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In a Political Campaign, City Officials Can Spend Your Money Against You. They Call it 'Education'

This commentary appeared first in the Orange County Register.

Californians going to the polls on Nov. 8 will find more than 300 measures to raise taxes. And despite multiple legal decisions limiting the practice, municipal officials in California may be paying outside consultants to run the campaign to sell you on your local tax measure.

In short, government officials use the public’s money to persuade the public to give government officials more money.

If you think that’s strange, you have good company. In the 1976 case Stanson v. Mott, the California Supreme Court established the principle that would seem to govern the space where government reaches out like the muscular and fully clothed God in Michelangelo’s “The Creation of Adam” and encounters a single naked, relatively powerless American voter. The judges put it plainly: “A fundamental precept of this nation’s democratic electoral process is that the government may not ‘take sides’ in a election contests or bestow an unfair advantage on one of several factions.”

The justices allowed that providing information and opinion – educating the public – is a legitimate function of government officials.

But how do we decide what’s political and what’s merely educational?

In the 2009 landmark case Vargas v. City of Salinas, the court returned to the distinction between information and campaigning, and the “style, tenor or timing” standard, says Thomas Brown, city attorney for St. Helena, California, and a partner in the Oakland offices of Burke Williams & Sorensen.

“The potential danger to the democratic electoral process is not presented when a public entity simply informs the public of its opinion on the merits of a pending ballot measure or of the impact on the entity that passage or defeat of the measure is likely to have,” says Brown. “The threat to the fairness of the electoral process arises when a public entity devotes funds to campaign activities favoring or opposing such a measure.”

But throughout the state, public officials increasingly turn to campaign consultants. Wave a magic wand and you can declare that politicking “educational.”

Take the city of Stanton. In the run-up to a controversial 2014 local sales tax measure, city officials in Stanton made 16 payments totaling $85,970 to Lew Edwards Group, an Oakland-based political consulting firm.

The consultant’s Stanton proposal indicates the relationship was always about winning a campaign. Sent to city officials on March 18 of that year, that document declares Lew Edwards Group “the California leader in Local Government Revenue Measures.”

“Lew Edwards Group has successfully enacted more than $30 billion in California tax and revenue measures with a 95 percent success rate, including $2.34 billion in successful tax and bond measures in Orange County alone,” the proposal says. In a separate PowerPoint document prepared for the city, company officials said they achieved political success in Orange County despite “the opposition of the OC Register in all cases.”

The company’s 2011 presentation to the California Society of Municipal Finance Officials is equally political. Titled “New Taxes: How to Get to Yes,” the presentation features a section on transforming informational studies into what sounds remarkably like campaign material. That section is called “Turning Theory into Reality: How to Convert Your City Studies and Polling Results into a Winning Campaign.”

The consultants’ website warns, “A Public Agency cannot, at any time, engage in a partisan campaign.” But the site goes on to offer advice about turning over campaign responsibilities to an outside group.

In the months leading up to Election Day 2014, Stanton residents were invited to community meetings where local elected officials, city staff and county firefighters and sheriff’s deputies warned them about Stanton’s crippled finances. When they returned to their homes, residents were hammered by official mailers predicting a public-safety catastrophe if the sales-tax measure failed. Invoices show the city (i.e., the taxpayers themselves) paid Lew Edwards for at least three mailers in the last six weeks of the campaign.

Supporters of such spending – generally public officials themselves – say government has a responsibility to educate. And now it’s possible for government officials to argue further, that they have a First Amendment right to support ballot measures. In the Vargas v. City of Salinas case, Salinas officials ultimately filed an anti-SLAPP suit against the plaintiffs, two local citizen watchdogs who had filed suit to stop the city from spending public dollars on a campaign. Revealing how far we’ve drifted from a fear of government power, a court ultimately sided with Salinas, and ordered the watchdogs to pay the city’s $200,000 legal bill. The plaintiffs have since declared bankruptcy.

There may yet be a new ending in Stanton. There, critics of the 2014 sales tax rallied, and late last year qualified a repeal measure for the November ballot.

But once again, those citizens will be fighting more than City Hall. Records obtained by the California Policy Center show Stanton officials signed a new contract with Lew Edwards Group. This time, officials say they’ll spend no more than $25,000. But like the last big contract, this one ends just days before Election Day.

Will Swaim is vice president of communications at the Tustin-based California Policy Center, and was founding editor of OC Weekly.

Just in Time for Halloween, City Manager Uses Official Letter to Scare Voters

Faced with the potential repeal of a controversial one-percent local sales tax, Stanton City Manager James Box mailed voters two weeks ago to warn that passage of a sales tax repeal will “terminate funding approved by Stanton voters” and result “in cuts to essential city services.”

The timing of Box’s letter, just weeks ahead of November 8, could be a problem for the city. Box justified his voter contact as a response to “many questions about Measure QQ.”

