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November 28, 2009
DHS City Council Study Session - November 24
Financial Assurances
This was a discussion to clarify, once and for all, exactly which financial instrument God had created so that cities could guarantee the completion of necessary infrastructure.
Right off the bat Mayor Pro Tem Baker said that he was extremely disturbed that the city attorney had presented a two-page letter to the city council that had some bearing on this subject. He said that he had not had enough time to prepare and understand the issues. He said that without some pressing urgency to discuss this issue, he moved that the discussion be delayed until the first study session in January. The motion died for lack of a second.
Mayor Parks explained that this is not an urgent item, and discussing it now will allow the city council to digest and understand it. Putting off to a later date will gain nothing. Councilmember Matas agreed with the Mayor, and said that since no decision was required at this meeting, the city council would have plenty of time to study the issue.
City Manager Daniels said this discussion was not about any particular project, but about financial assurances, the different kinds and when they are used. He said that they could also discuss improvements to internal procedures on how the financial assurances are handled. As an example, he cited the Paradise Springs project which was assured by a letter of credit that was (A) approved administratively (it should have been approved or disapproved the city council), and (B) from the same institution that was financing the project.
Financial Director Jason Simpson began a Powerpoint presentation that Public Works Director Jonathan Hoy and Attorney Ruben Duran contributed to. Under the Subdivision Map Act (which is a California law) there are FIVE acceptable forms of financial assurance for land development improvement:
- Bonds
- Cash deposit
- Letter of credit
- Lien
- "Other." Gold bars were used as the example for this during subsequent discussion. But whether the security is gold bars or magic beans the city council must by ordinance specifically permit that security before approving it.
More realistically, a possible "other" item is a promissory note secured by another financial instrument like a lien agreement or real property. Councilmember Matas asked if the fifth option could be ruled out entirely. Attorney Duran said that since each type of financial assurance that falls in the fifth category must be explicitly approved by ordinance before it is acceptable, the fifth category is effectively ruled out unless the council decides to rule it in.
Mayor Pro Tem Baker asked if in the instance of a cash deposit, could the city pay interest on the cash.
The usual work flow goes like this:
- Based on Improvement Plans that are substantially complete, the developer submits construction estimates and a copy of the final map. The city engineer reviews them.
- A Subdivision Improvement Agreement (SIA) is drawn up based on the Conditions of Approval & Plans.
- Financial assurance is attached to the SIA.
- City Council conditionally approves.
Jonathan Hoy explained that the developer submits plans to city staff and the staff reviews them for consistency with what the city council had approved. Then city staff asks for a cost estimate, which are certified by the developer's engineer. The city engineer reviews the cost estimate and requests changes as necessary. Usually there is a time limit set in the SIA, typically one or two years.
Mayor Pro Tem Baker raised the issue of fluctuations in the cost of construction. If today's data are used to establish estimates, the estimate may be too low (or too high) a few years down the road. Jonathan Hoy said they use estimates based on the last few years and include a contingency. In any case, the SIA should be for only a year, so the estimates can be reviewed and revised after a year.
The presentation included a list of 8 projects in the city with existing financial assurances.
| Project | Type | Issued By |
| Paradise Springs | Letter of credit | Estate Financial |
| Sunset Springs | Letter of credit | Canyon National Bank |
| Rancho Buena Vista | Bond | Lincoln General Insurance |
| Hidden Springs | Bond | Arch Insurance |
| Vista Santa Fe | Bond | Developers Surety & Indemnity |
| Eagle Point | Bond | Travelers Casualty & Surety |
| Vista Del Monte | Bond | Great American Insurance |
| Skyborne | Bond | various |
Paradise Springs - which includes the Village at Mission Lakes - we all know how well that worked. Sunset Springs - the city is having problems getting Canyon National Bank to cooperate. Canyon National says they have a "set aside letter" (something different than a letter of credit) and that the total amount of that set aside letter has been paid to the developer, and the bank thinks it's not the bank's fault that the developer didn't use the money to put in the infrastructure. A set aside letter would fall into the fifth category of financial assurances that would have to be approved by ordinance first - but this was never done. So that financial assurance, like the letter of credit at Paradise Springs, was done illegally [maybe there's a more polite word for that]. Rancho Buena Vista and Hidden Springs - the city is trying to call on those bonds, but the bonders have been dragging their feet in response. In the case of Hidden Springs, the bonding bank went under and now the FDIC holds everything. Vista Del Monte is the development that will go in around the Village at Mission Lakes. They did no more than grub up the land.
Mayor Pro Tem Baker asked if a developer goes bankrupt, does the financial assurance instrument become an asset in the bankruptcy. Attorney Duran said the answer is "Yes." But if the city has a lien on the property and the developer goes bankrupt, does the lien still stand? The attorney's answer was "Yes."
