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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The actual outfall lease is 250K that goes to the harbor department, The 500K and all the properties that Schultz and company extracted were the cost of getting the city council to sign off on the lease.

This was hardball negotiating for sure, but completely legal. Schultz and company were getting the best deal possible for the citizens of Morro Bay.

Good negotiations yes but the 500k was not for signing off on the lease. The 500k and all the properties was for sign off on the modernization project.. This can be all proven in reports, resolutions and agreements. It’s all there just go down to City Hall and ask for it.

So Shultz negotiated for the city to receive millions of dollars in revenue for a project that never happen and the Mayor has now fired him and brought in 4 new attorneys. I bet Shultz gets picked up pretty fast by another City or firm

It’s a little more complicated than that. A little more history might be helpful.

When Duke bought the plant from PG&E in 1998, they started paying gas franchise fees on the gas that they purchased from PG&E. (PG&E did not have to pay this because they were supplying their own gas.) When the energy crisis hit and the plant was running all out 24/7, this amounted to a windfall for the city.

Then Duke started their modernization effort and to get the city on board they were offering to guarantee 2 million a year in revenues to the city, no matter how much gas they used.

Then the project got stalled (thanks in big part to CAPE) and the market conditions turned against a viable project.

About this time, the outfall lease was coming due. So the city and Duke negotiated a deal where if they built the new plant, the city got 2 mil a year, if they continued to run the old plant, they payed the 500K for the outfall lease and extras.

To keep it short, over the next 10 years, several short term leases were agreed to with Duke/LS power/Dynegy paying more and more and giving the city various parcels.

So it was originally tied to the new plant, but morphed into just an outfall lease.

Do not befuddle me with facts, bro.

Once again, I direct your attention to the Agreement to Lease, Article 4, page 11.

Article 4 is titled, “COMMUNITY BENEFIT PAYMENTS”. Within Article 4 are two sub-sections.

Section 4.1 is titled, “Payment Upon New Plant Construction”. It says that when they start building the new plant, they have to give the City $4,000,000.

Section 4.2 is titled, “Community Development Fund Payments”. It is in section 4.2 that the $500,000 payment is covered. It is referred to subsequently as the “CDF payment”. The section describes the conditions under which the annual payment will be made and the conditions under which it will stop.

It’s all in the power plant outfall Agreement to Lease. Just go down to City Hall and ask for it.

It may very well have been the cost of getting the Council to sign off on the lease, but it is part of the lease terms, and thus it is part of the lease revenues. Tidelands grant lease revenues have to be spent within the grant lands.

Do you know this the same way that you know that the experts (consulting firms) could have proposed cheaper Water Treatment Plants? How much did that crystal ball cost?

Stay tuned on that one. The people using those inflated estimates are about to have their arguments shot down by a local WWTP expert whose extensive experience and training cannot be questioned.

Isn’t it ironic that the CSLC was audited in 2011 and found to be guilty of the following:

By: Bureau of State Audits

August 23, 2011 – Our review of the State Lands Commission’s (commission) management of leases disclosed that the commission:

Does not have policies and procedures specifying steps needed for managing leases and is ineffective or inconsistent in seeking payment from or evicting lessees whose rent is past due.

Has missed opportunities to generate millions of dollars in revenues for the State’s General Fund—estimated to be as much as $8.2 million for just some of the leases we reviewed.

Does not always evict delinquent lessees—we estimated losses totaling $1.6 million for 10 delinquent leases we reviewed. More than 10 percent of the revenue-generating leases were past due on rent and yet some of the lessees have remained on state land without paying rent for up to 22 years.

Does not take timely action to renew its expired leases, conduct rent reviews, or appraise properties. The commission lost up to an estimated $269,000 for the leases we reviewed that are currently in holdover—leases that have not been extended or renewed.

Lost $6.3 million in increased rent that it may have been able to receive on a sample of leases because it failed to promptly conduct rent reviews, which frequently result in increased rent amounts.

May be losing up to $174,000 each year for a sample of pipeline leases we reviewed because it has not updated the rate—established in 1981—in regulations, to use when calculating rent for such leases.

Is not appropriately tracking the status of some of its leases. Its Application Lease Information Database has inaccurate and incomplete data and staff do not always use it to track lease information.

Does not have a plan for monitoring its revenue-generating leases, in particular those leases that are potentially the most profitable because they involve the extraction of oil and gas from state properties.

Has not taken sufficient steps to quantify its need for additional staff.

Oh, the hypocrisy!

So Morro Bay was maximizing the income from the lease that went to it’s “general fund”

Just like the audit said the state should have been doing with the land it managed.

