Fiscal Prudence Makes Surprise Visit to LB City Hall-Part 1

During the City Council meeting on February 28, 2017, Laguna Beach resident Emil Monda spoke during the public communications period. During public communications anyone can speak on a topic of their choice for 3 minutes. Mr. Monda brought up a concern that had been circulating among residents since it had become known that the City had an “Essential Employee Housing Assistance Program” (EEHAP) and that the program had no official guidelines. Mr. Monda admonished the Council to review the program and “develop a detailed written policy…to clarify eligible positions, what the program offers to the employee and the responsibility of the employee who makes use of the program”. He voiced the concerns that many residents had that the City was offering to enter into 50/50 ownership arrangements with certain senior staff members under the idea that certain “essential” employees needed to live in Laguna Beach so as to be most effective in their jobs. In addition to becoming joint-owners on the properties, the City would also become the mortgage provider for the employee’s share of the purchase.

A Bit of Background and Some Maths

The EEHAP program was started in April 2000 when the then city council (motion by Dicterow, seconded by Iseman and supported by all others: Blackburn, Peterson, Freeman) approved the program which was intended to encourage employees having “essential emergency response duties and/or department heads essential to the efficient operation of the City to live in the City and be available to quickly respond to emergencies and other exigent conditions”. Back then, the median Laguna Beach house cost $625,000 and the informal program (recall, it was never formalized) was targeted at positions such as: City Manger, Assistant City Manager, Fire Chief, Fire Division Chief, Sewerage Supervisor, etc. During the ensueing 17 years, only 6 City essential employees have taken advantage of the program they are with the year they entered the program:

1. Mike Macy (former Fire Chief)
2. Jeff LaTendresse (a Battalion Chief at the time of the agreement, now Fire Chief) – 2000
3. Tom Christopher (Fire Division Chief) – 2006
4. Graham Wright (former Water Quality Supervisor)
5. Shohreh Dupuis (Assistant City Manager/Director of Public Works) – 2016
6. John Pietig (Asst City Mgr at the time of the agreement, now City Manager) – 2001

The most recent recipient of the program was Ms. Dupuis, who joined the City on or about May 1 2016. During the May 10, 2016 City Council meeting, a motion was made and unanimously passed to include Ms. Dupuis in the EEHAP with a term to:

“(c) appropriate $1.3 million from the proceeds received from the sale of 1044 Noria Way and 1419 Regatta Road toward this transaction and, if necessary until the properties are sold, temporarily borrow from the Insurance Fund to complete the transaction.“

(1044 Noria Way was the home that was jointly owned between the City and Fire Chief LaTendresse). So until just 14 months ago, the City Council felt that the program was reasonable, even though Ms. Dupuis’ likely total annual compensation (excluding pension benefits) is over $220,000 (we don’t have the exact figure but are using the 2016 figure for the other Assistant City Manager, Ms. Christa Johnson). Total annual cost to the City taxpayer’s for Ms. Dupuis inclusive of benefits is well over $275,000. For the Dupuis purchase, the City put in $797,500 for a 50% ownership, plus it provided a $450,000 loan. This means that the Dupuis contributed approximately $347,500 towards the total purchase price, or just under 22%. A commercial 30yr fixed mortgage for such a property would cost borrowers about $6,900 per month at current interest rates. On her income alone (ignoring that of her spouse), it seems that the Assistant City Manager could afford the house they purchased without any assistance from the City.

As is mentioned above, Fire Chief LaTendresse exited the program in July of 2016, and the City was the beneficiary of 50% of the proceeds of the sale of his property. As we see now, the Fire Chief’s exiting from the program was an early indicator of his intention to leave city employment (he announced his retirement in July 2017). A term of the program is that once the participating employee retires or otherwise separates from City employment, the joint-ownership arrangment must end; either through a sale of the property or a ‘buy-out’ by the exiting employee of the City’s interest. With LaTendresse’s exit, only 3 employees remain in the program: Christopher, Pietig and most recently, Dupuis. It is worthwhile noting however, under the programs if the participant retires and has been in the program for X years, they have X years after retirement to complete the sale. Since Mr. LaTendresse was in the program for over 16 years our reading of the program indicates that he could have waited until 2033 to buy-out the city’s equity in his home. The taxpayers’ money could have been tied-up for 32 years in this property.