State Attorney General Kamala Harris stated in a legal opinion that “it is illegal to use public funds to influence the outcome of an election.” Government officials can inform the public, but cannot directly engage in campaigning. But there is a razor-thin margin between information and campaign activities.

Measure QQ, on this November’s ballot, would eliminate the sales tax increase approved by voters in 2014, and return the sales tax in Stanton to a combined state and Orange County base rate of 8%.

In his letter, Box claims the tax increase has allowed the city to “enhance existing programs” and “rebuild the city’s financial reserves.” He did not refer to the city’s decision in 2012 to issue bonds to build Central Park, a project that ballooned from $6 million to $24 million, and annual interest payments on debt totalling some $42 million over 30 years.

In 2014, Stanton claimed the city’s budget shortfall would lead to cuts in public safety spending. In order to convince voters to raise their own taxes, the city issued a series of mailings and a feedback survey – all of it, officials said, aimed at collecting residents’ priorities. In practice, the communications functioned as a push-poll – a campaigning tool used to manipulate public opinion.

Days before the 2014 election, Stanton city manager James Box mailed voters under a similar claim of the “number of phone calls from Stanton residents” he had received. He used the opportunity to hold up the feedback survey as proof that voters wanted to raise their own taxes when, in fact, the survey was biased toward a predetermined pro-public safety response.

City officials claimed that failure to approve the sales tax would lead to deep cuts in public safety. Yet, they chose not to create a “specific tax” that would have legally limited the tax revenue to public safety spending. Instead, they chose a general one-percent sales tax increase that would fill the coffers of the city’s general fund. In the two years since the measure’s passage, the city has spent millions on new park construction, expanded city services and raised public employee compensation.

Andrew Heritage is a California Policy Center fall Journalism Fellow. He is a doctoral student in political science at the Claremont Graduate University.

Survey Says! How One City Used a 'Poll' to Raise Taxes

On Halloween 2014, Stanton, California, city manager James Box wrote to the city’s residents. City officials were at the end of a year-long campaign to stampede residents toward acceptance of Measure GG, creating a one-cent city sales tax, the first of its kind in Orange County. They had warned residents that failure to approve the new tax would lead to something like the apocalypse.

Just days before the Nov. 4 election, Box spoke to them one last time.

“I’ve received a number of phone calls from Stanton residents about the city’s budget, employees, service challenges, and Measure GG which is on Stanton’s November 4, 2014 ballot,” he wrote.

In the face of obvious public concern, Box said, he was ready to meet residents immediately – or, rather, not immediately, but in three months, long after the election, in a public park clubhouse, on a Friday morning at 9 o’clock.

Box’s nonchalant response to the “number of phone calls” is evidence that the real purpose of the communication was what political consultants call “Get Out the Vote.” That Box invoked his determination to provide “helpful information on issues of interest and concern” and “accountability and transparency” reveal how upside-down City Hall had become: he used the language of open government to obscure his real interests and to shape public concern.

Look for a similar October surprise this year. Residents this year qualified a measure to repeal the 2014 sales tax, and that measure will appear on the city’s Nov. 8 ballot.

City officials paid Lew Edwards Group throughout the first campaign, and it’s likely they drafted the letter that came over Box’s signature. They’re still on contract with the city, running a campaign for which Stanton officials have now paid them well over $100,000.

Papers, please: Spanish-language version of Stanton survey.

Papers, please: Spanish-language version of Stanton survey featuring scary cop.

 

California law allows public officials to provide nonpartisan information to the public in the course of government business. In several high-profile cases, state courts have ruled that public education campaigns like Stanton’s must not be intended to influence the outcome of a political campaign.

The landmark 1976 case Stanson v. Mott established the standard: “A fundamental precept of this nation’s democratic electoral process is that the government may not ‘take sides’ in election contests or bestow an unfair advantage on one of several competing factions. A principal danger feared by our country’s founders lay in the possibility that the holders of governmental authority would use official power improperly to perpetuate themselves.”

Despite that and other court decisions, Stanton officials have run a three-year campaign to persuade its citizens to raise their own taxes – and keep them raised. They’ve paid for that campaign with the public’s money.

The 2014 campaign featured a number of official-looking letters as well as a push-poll in disguise as a community survey. Like Box’s Halloween letter, a push-poll pretends to be one thing while being another. It’s a method of communicating (or pushing) a political message under the guise of a scientific effort to collect public feedback.

The science behind surveys is complex. That’s why it’s fairly easy to determine that the city’s survey wasn’t a survey at all.

The Stanton “Community Feedback Survey,” released to CPC following a Public Records Act request, was mailed to voters in June 2014. It featured photos of children posing alongside firefighters and police. Inside the brochure, city officials warned residents that budget shortfalls would likely lead to cuts in budgets for police and firefighters.

City officials sent a more disturbing version of the push-poll to their Spanish-language residents. That official-looking document features a severe-looking clip-art policeman at the top, and a request for compliance in responding to the survey.

