Thursday, Aug. 21, 2008 | After a voiceofsandiego.org investigation revealed last month that officials at the Southeastern Economic Development Corp. had paid themselves hundreds of thousands of dollars in hidden, non-budgeted bonuses and extra compensation, the Mayor’s Office was quick to act.
Jumping ahead of the potential public relations nightmare, the mayor issued stern rebukes of SEDC compensation practices, cut the redevelopment agency’s funding and called for its president’s resignation.
Other city officials have been quick to jump on the bandwagon. Three members of the City Council joined the mayor’s call for Smith to resign and City Attorney Mike Aguirre quickly stepped in with his own bombshell: An opinion that SEDC’s board chairman had violated California’s conflict of interest laws.
The rapid response displayed this summer belies the lack of pace and seriousness with which officials in City Hall, from the mayor and city attorney to the auditor and independent budget analyst, dealt with bubbling questions surrounding SEDC pay and other practices over the past two years.
A review of interviews, documents, official actions and public statements shows that, before the bonus scandal incited public outrage, few if any City Hall officials felt obligated to exercise oversight or conduct substantial questioning of SEDC, a nonprofit city redevelopment agency with an annual budget of about $50 million. The organization is responsible for revitalizing some of the city’s poorest and most blighted neighborhoods.
If no one felt responsible for SEDC, it’s because it can be hard to figure who indeed oversees the organization. The agency is one of just two nonprofit governmental corporations of its kind in California redevelopment. The other is the Centre City Development Corp., also run by the city of San Diego.
They have their own offices, their own stationery and logos and exude the air of private corporations. However, ultimately, both agencies are arms of the city of San Diego. The City Council passes final judgment on their major decisions, and SEDC and CCDC are subject to the same open-government laws as all municipal agencies.
Kathleen MacLeod, an Encanto activist who’s been critical of SEDC, said she searched extensively for the proper venue for her complaints about the redevelopment authority: the SEDC board, the Planning Commission, a City Council committee, the City Council itself, budget hearings, the mayor and the city attorney. She never heard back from any of them, she said.
MacLeod said city officials look at SEDC and CCDC as if they were private developers. “They see them as another corporation — they’re not public (to city officials),” she said.
To be sure, SEDC’s problems during the last couple of years have unfolded in the shadow of a City Hall reeling from one of the most high-profile municipal meltdowns in recent history and shaken by a raft of investigations into city officials’ actions in the early 2000s.
As the fallout spread from San Diego’s billion-dollar pension debt, the city’s finance team found itself preoccupied with the struggle to release long-stalled financial statements and to break the city’s four-year freeze out of Wall Street, both crucial steps in restoring San Diego’s fiscal stability.
But the failings of the city’s internal controls to catch the unsupervised leakage of hundreds of thousands of dollars a year to employee paychecks raises questions anew about whether City Hall is equipped to prevent the type of abuse that has left it severely financially challenged and made it a frequent target for all levels of law enforcement in the last decade.
Early Salary Concerns
Mayor Jerry Sanders’ office had a simple response when presented with evidence last year that the Southeastern Economic Development Corp.’s salary figures didn’t add up.
Spokesman Fred Sainz said the Mayor’s Office would be expanding a narrow performance audit that had already been requested to include a comprehensive review of SEDC’s finances.
That audit never happened. Instead, the city of San Diego commissioned a more limited performance audit, never asking for a full probe that might have revealed the scope of the various bonus and extra compensation programs the agency had failed to disclose to its board or the City Council, which oversees SEDC.
It’s now clear that for at least two years, the city’s internal controls failed to detect the wildly fluctuating biweekly salaries that were being paid out to top staffers at SEDC.
Throughout the fiscal year that ended June 30, SEDC President Carolyn Y. Smith received paychecks that ranged anywhere from $7,166 to $34,667 for a two-week period.
In May 2007, the Office of the Independent Budget Analyst saw something that raised red flags: an apparent 30 percent increase in salaries for SEDC employees in the agency’s fiscal year 2007-2008 budget. The IBA’s concerns were noted in a report that stated the increases appeared to be “excessive.” Council members bristled, noting a salary freeze that had been imposed on other city employees because of the city’s financial woes.
