Twilight Zone of the Bonds:
Secrets of the modern backroom
Way back in the late 1970s, SFI lived on the east coast. Enamoured of
New York City's bright lights, we didn't pay much attention to San
Francisco, which seemed from afar like some kind of hippie Shangri-La at
the far end of the universe.
Pow, pow, pow. Jim Jones. Dan White. Prop 13. San Francisco was on
everybody's mind; and it wasn't Shangri-La anymore.
The twentieth anniversary of Kool-Aid in Guyana looms in November; and
the assassinations of Mayor George Moscone and Supervisor Harvey Milk will
be marked in December. But let us not forget another remarkable event from
those mad times: the history-making moment when California property owners
decided that government was too expensive and voted in Prop 13 to limit
their property tax burden to one percent of assessed valuation.
Safe on the east coast, we pointed the self-righteous finger of
namby-pamby liberalism at California and shook it at the nasties who
defunded the kindergartens! Years later, after scoping out the fiscal
practices of the San Francisco Unified School District, we understood where
Howard Jarvis was coming from: outrage.
Stripped of ideological baggage, Prop 13 makes sense. It was, and
remains, an attempt to curb unbridled government spending and waste.
Unfortunately, it didn't take long for thousands of clever bureaucrats to
figure out ways to get around the will of the people. Suddenly, entire
categories of debt were undefined and yanked out of debt limit
calculations. Lease revenue bonds and certificates of participation were
invented and declared, against all common sense, to be not debt.
Petty charges for basic government services metastasized as bureaucrats
fought to maintain excessive spending levels and their fat salaries. After
a period of adjustment, post-Prop 13 spending took off to even greater
heights; and the increased freight was paid by the propertyless as well as
Now, as the twentieth century draws to a close we hear the final death
rattle of Prop 13: epitomized by Mayor Willie Lewis Brown's ability to add
a billion dollars (a 25 percent increase!) to the budget of our City in
just two years, even as he hocks the City's 30-year credit future in return
for tinsel and slag.
But lets not blame everything on poor Willie. That's far too easy.
Instead, lets take a close look at just one of the inventive ways
California's civil servants have managed to circumvent the spirit and the
letter of Prop 13. Let's focus on a fairly typical high level bureaucrat,
an energetic-yet-visionless man who has spent his professional life within
the system manipulating it for purposes that have nothing to do with the
common good: meet Mr. Rudolf Nothenberg, known as "Rudy" to his friends.
Now entering the Twilight Zone
A slight fellow, Nothenberg is either from the British Isles or he
affects a posh accent. Back in the early 1960s, Willie Brown found
Nothenberg working at the San Francisco State University bookstore as a
clerk. Ever sycophantic and devious, Rudy hopped on Brown's bandwagon and
served him for years in Sacramento as a details man. Willie would cut the
deal and Rudy would bag the loot and hide the bodies.
After San Francisco's Chief Administrative Officer, Roger Boas, was
arrested for raping underage girls in a Mission District brothel in the
late 1980s, even as he was running for mayor (!), Rudy was appointed to a
ten-year term as CAO. Until the Charter change two years ago, San
Francisco's finance and business operations were run by the CAO: an
official more powerful than the Mayor and much less accountable.
In 1991, Rudy created the SF Finance Corporation, the very definition of
a slush fund, with himself as sole incorporator. The "non-profit"
corporation was set up to spend taxpayer money on equipment, everything from
souped-up police cars to boatloads of laser printers, equipment that for a
variety of reasons can not be purchased through normal procedures, millions
and millions of dollars in equipment, much of it unneeded.
The SF Finance Corporation issues lease revenue bonds to buy the extra
stuff. This type of debt is not counted as debt by California state law.
That is one reason why San Francisco is burdened with nearly $5 billion in
outstanding municipal debt; even though the "technical" limitation on debt
backed by the full faith and credit of the City is about $1.9 billion.
Nothenberg, who recently retired after heading the commission in charge
of Muni, acted far-sightedly when he invented the SFFC out of hole cloth. He
knew that a huge boondoggle was bursting on the scene: the new 911
emergency communication center on Turk Street. He knew that the flavor of
the rich contents of this wonderfully deep ($165 million and rising) barrel
of sacrosanct public safety pork would be improved by darkness as it
fermented far from the light of even mild scrutiny by the supes, not to
mention the public.