Attorney Duran said a couple of important considerations in a lien are (1) the anticipated value of the property, and (2) the position of your lien; i.e., the city's lien has got to be primary.
Councilmember Betts described the situation at Hidden Springs, which was bonded by Arch Insurance. He says the bonding company is having a little harder time verifying this project, due to the extraordinary circumstances (of the economy). But he said that made it no less secure now than when the bond was taken. He said if he had a lien on Hidden Springs, we'd be in the same spot as everyone else trying to sell it.
Jason Simpson said that Arch Insurance is one of the largest bonding firms. Their net surplus is at least $2 billion. Mayor Pro Tem Baker asked how that compared with "AIG" two years ago. "AIG" was referenced several times during the discussion. I hasten to point out that they are now called Chartis Insurance (chartisinsurance.com) and if you look on their About Us page you'll see they don't even breathe a mention of their former name, "AIG." Councilman Betts said AIG is very strong right now because it's 80% owned by the U.S. government. He said there is no basis for saying that bonds from a AAA company are suspect. Here's a WikiPedia page that lists bond ratings by Moody's, Standard & Poor, and Fitch. In recent history we've learned that some high ratings of financial instruments were totally bogus. Those may have been stocks, not bonds, but I think people should be aware that it is possible that the bond ratings themselves could be wrong. Mr. Betts went on to say that as far as he knew the city had not gotten any bonds from any company that had failed or that was weak. City Manager Daniels said that AIG did fail, but it was through the good graces of the taxpayers that the city didn't lose on that.
C.M. Daniels went on to say that the city has been unable to get Arch Insurance to perform. Attorney Duran said that 6 months of failure to get a bond company to pay is a long time.
Mr. Simpson presented the strengths and weaknesses of the four types of financial assurance:
| Type | Strengths | Weaknesses |
| Cash Deposit | Cash is king | If estimates of the cost of development change, additional deposits may be required. (Later Councilmember Betts made the point that this is also a risk of bonds, letters of credit and liens). |
| Performance Bond |
|
|
| Letter of Credit |
|
|
| Lien | First trust deed position means the city is second only to the owner. Performance is secured by hard asset collateral. |
|
Attorney Duran said that bonding firms must, by law, be rated "A-" or better and "California admitted." "California admitted," if I understood correctly, means they are on the list of bond-issuing firms that are permitted in California. A California state agency reviews the companies for solvency and stability for this list. I think the starting place for this list is here. Go down to that line sying "Select Type of Insurance" and pick "Fidelity and Surety." At least that's the one that makes sense to me. Then you'll get your list of "California admitted" firms for the purpose of performance bonds. (I don't find either AIG or Chartis listed there).
Mayor Parks asked what recourse the city would have if a developer failed to pay the premiums on his bonds. Mr. Simpson said that the city could halt the development.
Mayor Pro Tem Baker asked if the developer of Hidden Springs went bankrupt. Mr. Simpson said that he thought they did. After bankruptcy, did the next party pay the bond premiums, and now does the FDIC pay the premiums? Mr. Hoy said that if the bond premiums are not paid, the bonding company puts a lien on the property. The city would have to release the bonds (i.e., state that the required work was completed) before the lien could be removed. Mr. Baker asked if a bank that had issued a letter of credit went belly up, would the bank that takes it over also take over the letter of credit. Attorney Duran said he would have to research that to be sure, while City Manager Daniels said he thought the new bank would have to take over the letter of credit as well, since the FDIC doesn't allow failed banks to be cherry-picked. Mr. Baker asked if the water district and the city could jointly share a first position on a lien. C.M. Daniels said the city should never, ever accept anything but first position.
City Manager Daniels said that performance assurance is the act of trying to guarantee the future, and there is no guaranteeing the future. He said all the instruments are widely used, while performance bonds are the most popular. At different stages of development different types of assurance might be called for.
At this point, City Manager Daniels called Michael Busch up to speak. Mr. Busch explained that he was offering information pro bono because Desert Hot Springs is his "favorite city to work with." He said he was glad the DHS city council is having this discussion, which is a heavy subject, but we're the first city in the valley to have the discussion. Development agreements are the source for a lot of the issues we're having, and other cities will have. He said the valley "is saturated with bad agreements." He said that when the city has the opportunity to open up a development agreement, we should open up ALL of it to look at all performance indicators and negotiate a better position. He said there are probably 50 agreements in the valley from the period 2001-2004 that are "awful." Letters of credit are almost impossible to get now. Those that may come along have to come from a bank with "AA" status, such as Bank of America, Wells Fargo, Union Bank, etc. Letters of credit may be for 1 or 2 years or as long as 5 years. He thinks bonds are "second to cash." Developer agreements should include milestones so that the developer doesn't move too far along without making improvements. He cited an example where a development agreement stated a developer would build 500 homes and a water reservoir. The effect would be that work wouldn't start on the reservoir until about the 490th home was built. "Community facilities districts" that Councilmember Betts had asked about are still available, but very expensive now. Mr. Busch suggested the city should demand a higher lien to value ratio. The lien may need to be for two times the estimated value of the improvements to allow for fluctuations in the economy. Performance bonds are available, he said, they're just very pricey.
