Tension Over SB City Manager’s Commitment Toward Bond Financing On City Hall Retrofit

By Mark Gutglueck
San Bernardino City Manager Charles Montoya jumped ahead of himself and just about everyone else when he mapped out and then undertook the preliminary steps toward implementing a strategy to salvage San Bernardino’s dormant City Hall, which has been empty since 2017 over concerns about its seismic stability.
The concept of retrofitting the building to make it once more safe for occupancy has remained alive since then-City Manager Mark Scott made the October 2017 decision to abandon the structure, but no substantive action in that regard has been taken by either of the three mayors nor the 11 members of the council have served since that time.
Montoya, without any publicly previewed or clear direction from the city council sent instructions to Public Works Director Lynn Merrill, the city’s finance department and William Lampi, one of the analysts working in the city manager’s office to look into the task of fully assessing the building’s engineering/structural shortcomings, determine whether they can be redressed and at what cost, make a determination of whether it is financially reasonable to undertake such a project rather than razing it and building a new structure from scratch and prepare the means for financing that undertaking. In doing so, he directed the finance department to work with the bond underwriting firm of Stifel, based primarily on his pas t dealings with the firm when he was city manager in Watsonville, as well as in Florence and Avondale, both in Arizona, and while he was the finance director and treasurer with the Town of Castle Rock and the chief financial officer for Centennial, both in Colorado.
San Bernardino’s misfortune with its City Hall might have been avoided but for what in retrospect know comes across as shortsighted and irresponsible action on the part of a past city council.
In 1971, the City of San Bernardino was moving toward building a new City Hall in Downtown San Bernardino, on property reclaimed from a longstanding historic section of the city, where nearly a score of buildings had been demolished to undertake an urban renewal effort that was to include government-sponsored capital improvements entailing a new civic center. To design City Hall, the city commissioned César Pelli, a highly accomplished Argentine American architect who emigrated to the United States in 1952, married Diana Balmori, a landscape and urban designer, and became a naturalized U.S. citizen in 1964. Pelli established himself as one of the world’s leading architects, particular with regard to designing majestic buildings as well as some of the world’s tallest structures, including the Petronas Twin Towers in Kuala Lumpur, which were for a time the world’s tallest buildings, as well as the World Financial Center complex in downtown Manhattan, Salesforce Tower in San Francisco, the Sao Paulo Corporate Towers, Xuzhou Central Plaza in Xuzhou, the Unicredit Building in Milan, and scores of others around the world.
In the early morning of February 9, 1971, the San Fernando earthquake also known as the Sylmar earthquake, occurred in the west foothills of the San Gabriel Mountains. The unanticipated thrust earthquake had a moment magnitude of 6.5 to 6.7 on the Richter Scale. The quake did damage to the San Fernando Valley and other densely populated areas north of central Los Angeles, causing several buildings to collapse. This demonstrated the inadequacy of the building standards that had been put into place in California following the Long Beach Earthquake of 1933. California lawmakers acted quickly to develop legislation related to seismic safety, tightening construction standards. Already at that point, architects and engineers had introduced the concept of incorporating rollers into the foundation of high rise buildings, which would allow the foundation to roll or shift with a seismic disturbance. Two decades later, rollers would be replaced by massive vertical springs in the foundations of large buildings. But San Bernardino City Hall had neither of those features. What is more, it would utilize pilotis, i.e., pillars or columns composed primarily of concrete, to support the building, including a major portion of the upper stories on the building’s east side, an overhang which was architecturally striking. Because of this, the easternmost portion of the building – all five of the upper floors, are not supported by a ground floor. Seismic integrity calculations done three decades later would determine that under the stress of a major earthquake, those pilotis would be very likely to crumble.
City Hall that Pelli envisioned and which the city built is a six-story building, 115 feet tall and 217 feet long by 68 feet wide, in the modernist style, which includes a mezzanine and basement that do not count toward the six floors. It has curtain walls, and is clad in glass, which forms 90 percent of its exterior entailing 6,000 windows with slim aluminum mullions.
City leaders of two generations ago instead of delaying the project by another 12 to 24 months and working to incorporate California’s updated seismic standards into the design for the edifice, elected to rush the timetable on the completion of the $4,950,579 City Hall project using Pelli’s original design and its accompanying specifications. The result was that City Hall, which was supposed to have a life of as long as a century or a century-and-a-half, had come to represent a potential hazard to those who worked within it or citizens who came to it for municipal services or to pay municipal utility bills.
A structural engineer brought in by the city in 2008 to examine telltale signs of instability and aging that were manifesting in various spots around the 104,000 square foot building came to the conclusion that it would in no case be able to withstand a locally based temblor greater than 7 on the Richter scale and would likely collapse in the face of a 6.5 scale quake. The building’s hopes would be marginal if shaken by a 6.0 event, the engineer prognosticated. The city, which had been facing progressively harder financial challenges going back two decades until it sank into the economic abyss and filed for Chapter Nine bankruptcy protection in 2012, did not have the means to tackle the issue and so it went unaddressed.
