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HomeMy WebLinkAbout09/29/2003 B A K E R S F I E' L D Mike Maggard, Chair Harold Hanson Mark Salvaggio Staff: Darnell Haynes BUDGET AND FINANCE COMMI'I'I'EE MEETING of the City Council - City of Bakersfield Monday, September 29, 2003 4:00 p.m. City Manager's Conference Room, Suite 201 Second Floor - City Hall, 1501 Truxtun Avenue, Bakersfield, CA AGENDA 1. ROLL CALL 2. ADOPT AUGUST 18, 2003 AGENDA SUMMARY REPORT 3. PUBLIC STATEMENTS 4. DEFERRED BUSINESS A. Staff report, review and Committee recommendation regarding reqUest from Kern-Tech, Inc. to provide discounted payoff of the City's Economic Development loan from available sales proceeds m Kunz 5. NEW BUSINESS 6. COMMI'I-I'EE COMMENTS 7. ADJOURNMENT S:~Darnel~003Bud&FinCom~bf03Sept29agen.doc B A K E 1R S FI E L D DRAFT Mike Maggard, Chair J~i~n Tah~ly City M~ager Harold Hanson Staff: Darnell W. Haynes Mark Salvaggio AGENDA SUMMARY REPORT BUDGET AND FINANCE COMMITTEE MEETING Monday, August 18, 200:3 · 4:00 p.m. City Manager's Conference Room - City Hall 1. ROLL CALL Called to Order at 4:10 p.m. Present:Councilmembers Mike Maggard, Chair; Harold Hanson and Mark Salvaggio 2, ADOPT JULY 21, 2003 AGENDA SUMMARY REPORT Adopted as submitted. 3. PUBLIC STATEMENTS 4, DEFERRED BUSINESS A. Review and Committee recommendation regarding future park amenities and the park development fee Assistant to the Public Works Director Georgina Lorenzi provided an update on meetings held with the Building Industry Association of Kern COunty (BIA) and North Bakersfield Recreation and Parks District (NBRPD) regarding the adjustment to the park development fee due to increased construction costs. Both entities are in agreement with moVing forward with the adjusted park development fee. There are three issues, which need to be reviewed by the Budget and Finance Committee at a subsequent meeting: 1.) In calculating the park development fee, staff backed out costs for street improvements. The NBRPD questioned if there would be a way to require developers to provide all street improvements for their facilities as they are required to do for the City? If not, NBRPD would recommend keeping street improvements included in the fee as part of the estimated park construction costs. Developers in the City are required to complete street improvements and in the NBRPD developers are only required to construct half the street improvements. Staff agreed this issue should be addressed. DRAFT BUDGET AND FINANGE GOMMITTEE MEETING Monday, August 18, 2003 Page - 2 - 2.) The NBRPD is requesting fees for permits and services traditionally waived for City parks to also be waived for North Bakersfield Recreation and Park District parks. 3.) The BIA indicated they are interested in a park development fee credit for the required open space in multi-family projects with four or less units. In 2002, an ordinance change required open space for this type of multi-family development and the BIA indicated it is their opinion this open space should receive credit toward public parks. Dave McArthur, Bakersfield-Recreation and Parks District, spoke in agreement with moving forward with the park development fee, but would like their outstanding issues (listed above) to be addressed by the Committee. Brian Todd, Building Industry Association of Kern County, spoke in agreement with adopting the fee, but would like their outstanding issue (listed above) to be addressed by the Committee. The Committee requested staff to bring these outstanding issues back to the Committee meeting in October. A memo from the Public Works Director was handed out with information not available at packet distribution time. Castle and Cooke provided their development costs for Windermere, Deer Peak and Windsor Parks. If prevailing wages are factored in, the cost per acre is consistent with the estimated costs used by staff to calculate the adjusted park development fee for neighborhood parks. After discussion, Committee Member Salvaggio made a motion that the Committee recommend adoption of the adjusted park development fee of $1,275 per dwelling unit. The Committee unanimously approved the motion and forwarding to the City Council for adoption. B. Review and Committee recommendation regarding Economic Development Loan Policy Guidelines Economic Development Director Donna Kunz provided background on the City's current Loan Policy Guidelines. The current policy requires 100% repayment and provides gap financing of 10% to 30% of the project development costs. The balance of the project's costs of 70% to 90% is typically privately financed by the owners or their commercial banks. However, since the new prevailing wage law has been in effect, the economic value of a business accepting a loan for only 30% of the" project with 100% repayment requirement does not offset the effect that accepting the City's loan triggers compliance to pay prevailing wage on the total project. BUDGET AND FINANCE COMMITTEE MEETING Monday, August 18, 2003 Page - 3 - Loan funds have been set aside for development in the southeast as an incentive to create jobs and clean up blight. The current loan policy guidelines are not working for-the economic development lending program since the law changed and paying prevailing wages added cost 'restraints. Creative loan funding has been approved for two projects by Council to fund only the public improvements, which does not trigger prevailing wage on the whole project. Staff recommended the following changes to the loan policy, which would provide more flexibility to assist loan applicants. Each agreement for a loan would still come before the Council for approval. 