State commission investigating Morro Bay for misuse of funds

November 25, 2013


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.

Rob Schultz

Rob Schultz

“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.

Andrea Lueker

Andrea Lueker

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.


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“pays Morro Bay about $800,000 annually to lease tidelands through which it pipes water used to cool the plant.”

“Pays Morro Bay” I repeat “Pays Morro Bay”…enough said. If the money is paid to Morro Bay then the money belongs to Morro Bay. It does not belong to the “State Lands Commission”…whatever the heck that is.

Right. It belongs to Morro Bay and must be put in the Morro Bay Harbor Fund. Morro Bay’s own Harbor Lease policy says that. Read the article. It says,

““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.”

Read the whole policy. It is is online at

In addition to the material quoted in the article, it says, among other things, “The City may lease out these lands to private businesses for a period up to 50 years and all revenues from such leases must be expended within the area of the granted lands for the purposes of the public trust.” That means the money must be spent in the Harbor area. You cannot divert it to the General Fund and spend it any way you want.

Do you mean the same State lands Commission that was audited in 2011 and determined that the State Lands Commission had improperly Managed Public Lands and had caused the State to lose Millions in Revenue.

I bet State Lands is investigating the City to learn how to properly negotiate leases and collect revenues!

Maybe Cal Coast News should do an investigation of the State Lands Commission.

Don’t hold your breath. They are busy digging up more stuff on Morro Bay Like where George lives…you know real important stuff like that.

These diversionary tactics are laughable. If the police department were under investigation, it would not mean that nobody had to follow the laws any more.

…and by the way, the State Lands Commission does not negotiate the leases and collect the revenues. That is done by the holders of the public trust grants. In Morro Bay, it is done by the City staff.

Despite the silly attempts to draw attention away from the facts, it remains clear that the staff came up with an illegal scheme to divert money to the general fund when the law does not permit that.

Please do your homework. There are many separate agreements with the Power Plant. They are all public record. The outfall lease is for $250,000 per year and just got a CPI increase. It is the largest tideland trust outfall payment in the State of California. Do your research. The State Lands Commissions entered into a 50 year lease in 1953 for a one time payment of $50. In 2003, the City negotiated a $250,000 payment. That payment goes directly to the Harbor fund. Under State Lands Commission calculations the City would have received under $5,000.

The $500,000 payment per year has nothing to do with the outfall or tidelands trust area. Just like all the agreements with the Power Plant like the Lia kaiser Park Agreement, The RV Park Agreement, The Fisherman’s Gear Storage Shed, the Triangle Property Agreement. All of these Agreements have nothing to do with the outfall tidelands trust area.

Again, just do your homework. All of these agreements are public record.

I know there are so many false statements in this article there is no way that Cal Coast News could have even read the agreements or done any homework on this one.

Exactly. All of this was discussed in public session at the time. The City Council directs the staff. There are no charges of money being missing. It was all spent for the betterment of the city. Just another example the sad fact Jamie Irons supporters will stop at nothing to try and mask the damage they are doing to the city at the present time. Sign the recall.

In most cases, a city council directs the city manager or other designated executive who then directs the staff in implementation of what the city council wants done.

It is set up this way to shield the city council members from liability for the implementation of what the city council wants done.

In addition, the last thing you want is five city council members approaching individual staff members and micromanaging them…the likelihood of city council members badgering staff with conflicting orders in implementation is high.

The $500,000 payment has nothing to do with the outfall or tidelands trust are? Oh really? Then how come I just found it in the power plant outfall Agreement to Lease that Schultz negotiated? Yes, that would be the outfall that lies in the tidelands trust area.

Look up the document online and check out Article 4 on pages 11 and 12. It says that the power plant will pay the City $500,000 a year to go into the community development fund. Yes, that would be the community development fund that CCN found had never existed. The money went into the general fund – illegal.

Maybe there will be enough money to properly dredge out the Morro Bay State Park Marina after all!

Mabye morro Bay will go bankrupt and the rents will become reasonable again and i can afford A PLACE TO LIVE instead of in my subaru wagon.

Oh man we put our money into a reserve fund to save it.

The only city, state, federal government that actually keeps there budget.

Once again the State Lands Commission messing everything up just like the CCC.

I guess we weren’t behaving like typical governments by making affordable and reasonable measurements. On the way to bankruptcy in Morro Bay…

Gee, how terrible that the State Lands Commission expects tidelands trust grantees to actually follow State law. What’s wrong with those people? Next thing we know, the State Franchise Tax Board will be asking us to pay State taxes. The California DMV will be expecting us to register our cars. Awful, just awful.

The law that requires that the money from tidelands trust lands to be spent on those lands is only a few decades old. How on earth could our poor ex-city attorney be expected to know about that law?