The one-sided push-poll is designed not to solicit meaningful feedback, but rather to lead citizens to answers that support the council’s conclusion: the proposed sales tax is essential to maintaining public-safety. By limiting responses to nine pre-packaged “priorities,” five of which were public-safety related, unsuspecting respondents would easily come to the conclusion that public-safety spending is important and balancing the city budget (which is a constitutional requirement) is good. If framing the response they sought was not enough, Stanton went a step further by selectively placing those photos of children playing around police and firefighters — hardly appropriate for a mere a purely informational campaign.

Despite that framing, some respondents thought outside the box. Nearly one in five told the city other issues were important to them. These respondents were not primarily concerned about public safety spending, but about attracting business, homelessness, code enforcement of noise complaints, and graffiti removal. One respondent suggested encouraging marijuana clinics to relocate to the city; another said, “I wish I were a genius with ideas that could help. Maybe a lot of prayer.”

The result of the survey was not a meaningful assessment of resident’s priorities – not a dispassionate interest in public sentiment – but rather a pseudo-scientific “study” that local politicians then held up as a justification for more public spending along with tax increases.

A month after the June mailer, the city council placed Measure GG, a 1-percent sales tax, on the ballot claiming it would raise $3 million annually to avoid public-safety cuts. As part of its contract with the city, the consultant actually helped draft the measure’s ballot description. Two months after that, in September, city officials mailed residents again – this time to tell them the survey results had been tabulated and showed that huge majorities of residents agreed that public-safety spending critical and so was balancing the city budget.

The city has responded to this coming November’s repeal measure on the ballot with neighborhood meetings called “Talks with the Block” to attack the repeal effort. Once again, the 2014 feedback survey has played a prominent role in that campaign, with city officials insisting that residents asked and voted for the controversial sales tax. And once again, the Lew Edwards Group’s contract with the city ends just days before the election.

Andrew Heritage is a California Policy Center Journalism Fellow. He is a doctoral student in political science at the Claremont Graduate University.

How Public Officials Can Reduce the Burden of Unionized Firefighters

What started in Stanton, California as an anomaly is spreading quickly across North Orange County – the push to create local sales taxes in order to pay off the rising pay and benefits of public employees.

Stanton voters passed a one-percent sales tax in 2014, giving residents in one of OC’s poorest cities the county’s highest sales tax. But in the last several days, the enthusiasm for this most regressive of taxes has spread to Westminster, Fountain Valley and La Palma, and always for the same reason: public employee compensation.

Stanton councilmember David Shawver is elated, perhaps because he’s no longer alone. “The 2014 sales-tax increase saved the city of Stanton’s life,” Shawver told the Orange County Register last week. “The tax will be a really big thing for Westminster. They will see a regeneration of their community.”

In those cities, as in Stanton, the same dire warnings are broadcast from City Hall: The end is near. We’ve cut every other city service imaginable, and if you don’t pay more in sales taxes now, you’ll lose vital public-safety services – the police and firefighters who represent the thin line between civilization and Darwinian struggle.

When asked about this problem, many city officials respond that for all their apparent authority, they’re really impotent. They’re trapped by the rising pay and benefits of government workers, especially those who are unionized, and especially those in unions of police and firefighters.

A Stanton official told me there’s no way to change the cost of sheriff’s deputies and firefighters. The county sets the rate – averaging around $236,000 per year for firefighters and $189,000 for deputies. Stanton just pays.

“There’s absolutely nothing we can do about that,” the official said.

That’s absolutely wrong. The City of Stanton and its neighbors have an amazing opportunity in the midst of their crisis. And the U.S. military provides part of the answer.

20160630-CPC-SwaimFirefighters
U.S. Navy Firefighters in action
(Source: U.S. Navy)

For years, the U.S. has run on the assumption that a relatively small number of career professionals can mass-produce the world’s most powerful soldiers, sailors, Marines and airmen. In 16 weeks or less, for example, the Army outfits, trains and deploys men and women around the world. It arms them with life-saving and death-dealing equipment and techniques. It counts on them to carry out their missions in the most dangerous conditions imaginable. Bravery, loyalty and resilience are standard.

In exchange for this exceptional demand, we nevertheless pay our service people very little – about $1500 per month. After four years, most enlistees are discharged and pursue other careers. The military expects that only a few will stay on to rise through the ranks of officers and noncommissioned officers who oversee the recruitment, training, support and management of new trainees. Their leadership is invaluable, but the military may at its discretion decide to reduce benefits – even retroactively – or terminate employment.

The Department of Defense isn’t perfect. The scandal over veterans’ health care, the bloat, the crony-capitalist contracts and the politicians’ ham-fisted use of force are real. But if we can train 18-year-olds to handle lethal force and million-dollar equipment in a combat zone, we can train young people to put out fires – or, as is more likely in Orange County, to respond to medical emergencies.

We could pay these firefighters well, better than their military counterparts. And at the end of four years, we could thank them for their service and let them pursue their bliss – to sign on as firefighters in wealthier cities still wedded to the old model. Or they could move on to work or college. It would be cheaper to spend more – to pay for their health care and offer tuition support for several years, for instance – than to turn them into careerists.