But in a public budget hearing days later, Smith waved away the IBA’s concerns. Saying she wanted to take the opportunity to correct the IBA’s report, Smith claimed the salary increase was only 4 percent, not 30 percent.
The SEDC president never fully accounted for the rest of the budget boost, only saying the remaining increase comprised of various benefit packages. After quickly noting that the IBA still had concerns about SEDC salaries, the IBA left it at that and didn’t question Smith in the hearing. The City Council went on to pass the budget with little questioning or follow up.
Unrestricted and unquestioned, over the following fiscal year SEDC paid out a total of $315,046 in bonuses and extra compensation to employees, including $89,394 for Smith and $67,438 to Finance Director Dante Dayacap, according to documents later released by the Mayor’s Office.
The agency vastly overspent the $114,000 the City Council had approved in its budget for non-salary compensation, something the IBA could not arguably have foreseen. But a studious review of SEDC’s budget would’ve shown it had the potential to boost employee pay significantly in a time when belts elsewhere in the city were being tightened.
Indeed, a July voiceofsandiego.org story showed that the pay boost was likely to be considerably higher than the 4 percent represented by Smith.
voiceofsandiego.org ultimately discovered SEDC’s bonus and extra compensation system by comparing the executive salaries listed in the agency’s budget against the total compensation reported to the IRS in SEDC’s nonprofit tax filings, an investigation prompted by the unanswered questions surrounding the agency’s 2007-2008 budget.
City officials said they were given sparse or misleading information when they queried SEDC.
“What we struggled with each time was our inability to understand the salary increase situation, and the lack of detailed information that we could get on the salary side of the budget,” said Andrea Tevlin, the City Council’s independent budget analyst. “We raised it as an issue — council raised it as an issue repeatedly. We felt that there must have been something like that going on.”
Looking back, Tevlin said her office could have pushed harder in its inquiries into SEDC. But she feels her team did its job by putting the issue on the table. It was up to the Sanders administration, Tevlin said, to take the information her office provided and to push SEDC for answers.
However, while she faults the Mayor’s Office, Tevlin also said that in a large city bureaucracy it can very difficult to ferret out wrongdoing at the level Smith was engaged in. Sainz offered a similar analysis.
“There is a modicum of independence that is afforded to these corporations,” Sainz said. “With that there is an inherent risk that they will do bad things.”
Before the Bonuses
Asked about a wide range of issues at SEDC beyond the budget problems in recent years, the Mayor’s Office made it clear that the redevelopment organization hasn’t been a high priority for Sanders, and the mayor has claimed that he has little ability to control Smith’s employment.
SEDC and its downtown counterpart, CCDC, each have their own board, nominated by the mayor and confirmed by the City Council.
Much of the heavy lifting at SEDC and CCDC is done at the board level. On most major decisions outside of the hiring and firing of the president, the City Council must approve SEDC’s work such as its development agreements and budget. But, to a large extent, the City Council delegates the oversight of the agency to each agency’s board.
In 2006, when asked why all of the SEDC board members’ terms had been allowed to expire, Sainz said the Mayor’s Office had inherited a broken appointments system and had been focusing first on what it considered the most important appointments. “That is not to say that SEDC is not important,” Sainz said at the time.
A year-and-a-half later, when the bonus scandal broke, eight of the nine SEDC board members’ terms were expired.
The Mayor’s Office used SEDC’s unique structure as a response when questioned in 2006 if any action would be taken against Smith after voiceofsandiego.org revealed that SEDC awarded one of its affordable housing units to a paid SEDC consultant and failed to monitor its for-sale affordable homes, allowing them to be flipped for profit.
At the time, Sainz said the Mayor’s Office didn’t have control over Smith’s employment. That’s under the purview of SEDC’s board, he said.
In a recent interview, Sainz said the mayor was concerned about SEDC prior to this summer’s events, but that the bonus scandal had raised his level of concern to take such action.
“There was a general suspicion that the agency was not operating at peak performance,” he said. “An issue here or an issue there — no one had been able to track non-performance.”
Councilman Tony Young, whose district houses most of SEDC’s project area, said he has spent the last few years slowly trying to reform SEDC from the inside out by proposing candidates for SEDC’s board to the mayor, who has the ultimate responsibility for appointing board members. Young said his efforts have been hampered by inaction at the Mayor’s Office.
