Bond Voyage: Pay-as-You-Go Policy Going Fast in Gardena

Six years ago, businessman George Anthony unveiled plans to construct a 16-story hotel here, claiming that the structure would attract corporate clientele and become the town’s crown jewel.

Then the problems set in.

Interest rates climbed, investors could not be found, a major bank withdrew its support and, in late 1984, the city failed in its bid to win a $3.5-million federal urban development grant for the project. Anthony doubted that the hotel would ever be built.

But now Anthony, who owns the Eldorado Card Club here, believes that the tables have turned in his favor.

Bonds Issued

Last month, in a dramatic departure from fiscal policies that have governed Gardena since it was founded 56 years ago, the City Council issued $17 million in tax-exempt bonds, $11.5 million of which were earmarked to build a parking structure for the hotel. Anthony predicts that bulldozers will break ground on the project this spring.

“I probably would have had to give up” on the project without the bonds, Anthony said last week.

For the 72-year-old Anthony, the city’s decision to sell the bonds could turn out to be the boost he and his partner, Beverly Hills investor William Peeler, need to make the hotel a reality. For city officials, the decision is part of what they call a larger move on their part to shed Gardena’s tradition of fiscal conservatism and lure developers into the 5.5-square-mile city.

“We are going out and using whatever resources or ingenuity we can conjure up,” said Paul Tsukahara, a dentist who was elected to the City Council in 1980. “We are using every mechanism that is available.”

“The people and council have been very conservative fiscally and their philosophy up to now has been not to get involved in any kind of financing,” said City Manager Kenneth Landau, who was appointed last year after serving as assistant city manager for three years. “But the council understands the next five years are very important to Gardena if it is going to increase its tax base.”

Pay as You Go

City officials say Gardena has long prided itself on adhering to what boils down to a pay-as-you-go policy with no outside interference or aid. That philosophy was so deep-rooted that Ed Russ, a former councilman and mayor, recalled that it was not until the late 1960s or early ‘70s that city officials decided to begin applying for and accepting federal grants. “At first they wouldn’t even take the grants” he said.

“I think the old home rule applied to that period of time, a feeling of doing everything yourself,” Councilman Mas Fukai explained. “They didn’t want the state or federal government involved. They didn’t want anybody to dictate anything except the City Council.”

Fukai and other city officials said it has been a source of pride for city officials and residents that Gardena had managed to avoid any bonded indebtedness over the years. Fukai recalled that when he was first elected to the council in 1974, the city found itself $2 million in debt because it had paid cash for a number of Civic Center improvements. The council had studied the possibility of issuing bonds for the projects, but abandoned the idea in the wake of criticism by some citizens who did not believe it would be a wise move, he said. The city took out a short-term note to cover the deficit.

Residents have also raised objections to the creation of a redevelopment agency that would have allowed Gardena to use tax-increment financing to revive ailing areas in the city. In 1977 voters rejected a proposal to form such an agency by a 2-1 margin. The effort to defeat the measure was led Gwen Duffy, who now serves on the council.

Cash From Card Clubs

Fukai and others say part of the reason for the conservatism of both citizens and city officials was that the city was financially sound, thanks largely to the six card clubs it licensed to operate. Gardena card clubs held a monopoly in Los Angeles County from the 1930s until about six years ago, and have historically provided the city with 25% of its total budget.

But that has changed in recent years as the card clubs experienced competition from bigger casinos in neighboring communities. In the past five years, the portion of the city’s $25-million budget derived from the club revenues has dipped to about 8% and is expected to decrease even more in coming years, Landau said. Of the six clubs that had been licensed to operate in the city, only three remain, he said.

Landau said that because of declining card club revenues, the lack of a redevelopment agency and the passage of Proposition 13 in 1978, which severely limited the abilities of cities to raise revenue by increasing taxes, the city has long recognized that it would have to turn to other means to attract new investment.