Instead, for decades, we’ve chosen to hire high school graduates who win the firefighting lottery. Thousands apply for just a few openings anywhere. The reason for the long lines: The winners will work a few days per week in exchange for about $236,000 per year, early retirement and annual pensions of about 90 percent of their highest annual pay.

You’d have to be a millionaire to clock that kind of income in retirement. But our cities and counties hand it out as standard procedure.

Our elected officials can rarely see a way out.

That’s why Stanton – and Westminster, La Habra, Fountain Valley, Garden Grove, Placentia and hundreds of other California cities – are so deeply troubled. For decades, police and firefighters have backed (with their time and money) political candidates who deliver on the promise to sign off on higher pay and benefits. The sweetheart deals have driven countless Orange County cities toward insolvency.

Stanton can survive if it innovates. And, sure, it may seem a long-shot to expect that the city councilmembers elected to represent government employees will have the courage to represent the people instead. But there’s an old saying about necessity as the mother of invention – or as they say in bureaucratic circles, urgency functioning as the distaff progenitor of creativity.

 *   *   *

Will Swaim is the VP of Communications at the California Policy Center.

Stanton officials launch propaganda war on tax-repeal effort

(Orange County Archives / Wikimedia Commons)

Downtown Stanton, 1913: More innocent times.

STANTON, Calif. – It was a Wednesday afternoon in early March, a more innocent time in Stanton, California. Gathered in the community center of the Plaza Pine Estates, we were like Adam and Eve in the Garden of Eden before they ate the apple that gave them a second-grader’s sense of good and evil.

Plaza Pine Estates is a well-manicured mobile home park so close to Beach Boulevard – the 26-mile state highway that functions as an asphalt riverbed moving automobiles between the foothills of inland Southern California and sprawling Huntington Beach State Park – that you can hear the dopplering traffic inside the community center.

That’s where Councilman David Shawver led a parade of public officials, including a county firefighter and two sheriff’s deputies, in a celebration of Stanton’s voter-approved hike in the city’s sales tax – from 8 to 9 percent, the highest in Orange County.

The so-called Talk with the Block series – there’ve been three-dozen so far, an official said – are supposed to be about community concerns. But at this one, at least, the communication was mostly one-way – what your computer scientists might describe as less input than output.

Speaker after speaker depicted that increase in the sales tax as the penny-thin line between civilization and chaos. And, in the end, the tax isn’t an ordinary tax, they said, but a “shared tax” – by which they apparently mean that the tax will hit residents as well as humans they called “outsiders.”

“The penny sales tax is a shared tax, a tax from people who drive through our community,” said Shawver. “They drive up and down Beach Boulevard, stop to get gas, and we get one penny. One penny! And thanks to that one little penny, we’ve been able to restore critical public safety assets.”

It also hits anyone who shops in Stanton, of course, though not (the officials stayed carefully on message) grocery and pharmaceuticals shoppers.

But it’s all for a good cause, Shawver said: public safety.

Stanton has a well-earned reputation for violence – it’s among the toughest towns in a county more famous for cat-fights among wealthy housewives than gunfights, gangs and prostitution.

“I’m not going to fool you,” said Shawver, a council veteran. “Public safety is expensive, but I am concerned with maintaining the level of service that you demand.”

Public safety in Stanton is indeed expensive – and getting pricier. This year, the city will pay an additional $1.1 million for public-safety, most of that the escalating cost of pay and benefits for its $220,000-per-year cops and firefighters. Those pay packages were negotiated by the powerful sheriffs and firefighters unions – the same unions that backed Shawver’s 2014 sales tax hike.

If it weren’t for a few lousy public investments over the last several decades, the city might be able to pay its sheriffs and firefighters even at that stratospheric level. But Shawver was among those on the city council who approved Stanton’s play in Vegas-style redevelopment schemes until Gov. Jerry Brown killed them in 2011. Stanton, Orange County’s poorest city, now pays millions on bonds to hold property it purchased while betting on its steady appreciation. Interest payments this year alone: $2,323,887. Unless the city refinances that debt, it’ll pay $42 million in interest by 2040.

And there’s bad news just ahead for Shawver and other Stanton officials. Residents qualified a tax repeal for the November ballot; if successful, that’ll put a ding in the city’s income statement. So will the steady rise in the cost of cops and firefighters: Thanks to more rigorous accounting (and the reporting of the Orange County Register’s Teri Sforza), Orange Countians recently learned for the first time that the Fire Authority is actually running in the red, with deficits – especially for retirement pay and other health benefits – exceeding assets by $169 million for the fiscal year that ended in June.

That has other cities so enraged, they’re talking about leaving the authority and even privatizing firefighting.

But not Shawver. When it comes to the county’s sheriffs and firefighters, “There are no finer government agencies,” he asserted.