1.) Allow loans of up to 50% of the cost of the project based on need, the development costs, the project's available and expected cash flow, and the borrower's ability to use their equity portion identified in the project development pro forma to obtain the matching private financing needed to finance the portion of the project not provided from the City's loan. Typically commercial banks provide the primary financing for the project and the City provides gap financing. 2.) Allow forgivable loans if the borrower meets a previously-agreed employment benchmark. The agreement would include employment of a certain number of workers each year for the term of the loan and at least 51% of the jobs would be for .Iow and moderate-income individuals. Each year the agreed upon percent of the loan payment would be forgiven depending upon how well the borrower met the conditions of the loan. Although the loans may be totally forgiven, the City receives the benefits of tax increments, jobs being created and businesses being established in a blighted area, so there is value returned to taxpayers. It was noted loan appiicants are still required to fully complete the application process, be evaluated on the project's ability to repay the loan and provide private financing (bank loan) for at least 50% of the project costs. Donna Kunz provided information requested by the Committee on how owner's equity fits into the underwriting guidelines for the purpose of this program. The department examines equity for the purpose of evaluating a reasonable return to the owner from the project's expected cash flow after the project has been completed. Typically owners use their equity portion identified in the project development pro forma to help them obtain the private financing required for the project. AGENDA SUMMARY REPORT BUDGET AND FINANCE COMMITTEE MEETING Monday, August 18, 2003 Page - 4 - Committee Member Salvaggio was hopeful if the changes were made to the loan policy it would assist developers working in the southeast, such as Vernon Strong, to qualify for funding. The Committee requested staff to contact Councilmember Carson and work with Phines regarding a possible restaurant project at the Bakersfield Municipal Airport. Committee Member Salvaggio made a motion to amend the current loan policy to provide staff with more flexibility to allow loans up to 50% of the .project's cost and also allow forgivable loans based on job creation and the project's economics. The Committee unanimously approved the motion and forwarding to the City .Council for adoption. 5. NEW BUSINESS A. Review and Committee recommendation regarding request from Bakersfield Civic Light Opera Association for early release of mortgage collateral associated with its CDBG loan (This item heard second.) Economic Development Director Donna Kunz explained the City has received a request from the Bakersfield Civic Light Opera Association (BCLOA) also known as the Bakersfield Music Theatre for release of the collateral that secures its CDBG-funded loan. The Bakersfield Music Theatre has a one-time opportunity to sell the collateral (property) and use the proceeds to reduce a bank debt held by a consortium of banks. 'The banks are also willing to donate part of the loan payoff if the debt is retired at this time. The original amount of.the loan was $50,000 and is a five-year forgivable loan. The .agreement requires 51% of all jobs created will be for Iow and moderate-income individuals. The BCLOA has met this requirement for the first three years and has an outstanding loan balance of $20,000. If the collateral is released, it would result in the City having an unsecured loan on the $20,000. All the other requirements in the agreement, such as hiring Iow and moderate-income individuals, will remain in effect. Staff explained the Stars Dinner Theater is an excellent commercial redevelopment project and a quality investment in the downtown. As this is a forgivable loan, staff recommended allowing BCLOA to amend the agreement to release the collateral, which would help assure the long-term financial success of the Stars Dinner Theater in the downtown. Rogers Brandon, Bakersfield Music Theatre, spoke regarding their request to sell the property being used as collateral and use the proceeds to reduce their bank debt. The Committee unanimously approved staff's recommendation to release the collateral and recommended forwarding the amendment to the agreement to the City Council for adoption. AGENDA SUMMARY REPORT BUDGET AND FINANCE COMMITTEE MEETING ~ Monday, August 18, 2003 Page - 5 - B. Review and Committee recommendation regarding hiring an in-house liability claims administrator Assistant City Manager Alan Christensen explained staff has reviewed the operations in Risk Management and found there would be an opportunity to save approximately $40,000 