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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Statelands is not investigating. They have known about the Agreement to Lease and the mitigation impact fee CDF payment since 2004. The City has documentation there was nothing illegal. Unfortunately since Irons fired the one who negotiated these incredible deals for the City we will have to pay the new attorneys thousands of dollars to research and determine what we already know.

Did you happen to see the Tribune story on this issue – the one that appeared a couple of days after the CCN story? Among other things, that story says, ““At this point our staff is still looking into the inquiries,” Pemberton said. “It hasn’t progressed any further than that.” She said that limited staffing has delayed completion of the review.””

By the way, if you check a thesaurus, you will find that “review” and “look into” are considered synonyms for “investigate”.

Was the city attorney, city staff and city council serving the citizens of Morro Bay by extracting the most out of the power plant?

To say anything else but absolutely yes, is just silly.

This is the kind of thinking that is so typical of the old boy/old girl network that controlled Morro Bay for so long. Take whatever you can, whether it’s legal or not. It’s easier to ask for forgiveness than for permission. See how much you can get away with, and the law be damned. We are seeing it over and over in the posts of these people.

No wonder Irons, Chrisine Johnson and Smukler were elected by such huge majorities. People are sick of the sleazy attitudes and actions of prior councils, their cronies, and some of the City staff. We want honest government. What a concept.

One aspect of the article that has not really been discussed is the fact that the $500,000 payments were supposed to go to the non-existent “community development fund”. In fact, since the fund never existed on the City’s books, the money went elsewhere.

If you do a search on the term “community development fund”, you find various such funds in this country and around the world. All those I found seem to be dedicated to helping disadvantaged persons and communities. You find words and phrases like these: “employment, education, income management, housing, nutrition, emergency services, and expanding economic opportunities, principally for low- and moderate-income persons.”

What I did not find anywhere were any words that said anyone was using money that was supposed to go into a community development fund for other purposes. I don’t know if it is illegal to say money is going into a community development fund, and then just use it however you want, but it doesn’t sound quite right.

I think is possible that the Councils never knew that the lease terms said the money was supposed to go to a particular fund. They may well have thought it was just free money to spend as they pleased, but the person who negotiated the lease terms knew.

mbactivist, What makes you such an expert? Who are you that you think you know better for MB? You are merely one person with one opinion. Seems you are merely a “Shp” disturber who’s time would be better spent on oneself, rather than chasing down hurting others.

If you cannot respond to my posts and those of others with pertinent arguments related to the issues, perhaps you should not respond at all.

Why don’t you just go down to City Hall and ask for the staff reports, resolutions and minutes related to the power plant agreements and you will find many many discussions that occurred in open session about the 500k payment. Instead since you didn’t live in MB at the time you would rather make up false lies. How do you live like that. Obviously you don’t believe in karma or the golden rule.

Don’t forget that one of your own recaller friends, Mr. Reddell, stated in a post in the notorious fogcutter news that most of the $800,000 comes from the outfall ease. I guess he must have been making up “false lies” (whatever that may be) too. Since you don’t agree that most of the money comes from the outfall lease, maybe you should speak to him about it.

The Trib and the New Times, along with several other news sources I have found online, have said the same thing in their articles regarding the money coming from the outfall lease. Better talk to them too about those “false lies”.

Here is another relevant fact:

The document that the city and Dynegy signed is called the “Agreement to lease” The 250k lease is of course at the heart of it. But everything else was what the city got for agreeing to the lease.

This all may seem a little smarmy to the rest of us, but to lawyers this is perfectly reasonable and legal.

Maybe it looks OK to some lawyers, but evidently it is not reasonable and legal to the State Lands Commission, which has its own legal staff. It it were, they would not be investigating.

Statelands is not investigating. They have known about the Agreement to Lease and the mitigation impact fee CDF payment since 2004. The City has documentation there was nothing illegal. Unfortunately since Irons fired the one who negotiated these incredible deals for the City we will have to pay the new attorneys thousands of dollars to research and determine what we already know.

