State commission investigating Morro Bay for misuse of funds

November 25, 2013

By JOSH FRIEDMAN

Editor’s note: This is the first in a series of articles detailing allegations of misappropriation of funds and questionable lease agreements promoted by Morro Bay officials.

The California State Lands Commission is investigating the city of Morro Bay over concerns that it misused funds it received from the owners of the soon-to-close Morro Bay Power Plant.

Energy firm Dynegy, which owns the power plant, pays Morro Bay about $800,000 annually to lease tidelands through which it pipes water used to cool the plant.

A state land grant requires Morro Bay to spend the lease money on preserving public access to the tidelands. But for nearly a decade the city has diverted the majority of the funds away from the harbor, city records show.

A spokesperson for State Lands said an investigation into the use of the funds is ongoing.

“We have had some concerns,” said Sheri Pemberton of State Lands. “We have looked at this, and we are still continuing to look into the matter.”

State Lands has been investigating the issue since 2011, Pemberton said.

Interim City Attorney Anne Russell said she was not aware the city is under a state investigation. City Manager Andrea Lueker did not respond to several requests for comment.

The California Legislature granted the tidelands bordering Morro Bay to San Luis Obispo County in 1947. When Morro Bay incorporated in 1964, the city received ownership of its adjacent tidelands from the county.

The grant allows the city to lease the tidelands to private interests, but mandates that all funds received from the leases go toward preserving public access to the area, the city of Morro Bay says.

“Under the Tidelands Grant Statue, all revenues received from the Tidelands must be used for operation and improvement of the tidelands,” the city website states.

Cities that violate land grant statues can face a range of possible punishments up to revoking the grant and returning the land to the state, Pemberton said.

Pemberton said other possible punishments for land grant violations include an order to repay misappropriated funds and criminal prosecution by the California Attorney General. The State Lands Commission can recommend prosecution to the Attorney General’s Office and revocation of the land grant to the Legislature.

Legislative action is required in order for a city to lose land granted to it by the state.

Morro Bay gets about $1.5 million annually from its tidelands leases, excluding an annual payment of at least $500,000 from the power plant outfall lease. The outfall lease is the power plant owner’s agreement with the city allowing it to pipe cooling water underneath the tidelands and into the ocean.

The city has diverted the $500,000 annual payment away from the harbor fund and into the general fund and reserves since it began collecting the money in fiscal 2005-2006, city budgets show.

The diversion has taken money away from the Harbor Operating Fund, which is supposed to pay for maintenance and improvement of the tidelands. The fund does not receive general fund revenue.

“In 1985, the city created the Harbor Department to focus property management efforts in the tidelands and to assure the state that tidelands revenues were properly accounted for,” the Harbor Department Lease Management Policy states.

Although the annual $525,000 payment is written into the lease, the agreement lists $260,000 as the cost of “rent.” Neither city officials, nor council members commented when asked for the legal justification of diverting the $525,000 payment away from the harbor.

Earlier this year, the Morro Bay City Council directed city staff to hold a study session on tidelands leases after members of the public raised complaints about the process in which the city manages the leases.

On March 25, then-city attorney Rob Schultz delivered a PowerPoint presentation on the city’s lease management practices.

“All revenues from such leases must be expended within the areas of the granted lands for the purposes of the public trust,” Schultz’s presentation stated.

Yet, in 2004, the city negotiated a clause into the power plant outfall lease requiring Duke Energy, the plant owner at the time, to make a $500,000 annual payment to the Morro Bay Community Development fund.

A review of Morro Bay budgets over the last decade revealed that the city did not have a Community Development Fund (CDF) at the time of the negotiation and has not had one since.

Instead, the city placed the annual $500,000 payment in the “other revenues” section of the general fund. In fiscal year 2005-2006, Morro Bay received a double payment of $1 million from Duke and received $500,000 annually thereafter.

Since 2006, the city has received a combined total of nearly $5 million in CDF payments from Duke and Dynegy.

In fiscal 2009-2010, the city moved the revenue from the CDF payment to the general fund reserves in anticipation of the power plant closing and transferred the money back into the general fund in decreasing yearly increments to patch up budget deficits.

The power plant is scheduled to close in February, and 2014 is the last year the city expects to receive a CDF payment.

In December 2012, the city renegotiated the lease with Dynegy to include a $525,000 annual CDF payment. The approval of the current lease agreement took place during an emergency council meeting the week before the current council took office.

Upon the swearing in of the new council, the majority swung in opposition to Schultz and Lueker. Schultz, who served as city attorney since 1998, resigned earlier this month after Mayor Jamie Irons led a push to fire him.

Irons has not said why he called for Schultz’s termination and would not comment when asked by CalCoastNews whether it had anything to do with the alleged misuse of funds.

The current council majority has also voted to begin the termination process with Lueker, but it is unclear whether they will follow through on doing so. Lueker became city manager in 2008 after rising up the ranks as a city employee.