City Gives $2 Million to Business Training Academy : Public funds: Concern builds that city leaders may have spent taxpayers’ money irresponsibly to support an unregistered program.

In the last 18 months, Lynwood city officials have given more than $2 million to a business development program, including a $1.5-million loan, and do not know how all the money was spent nor how the city will get its money back.

The City Council gave the money to the Entrepreneurial Development Academy of California with virtually no strings attached. City officials have no loan or security agreement and no receipts to show how public funds have been used. Moreover, the city has continued to support the academy although it is not registered as a business or nonprofit corporation.

Concern that city leaders may have spent taxpayers’ money irresponsibly to support the academy has prompted City Manager Laurence H. Adams Sr. to call for a review of the program. Adams said he wants to conduct an audit of the organization’s books and revise the agreements.

Adams said he will discuss his plans with the City Council at its regular meeting Tuesday. While he stressed that there is no evidence of illegal activity on the part of either the council or the academy’s directors, Adams said safeguards are needed “so that the city is assured of receiving the full value of the program’s promise.”

The brewing controversy about the city’s relationship with the academy has cast a pall over what even the program’s critics call a good concept--to create small businesses and jobs for Lynwood residents. A majority of the City Council members downplayed the concerns and praised the program. Councilman Paul H. Richards II called the academy “one of the greatest things that has ever happened” in Lynwood.

Pointing to the start-up businesses now operating within the academy, the majority of council members contend that the city’s money has been well spent.

Nonetheless, questions remain about what seems to be the city’s generous financial commitment to the academy. Participants receive free business classes and then are given free office space in two academy buildings. They receive free clerical support and access to office machines and conference rooms.

The city also has agreed in writing to pay the academy $300,000 a year for 40 years and $150,000 a year in rent for the two buildings. Under this agreement, rent alone would total at least $6 million by the year 2031, but the academy is supposed to repay only $2 million.

City Atty. Henry S. Barbosa has warned the City Council and former City Manager Michael Heriot in confidential memos at least three times in the last year that the city’s vague agreements with the academy fail to protect the city’s financial interest. However, no action was apparently taken by either the council or Heriot. Instead, the city manager continued to authorize payments to the academy.

In a Nov. 9 memo obtained by The Times, Barbosa pointed out that the city had written checks to the academy, which is not an independent corporation. The academy is a program of the Compton-based nonprofit Cultural Economic Youth Sports Arts Foundation, with which the city has no agreements. As a result, Barbosa wrote, the city may have trouble getting its money back.

As part of funding the academy, the city issued a $694,000 check to a private manufacturing business so it could buy industrial machinery to make aerospace parts. No loan agreements or security agreements were signed with Lynwood Manufacturing Inc. Company owner Richard Calhoun said he was not able to get work for the firm. He said he abandoned the effort after about 10 months and took up the ministry. Lynwood Manufacturing Inc. is out of business, he said. The equipment remains at the academy and is being used by another business, but it is not clear now who owns it.

“The city has been pouring money into (the academy) and there is no accountability,” said the Rev. Charles Floyd, one of several Lynwood residents who have long questioned the city’s arrangement with the academy.

Patricia Carr, a community activist, said a group of residents made repeated written demands to Heriot for information about the city’s contracts with the academy. Carr said Barbosa responded with a letter saying there was no information on file.

In interviews last week, a majority of the City Council members said they did not realize the city’s agreements with the academy were so vague until they received a letter from Barbosa last month. Only Councilman Armando Rea, who said he “kept a constant vigil” on the loose arrangements, remembered Barbosa’s warning letters. Councilman Richards denied receiving any warning letter before November. Mayor Louis J. Heine and council members Evelyn Wells and Louis Byrd said they don’t remember.

All five council members said they thought city staff was handling the details of the contracts. “I really don’t know what happened,” Wells said. “We have staff that is supposed to make sure everything is in line and we have a city attorney who is supposed to make sure everything is taken care of.”

Barbosa declined to discuss his letters to the council but said Heriot handled the financial details of the program.

Heriot, who resigned in May citing personal reasons, did not return telephone calls and the other two men who were responsible for the agreements are no longer involved. Former academy executive director Jesse Arnold, who suffered from high blood pressure and a heart condition, retired in August. And the city’s former community development director Kenrick Karefa-Johnson, who authorized a number of checks to the academy, died six months ago.

Arnold’s wife, Cecilia, said her husband was too ill to discuss the academy. “We are not to discuss the academy,” she said fiercely. “Jesse Arnold almost died putting that together and we are trying to put it out of his life.”

Herbert Reed, the academy’s acting executive director, agreed that the contracts with the city need to be tightened and said he thought city officials were working on it. He said he is not sure how much the academy owes the city but said he can document how the money has been spent.

