The Empire Mello-Roos mess

Those vaguely worded ballot measures can come back to haunt you.
We've noticed, driving around Merced and Stanislaus counties these days, that everything seems to be owned or controlled by bankers somewhere else. We wish we had a prize -- an award for real and sustained public service -- to offer J.N. Sbranti of the Modesto Bee, whose great coverage of complex financial issues in this area that has been shining a strong light since the speculative real estate boom began to go soft. We've appended a brief history of the Orrick law firm (from its website) below because the name Orrick has been associated with public bonds in California for a very long time.
Badlands Journal editorial board

Trustee says he didn't know
Bavaro, who as a trustee ran the district's Yes on Measure H campaign in 2001, said he didn't know it would boost taxes every year or that accrued interest and fees would cost so much or that the bonds couldn't be paid off early.
"That's a real shock to me," Bavaro said. "No one shared the total costs with us. … That would have put a different light on it."
Empire Superintendent Bob Price, who is in his 18th year leading the district, told The Bee last week that he will discuss the Mello-Roos situation with the school board.
"I guarantee that as a result of this we will revisit our options," said Price, who said he was not aware of all the bonding details and costs until The Bee started asking questions. "There were hundreds of pages of documents we signed. … We relied on the advice of our bond counsel."
Orrick has been the district's bond counsel for the past decade.
Daniel Bort works for Orrick now. He was Empire's bond counsel in 1987 when the Mello-Roos district was formed.
"I don't give my clients financial advice. If they want to borrow money, I help them do that," Bort explained. He said everyone understands that "when you borrow money, you have to pay interest … and by stretching out payments longer you make it more expensive."
Bort said it would "be condescending" for him to do the math for school trustees and administrators, like showing them the total cost of bond payments over time or how a 2 percent escalation clause would boost property taxes year after year.
"I did not get the impression Empire was a community of rubes who would vote for taxes if they didn't know what they were voting on," Bort said. "Nobody was trying to pull the wool over anybody's eyes. Everybody's motives were high"...Modesto Bee, Aug. 1. 2010

 
8-1-10
Modesto Bee
Were Modesto taxpayers 'snookered' into $123 million in extra taxes?...J.N. Sbranti
http://www.modbee.com/2010/08/01/v-print/1275262/district-snookeredempire-union.html
A financing scheme that voters approved 23 years ago to raise $13 million for new schools could cost southeast Modesto property owners more than $123 million in extra taxes, millions of which will go to investors and consultants.
Some Modesto homeowners could wind up paying more than $20,000 each for school facilities that — as it turns out — were not all necessary. Modesto businesses already are paying hundreds of thousands of dollars per year in added property taxes for those schools, which they had no say in approving.
And those tax rates will continue climbing year after year, regardless of plummeting property values.
Empire Union School District officials now realize they cannot pay off the debt early to avoid continued interest charges, despite dwindling student enrollment and campus closures.
Most of the millions collected will end up in the pockets of wealthy out-of-town investors who won't pay taxes on what they earn from the tax-exempt bonds.
School trustees instrumental in getting voters to OK the vaguely worded ballot measures admit they didn't understand the long-term impact of their actions.
"This is a sorry mess," said Ed Bearden, who left the Empire school board in 2007 after serving 24 years. "I never thought to ask that question about how much had been collected and where it went. I apologize."
The complicated tax plan began with what resembled a school bond vote in 1987. Then, after repeatedly refinancing its debt and quietly persuading voters to expand and extend its taxing authority in 2001, the district spent $25.6 million to build and renovate campuses.
Along the way, school officials authorized more than $1.4 million in commissions and fees for those who arranged the financing, and they committed taxpayers to more than 50 years of interest payments.
Another former Empire trustee, Nick Bavaro, fears the district "got snookered" by advisers. He said board members relied on the district's administrators to understand the details and make informed recommendations.
"I am going to ask for an investigation because there was a lot of misrepresentation," Bavaro said. "This is not the end of this."
Understanding how everything happened is not easy.
In 1987, Empire officials persuaded 1,491 voters — which was 71 percent of those who cast ballots but less than 24 percent of the registered voters — to place all property within the school attendance boundaries into a special taxing district.
That created Stanislaus County's first Mello-Roos tax district, a kind of property tax named after the state lawmakers who carried a bill in 1982 to give local governments a way to raise money for specific projects by charging people who benefit from them.
Empire voters agreed to the deal, in part, because it was designed to charge all new homeowners three times more in property taxes than existing residents would have to pay. It also billed businesses at triple rates, on a per-acre basis, even though existing companies like the Beard Industrial District and Del Monte Foods didn't generate any students.
