State Officials Criticize Long Beach City Hall Handling of Measure D, Warn of Impacts to Port

The California State Lands Commission on Thursday issued an analysis critical of the way in which City of Long Beach officials pushed Measure D onto the November ballot.

The analysis found that while Measure D does not, on its face, violate the state trust that allows the city to operate the Port of Long Beach, CSLC officials concluded that the city failed to analyze "any potential fiscal implications and impacts to Port operations that may result," from the measure.

The state report also criticized Long Beach City Hall officials for offering no rationale under state law for authorizing "significant diversions" of port funds for non-port related city expenditures. The report singled out recent expenditures of port funds such as contribution to the City Municipal Band and the Fourth of July Fireworks show as examples of expenditures not consistent with state law.

The CSLC functions as the state's watchdog over the various port authorities throughout the state, assuring that the port authorities and their city hall bosses adhere to state laws requiring the ports to be operated for the benefit of all the citizens of California and not just local interests. Under the Public Trust Doctrine, the state-owned ports are granted to the various cities to be operated in trust for the citizens of the state.

State law also requires that all funds generated by the various ports be used for very specific maritime-, navigation-, and water recreation-related uses within the city tidelands – that area below the high tide mark in 1911 when the first part of the trust doctrine was approved. In Long Beach, this area is basically anything south of Ocean Boulevard.

Under state law, port funds cannot be used for general fund purposes. However, the city maintains a Tidelands Operating Fund that is separate from the General Fund. Port funds, such as the annual transfer of port profits requested by City Hall, are allowed to be placed into this fund and spent on the state-defined uses within the tidelands. City Hall can in turn offset General Fund expenses that would have been spent in the tidelands, such as police and fire service, with money from the Tidelands Fund.

Measure D, which was rushed onto the ballot at the eleventh-hour, seeks to make two changes to the City Charter regarding the port. One change would alter the formula for how the annual transfer of port profits are calculated – from the current 10 percent of port net income to 5 percent of port gross revenue. The second part of the measure would remove the port's authority over port-area oil property, and the resulting profits, and give it solely to City Hall.

A fiscal analysis presented by port officials last week found that an approval of Measure D would shift $133 million over the next five years – $100 million in oil revenue and $33 million in additional transfers – from the port to the City Hall-controlled Tidelands Fund. This would in turn lower port net income by $148 million over the same five-year period and necessitate the port borrowing an additional $151 million for various capital projects.

"Over the five years, this accounts for approximately 15 percent of the Port’s annual net income," said the CLSC report. "When combined with the increase in transfer formula, the impact of Proposition D could account for approximately 20 percent of the Port’s annual net income.

The report goes on to state that the long-term financial draining on the port due to the passage of Measure D could have a significant impact on port operations.

"The impacts to Port operations may include a reduction in the Port’s credit rating due to anticipated reductions in its annual cash flow," said the report. "...If the Port’s credit rating is downgraded, the Port will pay more in interest."

The port analysis estimated that downgrades to the port's currently high bond rating could result in an additional $39 million to $158 million in interest expense over the next 30 years, depending on the severity of any downgrade.

Despite these estimates of potential loss for the port, the CSLC was unable to find that Measure D, on its face, violated either the Public Trust Doctrine or land use laws.

"However," said the CSLC report, "the City has a fiduciary duty, as the State’s trustee, to balance competing public trust needs and to carefully consider any potential impacts to Port operations that any change to the City Charter may have. The issue in diverting revenues from the Port is whether the City would be impairing Port operations of statewide and even national importance to fund less critical operations.

In addition, the state commission found that some expenses being borne by the port may be inconsistent with state law.

"Commission staff has not initiated either an investigation or audit, but has recently become aware, through news sources, of some questionable expenditures and budgeted expenditures of public trust revenues both by the City and the Port," said the report.

"Commission staff has received an explanation of some of these expenditures sufficient to determine that such expenditures are not inconsistent with the common law Public Trust Doctrine and the City’s trust grant. However, staff believes that further information is needed to determine trust consistency, given the Supreme Court [rulings], for other questionable expenditures and budgeted expenditures such as: the Port providing over $200,000 in scholarships since 2007; $50,000 by the Port to fund the Long Beach Municipal Band and $75,000 by the Port to fund the City’s Fourth of July fireworks (Port FY 2011 Budget); and $65,000 by the City’s Tidelands Operating Fund to fund the Long Beach Municipal Band (City FY 2011 Budget).

The State Lands Commission will hold a regular public meeting in Culver City on October 29th. The agenda for the meeting includes a staff report on the “City of Long Beach Public Trust Revenues, Including Proposition [Measure] D.”