After Nothenberg created the City-owned non-profit, he appointed
political flunkies to its Board of Directors. H. Welton Flynn, for example,
was the first President. While serving on various City commissions,
certified public accountant Flynn has fronted City Hall's shenanigans for
years. (Last year, Flynn broke State election laws when he formed a bogus
citizen's committee to support $300 million in unneeded water bonds.)
From the beginning, the SFFC functioned as a conduit for EXTRA pork:
above and beyond the normal quotient stripped from the public wealth.
SFI discovered the SFFC by accident. In the words of the City's director
of public finance, it is "unique." No other municipality in America is
known to have such a strange body lurking inside its organization chart.
The public NEVER attends its meetings. And no wonder: the meetings are not
announced. And there are reasons for the secrecy.
Over the years, the SFFC's closed door meetings, often less than ten
minutes in duration, have concealed some of the most flagrant self-dealing
you can find outside modern Moscow. One of Nothenberg's first hires as a
financial consultant to SFFC was Calvin Grigsby of Grigsby Brandford Powell
Inc. as in: recently indicted for kickbacks in Miami. Grigsby, a longtime
associate of Willie L. Brown, is facing years in the federal pen for
bribing municipal officials all over the country.
Are we to believe that Grigsby did not bribe San Francisco's officials?
Since the SFFC's inception, Peter Miller of Public Financial Management
Inc. has attended meetings as a financial consultant to the corporation.
California law forbids such a consultant from bidding on bond underwriting
contracts that are issued by the corporation; unless the consultant is
specifically exempted by the corporation for each contract.
In horrendous violation of the conflict of interest prohibitions
threaded throughout Western jurisprudence, SFFC corporate minutes show that
Miller's company, PFM, has been allowed to write the SFFC bond
prospectuses; design sales procedures; and supervise underwriting
negotiations at the same time that PFM has been allowed to bid on the bond
contracts! Ditto with Charles A. Bell Securities Corp.
Nothenberg also brought in sitting Redevelopment Agency Commissioner
Gary Kitahata of Kitahata & Company as a paid consultant who was also
allowed to bid on contracts designed by himself.
Nothenberg's stacked deck of financial consultants and bond lawyers have
been paid millions of dollars in fees over the years. SFFC is a
privately-run cash cow. When he retired, Nothenberg's disclosure statement
revealed a vast portfolio of stock, worth millions, bought on the same civil
service salary that purchased his house on Telegraph Hill.
Laws of the Zone
San Francisco Controller Ed Harrington recently refused to authorize a
full audit of the SFFC. The limited and useless audit that he did authorize
was not even signed by the non-independent auditors because, they said, it
was not complete. (KPMG Peat Marwick is not independent because they do
millions in business with the City in addition to performing as the
so-called independent annual auditor; and because there is a revolving door
between KPMG and the Controller's office, e.g. Ed Harrington, Colleen
Adams and others.)
Lack of even nominal oversight means that anything goes at the SFFC.
Redevelopment Commissioner Gary Kitahata, for instance, was privy to tons
of inside information, as both an RDA Commissioner and as a consultant to
the SFFC, that benefited his securities business. These are indictable
actions! But, City Hall needs, and will continue to reward, technicians like
Kitahata, who keep the money-stream in full flood come hell, high water or
For instance, an October 20, 1997 memo from Kitahata to Monique Moyer,
Mayor Brown's director of public finance and overseer of the SFFC,
instructs Moyer how to hide millions in "technically illegal underwriter
discounts" in the form of "premiums." These monies went to Kitahata!
In an email to Monique Moyer (July 3, 1997) Kitahata advises her to hire
property appraiser Keyser Marston, Inc. as a so-called "fiscal
consultant." SFI has run into Keyser Marston before. They fabricate real
estate appraisals for RDA on demand.
