A group of businesses in Pacific Beach significantly underreported the number of people they employ, triggering an investigation that revealed the neighborhood’s business improvement district was operating in violation of its contract with the city of San Diego.

Twenty-three businesses originally reported they employed a total of 52 people. But an investigation by the Office of the City Auditor uncovered they actually employed 297 people, more than five times the amount originally reported. The auditor’s office said it could not release the names of the businesses due to confidentiality of investigative files.

At a time when politicians of all stripes are focusing on eliminating City Hall’s red tape, the audit highlights a weak spot in the existing rules. Businesses pay an annual fee for operating in the city based on their number of employees. However, it’s largely an honor system.

But last year, the auditor’s fraud hotline received a complaint that certain businesses in Pacific Beach employed more workers than they let on.

The complaint sparked a seven-month investigation into the Pacific Beach Community Development Corp., better known as Discover Pacific Beach, which manages the community’s business improvement district.

The auditor’s report, completed in December, outlines several instances of noncompliance in the district:

Employee totals: Business tax rates are assessed based on the number of employees. If a business employs 12 employees or fewer, it pays a flat fee of $34. If it employs 13 employees or more, it pays a $125 flat fee plus $5 per employee. The price difference is significant because it could be an incentive for businesses to underreport their employee count.

Because the employee count rose following the investigation, additional funds were generated. The city received $1,656 in business taxes and $1,320 in business improvement district assessments on behalf of Discover Pacific Beach.

Contracting rules: The development corporation broke its contract with the city when it failed to solicit written bids from multiple vendors before settling on one particular bookkeeping vendor, to which it paid more than $5,000, according to the audit.

Contracts with the city include rules directing how nonprofits obtain goods and services. If a service is to be performed, in this case bookkeeping, at a cost of more than $5,000, business improvement districts must put it out to bid to make sure they’re getting a competitive price.

According Discover Pacific Beach’s executive director Sara Berns, it was put out to bid and the position has been filled. The auditor’s office said it could not release the name of the vendor.

Open government rules: The city auditor also found violations of the state’s open government laws.

The Brown Act ensures that actions taken by California public agencies, and the deliberation of those actions, are performed openly. All business improvement districts must comply with the act, but Discover Pacific Beach didn’t when it failed to post notice of meetings and skimped on the descriptions of what was being discussed at those meetings, the audit states.

San Diego’s business improvement district program is the largest in the state and one of the most active in the nation. The 17 districts were designed to be collaborations between the city and small business communities to improve business conditions.

Businesses located within geographical boundaries of a business improvement district can band together and assess themselves fees. In the case of Discover Pacific Beach, fees range between $60 and $360 each year. The fees are supposed to be invested back into activities and improvements that will directly benefit the businesses.

Often the districts work toward community improvement projects like installing street lights and removing graffiti. The Gaslamp’s Mardi Gras celebrations and the Adams Avenue Street Fair are some prominent examples of the events they hold.

Berns acknowledged the accuracy of the auditor’s report, but insists the organization is compliant with Brown Act. She said the contract violation has been fixed and the organization, which consists of two employees and 15 board members, continues to move forward. She added that no fines or penalties were assessed upon Discover Pacific Beach for its violations.

The Discover Pacific Beach board of directors met Friday at an all-day retreat at the Catamaran when it approved fiscal year 2011’s annual report, which includes a $27,043 deficit.

Albert J. Allison, the auditor who worked on the Discover Pacific Beach investigation, says the next step comes in March when the investigation report will be presented to the city’s audit committee.

Sandy Coronilla reports on local government and education for voiceofsandiego.org. She is on the Armen E. Keteyian Scholarship for Investigative Reporting. You can contact her directly at sandy.coronilla@voiceofsandiego.org or 619.325.0528.

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