The issue was forced to a crisis point in September 2017 when a succession of minor but recurring earthquakes, referred to as a swarm, were registered near the Salton Sea. Afterward, the California Office of Emergency Services put out a warning that the chances of a magnitude 7.0 or greater earthquake was slightly greater than normal. Upon doing his due diligence, Scott concluded that it would be best to move all of the city’s offices out of City Hall.
Thereafter, the lion’s share of the city’s departments took up residence in the Vanir Tower located next to City Hall, as well as in a number of smaller locations within the downtown area.
Montoya, after arriving in October, became aware of the constant drain on the city’s budget represented by paying for office space that otherwise would be available to the city at far less cost if it had its own quarters.
After hearing back from Merrill and Lampi, Montoya determined that the renovation of City Hall would run from somewhere between $75 million and $82 million. Without money in the city’s budget to pay for the makeover, he explored financing options, having already been half-convinced that issuing bonds to generate the proceeds for the project was the most likely way forward. After speaking with Sara Oberlies Brown, the managing director for Stifel in its San Francisco Office and Mark Reader, Stifel’s managing director in its Phoenix office, he sighed a letter of intent with Stifel to have it serve as the underwriter on the issuance of $82 million in bonds.
At the city strategy session on January 30, Montoya had Lampi and Merrill brief the council on the situation with regard to City Hall, while both Brown and Reader were on hand to educate the council on its bond financing options.
Brown explained that the city was challenged with regard to its financing options because for the city to enter into any type of indebtedness exceeding annual revenues including bonded indebtedness, the city would need to obtain two-thirds voter approval of a tax or assessment to service that debt. She said, however, that the city could bypass the requirement for a vote of the city’s residents by entering into “long term leases subject to annual appropriation by the city council as part of the budget process.” She assured the council, “That concept has been leveraged by cities and counties throughout the State of California on a regular basis to provide infrastructure that is considered to have general benefit to the community.
In the instant case, Brown said, this would call for the issuance of “lease-revenue bonds or certificates of participation, both having this common structure of lease-financing.” The strategy would entail, Brown said, “a lease-lease back structure,” one in which the city leases one of its assets to a financing authority – a parallel or ghost entity to city government which would have as its board of directors the city council – for an nominal amount, such as one dollar. The finance authority would then “rent” the asset back to the city, with the value amortized over a given period of time. The city’s lease payments transfer to the trustee, who uses the incoming money to pay down the debt, that is, make payments to the bondholders. This debt servicing would require “use and occupancy” of the leased asset.  “The trustee can re-enter and relet the asset if the issuer doesn’t make payments,” Brown said.
In practical terms, what the city would do is issue the bonds, take the proceeds from the sale of the bonds and use them to seismically retrofit City Hall, at which point the city could move all of its departments out of the Vanir Tower and other locations around downtown back into City Hall. The money that the city was otherwise paying to lease the office space to house its departments and employees would then be used to pay back the bondholders.
Brown said the city had set up financing authority’s previously, as was the case with the city housing authority and before the State of California in 2012 closed out all municipal and county redevelopment agencies statewide, its redevelopment agency. The city council in all such cases acts as the governing body or board of the financing authority.
The asset to be leased to the financing authority could be any of a number of city assets such as the existing City Hall, a park, the city’s corporate yard, or its police station. Such assets have served as the subject of the lease payments in other cities, Brown said. The bonds issued could be structured to refund the bondholders in as short of a span as 10 years or up to 30 years or more, she said, with the standard or typical time being 30 years.
Without being specific, Brown indicated the city could structure its lease payments on the asset to be entrusted to the finance authority to be roughly equivalent to what the city is paying to lease the existing substitute City Hall facilities in the Vanir Tower and elsewhere. facilities
Brown then somewhat aggressively laid out a schedule by which the city would “kick-off” the concept of doing the lease lease-back financing, draw up the legal documents relating to the bond issuances and educate all of the participants – i.e., the city council and city residents – about what is to occur in January and February of this year, draft credit and marketing materials in March and April and award a construction project contract to whatever company is to do the work on City Hall, present the city’s credit rating to a bond rating agency, post offering document and market the bonds in May and June. In July the city would then use the incoming proceeds from the bond sales to begin construction, that is, the retrofitting of City Hall.
Ultimately, Brown said, the city council would “act as the play caller,” while her suggestion was that it was understood a bond issuance was the city’s best option.
After listening to the presentation, Councilwoman Kimberly Calvin, without engaging in any direct direct criticism, probed how it was that the city was on a trajectory to make an $82 million expenditure toward retrofitting City Hall, committing the city and its residents to debt service of something approaching $180 million over the next three decades.
Calvin inquired about Stifel’s role as the city’s bond underwriter. When Montoya indicated that was the case, Calvin asked, “So, you’ve already hired them?”
“We already have a letter of intent with them and all the project personnel put on this will go ahead and be reimbursed through the bond proceeds,” Montoya responded. “So, we need to start moving ahead. And they’re one of the top companies in the United States.”