We might have believed that in a more innocent time, before the Talk With the Block. But later that night, we discovered that Shawver, a 28-year veteran of Stanton’s redevelopment fiascos, has served for 21 years as his city’s representative on the board of the Orange County Fire Authority.

'Outsiders': The powerful government unions that brought OC's highest sales tax to Stanton are at it again

Stanton city officials have taken to the streets to fight a November ballot measure that would repeal the city’s one-year-old sales tax.

In 37 community meetings and in a stream of communications from City Hall, officials tell residents the tax is essential to the city’s survival – and that its victory at the polls in 2014 was a local, grassroots effort. They say supporters of the repeal are outsiders.

The community meetings, called Talks with the Block, run on that insider/outsider impulse.

“Just because you’re rich and wealthy doesn’t give you the right to come and repeal our votes,” 28-year council veteran David Shawver told a Stanton audience in March. “We have the full support of everybody, and we make the decisions!”

In fact, the November 2014 campaign to promote the tax was funded primarily by outsiders – the county’s powerful firefighter and sheriffs unions, documents reviewed by California Policy Center reveal.

Sheriffs and firefighters who work in the city have much to gain from the sales tax. City officials say the tax brings in $1.5 million annually. This year, the city will pay an additional $1.1 million for public safety alone, most of that for the escalating pay and benefits of its $236,155-per-year firefighters and $187,000-per-year sheriff’s deputies.

Those are extraordinary pay packages, even in relatively affluent Orange County. And they stand out in Stanton, where the median yearly household income is $46,000 and 22 percent of the population lives below the poverty line.

The documents, which the city turned over following a California Policy Center public records request, show that the pro-tax campaign Yes on Stanton 9-1-1 received total 2014 contributions of $40,399 from three sources, two of them (maybe all three: hold, please) outsiders. The deputy sheriffs union gave $21,700, a bit more than half of all contributions. The county firefighters union gave the pro-tax campaign another $12,700. Together, the unions’ contributions accounted for 85 percent of the pro-tax campaign’s income.

But that number jumps when you include the one local contributor to the pro-tax campaign, council member David Shawver. The firefighters gave Shawver’s campaign committee $4,043.60 during the same election cycle, and Shawver in turn gave the pro-tax campaign $5,999.

Taken together, one could argue county firefighters union gave the pro-tax campaign a total of $16,743, and that Shawver’s real contribution to the pro-tax campaign (besides tactics) was just $1,955. In other words, outsiders gave the pro-tax initiative $38,443.60 – or 95 percent of all contributions to the pro-tax campaign.

But that’s not the message of city officials like Shawver. Without the sales tax increase, there’d be fewer cops, Shawver told the March gathering. He asserted that backers of the November measure to repeal the tax would cut public safety “50 percent.” No one questioned the number. Nor did anyone ask how much the county’s public-safety officers earn in pay and benefits.

“There are no finer government agencies than the OCSD and OCFA,” Shawver said of the agencies responsible for providing Stanton with deputies and firefighters. “I’m not going to fool you. Public safety is expensive, but I am concerned with maintaining the level of service that you demand.”

Who could oppose public safety? Outsiders, said Mayor Pro Tem Carol Warren.

“The group that’s against us, they live down in Newport, they live in Irvine, they all live in South County. They’re all wealthy. They don’t live here. They’ve just picked our city because we’re a small city and they want to control us. We’re low-hanging fruit.”

The desire to “control” Stanton seems a psychological abstraction – it’s never clear to what concrete end the outsiders want to control one of the county’s poorest and most violent cities – and at 3.1 square miles, it’s smallest. But the audience seemed satisfied with the explanation.

Warming to a boil, Shawver, a Republican with close ties to public employee unions, underscored Warren’s psychological analysis. “The rich, South County outsiders are going to try to get rid of our city council members,” he said. “They want their own people so they can control what goes on in our city.

“It’s time to tell the people who don’t live here to get the heck out of our city!”

The crowd roared its support.

Hoping to avoid citywide vote, Stanton officials quietly issued high-interest bonds

Taxpayers in Stanton, a quiet suburb of Orange County with only 38,000 residents, will pay millions for a pricey bond deal approved in an obscure vote of a little-known city agency five years ago.

Rather than risk voter rejection over the deal, Stanton city council members David Shawver, Alexander Ethans and Brian Donohue – acting in their capacity as board members of the city’s redevelopment authority – voted in favor of the 2011 bond issue.

The decision to borrow at high rates – some exceeding 9 percent – was likely driven by activity in Sacramento. In the state capitol, the Brown Administration had proposed to shut down local redevelopment agencies across the state. The end of redevelopment would ultimately kill the Stanton Redevelopment Agency’s ability to issue bonds without voter approval.

On March 1, 2011, the Stanton Redevelopment Agency hastily issued $27.81 million of bonds. Interest rates on the bonds ranged from 4.85 percent to 9 percent. The lower rates applied to relatively small portions of the bond issue maturing in the first seven years. Over $17 million of the bonds, maturing in 2030 or later, paid the maximum 9 percent rate, while another $5 million maturing between 2019 and 2025, carried rates of 7 percent or higher.

