City of Industry Must Sell Land or Face Insolvency, Grand Jury Reports

The City of Industry and two of its redevelopment agencies may face insolvency unless they sell land purchased for now-defunct redevelopment projects or issue new revenue bonds, according to a county grand jury-sponsored report that is highly critical of the city’s management.

Industry, whose $593 million in outstanding bond issues was the highest in the state last year, was the subject of a review commissioned by the county grand jury and released to the public this week.

The report concluded that Industry “may not remain solvent unless they sell surplus land, issue new debt or take other actions to meet future debt service requirements.”

The grand jury study also found that the city, the Industry Urban-Development Agency (IUDA) and the Civic-Recreational-Industrial-Authority had principal and interest payments that exceeded income by $6.1 million in fiscal year 1983-84 and $88.3 million in the fiscal year that ended June 30. The report projected deficits of $45.7 million this fiscal year.

The centerpiece of the city’s redevelopment efforts, the 500-acre Industry Hills Civic-Recreational Complex, posted an operating loss of $11.4 million last year. Industry has been making up the deficits by refinancing its bonds.

The document, which was prepared by the San Diego-based management advisory firm of Deloitte, Haskins & Sells, also contended that Industry lacked sufficiently trained staff to handle its volume of redevelopment work and used questionable accounting practices. The report further criticized the city for failing to use competitive bids on engineering, professional and many other service contracts.

Graham Ritchie, attorney for the city and its redevelopment agencies, said some surplus land acquired for canceled redevelopment projects already is up for sale, adding, “We don’t perceive it (the financial situation) as being grim.”

Ritchie said most of the other criticism contained in the report was unfounded. “We will do it (seek competitive bids) when we need to, without much regard for their recommendations,” he said.

Industry was selected for review because of the large amount of money it spends on redevelopment and because of concern by citizens that the city has been “controlled by powerful local interests,” the report said. Last year, the Industry Hills Civic-Recreational Complex--an Industry redevelopment project--was at the center of a major scandal over a kickback scheme orchestrated by city founder James Marty Stafford. Stafford pleaded guilty to 18 felony charges and is serving an eight-year sentence in federal prison.

The study also reviewed the performance of the city of Los Angeles Community Redevelopment Agency, which it found to be well managed. It also looked into allegations by citizens groups of mismanagement of redevelopment agencies in Alhambra and Monrovia, but found no basis for the charges.

Although the city has only 640 residents, Industry’s renewal program affects virtually every taxpayer in the county. The California Community Redevelopment Act allows cities to freeze property taxes of a redevelopment area at an existing level and allocate all or part of increased tax revenue to a redevelopment agency instead of passing it along to the county and other taxing authorities. All of Industry’s 11 square miles are designated for redevelopment.

Since its inception in 1971, Industry’s redevelopment agencies have received $158.7 million in property tax revenues that would have gone to the county and other taxing agencies if the area had been privately developed, a spokesman for the county auditor’s office said in an interview. By contrast, the city of Los Angeles has diverted a total of $258.8 million in property tax increments from other taxing authorities since 1948.

Ritchie questioned the grand jury’s motive in singling out Industry. “I don’t think they (Deloitte, Haskins & Sells) were hired to tell the grand jury what’s good about redevelopment,” he said. “All of that baloney (about diverting money from the county) you hear from the enemies of redevelopment in county government shows they have a somewhat hostile approach to it all.”

The report found that the city appeared to have issued new bonds to pay for operating losses.

That practice is unusual, according to Robert Vincent, vice president of California Municipal Statistics, a San Francisco research firm.

“When a city issues bonds, it’s usually for capital improvements, for public works, not for simply funding a fiscal year deficit,” Vincent said. “By bonding for a deficit, you have to pay back the deficit with interest, which is not prudent fiscal management.”

The report recommended that the city cease the practice and “develop a strategy for bond repayment” that includes the sale of surplus property and repayment of debt from expected revenues.

Trade Zone Land

On Tuesday, the IUDA accepted a $1.5-million offer for 10 acres purchased for a defunct hospital project. The agency also decided to seek buyers for a 200-acre parcel acquired for a canceled foreign trade zone project. Ritchie said proceeds from the trade zone land will cover $31 million in bond payments due in 1986 and that other debts can be paid by other property sales and additional taxes generated by new development.

The report asserted that Industry, which has only 10 employees, has insufficient staff. The city and its two principal redevelopment agencies this year have a combined budget of $179 million. By comparison, the Los Angeles Community Redevelopment Agency, which has a smaller budget, has 396 employees. The report also concluded that Industry’s staff lacks experience.

“We found no one individual person within the city appears to be responsible for the overall control of city fiscal matters,” the report stated. “The city staff does not appear to have the training, background or experience to fully understand the financial statements.” The report noted, for example, that city officials could not find records for four bond issues.

The report suggested that the city recruit a new management team, including a new executive director of the IUDA, a post currently held by John Radecki, who doubles as city engineer. Radecki refused to comment about the report and referred all inquiries to Ritchie.

Outside Contracting

“We think we know just as much about what’s going on here as they do in L.A.,” Ritchie said. “Even in the L.A. CRA, one person could not give the full picture.”

Ritchie added that Industry contracts with private companies for most of its services to reduce bureaucracy and said the city has no plans to replace Radecki.

The report said the use of Frazer & Torbet, a Los Angeles accounting firm, for both bookkeeping and auditing services is questionable because the firm was in the position of auditing its own bookkeeping work. Ritchie said the city will make changes if it determines its accounting practices are improper.

The report also contended that the city’s practice of awarding many contracts without competitive bidding has resulted in “contracts which appear to be unduly favorable to certain individuals and companies.” Among the examples of possible favoritism, the report mentioned that Mayor John Ferrero leases 600 acres of grazing land from the IUDA at no charge. “Thus, the question arises as to what consideration the IUDA is receiving in return or whether the right to use the land for grazing is a gift,” the report said.

Ferrero could not be reached for comment, but Ritchie said the arrangement has been investigated by federal and local authorities and its legality has not been challenged. Ritchie added that state law does not require competitive bids on engineering, professional or other service contracts.

The study determined that despite its high volume of bond issues, Industry spends two to three times more money to issue its bonds than comparable redevelopment agencies.

Ritchie said the city is in the process of reducing its bond issuance costs and that it severed its longstanding contract for engineering, planning and bond consulting services with the now-bankrupt National Engineering Co. after an employee, C. Ronald Rabin, was convicted last year in the kickback scheme involving the Industry Hills Civic-Recreational Complex

Ritchie said Deloitte, Haskins & Sells did a “reasonably professional job,” but added, “They obviously caught us in a transition of major proportions.”

The city has since hired other firms to provide those services at a reduced level because the foreign trade zone and hospital projects have been dropped.