By Mark Gutglueck
Upland Mayor Bill Velto and his four colleagues on the city council are suing the voters who elected them to prevent the city’s residents from objecting to or otherwise contesting city leadership’s intention to issue $120 million in pension obligation bonds later this year.
Because of generous commitments made by past city councils going back more than three decades, the City of Upland has an accrued pension debt that is close to three times its annual budget. The current outstanding debt to cover the payments the City of Upland must make to the California Public Employees Retirement System to cover the cost of the pensions being paid to already retired former Upland City employees and the anticipated cost of paying present employees their pensions in the future is referred to, in municipal parlance, as Upland’s unfunded pension liability. More than nine years ago, as of June 30, 2012, Upland’s unfunded pension liability had reached $88,994,066. It rose modestly but steadily for the seven years thereafter, jumping almost $11 million, reaching $99,976,917 as of June 30, 2019. Over the last two years, Upland’s pension debt escalation has been historically steep. During the six months after June 30, 2019 alone, the pension debt grew by more than it had in the previous seven years, hitting $112,039,675 by the midway point of fiscal year 2019-20 on December 31, 2019. As of June 30, 2020, it stood at $120,920,721. A document issued by the city in March 2021 indicated the city’s unfunded pension liability as of that month had reached $130,186,277.
For years, a small but vocal group of Upland residents, including Larry Kinley, who had been elected Upland Treasurer in 2016, began pushing for municipal pension reform. Alarmed at the growing pension debt, which was consuming more and more of the city’s budget on a yearly basis and reducing the amount of money available for the delivery of municipal services, they called for the city to both change the terms of city employee contracts to eliminate the generous pension benefits provided to city employees going forward and for an end of the city’s affiliation with the California Public Employees Retirement System. Simultaneously, Kinley sought to use his position and authority as city treasurer to place a running tally of the unfunded pension liability into the monthly treasurer’s report prepared by city staff and which he signed before it was released to the city council and the public. Kinley’s hope was that by alerting the public to the burgeoning pension debt the city was accruing, an impetus among Upland’s citizenry to redress the issue would form and action could be taken before the city is forced into bankruptcy. The city manager and finance director, both of whom stood to qualify for annual pensions of more than $200,000 and $140,000, respectively, upon retirement, moved to obstruct Kinley from doing so. At first, they prevented him from having city staff put the unfunded pension liability figure into the monthly treasurer’s report, and then whited out Kinley’s handwritten notation of the current debt figure Kinley put on the documents when he signed them before the reports were released. When Kinley sought to assert himself, the city council backed the city manager and the finance director when they renamed the “treasurer’s report” the “treasury report,” and cut Kinley out of the loop. In the summer of 2020, Kinley resigned as treasurer in frustration, while his supporters lodged a complaint with the civil grand jury. The civil grand jury ultimately delivered a report on the matter that was highly critical of the city, noting that city officials had illicitly and improperly curtailed Kinley’s function as treasurer.
Even before the grand jury report was delivered, the escalation of the unfunded pension liability to more than $120 million in June 2020 was forcing the city’s hand.
When city officials took up the question about what the city was going to do regarding the escalating pension costs, they turned to Urban Futures, which offers municipal management and financial consulting services, for advice on possible solutions. Urban Futures, which formerly employed then-Assistant City Manager Steven Parker who is now serving in the role of acting city manager, pushed the city council unrelentingly toward the option of issuing pension obligation bonds as a ploy to refinance the pension debt at a lower rate than the 7 percent expected return on investments that the California Public Employees Retirement System functions under. Undisclosed was that after the city council accepted Urban Futures’ advice and upon resolving to issue pension obligation bonds, it committed to pay Urban Futures $62,500 when the issuance of the bonds takes place. In this way the city council found itself relying upon an advisor with a financial stake in the advice it is providing to city management and the city council.