Oh, I forgot, it’s in our own Harbor lease policy that the money from the tidelands grant lands has to be spent there – and I also forgot that the article says that Schultz said the same thing in his presentation earlier this year.

So if we are on the way to bankruptcy, who is responsible?

I can’t wait for all that money to be returned to those special interest groups and power brokers on the Embarcadero

I do believe it was a very good idea to put that money into an emergency reserve fund for when we would lose the income resource. I believe that State Lands Commission is twisting a minor part of the rule and costing us millions of dollars.

It also makes me question how the powerplant and tidelands trust correlate.

My understanding was that the tidelands trust was for the majority of water front properties that the city rented out. (Those on the embarcadero.)

My understanding is that the powerplant is owned by Dynegy and not the city.

As evidenced in this article,


The tidelands trust states, “All revenues from such LEASES must be expended within theareas of the granted lands for the purposes of the public trust.”

Therefore this was not a violation of the tidelands trust because the city was not leasingout the powerplant property.

I think we should leave it up to an attorney to determine this,

not you mbactivist, me, or calcoastnews. This is what it is. A pending investigation.

Absolutely correct. The Power Plant property is all owned by the Power Plant. There is a strip of land for the outfall that does cross over tidelands trust property. Just research what other Cities, Counties and the State lands get for their outfall leases in the state and you will realize what an incredible deal the City negotiated.

incredible alright, and totally illegal

Your fancy footwork is not working. It is the outfall lease that we are talking about. It is $500,000 a year from that lease that we are talking about. It was supposed to be spent “within the areas of the granted lands”. Instead, it was diverted to the general fund.

As for the investigation, if there were not a major problem, this issue would not have been under investigation for 2 years.

Thanks for stating the obvious…of course it is pending litigation.

This is a message board where discussions are held. We are currently discussing the lawsuit against Morro Bay.

You have stated your opinions. Why do you have an issue with others stating their own opinions?

What lawsuit?

LS. Do you mean the same State lands Commission that was audited in 2011 by the State Auditor and determined that the State Lands Commission had improperly Managed Public Lands and had caused the State to lose Millions in Revenue. Maybe State Lands is investigating the City to learn how to collect revenues!

Who is responsible? Really? People like you that’s who.

The people responsible for the future bankruptcy of Morro Bay are the people who stopped the modernization of the power plant in 2005 which would have brought a minimum of 2.25 million dollars of guaranteed money to the city budget annually. It was stopped by CAPE, a small group of people who are many of the same people who supported Irons in the last election. Irons. Smukler and Christine Johnson are responsible for increasing the cost of the wastewater treatment plant and delaying the project so that it will force many senior citizens out of their homes when the full cost is revealed. Everyone should thank them by signing the recall petition: call (805) 464-8798 and someone will bring it to your door. Thanks for asking!

Is this kind of like the story with Family Ties in San Luis Obispo that never went anywhere?

The fact that not ONE incident reported on CCN to outside agencies has been investigated by anyone, including our own deadbeat DA’s office doesn’t mean illegal or unethical situations have not occurred. If you call these agencies, they tell you the file is still open, investigation is ongoing, etc. etc. I had a situation reported to me, investigated, found to be a solid major violation, had to go to Sacramento to the power that be, they reviewed, altered, changed, sent it back through the pipeline, again, and again, and again. Finally, after 4 1/2 years, everyone’s thumb print on it, it went from a valid class A violation to a class D validation because no one wanted to make an issue out of it. They even met and negotiated with the violator to make sure there were “no hard feelings”. That is how our government works. Doesn’t mean anything. Look into the story of Ron Calderon, state senator. This is a perfect example of how politics works in perfect California. No whistle blowers allowed in this State against their government.

Jesus dude you blew this one big time.

The agreement to lease sets the lease payment to the harbor department at $250,000 a year. That’s by far the largest lease payment of any tidelands lease the city oversees.

It is for the use of the outfall canal and the underground tunnel that runs from the power plant to the base of Morro Rock. There may also be an inflation clause written into it.

There is no lease payment for the intake building because that’s private property.

The city does absolutely nothing to get this money, though it’s supposed to be for administration of the lease, as the power plant is responsible for all upkeep. And the only reason they even got a chance to negotiate the lease was because PG&E’s original lease — signed with the County back in the 1950s for basically zero dollars — was coming due.

That lease ran out at the end of the 1990s and Duke and the city negotiated a new lease that brought $250,000 to the harbor department, a huge boost that’s allowed them to operate in the black and which the harbor department will sorely miss. Ask the harbor director, he’ll tell you.

The $500,000 a year that goes to the general fund includes the city’s share of the plant’s property taxes, fees to the fire department and the franchise fee the plant owners pay for the natural gas they buy from PG&E. When PG&E owned the plant there was no sale of gas, therefore no franchise fees were ever paid.