At the time, 30-year U.S. Treasury bonds, generally considered the safest bonds, yielded around 2 percent. Stanton’s longer-term bonds carried a premium 7 percent above that risk-free rate. In 2011, S&P rated the Stanton Redevelopment Agency A-, several notches below AAA, but still well within the investment-grade range.

But the deal was worse for Stanton taxpayers than even the high coupon rates suggest.

NOT SUCH A DEAL FOR STANTON

First, as an incentive to buyers, Stanton’s RDA sold the bonds at a steep discount. Investors paid less than 100 cents per dollar of face value. For example, $8.05 million of Series A bonds maturing on December 1, 2040, were sold to investors for 95 cents on the dollar. So, although these bonds carry 9 percent interest, their yield is actually an even higher 9.5 percent.

The fact that this arrangement was good for bond investors and not so good for Stanton taxpayers is illustrated by trading in the Stanton RDA bonds. Recently, the 2040 bond originally priced at around 95 was trading in excess of 126. An investor who purchased $10,000 (face value) of the bonds in 2011 for $9,500 could now sell them for $12,600 – netting a tidy profit of $3100 in addition to the $900 in annual interest payments he received.

Overall, discounts on the 2011 bonds totaled $921,749. So instead of bringing in the face value of $27,810,000, the RDA received only $26,888,250 from investors.

But the RDA actually received even less than that: it also had to pay so-called issuance costs. These costs are fees – points on a mortgage and other closing costs in a home sale – that a municipal bond issuer pays third-parties involved in the deal. Information in the bond’s Official Statement and the State Treasurer’s new DebtWatch web site shows Stanton taxpayers paid nearly $400,000 to third parties:

 

SERVICE COMPANY COST
Underwriter De La Rosa & Company $ 192,108
Financial Advisor Harrell & Company Advisors, LLC 67,000
Bond Counsel Jones Hall 67,500
Disclosure Counsel Quint & Thimmig LLP 25,000
Rating Agency Standard & Poor’s 14,000
Trustee Bank of New York Mellon Trust Company 5,000
Other 28,500
Total Issuance Costs   $399,108

 

Those costs of issuance further reduced to $26,489,142 the cash available to the Stanton RDA.

Between now and 2040, the Successor Agency will have to pay back the amount borrowed (including discount and issuance costs) – plus interest amounting to $41,835,775.

When you take out a new mortgage, the originator shows you the Annual Percentage Rate (APR) on the money you are borrowing. This rate reflects both interest and fees. In some cases, the State Treasurer’s web site provides the municipal bond equivalent to APR in the All-In Total Interest Cost, or the All-in TIC.

The Treasurer does not have the figure for Stanton, but we were able to calculate it. The 2011 Stanton bonds have an All-In TIC of 9.25 percent.

In a discussion with the city’s financial advisor, we learned that the bond financing was so costly because interest on the bonds is taxable. While most municipal bonds are exempt from federal income taxes, the Stanton RDA bonds could not qualify for the tax exemption because the planned use of proceeds did not meet IRS qualifications. (Interest on the bonds, however, is exempt from state taxes).

BUT WAIT! THERE’S MORE!

But the deal for Stanton taxpayers and residents has been even worse than these numbers indicate. As a protection for investors, the RDA was required to keep over 10 percent of the remaining proceeds — $2,823,292 – in a reserve account. Money in the reserve account must be kept in safe, liquid, low-yield investments and are thus not available for community investment.

The remaining proceeds were placed in two funds that could be invested. $13,054,810 was deposited in a Housing Fund which was “expected to be used by the Agency for the acquisition of up to 29 of remaining 41 housing units in the Tina/Pacific neighborhood, and associated relocation costs, for replacement with up to 161 new replacement affordable housing units.”

Another $10,611,039 was deposited in a Redevelopment Fund, which the agency could use to finance “park rehabilitation or expansion, and the Agency’s business assistance program.” The bond documents also state: “However, the proceeds may be used for other purposes allowed under Redevelopment Law, including making payments to the State under SERAF [the Supplemental Educational Revenue Augmentation Fund which allows sharing with school districts] or similar legislation or funding additional costs of the Agency’s Low and Moderate Income Housing Fund programs, including funding any difference between the amount available for and the amount required for the Tina/Pacific neighborhood project described above.”

While this language allows a lot of discretion, the primary purpose of the bonds was to redevelop the area between Tina Way and Pacific Avenue in the Northeast area of the city. As this July 2015 Google Street View image shows, not much progress has been made.

 

Lots of Space

Lots of Space

 

The neighborhood appears little changed since the Orange County Register reported in February 2012 that the city’s housing authority was planning to push forward with redevelopment despite the state’s decision to terminate redevelopment agencies.