Kitahata goes on to advise Moyer that Mayor Brown can "justify the
emphasis on downtown development and provide a rationale for issuing more
debt" by claiming that a series of RDA-funded projects around the Moscone
Center will increase the property tax base and painlessly pay off new GO
bonds. Kitahata knew this was a ludicrous assertion because the increase
was already spoken for as "tax increment" to pay off outstanding
Redevelopment Agency bonds! But would the public know?
Nor does the public know what the SFFC is doing with the $150 million in
bonded debt and telephone bill surcharges it is supervising. How about
buying $57,000 dishwashers and $225,000 color laser printers! Stuff that
either is not needed or could be found much cheaper through the Purchaser.
But because the SFFC is a non-governmental agency it does not have to
meet the stringent (if normally ignored) purchasing guidelines that afflict
other City entities. It is bound, however, by competitive bidding
requirements: which it consistently vaporizes.
The SFFC matter deserves a longer article and deeper treatment, but,
before we go, lets take a look at the minutes of some recent board
meetings, chaired by ex-supe Tom Hsieh. His fellow directors are Robert
Gamble, late of the Redevelopment Agency staff and Anna-Marie Booth.
Before Hsieh will sign any papers, he loudly insists that SFFC obtain
special liability insurance for him and his fellow directors. It turns out
that what Hsieh wants cannot be purchased, not even from Lloyds of London.
What Hsieh wants is insurance that will pick up his legal tab if he is
found guilty of fraud and embezzlement as a corporate director.
Hsieh settles for illegally steering insurance business, and substantial
legal fees, to his friend Stephen Haimo, an attorney based in New York.
One of the reasons Hsieh is nervous about indictments is because 911
Project Director Mike Martin wants millions of "extra" dollars budgeted for
state of the art technology that he admits to Hsieh will make no
difference in performance. (But, hey Hsieh, NOBODY is watching so lets get
what we can! Wink, wink, nudge, nudge.) Hsieh also knows that Jack Davis'
client Motorola Corp is sucking tens of millions from the 911 boondoggle;
and that the multinational and its lobbyist have no interest in saving the
taxpayer money, to say the least.
But what really bugs Hsieh, who is not stupid, is that Monique Moyer is
having trouble selling the corporation's 911 bonds at normal interest rates
because bondbuyers are not impressed with the risk element. The risk is
significant because the only legally BINDING security for the outstanding
bonded debt is the 911 equipment itself. If the City defaults on the bonds,
what use will a pile of customized radio chips and undergrounded
fiber-optic cables be? Can't exactly sell them to anyone else! (Of course,
the City will never declare a default, short of bankruptcy, which means that
the full faith and credit of the City is at risk for all revenue bonds, Mr.
Willie DeBartolo Stadium.)
Hsieh is worried because the too-ingenious Moyer wants to create a shady
device that she labels an "asset transfer." Instead of securitizing the
911 bonds with the 911 equipment as required by State law and corporate
charter, she wants to hock the City's Mental Health Rehabilitation Facility
and a couple of firehouses. THIS IS OUTSIDE THE LAW.
In 1990, the voters approved the creation of SFFC as a body issuing
lease revenue debt. The idea was that the corporation would lease the
debt-financed equipment back to the city and pay off the bonds with the
rent. The corporation's founding ordinance, and the bond indentures it
subsequently issued, REQUIRE the new equipment to be the security. Moyer is
mixing apples and oranges: if these bonds are not "technically" City debt
than they cannot be "technically" secured with City assets!! Plus, no
electorate gave Moyer permission to put our firehouses and mental health
operation at risk of foreclosure!
Not only is the SFFC stealing the taxpayers blind through self-dealing
and illegally using City assets to securitize debt for unneeded items and
boondoggles masquerading as improvements to public safety, but its leaders
constantly lie in public. For instance, in 1993 Nothenberg wrote a worried
supervisor Migden that the SFFC's debt counted in the City's debt limit.
Nothing could be further from the truth. Yet, Migden bought it, instead of
reading a few pieces of easily-available paper. (So much for Carols' phony
rep as a wonk.)
Well, dear reader, if you think all the above is messed up: you should
check out how the Public Utilities Commission is, as we speak, selling
commercial paper (just like IBM) backed by bonds IT CAN'T SELL because of
reasons we laid out in these pages last October.
Back to the index