The requirements for a state oversight agency and a city are different in many ways.

Trying to compare the oversight agency and the city is not logical. In other words, based on the evidence you presented, your argument fails.

Hypocrisy? Morro Bay did something illegal. The State Lands Commission was found to be inefficient and ineffective in some areas. Those are two VERY different problems. It’s only hypocrisy if you go after someone for doing something you yourself are guilty of.

I will also suggest that it is not very smart to attack a State Agency that is investigating the City. Your attack on the Commission is about as smart as telling the traffic cop who stopped you that you heard that he wasn’t a very good cop because sometimes he missed stopping speeders and he failed to write traffic enough traffic tickets to meet his quota.

A few people keep trying to divert attention from the simple fact that you can’t spend revenues from tidelands grant leases on anything but tidelands grant lands. The City put right in the lease agreement that besides the rent, the power plant had to pay $500,000 a year to go into the (mythical) community development fund. If it’s in the lease agreement, it’s revenue from the lease.

But they didn’t… You are grossly interpreting the facts in a way that is not true but serves you benefit. As is calcoastnews.

And the SLC is blaming Morro Bay for exactly what they do. That is hypocrisy. It doesn’t even seem much like an investigation is going on. Seems much more like CCN was just pushing to get quotes. Something they have been known to do.

Whether or not the Lands Commission was found to have issues carrying out its duties in SOME instances, it was not found have issues carrying out its duties in ALL instances.

An attempt to win a point by claiming fault in the opponent is a logical fallacy.

In other words, your opinion does not have a sufficient argument to support it.

Really, a citizen is risking something for the city by challenging the Commission? How is that possible? How do you know that the City spent the money inappropriately? The article indicates that it is being investigated. Nothing more. The author indicates that “city records show” that the money was used incorrectly. You are assuming that the author is correct. You also assume that a budget line item shown “other revenues” section was not specifically designated for these monies and were not spent for that purpose. The author, or you, have nothing but speculation at this point. After over 2 years of “investigation” the Commission has failed to bring charges or make claims. I would say that any audit of this money would take much less than 2 years and that this article, as your posts are purely political in nature.


So Schultz was a very tough negotiator and managed to rake in over 5 million in direct cash, plus land that is probably worth more, to the city coffers.

And some posters here are saying that this was the reason to fire him?


Yes, if it was illegal.

Emphasis on the, “If.”

And if it was not illegal what is next excuse for firing an employee that got millions from a corporate giant for mitigation for a project that never occurred. Wow

Well, when they were on Congalton, Josh and Karen said there is much more to come regarding some pretty shocking things that have been going on in Morro Bay – so much that they have a couple of months’ worth of articles. Let’s see what else they found.

What was illegal? Nothing has been claimed by anyone other than an investigation. It is just as possible that after 2 years and no findings that there is exactly that, no findings of wrong doing.

The idea that these contracts were illegal, or that the SLC will make them pay money back is foolish.

From the article the SLC says:

“We have looked at this, and we are still continuing to look into the matter.”

This doesn’t sound like much of an investigation, sounds more like they are placating a nosy reporter.

The spokesperson also said, “we have had some concerns”. That is not something you say to placate a reporter. Either it’s OK or it’s not. The Commission did NOT say it was OK. They said they are continuing to look into it.

“Some concerns” sounds to me like it wasn’t a very serious investigation.

….especially since they’ve been “looking into it” since 2011.

They will continue to say the equivalent of “some concerns” until they are ready to file. That is how government oversight agencies work.

Or until they decide not to file.

lol!!!! With the help of William and Bernie!!!!!!!!!

Now who would really be surprised about misconduct, specifically misuse of public funds at a local agency. Heir Irons, has some brass. He gets advised about the appropriate use or legal use of the funds which puts him on the plank if they continue to misuse the funds, they continue under his direction to misuse the funds based on this article and now he wants to fire the City Manager and City Attorney? Why, they told him he couldn’t do that which the law prohibited. Silly City Attorney and City Manager, don’t you know that laws are in place for the little people, not maintenance technicians who become MAYORS!

The recallers’ spin doctoring is sounding more and more desperate – and silly. Please do remember that Schultz is the one who reportedly arranged the illegal deal to funnel the money to the General Fund – and when challenged, claimed it was legal.

That’s because it is legal mbactivist. The tidelands trust lease is the largest payment of any in the state $250,000. We own the rest of the money because the entire power plant isn’t on tidelands trust property. Only a small portion of the property. This was a poorly written and extremely wrong article.