Moreover, also advising the city with regard to its options was City Attorney Steve Deitsch. Deitsch advised the city that it could get around the requirement in the California Constitution that requires that before a governmental entity in California levy taxes on its residents or citizens and before it take on bonded indebtedness, the residents, i.e., voters, to be burdened by that tax or debt first approve that tax or bond issuance with a majority vote. The way the city could avoid that vote, Deitsch told the city council, was to engage in a validation action. In Upland’s case, that validation action is a lawsuit filed against the city’s residents in which anyone who wants to challenge the issuance of the bonds is commanded to come into court to lodge their protest within 30 days of having received notice of the lawsuit’s filing. If someone responds to the lawsuit, that person or persons must then put on a case before a judge as to why the city should not be able to issue the bonds. If no one comes forward to respond to the suit within the thirty days, then the judge gives the city clearance to issue the bonds, after which no contesting of the bond issuance can be made.
On May 10, the city council agreed to pay Best Best & Krieger, the law firm with which Steve Deitsch is a partner, $70,000 for its assistance in readying the the city for the bond issuance, consisting of $45,000 to serve as bond counsel, $20,000 to handle the validation proceeding and $5,000 to cover miscellaneous court costs.
Last week, on Thursday August 12, the city quietly filed a summons naming no single individual but a collective, that being “all persons.”
“You are being sued,” the summons to participate in the validation process reads in part. “You have 30 calendar days after this summons and legal papers are served on you to file a written response.” That service will consist of a newspaper notice that is anticipated to be published three times over the course of three weeks beginning sometime this month.
There are residents in Upland who either question the wisdom of the city issuing pension obligation or are opposed to their issuance altogether. Among those is Kinley, a former vice president with the Bank of America, who headed up its problem loan department.
“All they are doing with this pension obligation bonds strategy is transferring the city’s debt from one set of books to another set of books,” Kinley said. “It’s a shell game.”
The Government Finance Officers Association has issued advisories against pension obligation bonds, calling them risky gambles with public money, saying strategies involving them are akin to using a newly-issued credit card to pay off existing credit card debt.
Given the degree of stealth with which the city council is approaching the matter, there is a real question as to whether members of the city council want their constituents to know that they have been sued by the city or if they would prefer that those who elected them and put them into office not know that they are defendants in a lawsuit brought against them by their own city.
The Sentinel this week sent an email to Mayor Bill Velto, Councilwoman Janice Elliott, Councilwoman Shannan Maust, Councilman Rudy Zuniga and Councilman Carlos Garcia, asking how understanding they each thought their constituents will be about getting sued, and if they had considered whether some of their constituents will resent that the city has sued them. None of the council members responded to those questions. The Sentinel inquired as to how energetic the city and the city council were going to be about letting Upland’s residents know that they had been sued by the city. The Sentinel asked if the three legal notices by publication will be the sole means by which the city’s residents would be informed that the city had sued them. The Sentinel asked the mayor and the council members if they believe the three legal notices by publication will suffice in informing their constituents that the city had sued them, and the city asked why they had not chosen to use the city’s website to inform the city’s residents that they were being sued. Neither the mayor nor the council responded to the questions. As of today, the city had not mounted on its website any reference to the lawsuit or notice thereof.
The mayor and council were also questioned as to why they had chosen to sue their constituents.
Specifically, the Sentinel asked if the mayor and council felt there was no other way to accomplish their goal, which presumably was to put the city into a position where it could issue pension obligation bonds, and whether they were individually and collectively convinced that suing their constituents was the only way the pension obligation bonds could be issued.
The Sentinel asked if there indeed was another way to issue pension obligation bonds that did not involve suing their constituents, why the mayor and council did not utilize that option. The Sentinel asked if the mayor and council had, prior to initiating the lawsuit, discussed among themselves whether there was another way to issue the pension obligation bonds that would not involve suing their constituents.
The mayor and each of the council members was asked if they felt that the issuance of pension obligation bonds has taken on such a priority that suing their constituents is absolutely called for.
