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City Council agrees to borrow $175M to pay Ash Street lease, replenish other funds

The San Diego City Council approved Tuesday a long-term borrowing plan proposed by Mayor Todd Gloria, adding up to $175 million to the city credit card and pushing the public debt closer to its limit.

The decision, which would backfill funds that were diverted when the city bought out leases for the uninhabitable 101 Ash St. office tower and nearby Civic Center Plaza, was made despite pleas from numerous speakers to reject the new bonds.

“A common person’s goal in life is to get out of debt, but what is the city doing?” asked John Stump, a City Heights attorney and frequent critic of city hall. “You are taking debt, a mortgage, on property that’s already financed.

“I urge you not to approve this,” he said. “Happy Thanksgiving. This is a turkey.”

Former City Attorney Michael Aguirre warned council members they may be violating public-finance rules by refinancing existing bonds secured by police and fire stations, libraries and other city-owned properties with new bonds that would add in the cost of the disputed Ash Street lease.

“You cannot use lease-revenue bonds to pay non-lease revenue debt,” Aguirre said. “That’s what’s being proposed.”

The City Attorney’s Office, now run by Mara Elliott, signed off on the bond proposal.

Council members brushed the criticism aside and endorsed the Gloria administration’s plan to issue 30-year bonds that are projected to cost up to $11.6 million a year to repay — or $348 million overall.

They approved the plan with limited discussion on a 7-1 vote, with Councilmember Marni von Wilpert opposed and Councilmember Vivian Moreno absent.

Three council members spoke about the borrowing before the vote.

Councilman Chris Cate asked staff to clarify whether any of the bond proceeds would be used to pay for the Ash Street purchase or if any other projects had been delayed by redirecting some $70 million to buy out the two leases.

As soon as city officials replied no, Cate moved to approve the recommendation.

Councilman Joe LaCava said the borrowing was the result of the council’s July decision to approve a $132 million settlement Gloria reached with Ash Street and Civic Center Plaza landlord Cisterra Development and lender Wilmington Trust.

“The prior decision of the council led us to this decision today, and you are really following the direction of the council,” LaCava said to staff ahead before seconding the Cate motion.

Von Wilpert said she was concerned about the city’s rising debt and urged officials to keep the council updated on future pension obligations and other costs, which affect city spending.

“We are all worried about the stock market and the upcoming economy, but if we are going to do more debt, please keep us apprised on that,” she said. But, she added, “since I was against the settlement, I am going to vote no.”

Councilmembers Monica Montgomery, Raul Campillo, Jennifer Campbell and Stephen Whitburn and Council President Sean Elo-Rivera did not explain their votes in favor of the borrowing.

The bonds were approved without the benefit of a report from the city’s independent budget analyst, an office created some 15 years ago after the city narrowly avoided bankruptcy for approving spending without sufficient revenue.

The borrowing also commits a growing chunk of the city’s general fund revenue to repay the bonds, to pay pension and retiree healthcare costs and other fixed expenses.

An initial report from staff to the council said that 24 percent of general fund revenue would need to be reserved for those costs if the borrowing was allowed — just shy of the 25 percent limit.

A revised report said the percentage of the general fund that would be committed by the new borrowing was 21.8 percent. The report provided no explanation for the change in calculation.

Every dollar diverted from the general fund reduces the amount of money available for police, parks, libraries and other services.

The long-term borrowing also was adopted as the city confronts years of budget deficits, according to a report by finance officials last week.

That study said with federal COVID-19 relief funds running out and pension costs escalating, the city could be facing more than $350 million in deficits over the next five years.

Structural budget deficits could worsen in the event of a recession or rising inflation, the city acknowledged.

A majority of council members agreed in July to buy out the Ash Street and Civic Center Plaza leases for $86 million and $46 million, respectively.

The council approved the settlement in August against the legal advice of City Attorney Mara Elliott.

The buyouts settled claims in a pair of lawsuits Elliott filed against landlord Cisterra, and Wilmington Trust. The settlement excluded real estate broker and frequent volunteer mayoral adviser Jason Hughes, who had a deal to share profits with Cisterra.

Those cases are scheduled for trial against the remaining defendants early next year.

Elliott said the leases were illegal under a provision in state law that prohibits anyone with a financial interest in a public transaction from participating in decisions related to the deals.

The transactions also are the subject of a criminal investigationby District Attorney Summer Stephan, whose agents last year executed multiple search warrants at Cisterra’s headquarters, Hughes’s home and his downtown office.

Hughes last year acknowledged collecting $9.4 million in the two leases, but said he had done nothing improper because he told six city officials that he expected to be paid for his work.

The city had been a longtime tenant of the Civic Center Plaza in 2015, when the owners indicated they wanted to sell.

With Hughes’s help, the city entered a 20-year lease-to-own deal for the $44 million property. It paid more than $20 million in rent before agreeing to buy out the lease in July for some $46 million.

The following year, Hughes helped the city negotiate a similar deal for the former Sempra Energy building at 101 Ash St.

Even though the 19-story building had been appraised at $67 million, the city agreed to pay $6.4 million a year for 20 years — $128 million in total — without the benefit of an independent inspection.

The original 20-year lease-to-own agreement was recommended by former Mayor Kevin Faulconer. Gloria, who was a council member back in 2016, made the motion to approve the contract.

But the Ash Street property was not safe to occupy due to asbestos and other problems, including substandard heating and air, electrical and fire-suppression systems.

The 101 Ash St. building still needs at least $115 million in renovations before it could be safely occupied — almost twice its former appraised value, a consultant’s report from 2020 concluded.

When Gloria proposed buying out the lease, his staff acknowledged the building was valued at “virtually zero” due to the cost of reoccupying the property.

File source

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