What those Empire voters may not have realized, however, is that — unlike a common school bond — the technical wording in "Bond Measure N" gave school officials authority to constantly raise taxes and expand how much could be collected.
The original ballot measure sought approval "to issue up to $13,000,000" in bonds to build and renovate schools.
Overcrowding alarm sounded
Ballot arguments endorsing that tax stressed how the four southeast Modesto elementary and middle school campuses were overcrowded with 3,000 students, and thousands more children were expected to move in.
"Double sessions and the use of libraries and cafeterias" could result, voters were told, because "no other source of funding" was available to cover new school construction costs.
Tax money started rolling in, especially once building began in Modesto's Dry Creek neighborhood near Claus Road and Yosemite Boulevard. New homebuyers there in the late 1980s started paying Mello-Roos taxes three times higher than what other Empire district homeowners were charged.
Those Mello-Roos dollars helped build Hughes Elementary in Dry Creek and Stroud Elementary behind Johnansen High School. They also renovated Sipherd, Capistrano and Empire elementaries and Teel Middle School. More than $11 million in state funds also were spent on those construction projects, plus building fee revenues collected from developers.
By 2001, the school district's property owners had paid nearly $20.8 million in extra Mello-Roos taxes. That apparently was allowed, despite the ballot measure asking for $13 million.
But school officials decided they needed more money.
So they called a special midsummer election by mail in 2001. That ballot asked voters to raise indebtedness by $15 million "without increasing the existing voter-approved special tax."
Business owners didn't get a say, but 2,560 voters in the low-turnout election agreed. That was 76 percent of those who mailed in ballots but only 21 percent of the registered voters.
To persuade those voters it was a good idea, the Orrick legal firm contributed $10,000 in campaign funds. That international law firm served as Empire's "bond counsel," and it earned commissions for setting up bond sales.
Once Measure H passed, Orrick arranged to sell new, expanded 30-year bonds.
Those bonds weren't the only ones the district sold, using its Mello-Roos taxing authority as collateral.
In 1988 and 1990, the district issued $14 million in bonds. In 1992, it refinanced those bonds and expanded Empire's debt to $16.7 million. Then in 2001 and 2002, it refinanced those previous bonds again and expanded the debt to $29.5 million.
Every time the district sold bonds or refinanced debt, it paid hefty fees and commissions to out-of-town underwriters, bond attorneys, special counsels, rating agencies and insurance companies.
During 2001 and 2002 alone, it paid $1.43 million in "costs of issuance" fees to consultants, attorneys, underwriters and other middlemen.
The district continues paying annual fees to a management company — NBS Local Government Solutions — to oversee its Mello-Roos taxes and bond payments.
Pam Wall, Empire's assistant superintendent for business services, said NBS has told her the school district must continue raising Mello-Roos taxes 2 percent per year through 2032 to be able to afford its outstanding bond debt payments.
The district's homeowners will pay an extra $450 this year in property taxes if their home is among the 2,618 built after 1987. They will pay an extra $150 if their home is among the 4,432 built before.
Those tax bills will not stop increasing until 2032. By then, the 2 percent escalator is expected to boost annual bills to $696 for post-'87 homes and to $232 for pre-'87 homes.
For homeowners who bought new in 1988 and retain ownership through 2032, their combined Mello-Roos taxes will total $20,682. And even if their property values decline, as they have the last five years, these tax assessments will not.
$123M in extra taxes in store
At the current 2 percent rate of increase — even if no more houses are built in the district — Empire's property owners will have paid more than $123 million in extra taxes from 1988 to 2032.
To date, more than $43.2 million in extra taxes has been collected. Wall said virtually all of that has been spent.
Wall calculated the district would have to come up with $40 million more to pay off its outstanding bonds today. That's what is currently owed on the $29.5 million it borrowed in 2001 and 2002.
One reason the remaining debt is so high is because some of those bonds have a "no call" provision that requires every cent of promised interest be paid, regardless of when the debt is retired. That prepayment penalty means taxpayers must pay bond holders the same amount in interest, whether they pay off the debt now or in 2032.
Trustee says he didn't know
Bavaro, who as a trustee ran the district's Yes on Measure H campaign in 2001, said he didn't know it would boost taxes every year or that accrued interest and fees would cost so much or that the bonds couldn't be paid off early.
"That's a real shock to me," Bavaro said. "No one shared the total costs with us. … That would have put a different light on it."
Empire Superintendent Bob Price, who is in his 18th year leading the district, told The Bee last week that he will discuss the Mello-Roos situation with the school board.