It wasn’t’ until Duke Energy bought this plant along with Moss Landing, Pittsburgh and Oakland PPs that the City even started getting a franchise fee.

During the energy crisis of 2000-02 Duke handed over payments in the millions, much to the shock and surprise of the city, which didn’t even know they were entitled to it until the first check was hand-delivered to City Hall by Duke.

The agreement to lease sets a minimum payment to the general fund (the community development fund) of $500,000 a year making the entire lease worth $750,000 a year minimum.

Should the plant run more and the franchise fees rise higher than the minimum, the City is supposed to get that extra money too.

The CDF was established as a means to accept and account for these monies into the city coffers and didn’t exist before the lease agreement was signed.

You can’t just take a payment like $500,000 and stuff it into the city treasury, it has to be accounted for and the CDF was the mechanism they put in place to accept the money. It’s been fully accounted for every year and yes, the city is audited every year.

When the current finance director came in, she did away with the fund and stuck the money directly into the general fund. In 2009, they started a policy to wean themselves off that money and took $100,000 less every year and stashed it in the general fund reserves.

This last fiscal year they used just $100,000 of that money in the general fund and the rest went into reserves. That’s why the general fund reserves are now $2.75 million (27% of the total general fund).

And the agreement to lease has also led to the city getting the private property at Coleman Beach, Lila Keiser Park, the fishermen’s gear storage area, Morro Dunes RV Park property, the triangle parking lot at the end of Front Street and the private property the plant owned between GAFCo. and the Harbor Hut — FOR NOTHING.

Since about 2005-06 when the plant pretty much ceased to run except during summer heatwaves, the minimum payments have not been surpassed. Still, at $500,000 a year it’s one of the top 5 or 6 tax sources in the city.

I find it incredulous that the State Lands Commission is investigating the city over this, since they looked over the agreement to lease before it was approved. They did that because there hadn’t been one to look at since the 1950s and the city council back then wanted it looked over and approved before then entered into it.

Morro Bay’s agreement was used by numerous other cities and counties as a model when negotiating their own agreements with power plants using state tidelands properties. This was all made possible by deregulation of the energy industry when PG&E and Edison had to sell off some power plants.

State lands has been investigating since 2011? Really? It takes that long to look over an agreement that’s posted on the city website? An agreement that has been in place for more than 10 years? Hmmm…

It’s in the Agreement to Lease, which puts it in the category of revenue from the lease. If it were “the city’s share of the plant’s property taxes, fees to the fire department and the franchise fee the plant owners pay for the natural gas they buy from PG&E.” it would not be in the outfall lease agreement.

You say, “I find it incredulous that the State Lands Commission is investigating the city over this, since they looked over the agreement to lease before it was approved.” I suspect that they thought the community development fund referred to was for the part of the community on the tidelands grant lease lands.

Baloney. The Agreement to Lease contains within it the outfall lease agreement. They are two separate things in the same document. They deal with two separate issues entirely — one deals only with the tidelands lease and the other encompasses all the payments the plant has to make including $40,000 annually to the fire department for equipment and training; property taxes of approximately $160,000 a year; and the natural gas franchise fees, which vary depending on how much the plant runs.

The minimum payment was done at the request of the city to make budgeting easier on them, and approved due to the generosity of Duke, which anticipated replacing this plant with a modern facility that would run far more often and make them literally tons of money, like more than a million a day.

Because of that potential, Duke agreed that if and when the plant were modernized, the city’s CDF payments would jump to a minimum of $2 million a year, again to make it easy for the city to budget. Duke anticipated the actual payments would be more than that based on 35-40% capacity for the new plant (runs 35-40% of the time year-round).

The city has kept the outfall monies separate from the other monies and no audit has ever found this to be irregular.

One should probably mention the new lease agreement for the Morro Dunes RV Park, which used to be owned by the power plant and now is entirely the city’s. The RV park pays a minimum rent of $170,000 a year plus collects TOT taxes of 10% for the city and if they get over a certain gross amount, they have to kick down some of their gross revenues, too. That lease gives the city about $230,000-$250,000 a year and it’s not a tidelands lease, so that all goes to the general fund.

The city also now owns the fishermen’s gear storage yard and collects some rent off it.

So when one adds in all the money that this power plant gives or makes possible for the city to collect, it is a significant chunk of the total city revenues for a year, and most of that is going away at the end of 2014.

Hold onto your wallets, the city council will be coming to you soon with its hands open and arms outstretched…

I guess we’re officially on the Road To Why. Velie and Friedman are going to be on Congalton from 5 to 6 today. Should be a good one. I’m so proud of us! We’re the talk of the county!

