Concord Naval Weapons Station Grand Jury Report a Promise Unfulfilled

Recommendations 2

• R2
  a To control costs and foster more accurate expense forecasting, City of Concord PSAs for LRA consultants should have specified hourly rates by either position or by individual and the hourly rates should remain fixed across the one-year PSA. Transparency The grand jury discovered that the LRA staff and their outside consultants were not allowed to offer recommendations on the selection of CNWS master developer applicants during the SOQ. This situation was present during the selection between Lennar and Catellus in September 2015. According to data officially released in the 2016 Jenkins Report, on September 1, 2015, there was discussion about whether the city council wanted staff to make a recommendation in the report presented at the meeting at which the city council would select the master developer. The initial decision by the city council was that “…consistent with general city policy, staff should make a recommendation.”33 This decision was made in response to questions posed in a report on Master Developer Term Sheets and Selection Process by LRA staff.34 Additionally, both companies vying for the master developer selection were advised there would be a staff recommendation at the end of negotiation process. On September 16, in a closed city council session, a near final staff report was presented, which included staff’s recommendation of Catellus as Master Developer.35 In late September 2015, the City Manager instructed the LRA staff to remove the staff recommendation from the staff report, after meeting separately with three members of the city council. In the days following the closed session, several council members changed their positions regarding inclusion of a recommendation in the staff report. The impetus for this change was a series of questionable allegations against Catellus and concerns by council that there would be a perception of favortism in the staff report. In late September, the city manager instructed LRA Manager Michael Wright, to remove the staff recommendation from the final staff report.36 Catellus then withdrew from the master developer selection process, and Lennar was awarded the CNWS master developer contract in May 2016. As stated in the Implementation of the Selection Process section earlier in this report, the Master Developer Selection ad hoc committee did not follow the LRA manager’s December 2020 recommendations on RFQ content. The RFQ limited the LRA team’s role to reviewing and vetting materials submitted for each applicant’s SOQ and then compiling these materials. There was no written report from the LRA team, just a spreadsheet showing the responses of the three applicants.
• R3
  a For future RFQs and RFPs used to select a master developer for the CNWS project, there should be a full analysis and report issued by LRA staff. Concord City Loans to Local Reuse Authority Through fiscal year 2019-2020, the City of Concord loaned the LRA $14.06 million to pay for CNWS expenses not paid from funds from governmental entities or the initial master developer, Lennar. These loans began in fiscal year 2012-2013 and were made through fiscal year 2019- 2020. In fiscal year 2019-2020, they totaled $3.35 million.37 These loans came from three Concord revenue sources: General Fund reserves of $9.91 million and Workers’ Compensation Fund of $3.15 million and Pavilion Fund of $1.0 million that total $14.06 million.38 Table 3 –CNWS Expenses Paid with City Loans ($ million) - February 2020 Prior Fiscal Year 10.46 Fiscal Year 19-20 2.73 Unencumbered Funds 0.87 Total 14.06 These loan agreements state that the Lender (General Fund or Workers’ Compensation Fund or Pavilion Fund) agree to lend to Borrower (Local Reuse Authority) and that Borrower agrees to repay to Lender an amount not to exceed the Loan amount plus applicable interest. Regarding payment of the loan, the agreement states “…principal payments shall be paid by the Borrower to the Lender at the time that sale proceeds of raw land at the Community Reuse Project are available…”.39 The sale of land regarding these loans is not the transfer to the LRA but a subsequent sale to a master developer. This will not occur until after a master developer is selected, the Navy and Concord have completed all regulatory requirements for transfer of the CNWS land to the LRA and the LRA has sold the land to the master developer. The grand jury was advised it would be two to three years following the master developer selection before the Navy would transfer land to the LRA and there would be two years of infrastructure development at CNWS before residential construction would begin. The December 2022 term sheet proposal negotiated with CFP called for paying Concord approximately $5 million before issuance of building permits for 90 percent of the market rate