Twelve Years On, Advisor Yet Earns From Colonies Settlement

More than eleven years after members of the board of supervisors conferred a $102 million payout on the Colonies Partners development consortium to settle a lawsuit that company had brought against the county’s flood control district over storm water drainage issues at the Colonies at San Antonio residential and Colonies Crossroads commercial subdivisions in northeast Upland, a Philadelphia-based investment advising company continues to rake in money as a consequence.
In 1999, after the City of Upland gave go-ahead to the Colonies Partners’ plan for the first phase of a residential development project known as the Colonies at San Antonio which was being carried out on property purchased two years previously from the San Antonio Water Company, the San Bernardino County Flood Control District assented to the project. The property had been used historically by the San Antonio Water Company for percolating rain water into the water table at the base of the foothills of Mount San Antonio. The property, consisting of roughly 440 acres before the Colonies Partners sold some 40 of those acres to the California Department of Transportation to be used as right-of-way for the 210 Freeway, was encumbered by flood control easements that the San Antonio Water Company had granted to the San Bernardino County Flood Control District in 1933, 1934, 1939 and 1962. The 1999 agreement with the county allowing the Colonies Partners to proceed with the project called for the company to construct a flood control retention basin in exchange for the county granting the company an unimpeded right to proceed with the development of the property.
By 2001, disagreements had arisen between the Colonies Partners and the county over the county’s expectations with regard to the construction of the basin and the company’s expectations with regard to the progression of the project. Litigation ensued the following year, and the project hung in limbo. The Colonies Partners, meanwhile, began casting about for a political solution to the dilemma, backing, to the tune of an initial $70,000 and more money subsequently, Rancho Cucamonga Councilman Paul Biane in his quest to dislodge then-incumbent Second District Supervisor Jon Mikels, in whose district the Colonies Partners’ project was located and who disapproved of the use of public money to defray the cost of flood control infrastructure needed to complete a development project on land traditionally used for flood control purposes. Biane prevailed against Mikels in the 2002 election. The Colonies Partners thereupon began investing heavily in the political career of then-First District Supervisor Bill Postmus, pouring into his political campaign coffers over the next four years and seven months, both directly and indirectly, $440,000. In 2004, the Colonies Partners heavily supported then-Ontario Mayor Gary Ovitt in his successful run for Fourth District supervisor against Chino Mayor Eunice Ulloa. The litigation drug on for two years further as county staff, including those at its highest administrative level and its internal set of attorneys known as the office of county counsel, along with the county’s outside attorneys, consistently advised against settling the case. In the November 2006 election Postmus was elected to the county assessor’s post. Prior to his having left the board, in one of his last acts as a supervisor, Postmus on November 28, 2006, joined with Biane and Ovitt in a vote of the board of supervisors, acting as the governing board of the county flood control district, to approve in a 3-2 vote, with supervisors Dennis Hansberger and Josie Gonzales dissenting, settlement of the litigation with the Colonies Partners in the amount of $102 million. $22 million of that amount was payable immediately and the remaining $80 million payable within 180 days.
The $102 million exceeded by a considerable amount the money then available in the flood control district’s budget as well as what was available over the next several years. Thus, the county was in need of some creative financing to make good on the lawsuit settlement and continue to cover the expenses of ongoing flood control district functions. On December 19, 2006 the board of supervisors approved a sole source contract in an amount not to exceed $150,000, plus expenses, with Los Angeles-based Gardner, Underwood and Bacon LLC to serve as financial advisor on the financing transaction to fund the settlement with the Colonies Partners.
On April 24, 2007, the board of supervisors, acting as the governing board of the San Bernardino County Flood Control District, adopted a resolution authorizing the issuance and sale of up to $120,000,000 in San Bernardino County Flood Control District Judgment Obligation Bonds, while authorizing the treasurer’s office to use some of those proceeds in investing in tax-free municipal bonds.
