exposure, city management said the LB Museum of Art foundation "intends to reimburse the City for all of its costs through the receipt of pledges from its 5-year capital campaign...The Foundation's goal is to redeem all of the bonds within five years."

Below is the salient text from the archival September 14, 1999 memo as agendized by then-city management for Council action. The memo was authored by then-Director of Financial Management, Robert Torrez, and co-signed as approved by then-City Manager Henry Taboada stated in pertinent part:

September 14, 1999...

SUBJECT: Tax and Equity Fiscal Responsibility Act (TEFRA) Hearing Report and the Financing of Certain Improvements for the Long Beach Museum of Art Expansion Project (District 3)

...This spring, the Long Beach Museum of Art Foundation (Foundation) requested that the City assist it in financing its $6.5 million construction project. The Long Beach Museum of Art is owned by the City and leased to the Foundation under a management agreement...

...In 1985, the City contracted with a private group to operate the Museum. As a result, the Long Beach Museum of Art Foundation was formed as a non-profit, public benefit corporation. Approximately three-fourths of the Museum's permanent collection was acquired while under City operation and remains City property.

Today the City contributes approximately $300,000 annually to the Foundation for collection and record maintenance, safekeeping and exhibition services. Through fundraising and grants, the Foundation raises approximately $800,000 annually for Museum operations.

...In 1985, the Foundation decided to expand the Museum at the current Ocean Boulevard location in order to improve and modernize the facility...

...The total project budget is $6.5 million. To date, more than $3.4 million has been pledged from individuals, corporations, and foundations through a dedicated capital campaign. The pledges are payable over a five-year period...The campaign has commenced its "public" phase and believes it has many prospects and is optimistic based on its strong track record of success.

...After reviewing several alternatives, staff has determined that the best available financing option is...to issue tax-exempt variable rate lease bonds...As currently structured, the principal amount will be approximately $3.1 million. The net proceeds, after costs, will be loaned to the Foundation to partially finance its construction project. The bonds will be structured with a 10-year maturity...The entire $3.1 million of principal will be due at maturity, unless earlier redeemed.

The foundation intends to reimburse the City for all of its costs through the receipt of pledges from its 5-year capital campaign. It has also committed to use these receipts in the following order: (1) to pay current interest and fees related to the bonds, (2) to pay additional costs related to the construction project, up to $1 million (unless increased at the discretion of the City), and (3) to redeem bonds (through optional prepayment). The Foundation's goal is to redeem all of the bonds within five years. The longer, 10-year maturity will allow both the City and the Museum more flexibility should there be a need to expend the targeted redemption date a few years.

FISCAL IMPACT

The City's General Fund will secure the annual debt service payments and other annual costs...The City's obligation to pay debt service is separate from the Foundation's obligation to reimburse the City...

Although the Foundation is confident of their capital fundraising capabilities, there is a risk that the fundraising campaign will not realize all of he pledges made to it. In the event that the Foundation can no longer reimburse the City for the cost of the debt service, the City's General Fund will continue to secure the bonds without subsequent reimbursement from the Foundation.

The proceeds of this financing, in addition to other capital funds raised by the Foundation, will be used to improve and modernize this City-owned facility...

In February 2006, then-City Auditor Gary Burroughs office (per Deputy City Auditor Janet Sutter) delivered an Audit on the LB Museum of Art, identifying current and approaching problems. The Burroughs-office document stated in pertinent part:

...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.

The Burroughs office Audit 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 Burroughs-office Audit was relegated to the Council's Feb. 7, 2006 "consent calendar" (not scheduled for public discussion unless separately requested). The item was labeled a contract review item.

The 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."

When the item came up, it was eclipsed by the resignation of 2nd district Councilman Dan Baker early in the same Council meeting. In the wake of Baker's exit, some Councilmembers (Colonna, Reyes Uranga and Gabelich) exited the Chamber; the Council vote to receive and file the Burroughs audit 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].

The Burroughs audit findings were transmitted to then City Manager Jerry Miller, Dir. of Financial Management Mike Killebrew, Parks & Rec Director Phil Hester...and then-Community Development Director (now City Manager) Pat West.

In March 2007, LBReport.com reported on the approaching potential taxpayer exposure in a Perspective story titled, "Credulity Then, Debt Now: How 1999 Council Action Left Taxpayers Facing $3+ Million Debt...And Controversial City Hall Plan To Pay For It Now." The controversy resulted from a city management proposal to enter into a contract with a private firm that offered to construct and operate electronic billboards in areas in or adjoining Redevelopment areas with a revenue sharing arrangement for City Hall. City management indicated that resulting ad revenue from the billboards might be used in part to pay (i.e. bail out) the Art Museum Foundation's debt.

A geographically polarizing controversy ensued. The electronic billboards were supported by some arts-advocacy groups (whom city management indicated could receive funding from billboard revenue) while residents near the proposed billboards (some deemed legally blighted in Redevelopment) blasted the proposal as "blight for the arts." City management eventually dropped the plan.

On March 25, 2008, city management told LB's Budget Oversight Committee that the sale of some of LB Museum of Art assets was one of many options being considered if the LB Museum of Art Foundation can't make a $3 million Sept. 2009 payment on a debt bond floated in 1999 to expand and renovate the facility.

At that time, Councilman O'Donnell called the $3 million bill "a threat to public safety...a threat to our fiscal health...Please don't let this come down to June and decide we're going to move on this...The fiscal health of this City is paramount."

At that time, LB Museum of Art Executive Director Ron Nelson (responding to a request for comment from LBReport.com) emailed us (and we published) that "In conjunction with the City of Long Beach the L.B.M.A. Foundation is considering many options for repayment of its debt, by the September 2009 deadline. As an accredited institution we continue to follow the high ethical standards set by the American Association of Museums during this process."

In June 2008, City Auditor Laura Doud and Assistant City Auditor James Johnson released an audit of the LB Museum of Art. It mentioned the 2006 Burroughs audit in passing...but didn't tell taxpayers what it said. Instead, the Doud-Johnson audit shifted attention to 2007, when city management says it was told by the Museum about problems and the Doud office followed up.

In May 2009, the Doud-Johnson audit won the 2008 Knighton Award from the Association of Local Government Auditors (ALGA) representing 400 local government audit organizations. City Auditor Doud flew to San Francisco to receive it at the group's annual conference and her office issued a release that included the following:

"I am very pleased to accept this award on behalf of my office. This audit was about ensuring that the Museum establish a plan to repay the debt owed to the City so that Long Beach taxpayers will not have to pay the bill," said City Auditor Doud."

Efforts by LBReport.com to obtain comment from the LB Museum of Art/Foundation for this story were unsuccessful.

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