From July, 1991, to January, 1992, the city gave or loaned the academy $1.5 million, plus $173,000 in rent. Reed said $694,000 was used to buy manufacturing machinery, $300,000 went for building improvements, and $262,000 was spent on administrative and professional, technical and support services, the bulk of which was used to pay six staff members. The academy also spent about $40,000 for utilities, security, telephones and office supplies, Reed said.

“Here you have people pursuing a concept that is a very good concept,” Reed said. “Some way or another we’ve got to solve these problems. It can work if we can make it survive or it can be killed by politics.”

Entrepreneurs who want to go through the academy first enroll in six months of free business classes taught in the Business Institute by instructors from Cal State Dominguez Hills and UCLA Extension. Upon graduation, they are given free office space and services in one of the two academy buildings until their businesses are operating smoothly.

In exchange, they are supposed to relocate in Lynwood and hire Lynwood residents. The academy does not specify how long these so-called incubator businesses can stay at the rent-free site nor penalize those that fail to relocate to a Lynwood site or hire Lynwood residents. The academy currently houses 15 businesses, including six established firms that will remain as “anchor” tenants. So far, none of the other incubator businesses has left. Another 35 entrepreneurs are enrolled in the Business Institute and will graduate sometime in February, said institute director Adriana Richards.

Clothing designer Myra Wallace is one of the start-up businesses at the academy. Until the academy opened, Wallace ran her custom-made clothing company out of her Inglewood home. After she graduated from the institute in June, program directors helped her buy an industrial sewing machine and five fabric cutting boards. Today, she occupies a large corner of one of the academy’s warehouses and has a contract to make custom-designed clothes for six Lakers basketball players.

“When you’re trying to run a business professionally, it’s very hard to do it out of your own house,” Wallace said, sitting in her small office, surrounded by photos of Lakers players modeling her clothes. “The biggest setback for small businesses is that you don’t have a place to operate, and the biggest expense is rent. That’s what held me back until I came here.”

Wallace said she expects to relocate in Lynwood within a year.

One of 470 incubator programs nationwide, the academy’s policy of offering rent-free space is unusual, said Dinah Adkins, executive director of the National Business Incubation Assn. in Athens, Ohio. She added that it is rare for a public agency to entirely fund an incubator program for 40 years.

Most incubator programs require their businesses to pay below-market rent and pay for other office services. “You have to develop a revenue stream from the incubator businesses,” she said. “How can you teach people to be entrepreneurial if you’re not entrepreneurial? You can’t run it as a charity.”

Reed acknowledged that the academy’s rent-free policy is unique, but he said the six anchor businesses at the academy will help repay the city loan. Reed owns one of the businesses, a management consulting firm that has done work for the city. The other so-called anchor businesses include a tree-trimming company that has a contract with the city, a company that provides clerical staff for the academy, a security firm that also has a contract with the academy, and a construction firm. Reed said he and the other five business owners have agreed among themselves to do what they can to pay the city back.

“We can be very, very entrepreneurial in how we raise the money,” he said, adding that the academy has already applied for a federal community development block grant.

With the exception of Councilman Rea, the other council members vowed to continue funding the program.

“I’m not worried,” Mayor Heine said. “You worry about something when you’ve done something illegal.”

City Manager Adams and several council members characterized the academy’s shortcomings as oversights by well-intentioned individuals.

“Maybe things weren’t documented properly, maybe it’s not a grandiose success, but there is no doubt in my mind that it’s the right economic tool,” said Adams, who was hired as city manager in November. “It is absolutely critical to Lynwood.”

Lynwood Spending on Academy

A chronology of the city of Lynwood’s financial support to the Entrepreneurial Development Academy of California, a business development and training program that is supposed to create small businesses and jobs in the city:

1991

* May 21: Lynwood officials approve the creation of the academy.

* June 25: City agrees to pay $200,000 a year as tuition for 20 start-up businesses and $100,000 a year in operating expenses for 40 years.

* July 29: Pays $200,000 to the academy for “technical and professional services; writes $694,800 check to Lynwood Manufacturing Co., a major tenant of the academy, for industrial machinery.

* July 30: Gives $300,000 to the academy for building improvements.

1992

* Jan. 15: As part of agreement, city makes first payment of $200,000 for tuition and $100,000 for operating expenses.

* Aug. 13: Makes second payment of $200,000 for tuition for 20 new start-up businesses.

The city also paid $234,251 in 1991-92 to rent two buildings for academy operations. City Manager Laurence H. Adams Sr. withheld December rent payment until contracts between the city and the academy are rewritten.

Source: City of Lynwood.