The mayor and the four council members did not consent to answer those questions.
The Sentinel sought to engage the mayor and council with regard to their understanding of all that the pension obligation bonds issuance would entail. Each was asked how much of a command he or she had of the particulars with regard to the plan to utilize pension obligation bonds to reduce the city’s unfunded pension liability, and whether he or she had a comprehensive understanding of the process or if each would characterize his or her understanding as less than comprehensive but still well-rounded. Each was asked if he or she was relying on Parker, Deitsch or Julio Morales, a managing director with Urban Futures, for guidance. Velto, Elliott, Maust, Zuniga and Garcia were asked if they had any misgivings about a potential conflict of interest arising from relying on Morales and Urban Futures and on Deitsch for advice with regard to the advisability of issuing pension obligation bonds when Morales and Urban Futures and Deitsch’s law firm all stand to profit if the bonds are issued.
The mayor and council made no response to those inquiries.
The Sentinel’s emails to the mayor and council provoked a response from City Manager Parker.
“No action is being taken against any individual, constituent or not, and at the end of the day, there will not be any judgment or adverse action taken against any individual because of the validation action,” Parker wrote. “The only exception to this would be if an individual specifically chooses to participate in the lawsuit, then they would risk having to pay fees and costs. But to be clear, no constituent will have a judgment entered against them and they will not owe the city any money because of this lawsuit.”
Despite the action filed in San Bernardino County Superior Court on July 21, 2021, designated CIVSB2121939 and titled City of Upland v. All Persons routed to the courtroom of Judge Lynn Poncin, Parker asserted, “To be clear, the city has not directly or even indirectly sued its constituents. What the city has done is filed a validation lawsuit regarding the potential issuance of pension obligation bonds. Under the rules imposed by the State of California, the city is required to file a complaint ‘in rem.’ This means that it is required by law to be stylized against ‘all persons interested’ in the matter.”
The term “in rem” designates that the lawsuit is against the residents of Upland together rather than against the residents individually.
Parker said, “The reason for filing the validation action is because the city is considering issuing pension obligation bonds, and in the event that the city issues such bonds it wants and needs to make sure that, as it firmly believes, the bonds are valid and properly issued so that there is financial certainty for the city, its constituents and the purchasers of the bonds. It is important to make sure that the bonds will be valid and binding before the time, effort and expense are expended to issue bonds. Filing a validation action is the best way to get that certainty and financial protection.”
Parker did not address why the city is not using its website to inform the public about the filing of the lawsuit, saying only that “notice must be published in a newspaper of general circulation in the community for three successive weeks. Obviously the city does not dictate the terms of how the newspaper publishes, but will make sure that the notice is properly given consistent with the rules.”
The bonds to be issued, Parker said, will run “up to approximately $120 million.”
Despite the elaborate preparations now under way for the issuance of the bonds, including the hiring Best Best & Krieger to serve as the validation counsel and bond counsel for the issuance, the filing of the validation action to issue the bonds, the selection of the law firm of Stradling Yocca Carlson & Rauth to serve as disclosure counsel for the issuance of the bonds and the city having hired J.P. Morgan Securities LLC and Stifel, Nicolaus & Company, Incorporated to serve as the managing and co-managing bond underwriters, Parker insisted, “The city has not made a decision on issuing pension obligation bonds. We will have additional public meetings to discuss the risks and benefits as well as how much to consider borrowing in the form of pension obligation bonds.”
The only direct response vouchsafed to the Sentinel by any of the members of the council was that of Councilwoman Elliott, who told the Sentinel it should “review the various definitions of ‘sue.'”
She suggested that it was not accurate to say the city is suing its residents.
“In the validation language, the word ‘sue’ means to notify of a court action. In this case, it is not an action against our constituents, it is a notification of a court process that allows us a cheaper and faster means of issuing pension obligation bonds than putting it on a ballot and calling for a special election or adding it to the governor recall election.”
By Mark Gutglueck