What firm audited Morro Bay’ books? If they didn’t at a minimum find something wrong with where the funds were placed and how they were spent then the firm is incompetent.

Is the city on record for borrowing funds to be used to fill deficits?

I could never understand why Morro Bay was having financial problems because they rake in bed tax and sales tax revenue and the city is not that large. There is something fishy going on.

Where I live revenues that come with use conditions (such as mitigation) have their own fund and you can track income and expenses. It keeps the city council honest.

Good work Calcoastnews

Well, maybe there was a problem with audits, but I’m not so sure that accountants are supposed to be experts regarding the laws governing tidelands grant lands.

That is not quite true. Having done and been involved in City/County audits, if they are a good firm, they pull ordinances, leases, making sure the terms and conditions are being upheld financially and then trace the revenue into what funds, especially if the money (received under the ordinance/ contracts) is properly expended. That is why government audits take so long. A city takes 2-3 months with 2-3 people on site,

I will defer to you on this one, Bluebird. I used to work with financial auditors sometimes, but was not one myself. What you say makes a lot of sense to me.

If the audit is paid for by the agency being audited, then the outcome is likely to be (barring extremely obvious malfeasance) very close to what the agency whats it to show.

Audits were done each year and these agreements have been vetted with the State.

Fascinating – and the recallers claim that our mayor had no reason to terminate the City Attorney and City Manager. I’d say this is pretty good reason. Wasn’t Schutlz the City Attorney back in 2005?

If the State Lands Commission has been investigating this since 2011, it must be every bit as serious as the article seems to indicate it is.

Should the State Land Commission find any actionable wrongdoing, it is going to be very difficult for MB to defend itself now that Irons has fired the braintrust.

The braintrust? Uh…. Yeah, sure.

I have talked to a couple of people who say they told our ex-City Attorney YEARS ago that using those revenues outside the tidelands trust area was illegal, but he always claimed it was legal and that there was no problem.

Did you happen to notice this part of the article, ““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.” ?

So how come the city attorney was telling people there was no problem with this? Since people have always relied on the City Attorney to interpret the law, who else is responsible for this mess?

Years ago? Well then it’s time that those “couple of people” you speak of come forward, don’t you think? If they had direct contact with the ex-City Attorney, as you claim, notifying him of the wrong doing and he claimed the city was legally justified in doing what they were doing, they should come forward and tell their stories. I would, and as your self proclaimed “mbactivist1” implies you would too, right?

Ask them to step up! Why? Because Morrow Bay and its residents deserve better from their elected officials. It would go a long way in setting a tone that tells our future elected officials, and those to follow, that we the people are taking back control of our communities and we will not tolerate any more BS from those we entrust the governing of our communities to.

Just sayin’….

Sorry, just one more thing….

More importantly… It’s the right thing to do!

Just sayin’…


Meant to say “…. setting a tone that tells our CURRENT elected officials, and those that follow….”

Too much coffee too late in the evening…JEEZ!

Just sayin’….

No problem, jrstone. I think you make good points. As I recall, the people I talked to said these things were said in public comment at meetings. Unfortunately, that’s a little hard to research because the online minutes of City Council meetings only go back as far as 2008. The rest is on paper, and so finding anything in there is a huge undertaking – requires a lot more time than I have available.

So, you don’t remember who you talked with? Their names, anything? You can’t go to them and ask them so step forward?

A little thin my friend, pretty anorexic as a matter of fact.

Just sayin’….

All revenues from the outfall lease are used by the Harbor Dept.

That’s 100% correct and all anyone had to do was contact the Harbor Patrol office to find that out.

the braintrust is who got Morro Bay into hot water.

No way should we trust this shyster, now we know why the shyster was forced to

resign. This type of braintrust is known as a birdbrain, now Morro Bay’s current council

will have to clean up his mess.

Birdbrain? I love it

Just because Morro Bay is a Bird Sanctuary doesn’t mean we need a birdbrain running the town

Thank Gd the council kicked him in the butt and he flew the coop, as the coop was starting to stink

like poop.

Oh love our hunting season on the sand spit! hear the noise of gunfire going off every morning. Welcome to our “Bird Sanctuary”

You are assuming that is why the city attorney was so obsessed with getting rid of the two people who knew the past history of MB the best: the city manager and city attorney.

Yet the mayor never gave that as the reason for drop-kicking MB’s two decades-long senior members.

Mary, I believe you mean that the mayor was so obsessed. Am I incorrect?

That’s some interesting logic. I think the word you’re looking for is “oops.”

$5 million oops!


Your reasoning re: the problems with the Land Commission being the reason for the current mayor wanting to get rid of the attorney would be more believable if the current mayor had actually given that reasoning for his zeal in getting rid of the city attorney….

…AND if the city manager was also fired because of the Land Commission issue.

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