"I guarantee that as a result of this we will revisit our options," said Price, who said he was not aware of all the bonding details and costs until The Bee started asking questions. "There were hundreds of pages of documents we signed. … We relied on the advice of our bond counsel."
Orrick has been the district's bond counsel for the past decade.
Daniel Bort works for Orrick now. He was Empire's bond counsel in 1987 when the Mello-Roos district was formed.
"I don't give my clients financial advice. If they want to borrow money, I help them do that," Bort explained. He said everyone understands that "when you borrow money, you have to pay interest … and by stretching out payments longer you make it more expensive."
Bort said it would "be condescending" for him to do the math for school trustees and administrators, like showing them the total cost of bond payments over time or how a 2 percent escalation clause would boost property taxes year after year.
"I did not get the impression Empire was a community of rubes who would vote for taxes if they didn't know what they were voting on," Bort said. "Nobody was trying to pull the wool over anybody's eyes. Everybody's motives were high."
Bort also defended the fees and commissions he and others involved with bonds collect: "It is expensive to borrow money in the public market. You're hiring professionals to do a lot of work."
School officials should not rely solely on a bond counsel's advice, warned John Anderson of J.B. Anderson Land Use Planning in Ripon.
Anderson has been researching Empire's Mello-Roos district on behalf of the Beard Land Improvement Co., which pays it more than $250,000 in annual taxes.
"If you don't know how to ask the right questions, you can't expect the consultants to hold your hand," said Anderson, who considers Empire's bond costs horrendous. "Someone has got to be watching the shop, and no one at that district is. … It's been managed by consultants the whole way."
As a result, property owners are suffering financially.
"Taxpayers there have paid a lot of money and not gotten a lot of benefit. Meanwhile, the tax burden is not going away any time soon," Anderson said. "The tax hit is absolutely tremendous. … I don't think voters realized these taxes would go on forever."
At least they got to vote. Business owners did not.
"It's like taxation without representation," Anderson said about the taxes forced on industrial and commercial land owners.
State treasurer mulls review
He's not the only one concerned by Mello-Roos taxes.
"We are considering whether to launch a thorough review of the Mello-Roos arena," said Tom Dresslar, spokesman for California Treasurer Bill Lockyer.
Dresslar said questions about Empire's bonds are not the first to arise regarding Mello-Roos financing.
During the last 20 years, more than $25 billion in Mello-Roos bonds have been sold by California agencies.
Empire, meanwhile, keeps spending the Mello-Roos funds it collects whenever tax revenues exceed bond debts. The schools' current to-do list for those taxes includes new playground equipment, fresh pavement and updated technological gear.
"Why are they spending that money? They're supposed to be paying off the bond," Bavaro asked. "It's not a revolving line of credit. That's not what I voted on."
The district certainly doesn't need any more schools or classrooms.
Only 3,000 students are left. That's about how many there were in 1987 before all the taxes started and three new schools were built.
Empire's enrollment peaked at 4,100 students in 2001, around the time Measure H asked voters to finance another new school.
Price, the superintendent, said enrollment was projected to grow. Instead, it plunged more than 25 percent.
To accommodate projected growth, the district in 1987 or 2001 could have opted to operate its schools year round, expanding classroom capacity by 25 percent.
That's what Modesto City Schools did for decades to relieve overcrowding in its elementary schools.
Instead, Empire school leaders chose to hold that middle-of-the-summer election to get voters to authorize more taxes for a new middle school.
Glick Middle School opened in 2003, but by 2009 declining enrollment forced the district to close Teel Middle School. More school closures may be considered soon because the district really doesn't need five elementary campuses.
Taxpayers, nonetheless, will keep paying for them.
History of Orrick, Herrington & Sutcliffe law firm
http://www.orrick.com/about/history/history_timeline.asp
1863
As San Francisco was emerging from the Gold Rush as a center of commerce amidst the wilderness of the western United States, a pioneering lawyer named John R. Jarboe became the general counsel of a new financial institution, the German Savings and Loan Society, which would later become part of the First Interstate Bank of California.
1885
Jarboe, an authority on real estate titles, founded Jarboe, Harrison & Goodfellow, the beginning of present-day Orrick, Herrington & Sutcliffe LLP, which would, as it evolved over the next 100+ years, participate in many of the most significant events in San Francisco's history.
1891
Ralph C. Harrison was appointed justice to the California Supreme Court, and the partnership of Jarboe, Harrison & Goodfellow was dissolved.
1901
W. S. Goodfellow formed a new partnership with Charles Eells, named Goodfellow & Eells.
1905
Ralph Harrison assembled the corporations that became the Pacific Gas & Electric Company.