I know that the recallers won’t like this, but others will. At least one poster says that there is no connection between the $500,000 payments going to the general fund and the outfall lease. This appears to many of us, and evidently to the State Lands Commission as well, as an attempt at fancy footwork.

Following is part of some material I posted below. I want to repeat it here because think it is significant. As noted in the quoted material, the recallers now appear to be arguing with themselves.

“Since most of the recallers appear to be great fans of, and even contributors to the infamous “Fogcutter News” (I call it the Brainfog Gazette), allow me to quote from that stellar publication. The following is from a posting done on November 10, 2013 by Mr. Dan Reddell. I have changed the font of the pertinent text to capital letters:

“Bottom line, the closing is an $800,000 hit to the city budget and the loss of about 40 decent jobs in this community.

MOST OF THE REVENUE IS FROM THE OUTFALL LEASE, the agreement the city has with the power company for having the cooling water pass over city property. a smaller portion is a franchise fee that PG&E pays for the natural gas used when the plant is operating.”

So, it appears that you folks are now arguing with yourselves. :) You had no problem with this information when it came from one of your own, but just let Cal Coast News say it and all hell breaks loose.”

Also quoted in my earlier post are statements from the Trib and the New Times, also saying that the money is from the outfall lease. None of the recallers seem to have been distressed by those articles.

P.S., I made a screen shot of the page with part of the article – just in case it should accidentally disappear or be accidentally modified – you never know what will happen, given the eccentricities of the Internet, and I would hate to lose access to Mr. Reddell’s words of wisdom :)

Having the 500K a year, and all the property go to the city was indeed fancy foot work. That is what lawyers get paid to do. The plant needed the outfall lease and the city knew it. The city council tasked Schultz with getting as much out of it as he could. It’s called legal extortion and it looks like Schultz was very good at it.

Yes recallers do not like this because we recall the history and what happen. Where as you are trying to rewrite and make up new history of what has happen with the outfall.

The other thing that nobody has brought up is that Schultz, the City et al are responsible to the taxpayers of Morro Bay. If they think a regulation is in error, they would be remiss and not testing the limits of the Commissions authority. That would look like discussing the merits and risks of not complying with an unenforceable mandate and challenging enforcement activities in court. In business we expect our Corporate Lawyers to bring those things to our attention and allowing us to consider the benefit vs. risk. Appointed political hacks fortunately do not run this country.

Test the limits of the Commission’s authority? The desperation evident in the spin doctoring is growing every minute. Great. Let’s just break the law and see what happens. Maybe we can get away with it. This kind of scofflaw mindset is typical of the Morro Bay special interest group, and a key reason why they were voted out of power. Most people are decent, honest, and ethical, want their government to play by the rules.

Regarding the argument that Irons, soon after being elected mayor, started zealously trying to get rid of the city attorney because of the Lands Commission’s investigation of possible illegal activities done under the city attorney’s watch…

Irons has not indicated his reason for insisting on getting rid of the city attorney.

A city attorney does not initiate actions by the city council. It is the other way around.

The way the chain works is the city council members come up with some brilliant idea, they run it by the city attorney to allow the attorney to fine-tune it so it (hopefully) can be legally defensible, then it is handed off to the the head city administrator (i.e., city manager) for implementation. The head city administrator then instructs staff on the implementation of the city council’s brilliant idea.


It wouldn’t have gotten to the city manager if the city council had not initiated it and it had been approved by the city attorney.

Ultimately, the city council instructs the city manager to effect a policy, program, procedure, etc. Therefore, the city council members who signed off on it are the ones running the show.

City council members can be held responsible for policies, procedures, etc. on which they enact by their signatures. City council members are usually not held responsible for how the city manager implements the program because council members don’t actually direct staff.