It doesn’t suprise me that someone like yourself would be fooled by it.

Your literally saying because 1% of the power plant is crossing over the tidelands property all that money must go to the tidelands trust fund. That’s simply not true.

Your literally blaming Mr. Schultz for negotiating an incredible deal. Part of why he should still be the city attorney. And the city manager did a great job putting it in a reserve fund. Nothing is going to come from this, “investigation,” which hardly seems to be very relevant considering I see a misquote from the website, a comment from Russel that she knows of no investigation, no city council comments, and Pumberton saying, “We will look into it.”

No, you are attempting fancy footwork again. I couldn’t care less what percent of the power plant lies on tidelands property and neither does the State Lands Commission. What is important here is the power plant outfall lease, which is the subject of the article and the discussion. The outfall does lie entirely within the tidelands grant. The extra $500,000 is included in the outfall lease agreement – which makes it part of the revenue from the lease.

By the way, the name of the Commission spokesperson is Pemberton, not Pumberton,and you are not quoting her correctly.

I disagree and believe you are misinterpreting the tidelands trust lease. Only time will tell. I trust that Schultz whose job it was to know this, knows more then CCN knows on the subject.

Nothing has been proven illegal nor has there been any challenge.

There is a great source of information on the Tidelands Trust at this Web site:

According to the site, “The Public Trust Doctrine, established in constitutional law, provides certain public access rights and restrictions for waterways, tidelands, and lands created by filled waterways.” The Web site includes links to both the Public Trust Doctrine and Public Trust Policy.

Every state with such lands evidently has its own enforcement body. In California, we appear to have quite a substantial amount of case law. At least one such case was cited in that presentation that the City gave back in March – the one the article refers to.

This Web site has, at the very bottom of the page, a link to an interesting document titled “California Tidelands Land Held in Public Trust”

The only huge errors are in your post. Read the article. It says, “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.” Yes, people, that would be the power plant outfall lease. After it is used for cooling, the water is discharged into the outfall, which is on Tidelands Grant land.

The State Lands Commission is not greedy, and is not asking for part of the contract or the money. It is saying that we need to spend all of the revenues from the Tidelands Grant lands on those lands – in other words, as the article says, as our own policy says, and as the March presentation said, the revenues are supposed to go into the Harbor Fund, not the General Fund. That would be OUR Harbor fund – money to be spent in OUR harbor. The State Lands Commission would get absolutely nothing.

Yes, Schultz did negotiate the contract, but the way he arranged for the revenues to be distributed is against State Law – illegal.

Oops, sorry. This is supposed to be a reply to MB20’s post of 11/25/2013 at 8:41 pm. I accidentally put it in the wrong place.

The power plant does not pay $800,000 to lease the tidelands. That is fact proven by just reading the outfall lease which is a public document. You can state as many times as you want that something is illegal but that not make it true. This entire article and your misguided and incorrect statements are factual untrue and can easily be proven.

I sure hope CCN does a better job on the next report. They clearly took somebody’s word and did not do their research.

You are right. The power plant does not pay $800,000 to lease the tidleands. They pay $800,000 to lease the outfall area, which lies within the tidelands grant.

CCN discussed the issue with the spokesperson for the State agency in charge of enforcing the laws related to leasing of tidelands grant land. I think it is likely safe to take that person’s word on the issues at hand.

No you are wrong, the outfall lease is not for $800,000. And you have only exposed how good of an attorney and city manager we use to have…

Check out that Fogcutter News item I mentioned earlier. One of the recallers’ own people said that most of the $800,000 comes from the outfall lease, and he put it in writing. So now, you are arguing with yourselves about this. Evidently, you had no problem with Reddell saying this was true, but you don’t like it when CCN says it.


There they are about 19 down on the list. They must be very important.

Board of Equalization

California Alternative Energy and Advanced Transportation Financing Authority

California Coastal Commission (even number years)

California Debt and Investment Advisory Commission

California Debt Limit Allocation Committee

California Educational Facilities Authority

California Health Facilities Financing Authority

California Industrial Development Financing Advisory Commission

California Ocean Protection Council (even number years)

California Pollution Control Financing Authority

California Public Employees’ Retirement System (CalPERS)

California State Teachers’ Retirement System (CalSTRS)

California Tax Credit Allocation Committee

California Transportation Financing Authority

Citizens Financial Accountability Oversight Committee (CFAOC)

Commission on State Mandates

Franchise Tax Board

Multistate Tax Advisory Committee

Safe Drinking Water, Clean Water, Watershed Protection, and Flood Protection Finance Committee