In answer to a question from Mayor Pro Tem Baker, Attorney Duran said that you can't get performance bonds for just part of the required development, in order to reduce the developer's expenses. You have to get bonds for the whole map. But a developer can phase the map. Mr. Baker said that was the problem Paradise Springs ran into, they didn't phase the map. They thought they could just build it all. Mr. Busch said a lot of the developments approved in 2001-2003 were not phased.
Attorney Duran explained that there's a difference between the map and the development agreement. The development agreements have time lines and expiration dates. Any time a developer comes back for an extension on a development agreement, the entire agreement can be updated and revised. The city can negotiate anything it wants.
Mayor Pro Tem Baker asked about the Snellenberger development. "If he bails, do we get that land?" Mr. Hoy said there is a 25-year development agreement on that. Yes, after hearing Mr. Busch talk about 1-year, 2-year or 5-year development agreements, we learn that Snellenberger has an outrageous 25-year agreement. Who was on the Planning Commission and City Council when that hog came through? Mr. Busch said this was one of those bad developer agreements he referred to earlier.
Mayor Pro Tem Baker asked staff to get some background information from cities that have gone with liens as financial assurance as to why they did it and what their experience has been. Councilmember Betts ask for similar information from cities that have refused to use liens.
Mr. Hoy said Fontana recently decided to do a lien. A map had been approved, but no development had been undertaken. The developer is not ready to begin work, so rather than requiring the developer to carry bonds while he waits, the city agreed to a lien to tie him over. When he gets ready to develop, then the lien may be removed in favor of bonds, or some other type of assurance.
Public Comment
Jim Kozak from Skyborne said that he thought this was a great discussion and he suggested that the council and staff be flexible and look at different ways to protect the city and allow development to go forward.
Water Efficient Landscaping Ordinance Discussion
Mayor Pro Tem Baker moved to accept the staff recommendation on the landscape ordinance without discussion. He said that since MSWD has an ordinance in effect, the city doesn't need one. City Manager Daniels said the item would be agendaed for action at a future city council meeting.
Red Light Cameras
The proposal for a red light camera program will come to the city council at the December 15 meeting. Chief Williams said that in addition to north and southbound Palm Drive at Two Bunch Palms, the city is considering a red light camera for northbound Palm at Ironwood. The chief's presentation was a much-shortened version of the one given at the public safety commission. An RFQ is out right now, so if anyone wants to bid on it in addition to American Traffic Solutions, they can. The Chief pointed out that the information presented to the alleged red-light runner will allow them to see if the yellow light was too short.
Here you can find the Federal Highway Administration guidelines on the duration of the yellow light. It says "A yellow change interval should have a duration of approximately 3 to 6 seconds. The longer intervals should be reserved for use on approaches with higher speeds." There ya go, pretty vague. But clearly, something shorter than 3 seconds is not acceptable.
Mayor Pro Tem Baker said he had heard that red light cameras caused higher accident rates in Cathedral City and Beverly Hills. Chief Williams said he had not heard any credible information to that effect. Earlier I have linked to this news report that accidents have declined by 30% at Cathedral City's Date Palm and Ramon intersection. While there is no 100% clear proof that the reduction is due to the red light cameras, there certainly has been NO INCREASE in accidents at that intersection. Mr. Baker went on to ask how confident the chief was that this would be revenue source (this after the chief had said it was not intended to be a revenue source). The chief said that American Traffic Solutions is prepared to expect 30% of the violations will never be paid.
Councilmember Betts said that at Date Palm and Ramon the traffic patterns have become difficult to drive through. Not only does he worry about the camera, but also about how other drivers will react to it. He is concerned a red light camera will impede safe traffic control. Chief Williams said that by that reasoning the police should not park a cruiser at the intersection either.
Mayor Parks admitted that she didn't even know there were red light cameras at Ramon and Date Palm, and she hasn't noticed any problems at that intersection.
Filed under Desert Hot Springs | permalink | November 28, 2009 at 09:08 PM
Comments
I asked Commander Smith if in a case where the photographed red light driver is clearly NOT the registered owner of the vehicle, is the registered owner under any legal obligation to help police identify the actual driver? The answer is "No." The registered owner can, of course, volunteer the identity of the actual driver.