According to the City’s financial advisor, the Successor Agency to the Stanton RDA has been unable to spend the bond proceeds because of state restrictions. These restrictions were recently relaxed with the enactment of SB 107 which will allow the agency to spend the proceeds in the housing fund. It remains to be seen when, or even whether, this parcel can be redeveloped with the remaining funds — or whether the city will have to look for new money to continue this project.

Marc Joffe is the President of the Center for Municipal Finance and a California Policy Center policy analyst. Marc’s research has been published by the California State Treasurer’s Office, the Mercatus Center and the Haas Institute for a Fair and Inclusive Society at UC Berkeley among others. Previously, Marc was a Senior Director at Moody’s Analytics. He earned an MBA from New York University and an MPA from San Francisco State University.

Tax hike masks Stanton's public-safety pay problem

Stanton has become the stage for a political brawl: in one corner, city officials and the public employee union leaders who backed the measure to give Stanton – Orange County’s smallest city and one of its poorest – the county’s highest sales tax; in the other, residents and business owners working to repeal Measure GG, the city’s 2014 voter-approved sales tax hike.

Late last year, the City Council grudgingly voted to put that citizen-backed tax repeal on the November ballot.

Until then, outsiders might have reasonably believed the people of Stanton were united in their generous desire to pay more for goods and services than anyone else in Orange County – a full percent more than neighboring Anaheim, Cypress and Garden Grove.

The pro-tax propaganda began during the 2014 campaign, when the city spent residents’ money to make the case for taking more of it. There was city money for polling and “informational brochures” targeting voters, city money to research effective messaging and city money for a direct-mail campaign with photos depicting families and firefighters along with information about Measure GG.

Outgunned retail business owners who had the temerity to post signs saying “No on Measure GG” were visited by off-duty code enforcement officers and off-duty sheriffs, who asked innocuous questions about their businesses and city services. In some cases, these off-duty city employees reportedly suggested the business owners take down their “No on GG” signs because they might dissuade city workers from shopping or eating there.

After Election Day, some in the media congratulated Stanton voters for their wisdom. In April 2015, the Orange County Register airdropped David Whiting into post-election Stanton, a place the columnist declared “Orange County’s scrappiest city.”

What makes O.C.’s tiniest town so scrappy? According to Whiting, it’s the willingness of Stanton’s residents to raise their own taxes.

Yes, Whiting paused to spotlight “a former gangbanger, paralyzed from a .32-caliber bullet to the spine,” tractor-mowing a 10-acre park by himself – for free. That’s truly scrappy.

But Whiting was really enthusiastic about Stanton’s self-inflicted economic wound. Raising sales taxes from 8 percent to 9 percent is evidence, he reported, that this is “the littlest city that can.”

Among the post-taxation signs of renewal Whiting found, one was literal: “The placard on the visitor’s counter at Stanton City Hall captures this comeback story,” Whiting reported. “It says that by boosting (the) sales tax from 8 percent to 9 percent, the city has restored personnel to handle 911 calls.”

Whiting’s post-election claim – that the tax hike had improved public safety – mirrored the claim city officials used to sell the tax hike and avoid a confrontation with the firefighters and sheriffs who work in Stanton.

Real reporting might have revealed other ways to manage Stanton’s budget without pick-pocketing residents and wounding businesses surrounded by competitors in cities with lower sales taxes.

For instance, my colleague Ed Ring has found that Stanton could eliminate what it calls its “structural deficit” of $1.8 million through a 14 percent decrease to the average total pay and benefits earned by its 33 sheriffs and 15 firefighters. Even after that reduction, firefighters would earn average pay and benefits of $187,285 per year, and sheriffs would earn $160,412 per year.

To put these public safety rates of pay into perspective, the median earnings for full-time, year-round employed residents of Stanton is $35,769.

There’s another reform that could alleviate the structural budget deficit: sell off about five dozen private properties the city purchased with redevelopment funds. As reported by the Register, the “Stanton Redevelopment Agency had two bond issues: One for $15.3 million, on which it will pay investors a whopping 9.496 percent interest; and another for $12.5 million, on which it will be paying 9.346 percent interest.”

Translation: Stanton is paying $2.6 million per year – $800,000 per year more than its “structural deficit” – to own property that the city should never have bought. The city should sell that property immediately – not as part of a dystopian scheme to sell off libraries and parks, but as an attempt to fix its budget and put commercial real estate back into private hands.

Instead, city officials have taken the path of least resistance, avoiding a fight with the powerful public employee unions that help keep them in office by raising taxes.

The council wanted civic peace; now it will have the political version of war – acrimony, intimidation and threats of panic in the streets. As soon as it bowed to state law last year and placed the citizen-backed repeal on the November ballot, the City Council kick-started a new propaganda campaign, predicting that repeal of the 2014 tax will unleash on their benighted city the Four Horsemen of the Apocalypse.

Local Protestors show up to question Council Member David Shawver's support of an increase in Sales Tax for Stanton

Local Protestors show up to question Council Member David Shawver’s support of an increase in Sales Tax for Stanton.