And while he said Gardena, whose population of 47,700 is 21% Japanese, has been successful in attracting Asian investors in recent years, it was not until last year that the City Council decided to join ranks with other cities and rely on what Landau calls creative financing to promote private development.

Parking Authority Formed

Last month the council formed a parking authority to give it the legal authority to issue $17 million in tax-exempt bonds. Besides the $11.5 million pegged for Anthony’s hotel project, $5.5 million was set aside for the construction of a $16-million medical office building and retail complex planned by Encino-based Condor Wescorp. Ami Dabach, president of the company, said he expects construction to start in May.

The city’s first involvement with bonds was in November when it sold a $1.4-million issue to purchase a mobile home park where residents were threatened with eviction. Although the city is ultimately responsible for paying back the bonds, the payments are made from mobile home rents and the park itself serves as collateral.

Unlike that bond issue, the city is not ultimately responsible for guaranteeing those issued by the parking authority. Instead, the bonds, technically referred to as certificates of participation, are secured by letters of credit issued by a bank and obtained by the developers. The bonds will be paid back over a 20-year period by the developers, who also pay for issuing them.

“Certificates of participation are the investment bankers’ answer to the limitations Proposition 13 placed on the issuance and servicing of general obligation bonds,” Redondo Beach City Manager Tim Casey said.

Taxes Could Be Raised

Casey explained that before Proposition 13 passed, a city could issue general obligation bonds with a built-in security blanket for investors: If the municipality ran into trouble paying off the bonds, it could always raise property or other taxes to pay them off.

Councilman Fukai, echoing the comments of other city officials, said the parking authority bonds “won’t cost the taxpayer a dime” while creating new jobs and revenue for the city. Landau estimates that the hotel alone will generate $500,000 a year in new tax revenue, while the medical facility should generate more than $100,000.

Bill Straw, the vice president with Security Pacific Capital Markets Group in Los Angeles who handled the bond sale for the city, estimated that Anthony will save $300,000 the first year because of the lower interest rates the bonds carried compared to prevailing market rates for conventional loans. The bonds’ initial interest rate is 7.75%, but they are set up to fluctuate with the market in much the same way a variable home-loan mortgage does, he said.

(Bond buyers accept a lower interest rate because they do not have to pay federal tax on their bond income. In effect, the deal is subsidized by the federal government.)

Growing Practice

Straw and other bankers said that Gardena’s decision to issue the type of bonds it did comes at a time when many cities in the Los Angeles area doing the same thing. And, like Gardena, many are first-time bond issuers seeking ways to boost their dwindling treasuries.

Whether Gardena or the other cities will be able to issue more such bonds is uncertain, however. Landau said the city rushed to issue its bonds because of pending changes in the federal tax laws that could abolish tax exemptions on bonds used to finance public facilities such as parking structures, sports and convention centers and waste-water treatment plants.

“Each year the field gets narrower and narrower,” Landau said. “It used to be you could build a McDonald’s or a Jack-in-the-Box with tax-exempt bonds.”

Nevertheless, Landau, whose goal is to increase city revenues by $5 million over the next five years, predicts that even if Congress puts a halt to such bond issues, the city might be able to issue other types of tax-exempt bonds.

For instance, he said he is confident that the city will soon conclude negotiations for a 25-acre parcel of land that the state Department of Transportation has declared surplus. Once the sale is completed, the city, working with the developer, could form a public improvement district and sell tax-exempt bonds to build a public facility such as a police substation on the land, he said.

No Strong Opposition

Several council members said they are committed to using whatever financial mechanisms are available to spur growth. And no strong public opposition has emerged at council meetings.

Moreover, the council’s pro-development stance could continue for at least another four years. The terms of council members Fukai and Duffy, as well as Mayor Donald Dear, expire this spring, and all are seeking reelection. As of last Thursday, four potential candidates had picked up filing papers at City Hall. The deadline for filing as a candidate for the April 8 city election is Jan. 30.

Councilman Tsukahara, with two years left on his term, said he toyed with the idea of challenging Dear for the mayor’s seat, but later changed his mind.