Gadfly Blocks Bond Sale, Costing L.A. Thousands : Government: Legal challenge adds $190,000 a month, officials say. Man says he’s trying to teach city a lesson.

In a dispute that Los Angeles officials claim is costing taxpayers $190,000 a month, a City Hall gadfly is single-handedly holding up the sale of $250 million of municipal bonds.

Leonard Shapiro, a Granada Hills retiree who regularly takes potshots at bureaucrats in a self-published newsletter, took legal action in February that blocked the huge bond package, intended to pay off a court judgment against the city.

Issuing bonds to pay a court award is rare, but not unheard of. However, Shapiro argues that these bonds, approved by the City Council in January, were illegally passed and violate Proposition 13.

City officials maintain that they can save $22 million by paying off the judgment immediately with revenues from bonds sold at about 5.7% interest. If the judgment was paid out of the city’s general fund, the city would have to pay 7% interest over 10 years--the rate and time period specified by state law in cases municipalities lose in court.

But Shapiro’s court action, city officials said, has delayed the bond sale, scheduled for March 31, until mid-July at the earliest. Meanwhile, the judgment continues to pile up interest at 7%, adding $190,000 a month to the price tag, said David Brodsly, a city bond specialist who is trying to execute the sale.

“Democracy seems to require that we flush public dollars down the toilet once in awhile,” said Brodsly. Shapiro countered that city officials are the ones throwing money down the drain because they should have stockpiled funds in anticipation of the judgment years ago.

The arguments and counterarguments between Shapiro and the city will get a hearing Friday when city lawyers ask a Los Angeles Superior Court judge to dismiss Shapiro’s complaints and declare the bonds legally sound.

The dispute began in February when Shapiro, 72, got a phone call from one of his subscribers who had spotted an intriguing legal notice in a newspaper.

The announcement notified the public that the city had filed a “validation suit” intended to resolve potential legal questions about the bonds. The action, filed in the form of a lawsuit against the city’s 3.5 million residents, offered the opportunity for anyone to challenge the bonds in court.

Shapiro filed a response--the only person in Los Angeles to do so. Using a legal form borrowed from a friend, he hurriedly typed a four-page answer to the city suit and delivered it to a downtown court clerk one hour before the deadline--bringing to a halt months of planning and negotiations over the bond sale.

City officials did not expect the challenge and are angry at Shapiro. But it is hardly the first time he has gotten under bureaucratic skin.

Short and nearly bald, with a booming voice and almost frantic energy, Shapiro is a well-known figure at City Hall. At council meetings, he frequently takes the microphone during comment periods to berate city authorities for what he views as their nearly limitless incompetence, laziness and lack of imagination.

Those are themes repeated often in his monthly newsletter, the L.A. Observer, which has about 2,000 subscribers. He puts it together himself in a small home office crammed with city reports, budget books and newspaper clippings.

Shapiro claims that the city tried to hide the bonds so citizens would not learn of its handling of the court case that led to its attempt to float them.

The case stems from the city’s 1982 imposition of a gross receipts tax on savings and loans and other financial firms despite a state prohibition against such levies. The city was sued by California Federal Savings in a test case closely watched by other S & Ls.

A Los Angeles Superior Court judge ruled against the city in 1988. City officials began impounding the tax revenues and took the case to a state appellate court, which ruled in their favor.

City officials spent the impounded revenues--$38 million--using the money for operating expenses during a period of lean budgets.

Last year, after the S & L appealed, the state Supreme Court ruled against the city, sending officials scurrying for a way to pay back taxes and interest to CalFed and up to 60 other S & Ls with claims against the city.

City officials defend the decision to impose the gross receipts tax, saying they believed that the state did not have the legal power to bar local business taxes on S & Ls and that those revenues were an important source of income for the city.

But Shapiro argues that the tax was illegal from the start. He said officials should have impounded the revenues from 1982 on, and acted irresponsibly by spending the money in escrow. The result, he said, is that the city now must pay an additional $70 million--more than a quarter of the $250-million judgment--in interest on past taxes.

Bonds have been used before to settle court judgments but that is rare. Still, the city’s attorneys felt uncomfortable enough about the S & L bonds to seek a judge’s ruling that they are legal instruments.

“The cases are old enough and the bonds are rare enough that we decided we would get a judge to say it’s OK,” said Marilyn L. Garcia, a private attorney representing the city in the validation lawsuit.

But Shapiro said the bonds violate a provision of Proposition 13 requiring two-thirds voter approval for the issuance of bonds.

Garcia claims that the bonds are exempt from Proposition 13 because they will not be secured with property taxes, but with city general funds.

Shapiro further argues that the City Council tried to “hide the incurrence of huge amounts of debt” by authorizing the bonds at a meeting just two days after New Year’s Day--a time when few people were likely to be paying attention.

He also complains that a new ordinance passed to float the judgment bonds gives the city open-ended authority to issue such debt whenever it loses a court case.

That, he said, eliminates incentives for city officials to be careful in their business.

Shapiro offered to drop his court action if officials agreed to hold a series of public hearings to apologize for the way they handled the CalFed case. He also demanded that the city rescind the bond ordinance. Officials have not accepted that offer.

City Council President John Ferraro, who has often sparred with Shapiro in the council chambers, said he is willing to say the city made a mistake in imposing the S & L tax.

“I’m not so big I can’t apologize,” he said.

But the city has held a hearing on the bonds and conducting additional sessions “doesn’t accomplish anything,” Ferraro said.

Brodsly, the city bond specialist, said officials are unwilling to “commit some kind of public seppuku”--a Japanese word for ritual suicide--for the sake of appeasing Shapiro.

“Poor Leonard needs to get a life so I can get mine back,” said Brodsly, who said he has spoken with Shapiro “about 10 zillion times” in an effort to settle the matter.

“If I sound frustrated, it’s because we worked very hard to cut our losses as much as we can (by devising the judgment bonds). . . . This is a nuisance that’s costing us a lot of money,” Brodsly said.

But Shapiro replies that city authorities have “already blown $70 million” in interest on the back taxes that must be returned to the S & Ls. That money could have been saved if officials had been putting into escrow the tax revenues in anticipation of an adverse court ruling, he said.

“They can’t go blindly and blithely taxing people when it’s going to be declared illegal later,” he said.

If his delaying action costs the city even $1 million or $2 million, Shapiro said, “it’ll be a cheap lesson” to city officials not to take such risks in the future.