State of CA worsened Desert Hot Springs’ financial problems

Desert Hot Springs is a poor city east of Banning. The city’s median income of $31,356 is 55 percent of California’s $57,287. It also has a reputation for crystal meth production straight out of  the television series “Breaking Bad.”

Hot and poor, Desert Hot Springs now is in the brink of municipal bankruptcy — although not just yet.

On Nov. 12, the Desert Hot Spring’s city council threw cold water on the city finance director’s heated recommendation to declare a fiscal emergency in preparation for filing for municipal bankruptcy.  One reason: the city still has $10 million to pay off from declaring bankruptcy 12 years ago, back in 2001. The city council believes that bankruptcy didn’t help the city the last time and probably won’t again.

The city’s interim financial officer, Amy Auger, said the city’s financial problems are not from external causes but from “optimistic” financial projections. But it was the orchestrated effort of many state agencies to shove a low-income trailer park down the throats of Desert Hot Springs that resulted in municipal bankruptcy in 2001.

So the city’s situation is a little bit different from that of the three California cities that declared bankruptcy last year. One was Mammoth Lakes, which lost a development lawsuit, a singular situation. The other two cities, Stockton and San Bernardino, relied way too much on revenues during the Mortgage Bubble of the mid-2000s, which went bust in 2007-08, while spiking pensions for public retirees.

Desert Hot Springs also suffered from lavish pension payments. “It’s obvious we can’t continue with salaries and pensions that are in the stratosphere, no matter how much love there is for our police department,” said Russell Betts, a city council member, as reported by NBC News.

But the city’s background is unique.

Background

Step back 30 years.

1983. Riverside County denied a subdivision map for single-family homes on the Silver Sage Mobile Home Park property in Desert Springs and downzoned the land.

1984. The State Water Quality Control Board approved a permit to allow the mobile home park to dispose of 26,000 gallons of sewage waste per day in underground seeps and septic tanks. The mobile home park was considered a nuisance by the city.

1990. The partners of the Silver Sage Partnership, Ltd. tried to purchase the mobile home park from Huntington Savings and Loan. The partnership initially sought low-income housing bond financing from the County of Riverside to finance the purchase. Such low-income housing bond issues require local voter consent, which the city denied in December 1990.

Dec. 1990. The prospective mobile home park buyers obtained a 50-year mortgage of $4.2 million from the California Housing Department. This again triggered voter approval as required by the State Constitution for any low-income housing development.

1991. Believing the state was not subject to the home rule of the city, the prospective buyers subsequently tried to find more financing from the State of California.  Tax credits in the amount of $8.2 million were approved by the California Tax Credit Allocation Committee.

Holding Out for a Favorable Court Decision from the 9th Circuit

1994.  When the city again rejected approval of the project, the partners sued under the federal Fair Housing Act. A jury found in favor of the prospective buyers and awarded damages of $3 million.

1999. A district appeals court denied the city a new trial, but found the damage award excessive. Judge Consuelo Marshall  ruled the partnership’s “lost profits” were “speculative,” losses were double counted and the partnership did not attempt to mitigate its losses.  Judge Marshall reduced the award to $388,146.

1999. The park buyers rejected the reduction and another jury trial was held. The jury awarded only nominal damages, but awarded $57,000 in attorneys’ fees. The buyers again appealed to a higher court.

2001. Ultimately, the U.S. 9th Circuit Court of Appeals reversed both prior decisions and let the original court award stand.

2001. The legislation that authorized the tax credits in 2001 was state Senate Bill 73, by state Sen. Joe Dunn, D-Santa Ana. The bill was signed into law on Oct. 9 by Democratic Gov. Gray Davis. SB 73 was proposed by state Treasurer Phil Angelides, also a Democrat.  The single opposition to the bill was from the State Department of Finance, which later was vindicated when Desert Hot Springs filed for bankruptcy.