The analysis done by City staff found that contrary to common assumptions, the City did not gain financially through participation in the EEHAP. Most thought that despite tying up large amounts of taxpayers’ funds in local properties, property-value increases together with the loan interest-rate being pegged at an amount slightly higher than the City gains from investments would naturally mean that the City gains financially through the program. The findings were that the City actually loses approximately $8,200 per participant/per year via the program. The reasons given were: “ongoing costs for property insurance, property taxes, reimbursement of federal and state taxes attributable to City ownership interest, and qualifying property repairs have created an annual cost for some properties. … the annual cost of the three properties recently sold in the Program averaged approximately $8,200 for each employee…”.

Reduced Need for Such a Program

Half of the program’s participants have been with the Fire department and most would agree that having managers of this department living in the City would be adventageous. However, the Fire department has gone to 24-hour shift management, meaning that there is always senior management on-duty in the City. This reduces the need for EEHAP participation for senior Fire department staff. For the sewerage department, the City has established the ‘Wastewater Emergency On-Call Response Program’ in 2003. As stated in the staff report: “This program was designed to help facilitate response to the sewer system emergencies (sic). In general, the program reimburses four employees up to $987 a month for locating in the City and being on-call.”

Since arguably the most ‘essential’ City staff have now been accommodated and are guaranteed to be in-City 24/7, the only other eligible employees are the City Manager and various Assistant City Managers. It is far less clear how having employees in these roles living in the City adds to residents’ safety or better execution of City operations. Maybe I’m missing something.

One-Percenters Don’t Need Public Housing Assistance

This author presented 2016 remuneration data for Laguna Beach employees (sourced from www.transparentcalifornia.com) during the City Council meeting of July 11 2017, as part of his argument against continuing the EEHAP. We reproduce the graphic here:

(These data are from 2016 and so the current amounts should all be increased by about 3% according to the most recent terms of the Employee Union contract).

After presenting this data, the City Manager felt it necessary to add some context to his EEHAP deal and where is current remuneration stands. His point, which is valid to a limited degree, is that he took the deal while he was still Assistant City Manager/Sewer System Manager and earning a lot less than the 2016 indicated amount. The background of his EEHAP deal:

  • Originated in April 2001
  • City put in $400,000, or 57.89% of the purchase price ($690,965) and provided him a loan for a portion of his remaining 42.11%

In April 2001 the Assistant City Manager was earning $136,200 annually ($11,350 per/mo). The then prevailing 30 year-fixed home loan interest-rate was approximately 7.0%. Assuming a 10% downpayment, the Pietig’s would have had monthly P&I payments of $4,138 and total monthly payments (inclusive of property taxes & insurance) of $4,925. This would have been too large of share of the monthly income at 40%. If the Pietigs could have made a 20% downpayment on the home, the numbers change a lot, and the percentage of monthly income needed for the purchase would have been 36.6%, arguably a manageable amount. Fiscal prudence might have dictated that the Pietigs wait a few years for the city salary to increase and their savings to do likewise and the purchase could have no doubt been made comfortably.

Final Thoughts

In the end, we applaud the City Council for halting future use of this informal program. The remaining 3 City employees will continue to enjoy the benefits of joint-ownership but we encourage them to buy their way out as soon as possible. The taxpayers’ money can be put to better use.

While the program will not continue to be used, we have some concerns that the program (or something largely similar) might be used on an ‘ad hoc’ basis in the future. During the Council’s deliberations on the agenda item, Mr. Dicterow (who readers will recall was the Council member who originally made the motion that resulted in the programs’ establishment in 2000) commented that he wanted the Council to have the option of using a housing assistance program in an ad hoc fashion. He stated: “I can support case-by-case assistance”. His reasoning was that when the city needs a new City Manager, such a facility should be available to the Council to ensure that the new manager lives in the city.

This author believes this is a very dangerous precedent and is worse than having an unwritten but semi-understood program in place in the first place. We take comfort in that the motion that the Council passed explicitly opted for Staff Report Option #4: “Discontinuing the program”, and expect that if a future Council wanted to offer ‘essential housing assistance’ in the future, the proposal would have to be agendized, discussed and voted upon before the public.

 

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