Now, in the case where the actual driver looks a lot like the registered owner, it might get messy and when the registered owner ends up in court, the best way he can get off the hook is to identify the actual driver.
Posted by: Ron's Log at Dec 1, 2009 11:18:13 PM
During a 24-hour period 17 vehicles ran the red light at Two Bunch and Palm. The Chief said that, but I didn't report it here.
I hardly think a question from a city councilmember about revenue is legal grounds for any kind of a suit.
In the case of Charlotte, the city was paying $10,000 for red light cameras. DHS would pay nothing.
Posted by: Ron's Log at Nov 29, 2009 6:03:04 PM
Mr. Stop,
I can tell you that the camera system will not cost the city anything and that it is not being presented to be any sort of positive cash flow. If that happened, fine, but if not, that is OK too.
The goal is to produce intersections that are safer than they are now without having to tie up an officer sitting at the intersection.
These points being true, DHS will benefit from these cameras.
Chairman Jeff Bowman, DHS Public Safety Commission
PS. Who are you? Why do you use a fake name?
Posted by: Jeff at Nov 29, 2009 5:40:54 PM
Apparently Baker likes the idea of the cash flow from these cameras as per his statement, which is legal grounds for not installing them in order to avoid a lawsuit by the people.
Not only that, there are other ways of preventing the problems of red light running.
And where was that data on how many red light runners are going through those intersections again, that would "necessitate" such discussions??? I don't remember hearing any data at all on how many they have caught or seen going through those intersections.
This is clearly another scheme for the city to make money so they can waste it for fun. I have seen people go through red lights one second after it changed to red completely safely as traffic itself caused it yet they would be given citations to the letter of the law. Your city does not need these devices. Many cities have removed theirs or are planning to, why is DHS always behind the times? Cities started getting rid of these years ago. Apparently the company that came to DHS ran out of cities to scam, take a look at these articles, the latter mentions the company that came to a Texas town and is being run out, in old fashioned petition style.
Russ, this would be a good one for you to get moving on......
Charlotte, North Carolina Cameras to be Removed
Charlotte, North Carolina pays nearly $500,000 to get out of its photo enforcement contract.
Keith ParkerThe red light camera and speed camera program in Charlotte, North Carolina has come to an official end. The city agreed this week to pay $490,090 to get out of its contract with ticket vendor Traffipax.
The city had suspended issuing tickets from its camera program last May after the state Court of Appeals ruled that photo enforcement fines must be paid to the public school system under a state constitutional provision. Charlotte officials have lost hope that the state supreme court would save the program. Under the contract, Charlotte continued to pay $10,000 a month to the vendor.
"Rather than the city pay money for a suspended program, we decided to terminate the contract," Assistant City Manager Keith Parker told the Charlotte News Channel.
The city still owes $4.6 million to Charlotte-Mecklenburg Schools because of the court ruling.
Source: Future of traffic cameras looks bleak (Charlotte News Channel (NC), 1/19/2007)
Second Texas City Initiates Traffic Camera Referendum
Activists in Baytown, Texas work to put red light cameras to a public vote.
Baytown speed limit signInspired by the success of the College Station, Texas initiative banning red light cameras, activists a hundred miles away in are collecting signatures to do the same in Baytown. Officials in the Gulf Coast city of 72,000 allowed American Traffic Solutions to set up the cameras in April 2008, but resident Byron Schirmbeck is circulating a petition in the hopes of giving voters the opportunity to take them back down.
"The response has been absolutely overwhelming," Schirmbeck told TheNewspaper. "I am conservative in saying that I have had less than ten percent of people I asked at public places refuse to sign because they support the cameras. The usual response to the question, 'Would you like to sign the petition to ban the red light cameras?' is 'Hell yes' and 'Can I get my wife to sign it too?'"
Schirmbeck formed the Baytown Red Light Camera Coalition PAC to coordinate the petition drive. He needs 620 verified signatures to qualify the initiative for the next ballot. No photo enforcement program has ever survived a public referendum.
Schirmbeck has been especially interested in the issue since he caught the city using illegally short yellow times in an effort to increase revenue. After he beat his ticket at West Baker and Garth Roads earlier this year, the city increased the yellow time to 4.5 seconds on June 5. Seeing the number of $75 violations drop, the city decreased the yellow time to 4.0 seconds in July. The city justified this change by putting up a 40 MPH speed limit sign on the camera-monitored approach, even though the other side of the same road is posted at 45 MPH. Texas law sets minimum yellow timing standards according to the posted speed limit.
"Just when I think I have seen the city do everything they can to keep their revenue with the cameras they go and surprise me again," Schirmbeck said.
Posted by: "STOP" at Nov 29, 2009 7:31:35 AM