County staff worked with the finance team to prepare the required bond and disclosure documents related to the issuance and sale of the bonds. Because of the extraordinary circumstance created by the $102 million drain on the funding available to the flood control district as a result of the lawsuit settlement, the board granted the district an exception to the county investment policy allowing the district to withdraw funds from the county treasury pool on an annual basis, reserving five percent of the money for district operations and investing the remaining 95 percent of those funds pursuant to an indenture arrangement debt serviced by the profit achieved by the bond dealing. This was done to create a financing structure that provided the lowest overall borrowing cost to the district. Federal Treasury regulations limited the amount of tax-exempt obligations that can be issued for working capital purposes based on cash levels maintained by the agency issuing the obligations. Because of the nature of the services provided by the district, county staff determined that cash balances in excess of those allowed by the regulations had to be maintained to ensure that the flood control district could continue to provide the proper level of service relating to its basic function, i.e., building and maintaining flood control channels. Previously, all flood control district funds had been invested in the county treasury pool. In order to comply with Federal Treasury regulations, any district funds in excess of what the regulations allow must be segregated from other funds in the county treasury pool and invested in certain tax-exempt securities.
Though there was an authorization to issue up to $120 million in bonds, only $103,780,000 in bonds were issued.
The indenture arrangement required the district to make a calculation of excess cash on an annual basis. The county in 2007 made an exemption to its investment policy allowing the annual segregation and investment of the calculated amount pursuant to the indenture that was to be ongoing for as long as the bonds remain outstanding, and no further approval of the exception by the county board of supervisors has been required. Without that exception the flood control district would have been required to borrow funds on a taxable basis resulting in significantly higher annual interest costs, according to the treasurer’s office’s representation to the board of supervisors at that time.
The constant reinvesting of the proceeds from the investments have required a degree of expertise with the bond market that the county does not have among its staff members.
The county entered into an investment advisory agreement with Philadelphia-based PFM on September 18, 2007. On January 29, 2008 the board of supervisors voted to approve extending the treasurer-tax collector/public administrator’s existing non-competitive arrangement with PFM Asset Management, LLC for accounting services and approve a non-competitive $188,000 per year agreement with PFM Asset Management, LLC to provide investment advisory and accounting services.
The county’s contract with PFM required that PFM work in conjunction with the auditor-controller/treasurer/tax collector; Gardner, Underwood and Bacon at one time worked for the county administrative office. At some point the supervision of the indentures segued to the auditor-controller/treasurer/tax collector and PFM became the financial advisor with regard to the $103,780,000 bond issuance prompted by the settlement with the Colonies Partners.
At present the county no longer uses Gardner, Underwood & Bacon as an investment advisor. According to a January 11, 2011 article in the Bond Buyer, a securities industry publication focusing on bonds, Gardner, Underwood & Bacon was acquired by Loop Capital Markets.
As the result of a competitive procurement, on July 8, 2014, the board of supervisors approved an agreement with PFM for investment advisory services for the San Bernardino County Flood Control District at an annual fee of 12 basis points (0.12 percent) for the period of July 8, 2014 through January 28, 2017, with two one-year options to extend the term of the contract. On January 24, 2017, the board approved a first amendment to that agreement, exercising the first option to extend the agreement through January 28, 2018.
Last week, at its January 23, 2018 meeting, the board of supervisors complied with a recommendation by auditor/controller/treasurer/tax collector Oscar Valdez to approve an amendment to its 2014 agreement with PFM Asset Management, exercising the second option to extend the contract for a one-year period from January 29, 2018, through January 28, 2019, at an annual fee of 12 basis points (0.12 percent) for investment advisory services for the San Bernardino County Flood Control District.
Prior to the board’s vote last week, Valdez told the board of supervisors, of whom only Josie Gonzales was a member of the board in 2007, “As a result of the issuance of judgment obligation bonds in 2007, a portion of the [flood control] district’s funds are held outside of the county treasury pool and invested pursuant to the bond indenture of trust. Per the indenture, these funds must be invested in instruments that are not permitted under the county’s investment policy. The requirement to invest the district’s funds in this manner allowed the district to achieve the lowest overall borrowing cost while also allowing [it] to maintain sufficient cash balances to respond to flood emergencies. On April 24, 2007, the board of supervisors approved an exception to the county investment policy to allow the investment of these funds as required in the indenture. The recommended amendment with PFM Asset Management LLC will allow for the investment of the district’s funds as specified in the indenture as the county does not possess the in-house expertise and brokerage relationships to invest and monitor the district’s funds as required. This item supports the goal of operating in a fiscally-responsible and business-like manner as it allows the district to continue to manage and invest its assets in a cost-effective manner pursuant to the requirements stipulated when the judgment obligations bonds were issued.”
-Mark Gutglueck

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