The one thing that undercuts the idea that Irons was heII-bent on firing the city attorney because of the problems with the Lands Commission…

Why was the city manager sent packing? Irons went after the city attorney and city manager at the same time. The city manager does what the council instructs them to do. Usually, they can’t legally initiate new policies, procedures, programs, etc. themselves.

Nice post Mary! I’ve been hammering away for a while now trying to get that same point across, that it is the CITY COUNCIL that dictates to the City Manager in what direction they want to take the city. The job of the City Manager (and City Attorney) is to implement that direction, at the same time informing the City Council of any possible financial or legal issues that may result in trying to implement that direction. Sadly, Irons takes any negative feedback as a direct assault on his power, and he will have none of it. Hence, the dismissal of these two employees “without cause”.

Evidently you did not attend, and did not watch the telecasts of the Council meetings in which Irons politely listened as a series of obnoxious hooligans called him names and yelled at him. All, by the way, were Schultz and Lueker defenders and are recallers. the comments made went way beyond the description of “negative feedback” They involved vicious personal assaults and in some cases, threatening behavior.

Irons had every right to have these people removed from the meeting room, as their behavior violated written rules of conduct for public comment. Yet, he showed them the same courtesy and respect that he showed the civilized people.

Peters and Yates never let anyone criticize them. They immediately invoked the rules for public comment. Peters even cut off the mike. Yates used to shut people down if he even suspected they were going to say something he wouldn’t like.

Irons has an amazing tolerance for people who are hostile and ill-mannered and who do not like him and his policies. I believe that is in part because he is committed to doing what is best for everyone in this town, including the ones who never learned how to behave in polite company. It’s also because, I believe, he believes in leadership by example.

Nice job of taking my post about the City Manager and City Attorney and twisting it around to comment about the speakers at the meeting. You just don’t care to understand that the issue that started this whole brouhaha was the unwarranted and unnecessary firing (and you can put your little “spin” on it and call it something else) of those two employees. It’s still “without cause” and will always be such. And I guarantee that you’d be appalled at how your mayor acts when he’s not on stage. Pompous, dismissive and condescending are descriptions that come to mind.

If the City Council tells the staff to do something illegal, it is the City Attorney’s job to tell them it’s illegal and thus protect the City from potentially-serious consequences. If he blindly did whatever he was told, knowing it was wrong, he was not doing his job.

More Nonsense. He has no control if he recommends against doing something and they decide to do so anyway. Didnt Miss Winholtz and Mr. Smcukler serve when all of this was going on?

schultz was the “legal advisor” to the city council.

for a fact winholtz and smukler were the minority on the city council.


Just ANOTHER reason to recall INEPT Iron’s!

a winner

The Council relies on the City Attorney to tell them when things are legal and when they are illegal. Residents I have spoken to about this say that Schultz was challenged at public meetings by residents who said that it is illegal to funnel that tidelands grant lease money to the general fund. They say that Schultz always denied that there was any problem and said the procedure was legal.

This certainly puts the responsibility on him; not the Council. After all, they are not legal experts. That’s why they have an attorney to advise them.

You literally know nothing about this issue…

Stop claiming, “there are residents you have spoken too that know x.”

You are obviously just making things up or Morro Bay is even less intelligent then I already thought.

dream on

Seems to make sense that only a percentage of $ would be designated for the tidelands. So what is the big “Ilegal” deal here?

Think about it. You own a home and use a small office to Legally run a biz. So you attribute that office only, not the entire property.

What makes the Entire income, if it is NOT ALL tidelands susceptible to the same requirements?

These recent months have been very sad for MB, nothing but drama, dictators and difficulties.

Your home is not on tidelands grant land, so you are comparing apples to oranges. There are special rules for leases on tideland grant land. All lease revenues must be spent on the grant lands. They cannot be spent for things in other parts of town.

The $500,000 was included in the Agreement to Lease document for the power plant lease outfall, which is on tidelands grant lands. Therefore, that $500,000 legally had to go into the Harbor fund, and had to be spent on the grant lands, but it was illegally funneled to the general fund.