State Lands Commission

State Public Works Board

Stem Cell Research and Cures Finance Committee

Victim Compensation and Government Claims Board

Other Boards and Commissions (Including Finance Committees for Voter-Approved General Obligation Bonds)

California Clean Water, Clean Air, Safe Neighborhood Parks and Coastal Protection

California National Guard Financing Committee

California Streamlined Sales Tax Project – Board of Governance

California Urban Waterfront Area Restoration Financing Authority

California Wildlife, Coastal and Park Land Conservation Program of 1988 Finance Committee

Children’s Hospital Bond Act Finance Committee

Clean Water and Water Conservation Finance Committee

Clean Water and Water Reclamation Finance Committee

Clean Water Finance Committee-Clean Water Bond Act of 1970

Clean Water Finance Committee-Clean Water Bond Act of 1974

Clean Water Finance Committee-Clean Water Bond Act of 1984

1986 County Correctional Facility Capital Expenditure Finance Committee

1988 County Correctional Facility Capital Expenditure and Youth Facility Finance Committee

County Jail Capital Expenditure Finance Committee-Bond Act of 1981

County Jail Capital Expenditure Finance Committee-Bond Act of 1984

Disaster Preparedness and Flood Prevention Bond Finance Commitee

Earthquake Safety and Housing Rehabilitation Finance Committee

Earthquake Safety and Public Buildings Rehabilitation Finance Committee

Economic Recovery Financing Committee

Golden State Tobacco Securitization Corporation

Higher Education Facilities Finance Committee

High-Speed Passenger Train Finance Committee

Highway Safety, Traffic Reduction, Air Quality and Port Security Committee – Bond Act 2006

Housing Committee – Housing and Homeless Acts 1988, 1990

Housing Finance Committee

First Time Home Buyers Financing Committee

Lake Tahoe Acquisitions Finance Committee

New Prison Construction Committee-Bond Act of 1981

Parklands Program Finance Committee of 1980

Parklands Program Finance Committee of 1984

Passenger Rail Finance Committee

Pension Obligation Bond Committee

Pooled Money Investment Board

1984 Prison Construction Committee

1986 Prison Contraction Committee

1988 Prison Construction Committee

1990 Prison Construction Committee

Reciprocity Commission

Recreation and Fish and Wildlife Enhancement Finance Committee

Safe, Clean, Reliable Water Supply Finance Committee

Safe Drinking Water, Water Quality and Supply, Flood Control, River and Coastal Protection Finance Committee

Safe Neighborhood, Clean Water, Clean Air and Coastal Protection (Villaraigosa-Keeley Act) Finance Committee

Seismic Retrofit Finance Committee

State Parks and Recreation Finance Committee-Bond Act of 1964

State Parks and Recreation Finance Committee-Bond Act of 1974

State Parks and Recreation Finance Committee-Bond Act of 1976

State School Building Finance Committee

Technology Services Board

Transportation Improvement Finance Committee

Veterans’ Debenture Finance Committee

Veterans’ Finance Committee of 1943

Veterans’ Home Finance Committee

Voting Modernization Finance Committee

Water Conservation Finance Committee

Water Conservation and Water Quality Finance Committee

Water Resources Development Financing Committee

Water Security, Clean Drinking Water, Coastal and Beach Protection Act of 2002 Finance Committee

Wildlife Habitat Enhancement Program Finance Committee

Are we crazy or what?

That’s page one of California’s Commissions and Committees.

How does placement on the list in any way signify importance? It’s an alphabetical list.

And just what does any of this have to do with the fact that the City has been violating State law for years? Clearly, it does not matter how large the enforcing agency is. It matters that State law has been broken. The spin doctoring by the recallers is starting to sound more than just a little bit desperate.

I guess CCN is your friend only when they’re your friend. Velie & Freidman said on Congalton that there will be a story about every two days for the next two months, and no matter how much Congalton tried to minimize it, they maintained that some important, shocking things are about to come out. CCN has credibility in my book. They approach stories with an angle, a goal, yes, but they usually don’t go down a road unless there’s something there, and they don’t play either side of the Left/Right fence. I think maybe we just heard a big pin being stuck into the Recall Balloon.

It sure appears that they are 0-1 so far.

Huge errors in this article.

The powerplant is not a part of the tidelands leases except for a small portion which the water passes across when pumped out. (And we pay them for that small portion.)

The State Lands Commission is just being greedy and saying that it deserves a larger part of the contract. The contract that Mr. Schultz negotiated. Which was a great deal indeed for us.

Irons supporters seem to forget that.