“That one of the poorest cities in Orange County has to pay the highest tax is totally unbelievable,” former Stanton Mayor Sal Sapien told the Register. “I am very hopeful the residents will prevail over the council.”

In their fight, residents will need more than hope. But hope is a start. Really, scrappiness would be better.

Will Swaim is vice president of communications for the California Policy Center. This article first appeared in the Orange County Register.

 

City of Stanton Faces Taxpayer Revolt

Back in November 2014, in a 54% to 46% decision, less than 20% of Stanton’s registered voters approved “Measure GG,” which increased their sales tax rate from 8.0% to 9.0%. Needless to say, this measure will not encourage retail businesses to relocate to Stanton, nor will it encourage residents to shop there. But like local tax proposals that passed in 116 other cities in California last November, this measure was represented to the public as necessary to adequately fund public safety.

Back in October we published an analysis, “City of Stanton Proposes Higher Taxes Instead of Cutting Pay and Benefits,” which documented the city’s official estimate that the new sales tax would add $3.1 million to their projected annual sales tax revenues, in order to alleviate a $1.8 million structural budget deficit. That is, they expected the tax increase would eliminate their budget deficit with $1.3 million left over. But tax increases without spending reforms are fruitless.

For example, CalPERS has announced a 50% increase in required annual pension contributions, to be phased in between now and 2017. If Orange County’s independent pension system follows suit, and there is no evidence their financial imperatives differ significantly from CalPERS, then Stanton’s annual required pension contributions will increase by $2.2 million per year – nearly all of that for public safety. Again from our October 2014 analysis, here are Stanton’s estimated costs per public safety employee, which they contract for from Orange County:

Orange County Public Safety – Average Compensation
20141007_OC-public-safety-comp

If Stanton were to negotiate a 14% decrease to the average total pay and benefits earned by their 44 sheriffs and 21 firefighters, they would eliminate their structural deficit of $1.8 million – and their firefighters would still earn average pay plus benefits, after the reduction, of $187,285 per year, and their sheriffs would still earn average pay plus benefits, after the reduction, of $160,412 per year.

To put these public safety rates of pay into an appropriate perspective, the median earnings for full-time, year-round employed residents of Stanton is $35,769.

There’s another reform, also not on the table, that could alleviate Stanton’s “structural deficit,” which is to liquidate approximately five dozen formerly private properties owned by the city that were purchased with redevelopment funds. As reported by the Orange County Register, “Stanton Redevelopment Agency had two bond issues: One for $15.3 million, on which it will pay investors a whopping 9.496 percent interest; and another for $12.5 million, on which it will be paying 9.346 percent interest.”

To put Stanton’s interest payments into the context of their $1.8 million “structural budget deficit,” Stanton is paying $2.6 million per year to own property that, arguably, they never should have owned in the first place. We’re not talking about some libertarian scheme to sell off libraries and parks. We’re talking about commercial real estate that used to be in private hands and ought to be put back into private hands.

Stanton
Only three miles in size, Stanton lacks a strong retail sector – yet their elected
officials believe the benefits of increasing sales taxes outweigh the costs.  

Some residents are fighting back. A local ballot petition is now being circulated to repeal the sales tax increase. Significantly, if the petition gatherers are able to muster enough signatures to hold a special election, 1,908, that will be a few hundred more people than the entire number of people who voted yes to impose this sales tax to begin with.

Activists in Stanton have their work cut out for them. During the campaign season last year, the city spent money on polling and “informational brochures,” targeting Stanton voters. Stopping just short of outright advocacy in favor of Measure GG, which would be illegal, the city spent funds to research voter receptivity, effective messaging tactics, and then paid for mailed flyers with photos depicting families and firefighters – along with information about Measure GG. The outgunned retail business owners who had the temerity to post signs saying “No on Measure GG” were visited by off-duty code enforcement officers and off-duty sheriffs, who asked innocuous questions about their businesses and city services. In some cases, these off-duty city employees suggested the business owners take down their “Yes on GG” signs, because it might dissuade city workers from shopping or eating there.

This is intimidation by any other name. No, it doesn’t compare to the practices inflicted on citizens of some corrupt mafia state. But it must be exposed and challenged, because it represents an unhealthy cultural drift away from pluralistic democracy and towards coercive cronyism in a system dominated by the nomenklatura. Government unions are the primary cause of this unhealthy drift, abetted in this case by bond underwriters who are pleased to loan money to local governments that blew up their budget to comply with union pay scales.

The efforts of Stanton’s reform activists are laudable. But until the entire paradigm is altered, they oppose special interests that are empowered with taxpayers’ money, perennially funded, perpetually engaged. In the public sector, collective bargaining should be severely restricted, if not eliminated. Political activity by organized groups of public employees should be curtailed. Until that happens, reform activists play at tables where the deck is stacked, and ordinary citizens are the victims.

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Ed Ring is the executive director of the California Policy Center.