You have never answered my questions about the residences on the South end of the Embarcadero. How are they managed differently? Why are they legal?

Now THAT’S a very good question. Why are the homes on the South end of the Embarcadero legal?

From the map in the City presentation at . (16th slide) it appears they may be just east of the grant land boundary. They also appear to be rather old. Perhaps they were built before the trust lands were established and/or conveyed to the County.

It seems that some citizens of our fair city will not be happy until we are bankrupt and half of our former city councilmen and women are behind bars. At least the ones she could not beat in an election anyway.

Final you admit that the 500k payment is not in the outfall lease but the Agreement to Lease ! The Agreement to Lease was a seperate legal document and dealt with the modernization project and ithe impacts to the town. The 500,000 payment had nothing to do with the calculations allowed under state law that authorize payment for out falls in tidelands trust area.

Since most of the recallers appear to be great fans of, and even contributors to the infamous “Fogcutter News” (I call it the Brainfog Gazette), allow me to quote from that stellar publication. The following is from a posting done on November 10, 2013 by Mr. Dan Reddell. I have changed the font of the pertinent text to capital letters:

“Bottom line, the closing is an $800,000 hit to the city budget and the loss of about 40 decent jobs in this community.

MOST OF THE REVENUE IS FROM THE OUTFALL LEASE, the agreement the city has with the power company for having the cooling water pass over city property. a smaller portion is a franchise fee that PG&E pays for the natural gas used when the plant is operating.”

So, it appears that you folks are now arguing with yourselves. :) You had no problem with this information when it came from one of your own, but just let Cal Coast News say it and all hell breaks loose.

Whereas I suspect that real news sources generally do not concur with the pronouncements made by the fogcutter clan, that is not the case in this instance.

Here is a quote from a November 14, 2013 Tribune news article: “Morro Bay gets more than $800,000 annually from Dynegy as part of its lease of the plant’s cooling water discharge structure.” That cooling water discharge structure is the outfall.

Here is one from the December 13, 2012 New Times: “At a special Dec. 5 meeting, the Morro Bay City Council approved an amendment to its outfall lease agreement with Dynegy Morro Bay, LLC, which runs the plant.

The new agreement will bring some $800,000 a year to the city in the form of various fees and concessions, according to a city staff report.”

How is it that your people AND the Trib AND the new times AND the Cal Coast News all came to the same conclusion? It may be due to the fact that these documents are a “package deal”. They are essentially integrated, and one does not exist without the other, just as the power plant cannot run without the outfall.

It may also be because Schultz was heard to brag that the land the outfall is on is only worth about $20,000 a year, and he got $800,000 for it. Oh, did I mention that it is not legal to charge more for tidelands grant leases than their market value?


To get an idea of how good a deal this was for Morro Bay, let’s look at a couple of details:

The tide lands lease we are talking about is not property right on the bay where you could locate a business and make some money. It is a narrow strip in the dunes by Coleman park where the buried outfall lines cross tide lands property.

Other than for the use for the outfall, this lease is totally worthless. You can’t build anything on it.

So getting 250K for the actual lease and the 500K and property for the city, was an incredible deal.

Unfortunately for Morro Bay, this deal is now done for ever.

Business as usual in Morro Bay. Killing the goose that lays the golden egg

Please note that it is illegal to charge more than market value for rent on tidelands grant lands. ANOTHER illegality in this scheme.

From the City’s Harbor Department Lease Management Policy:

“Fair Market Rent: State Law requires that fair market rent be charged for use of the granted tidelands. Fair market rental shall be determined through the use of an independent appraiser to appraise the fair market value of the property and the City will set a minimum annual rent equal to 8% of the appraised value of the land or improvements if the improvements have reverted to the City. The lease rent will be structured to provide for a minimum annual rent as outlined above or a percentage of gross sales rent as shown on the attached Schedules entitled Standard City percentage of gross sales rent.”