1906
Charles Eells was instrumental in the reorganization of Fireman's Fund Insurance Company after the devastating 1906 earthquake and fire in San Francisco. Eells saved the business from collapse by devising an innovative plan to pay unpaid claims with company stock. Goodfellow & Elles also counted among its clients the first two San Francisco firms to engage in investment banking.
1910
William H. Orrick began his 50-year tenure with the firm. Goodfellow & Eells was involved in litigation surrounding the controversial development of hydroelectric power and water-use rights in the Truckee River/Lake Tahoe region. Mr. Goodfellow, representing business interests, met with President William Howard Taft, who opened the interview by saying, "My trouble is to find anyone who understands your western water law." The resulting litigation led to legislation that affects the use of Lake Tahoe water today.
1914
Stanley Moore joined the firm, and the name was changed to Goodfellow, Eells, Moore & Orrick.
1927
Ralph Palmer, Tom Dahlquist, George Herrington and Mitchell Neff became partners. In the following years, the most famous of the firm's bond matters was the issuance of bonds to help finance the construction of the Golden Gate Bridge. Despite many attempts by numerous parties to block the bonds, the bond issue passed with overwhelming public support, and George Herrington established his reputation as a premier West Coast bond attorney.
1932
Eric Sutcliffe joined the firm and conducted extensive research for Golden Gate Bridge bond matters, as did all associates who assisted W.H. Orrick with the research he conducted himself well into his 80s, before retiring in 1960.
1934
Eric Sutcliffe worked on PG&E registration statements, completing the first in 1934, which was one of the first registrations processed by the Securities and Exchange Commission under the Securities Act of 1933.
1947
Eric Sutcliffe was chosen by W.H. Orrick to become managing partner, a position he held for more than 30 years.
1980
The firm's name was changed to Orrick, Herrington & Sutcliffe.
1983
Orrick began its expansion outside of San Francisco with an office in Sacramento, California.
1984
Orrick opened its first non-California location, establishing an office in New York.
1985
Orrick opened its third California office, located in Los Angeles.
1990
Ralph H. Baxter, Jr. became chairman and CEO of Orrick.
1993
Orrick opened its second office on the East Coast of the United States in Washington, D.C.
1995
Orrick opened its fourth California office, located in Silicon Valley.
1996
Orrick developed and adopted the core values that continue to govern the firm today:
Excellence and Integrity
Cooperation and Individual Respect
Enthusiasm and the Pursuit of Improvement
1997
Orrick opened an office Tokyo with two U.S. qualified lawyers. Two years later, Orrick formed a joint enterprise with Sho Kokusai Law Offices (known today as Orrick Tokyo Law Offices).
1998
Orrick opened an office in London and expanded the New York office with the addition of the entire litigation department of Donovan, Leisure, Newton & Irvine.
2000
Orrick opened an office in Seattle, Washington, which grew to include an office in Portland, Oregon, two years later.
2002
Orrick opened an office in Paris and its fifth California office, located in Orange County, along with its Global Operations Center (GOC) in Wheeling, West Virginia. The GOC is the hub of Orrick's day to day administrative operations. No other firm has a 24/7 facility that rivals it.
2003
Orrick opened an office in Milan and expanded its presence in the Pacific Northwest of the United States with an office in Portland, Oregon.
2004
Orrick opened an office in Rome and significantly expanded its Tokyo office with the addition of six bengoshi lawyers and a partner focused on South Korea. Orrick’s San Francisco office moved into the Orrick Building on Howard Street, and the majority of Clifford Chance's West Coast Securities Litigation Group joined Orrick.
2005
Orrick opened offices in Hong Kong, Moscow and Taipei, and the firm doubled the number of lawyers in the London office. Ten partners joined Orrick from Heller Ehrman Venture Law Group, expanding the firm’s Emerging Companies Group.
2006
Orrick opened offices in Beijing and Shanghai with pioneering lawyers from Coudert Brothers (the first foreign law firm in Hong Kong and China) and increased the Paris office by nearly 100 lawyers through a merger with Rambaud Martel. The highly-rated bankruptcy team from Swidler Berlin joined Orrick's office in Washington, D.C.
2007
Orrick grew to more than 1,000 lawyers in 18 offices throughout the world. A five-member global compliance team joined Orrick’s New York office to help clients master the complex international regulatory environment for a range of issues, including equity compensation, corporate governance and corporate secretary services.
2008
Orrick's Washington, D.C., office expanded its Middle East practice capabilities with the hire of the first non-Qatari attorney licensed to practice law in the State of Qatar. The Düsseldorf, Berlin and Frankfurt offices opened in 2008 when Orrick merged with the highly regarded German firm of Hölters & Elsing.