dwelling units (2,180) in phase one, and paying the City approximately $10 million before issuance of building permits for 90 percent of the market rate dwelling units (3,777) in phase two.40 Using, the timelines from these statements and contracts, the loans to the LRA would repaid in two payments four to five years after a master developer is selected plus the time required to buildout the units specified in phases one and two. There are many issues to be addressed before construction at CNWS can begin, including hydrology, air quality, traffic flow, hazardous materials, soil geology, BRAC disposition activities, and affordable housing that require analysis and study involving public and private entities at federal, state, and local levels. To complete these prerequisites, Concord has engaged various consultants, attorneys, and other experts to study, analyze and complete reports. When a master developer is selected, the ENA and term sheet agreements include language that will require the master developer to provide reimbursement of certain ongoing and previously incurred expenses associated with the CNWS project. Such expense reimbursement policies were detailed in the term sheet signed by Lennar in 2016 and in the one negotiated with CFP in 2022. In our investigation, we found that it is common for municipalities to charge developers upfront fees and seek reimbursement for third party costs. LRA financial reporting shows that more than $37 million has been spent on the CNWS project since 2006, with the City of Concord providing loans to the LRA totaling over $14 million. In reviewing payments made from city loans, there are two vendor expenses that will be discussed in the next two sections of the report. A memo on the interfund loans was compiled at the city council’s request in February 2020, shortly before the expiration of Lennar’s ENA in March 2020 (see Appendix 5). It shows vendors by active or inactive status, vendor payments totaled for prior fiscal years and vendor payments for the 2019/2020 fiscal year. Aside from this report, there have been no written reports by Concord city staff detailing how the loan funds have been spent on the CNWS project. Reporting on CNWS vendor expenditures is done quarterly or biannually under the section heading of Program Report on the LRA website but these reports provide no detail on spending against the city loans to the LRA. The Program Reports also show budgeted and actual expenses by CNWS project vendor for the city fiscal year. The initial citizen complainant advised the grand jury of their concerns about the amount spent by Concord on the CNWS project and the lack of financial reporting on it. On the LRA website, we reviewed a June 2022 CNWS report that showed expenditures to date of $37.4 million, which includes federal grants, state redevelopment money, developer funds, and city loans.41 The annual Program Reports issued by the LRA do show multiple funding sources such as city loans and developer funds. Annual forecasts by vendor show projected funding sources but fiscal year actuals are shown as totals with no indication of the funding source used to pay the vendor expenses. Table 4 is a pro forma of how the funds available in the city loan to the LRA have changed since early 2020. Unencumbered balances are funds that have been appropriated but not spent or targeted for use. This concept is employed in governmental accounting.42 Starting with listed unencumbered balances of $866,000, the loan initially was about a half million dollars over the forecast based on final 2019/2020 expenses shown in that year’s Project Report. This discrepancy was due to a $1.050 million payment to Lennar, which was a refund of previously deposited funds that had not been spent when Lennar’s ENA expired in March 2020. The city’s reporting of this payment as an expense is not accurate, as it was a reimbursement of previously deposited funds by Lennar. At the end of fiscal year 2020/2021, the loan reserve balance was $1.496 million. For fiscal year 2020/2021, there was no master developer on the CNWS project, and $1.088 million in expenses were incurred. Following a GoMentum reimbursement of $99,423, the loan reserve balance stood at $507,349. When CFP signed the ENA in October 2021, they deposited $250,000 to pay for expenses on the CNWS project. In the same period, CNWS project expenses of $1.138 million were shown as paid from the General Fund in the 2021/2022 program report.43 By June 2022, the LRA loan reserve stood at -$243,000, a net decrease of $1.108 million. With LRA expenses averaging $1.113 million over the last two fiscal years (38% are salary/benefits) and no funds coming from a master developer, the reserve balance in the pro forma is trending to exceed -$1.5 million by December 2023. The financial data for the three budget cycles used to compile this pro forma can be found in