per year in claims administration costs if this service were brought in-house. The City currently contracts with AIMS to handle liability claims made against the City. AIMS fees are Charged on an hourly basis with an annual cost of approximately $115,000. Bringing claims administration in-houSe would require a claims adjuster position be created. The budget for this position for the first, year would be $73,443, with one-time costs for software of $20,000 and $2,000 for a personal computer. Besides the savings, there would be 'other benefits. From a Service perspective, handling claims in-house allows quicker contact and resolution of claims for citizens. Sending claims to AIMS adds three to five days delay. There would also be time-savings for Risk Management staff when a claim is filed and being. adjusted as they have numerous conversations with claimants, which must be passed on to AIMS. The current agreement with AIMS ends in January 2004. A survey of other cities was conducted. Responses were received from eight entities and seven (six cities and the County of Kern) adjust liability claims in- house. All seven expressed the opinion this was the best way to handle and adjust liability claims from both cost and service perspectives. Risk Manager Patrick Flaherty spoke about time-delays and duplication of work when using an outside liability claims administrator. City Attorney Bart Thiltgen and City Manager Alan Tandy spoke in favor of handling liability claims in-house. Committee Chair Maggard expressed his appreciation for staff's initiative to come up with ways to save money. However, with the current budget constraints and vacancies in safety positions, he had concerns with the timing and adding another administration position. He asked staff to check into contracting this out and having the services done on a retainer basis. Committee Member Salvaggio wanted staff to check With the Blue and White Collar group to get their input on contracting the work out. Committee Member Hanson was also in support of checking into contracting the services out. Committee Chair Maggard asked staff to give him a call regarding AIMS contracts and why AIMS services work well for workers' compensation and are not cost effective for liability claims. AGENDA SUMMARY REPORT BUDGET AND FINANCE COMMITTEE MEETING Monday, August 18, 2003 Page - 6 - 6. COMMrl'rEE COMMENTS 7. ADJOURNMENT The meeting adjourned at 5:30 p.m. Attendance: City Manager Alan Tandy; Assistant City Manager John W. Stinson; Assistant City Manager Alan Christensen; City Attorney Bart Thiltgen; Assistant to the City Manager Darnell Haynes; Public Works. Director Raul Rojas; Economic Development Director DOnna Kunz; Risk Manager Patrick Flaherty; Assistant to the Public Works Director Georgina Lorenzi; Assistant Recreation and Parks Director Allen Abe; Principal Planner, Economic Development, David Lyman; and Public Works Civil Engineer Arnold Ramming. Others: Kim Turner and Rogers Branson from the Bakersfield Music Theatre; Brian Todd, BIA of Kern County; Dave McArthur and Colon Bywater from North Bakersfield Recreation and Parks District; Peter J. Rudy, reporter, KUZZ; and James Burger, reporter, The Bakersfield Californian. cc: Honorable Mayor and City Council S:~)amell~O3Budget and Finance~bfO3aug18summary ...... DRAFT ADMINISTRATIVE REPORT '"'~?J~\'""' ' . - I MEETING DATE: October 8, 2003 I AGENDA SECTION: Consent Calendar ITEM: TO: Honorable Mayor and City Council FROM: Donna L. Kunz, Economic Development Director DEPARTMENT HEAD _~ DATE: September 26, 2003 CITY ATTORNEY CITY MANAGER SUBJECT: Request from Kern-Tech, Inc. to provide discounted payoff of City loan from available sales proceeds. RECOMMENDATION: Staff recommends Alternative Three. By releasing the equipment and receiving the remaining cash in return, the City would realize 74% of the market price for Equipment "A" (Amount remaining from purchase agreement: $32,235 / Purchase price found on Internet: $43,500 = 74.10%) without having to relocate it and attempt to sell it in an uncertain market. The City also would help to assure that the existing Kern- Tech employees retain their jobs. BACKGROUND: Due to a variety of unfortunate events, Kern-Tech, Inc., has indicated that it cannot pay the outstanding balance of its loan. Since the loan was approved in 1997, the company has employed about 60 employees and currently employs 18. During its five year loan term, Kern-Tech exceeded it hiring goals of Iow- and moderate- income individuals. Several negative factors contributed the collapse of the company. One of the firm's customers went bankrupt, owing Kern-Tech about $350,000. Another customer took similar action owing Kern-Tech additional $20,000. Kern-Tech was doing well with work in the commercial aircraft business until September 11, 2001 when that work stopped completely. Although the company is now involved in defense work, Kern-Tech has found that this is not as profitable as the commercial business was. A local manufacturer has offered to lease Kern-Tech's equipment, hire its employees, and continue work on existing contracts. Kern-Tech's president Mike Miller will continue to pay suppliers, pay past payroll taxes and other bills with the money received from the lease