“It’s been frustrating,” Young said. “I have so many goals for that community, and without the organization functioning properly, those goals will not be met.”
But, like others, Young kept noticeably silent on SEDC until he knew he had the support of his colleagues. He said in an interview that comprehensive reform of the agency — starting with the removal of Smith as president — was untenable before the mayor and other members of the City Council joined forces with him.
“It clearly took a chorus to say that there should have been a change,” Young said.
But even after Young, Sanders and councilmembers Donna Frye and Ben Hueso called for Smith’s resignation, the SEDC president remained defiant, insisting she had done nothing wrong.
As Smith hung on, Sanders and the City Council appeared more toothless by the day as some of the mayor’s official requests for documents went unanswered. The city’s frustrated leaders vowed to shake SEDC up from the inside instead, by replacing almost the entire SEDC board, which would then be asked to fire Smith.
Eventually, however, SEDC’s veneer of independence melted away. In their next meeting the board ousted Smith, despite much emotional testimony from members of the community who had showed up to support her.
Tevlin, the independent budget analyst, said she remains baffled by the mayor’s lack of authority over redevelopment.
“I still don’t understand the system,” she said. “I don’t know how a board of a city agency has more authority than the mayor in a serious situation, when there are audits and investigations and tax dollars at risk.”
Even after problems with city redevelopment are revealed, sometimes it can be unclear whose job it is to even look into them.
Following the disclosure in 2006 of SEDC’s broken affordable housing program, Young and Frye demanded an investigation from City Attorney Mike Aguirre, who in turn asked the City Auditor’s Office to conduct an audit. That audit was never undertaken.
Aguirre’s office did complete a report on the affordable housing program. But unlike many of Aguirre’s other reports, which are usually unveiled at press conferences with great fanfare, that report was sent quietly to City Council members.
Like the mayor, Aguirre was quick to act once the bonus scandal broke open.
He did not join the call for Smith to resign, but instead weighed in on a separate issue: the controversy over SEDC board Chairman Artie M. “Chip” Owen’s financial ties to a company that had consistently been awarded development deals with SEDC.
Owen’s relationship with the developers, Pacific Development Partners LLC, constituted a conflict of interest under state law, Aguirre opined in a letter sent to Owen in mid-July. As a result, Aguirre wrote in his opinion, any deals inked between SEDC and PDP were null and void.
|The Office of the Independent Budget Analyst, headed by Andrea Tevlin, warned about abnormal budgeting practices at SEDC in May 2007. Photo: Sam Hodgson|
But documents show Aguirre’s office had started looking at Owen’s relationship with PDP months earlier.
City legal bills from February, obtained through the California Public Records Act, show that attorneys from Aguirre’s office were meeting with SEDC lawyers to discuss a possible conflict of interest involving Owen.
But the City Attorney’s Office took no action on the issue at that time, even as a PDP project moved forward at SEDC. In early July, days before the bonus scandal broke, PDP was re-awarded a controversial development deal at the Valencia Business Park after a months-long bidding process. That deal is now null and void, according to Aguirre’s opinion.
Aguirre acknowledged that SEDC wasn’t on his radar screen until the bonus scandal broke. He said before he issued his legal opinion, his top redevelopment attorney, Huston Carlyle, had been researching Owen’s relationship with PDP and assessing whether or not it constituted a conflict. But the seriousness of the situation didn’t really hit home until the bonus issue became headline news, he said.
And Aguirre echoed the reasoning of Sanders and Young, saying that there was some reluctance on his behalf to focus too sharply on the potential conflict of interests until others in city government had decided to shine the spotlight on the agency.
“There’s always some reluctance to go out on a limb by yourself,” Aguirre said.
For now, the bonuses scandal appears to have awoken City Hall from its slumber, but local observers wonder whether the attention from the city’s politicians will last and whether this summer’s ride for Southeastern San Diego might not have been a whole lot smoother.
“We used to be completely off the radar screen, now we’re No. 1 on the radar screen,” said Carrol Waymon, a columnist with the San Diego Monitor newspaper, who has criticized SEDC’s actions for years. “But if we had been on the radar screen all along, everything could have been handled differently. It could have all been handled all right, and we wouldn’t have had to have this scandal.”
— Staff writer David Washburn contributed to this report.