“If you don’t mind my asking, what was that cost?” Calvin inquired.
“We’re still working on that,” said Montoya. “It’s not a final cost yet. We will know as soon as we know what the bond issuance is and what the market rates are and those type of things. So, we don’t have a final cost yet but that will be rolled into the bond proceeds.”
“So, we just opened up a contract but we don’t have any idea of the number?” Calvin asked.
“When you do bond proceeds, this is how that process works, nationwide,” Montoya said.
“They’ve already been identified, though?” Calvin pressed.
Yes,” said Montoya.
“So, we didn’t need to go out for an RFP [request for proposals, i.e., seek bids] for that?” Calvin asked.
“No, we did not,” said Montoya.
“And why was that?” asked Calvin.
“We do not because they are one of the top people in the marketplace, one of the top ones in California,” said Montoya, meaning Stifel. “It is relationship-based, people that we trust, that we know, that we work with.”
“They have worked with us before?” Calvin asked.
“They have worked throughout California,” said Montoya. “They have worked with me in several different states, as well, and other individuals.”
Montoya at one point indicated his belief that the salvaging of City Hall was an important enough undertaking that the city should commit to it. He evinced the attitude that the council should not dwell unnecessarily on financing options after staff had already carried out such evaluations or involve itself in an inteminable debate over which bond underwriter to utilize.
“Why are we doing this?” Montoya asked, rhetorically. He said, “I think why are we doing this [is] over the number of years the council and the community have been given an empty bag of happiness to do this and it hasn’t been done yet. This building is iconic. It is not only iconic to this community but to the state and the United States. It still sits in historic books everywhere This building has not been upkept. It needs to be done. It needs to be retrofitted and brought up to today’s standards but it is still a beautiful building. In the meantime, the city has been paying lease rates in a building next door where we can be paying the bond rates to pay for that building and just get it done and get back in there, which is your building, the community’s building, for the city council and everything else. That’s why we’re doing this move forward. If we don’t do this now, sooner or later that building’s just going to become a gigantic doorstop.”
Calvin sought to pursue why the city has not sought from either or both the state and the federal government money or economic support in the form of grants or subsidies to preserve the building. Montoya said efforts had been made in that regard but that so far no progress in that regard had been made. Calvin pressed the city manager to have the city’s lobbyist angle toward freeing up any available funding that could come into play since City Hall has status as an historic building.
This week, the Sentinel spoke with Calvin, who said she found the manner in which Montoya was pushing ahead with preparations on a project that had not been fully deliberated upon by the mayor and council nor yet given approval by a council vote somewhat disconcerting.
“I think when Mr. Montoya referenced the letter of intent is when my ears perked up,” Calvin said. “He seemed to be saying he did not need advising on the bonds and that he would be utilizing the same bond broker or underwriter he has used in other other cities, that there was already a letter of intent, which had never been mentioned to the council before. He said there would be no RFP. This to be another example of sole sourcing on our city contracts. The city council is to have no say, apparently, on the commissions this bond broker is to receive. He seemed to be saying he did not need the council’s permission to proceed. In our city, the city manager has spending discretion on contracts up to $100,000, but this supersedes that. I thought I heard $80 million, which supersedes that $100,000 threshold on what he can spend without first getting council permission not by just a little but by a lot. I‘m not sure how a city manager who has only been here three or four months can start dictating to the council what we are going to do even before we vote on it. He has at least tentatively committed us with this letter of intent to issue $80 million in bonds. I don’t know how things were done in the cities where he was before, but that’s not how we handle things here. I am concerned about where that direction came from. I know it didn’t come from a council vote. At the very least there was confuison about this and I am a bit taken aback that none of my council colleagues had the same level of concern about the direction we are headed in without close monitoring by and the consent of the council in a formalized decision-making process and vote.”
Calvin said, “The idea just popped up during a strategy meeting like it was a done deal, without any previous discussion. I am not saying I am totally opposed to reclaiming City Hall or maybe using bond financing as a way of financing the City Hall project or other important public improvements, but that is something that is going to be labored over and closely considered and labored over by all my colleagues so we can work through what has to be done.”
Councilman Damon Alexander told the Sentinel that Montoya had moved a little too quickly with regard to the City Hall retrofit, and had not gotten the city council into the loop before taking important preparatory action.
“I don’t know how he could have moved ahead with the letter of intent without getting authorization from the mayor and council first,” Alexander said.
Alexander said he did not see Montoya’s premature action as anything that will endanger his status as city manager, but rather a jog in the highway as Montoya and the council learn where their respective lanes are. The councilman said it is well established that the council is the final authority on how the city’s money is going to be spent.
“When bonds were issued for the city’s housing authority, the council approved the arrangements at every step in the process,” he said. “Issuing bonds for any purpose should follow the same protocol. Simply for the sake of consistency, we need to be in on all decisions relating to bonds, including whether we are going to issue them and how they are going to be issued.”

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