payments to Kern-Tech. Kern-Tech's president has indicated he will most likely have to declare personal bankruptcy because he has personally guaranteed many of Kern-Tech's obligations. S:~,~dmins\ClTY COUNCIL ADMINISTRATIVE REPORT.doc 9126/2003 10:43 AM ' ADMINISTRATIVE REPORT DRAFT Page 2 The proposed buyer of Kern-Tech will not go forward with the purchase if the City's loan remains in place. If the purchase does not go forward, the offer to hire Kern-Tech's existing employees will be negated. In such a scenario, Mr. Miller has indicated he will be forced to immediately declare bankruptcy. Timeline Here is a chronology of events leading up this situation: March 1997: Council approves Agreement 97-65 to provide Kem-Tech with a CDBG-funded loan for $169,797 for the purchase of two pieces'of equipment and computer software. The loan has a five year term with a balloon payment due in March 2002. February 2002: Budget and Finance Committee is advised by the company that it cannot make the balloon payment. The committee recommends amending the agreement to extend the loan term for six months with a 0% interest rate, keep the existing collateral in place, accept $1,000 monthly payments, and request a review of the company's financial statements in six months. March 2002: Council approves the Budget and Finance Committee recommendation to amend the agreement. September 2002: Kem-Tech co-owner Cliff David dies. September 2002: Budget and Finance Committee reviews the company's financial statements and recommends that the agreement be amended to continue the existing payment schedule with a one year review. This would provide the company an additional year to assess its status and adjust to the loss of one of its two partners. November 2002: Council approves the Budget and Finance Committee recommendation to amend the agreement. Au,qust 2003: Kern-Tech misses its first monthly loan payment and says it will be paid along with the September payment. Auqust 2003: Kern-Tech notifies City staff that the company is near collapse and a local manufacturer has agreed to purchase the company. Staff requests additional information and a copy of the purchase agreement for analysis. September 2003: Kern-Tech misses its second monthly loan payment. Collateral The City has two types of collateral securing the loan. First, UCC filings, or liens, are being held on two pieces of equipment: Equipment "A" had an odginal purchase pdce of $155,401, and "B" $8,944. Second, a personal guaranty exists from Kem-Tech owner Mike Miller. The original personal guaranty was from both Mr. Miller and Mr. David but was subsequently amended to cover Mr. Miller following the death of Mr. David. Purchase Aqreement The buyer has offered $350,000 to pay off the existing secured debt (excluding the City's loan) and tax liabilities, pay rent, and purchase Kern-Tech equipment. Regarding the proposed equipment purchase, neither pieces "A" or "B" can be purchased as long as the City's liens remain in place. The existing secured debt, tax liabilities,' and rent total $317,765, leaving a difference of $32,235 (see table below). S:~Admins\ClTY COUNCIL ADMINISTRATIVE REPORT.doc 9~26~200310:43 AM ADMINISTRATIVE REPORT DRAFT Page 3 Kern-Tech, Inc. Sales agreement $350,000.00 Less: Secured debts 196,092.00 Less: Tax debts 114,673.34 Less: Rent 7,000.00 Amount remaining $32,234.66 Value of Equipment comprehensive internet search of used equipment on September 4, 2003 found the same Equipment AA" on the market for $43,500, or $0.28 on the dollar of the outstanding loan balance. Equipment "B" had a relatively small purchase price ($8,994) when purchased seven years ago and has no resale value. A search of similar equipment for sale was fruitless. "A" had the largest purchase price of any piece of Kem-Tech equipment while "B," as noted previously, had a much smaller value. Mr. Miller agrees that without "A," the deal will Probably disintegrate and existing Kern-Tech workers would lose their jobs. Alternatives Alternative One: Forgive the loan. Many other economic development loans were structured as forgivable loans with no realistic thought that the City's investment would be repaid. These loans have been with Guy Chaddock and Company, Hammons Meats, Inc., SouthweSt Contractors / ARB, Inc., Galey's Marine Supply, Harvel Plastics, Bakersfield Civic Light Opera, Dopaco, Step2, and Pleasant Holidays. Should the loan be forgiven the City would recoup no funds. ,Alternative Two: Declare Kern-Tech in default, take possession of equipment "A" and "B," and sell them. In theory, this could result in recovering some of the outstanding loan amount. However, it would involve taking physical possession of the equipment, being responsible for its upkeep, then marketing it. A comprehensive internet search found only one such piece of used equipment for sale at present. ,Alternative Three: Declare Kern-Tech in default, release the liens on the equipment to allow the purchase of the business to proceed and, in return, make a claim on the remaining funds from the purchase agreement. The purchase agreement calls for $350,000 to be paid to Kern-Tech. After paying all other secured debt and rent, $32,235 remains. S:~.dmins\CITY COUNCIL ADMINISTRATIVE REPORT.doc 9~26~200310:43 AM