2001. Some $6 million of the city’s $18 million current total debt is due to a 2001 legal judgment against the city for denying voter approval for the private redevelopment of the former 102-space Silver Sage Mobile Home Park. The city pays $476,250 in interest-only payments each year to pay off its $9,725,000 Judgment Obligation Bond in settlement of the Silver Sage Mobile Home Park court judgment.  The bond will be paid off in 2044 at a total cost of $20,978, 564, according to the city’s 2012 budget.

Award for Speculative Damages

1999. Desert Hot Springs was thus pushed into its initial bankruptcy for what district Judge Consuelo Marshall ruled were “speculative” damages to a business partnership that could not have received a profit until it paid off the loan in 50 years.  The prospective buyer’s initial allegation was that the city’s rejection of the purchase and conversion of the mobile home park into a low-income housing project was racial discrimination due to the minorities that lived in the park.  But it was Judge Consuelo Marshall, a minority judge, who reduced the initial damage award.

2001.  In the 2001 adjudication, the 9th Circuit Court of Appeals ruled that there was no likelihood of future violations of the Housing Fairness Act and the discrimination complaint was denied.

Moreover, the appeals court sustained a damage award against the city for a hypothetical development that was never completed. The Silver Sage Mobile Home Park damage award was an orchestrated, government-funded punitive effort that resulted in the city declaring bankruptcy in 2001. It emerged from bankruptcy in 2004.

The reasons the city rejected the conversion of the Silver Sage Mobile Home Park into a low income housing development were that it was remote and without infrastructure (i.e. sewers, water, road maintenance).  Therefore, it was a drain on city finances to provide police and fire services and extend and maintain road and utility infrastructure to it.  In other words, the state was forcing the city budget into insolvency by the extra costs entailed to provide public services to the park in addition to the judgment for damages. The city didn’t want a housing project on the outskirts of town, whether it was low income or not, draining their operating and capital improvement budgets.

Mobile home parks

Desert Hot Springs has continually tried to resist “mobile home parks” in its community. It has double the rate of mobile homes (7.7 percent) than the statewide rate (3.9 percent) [source: U.S. Census Bureau, Selected U.S. Housing Statistics, Desert Hot Springs).  There are several other mobile home parks in the city that are not charged a development impact fee.

The city is no bastion of conservatism or bigotry.  Over 60 percent of its population falls into a category of minority. It voted for a split ticket in the 2012 national election, with 49 percent for Romney and 49 percent for Obama.

In 2012, the California Department of Housing and Community Development stripped the city of its authority to impose up to $7,000 in Development Impact Fees on new manufactured homes.  The state threatened to repeal the city’s Local Enforcement Agency status if it did not repeal its Development Impact Fee on a mobile home inside the Palm View Estates Mobile Home Park, formerly Silver Sage Mobile Home Park. The city had collected $3,473,848 in Development Impact Fees for its capital improvement program budget.

Of course, a big contributor to the city’s budget insolvency is that new housing permits have gone ice cold in Desert Hot Springs.   Construction is the most common industry in the city, reflecting 18 percent of local businesses. Building permits have dropped from 1,132 per year in 2004 to zero the past two years (see table below).  Desert Hot Springs depended on $26,889,492 in redevelopment revenues for its capital improvement program budget in 2012, which has since been totally cut by the state. But a significant share of the city’s debt is going to pay off a judgment for imaginary damages.

While the 2007-08 national housing bust hurt construction, Desert Hot Springs has not enjoyed the subsequent housing rebound that especially has occurred in California. Zero permits is as low as you can get.

The Desert Hot Springs case created a whole new category of “state-induced municipal bankruptcy and insolvency” in the name of a fair housing discrimination complaint that was eventually denied.

No. of Building Permits — Desert Hot Springs 1997 to 2013

Year	Number of Building Permits	Average Cost	Total Valuation Added To Tax Base	1 percent tax assessment
2012	0	None	$0	$0
2011	0	None	$0	$0
2010	3	$145,200	$435,600	$4,356
2009	2	$162,800	$325,600	$3,256
2008	23	$171,500	$3,944500	$39,445
2007	113	$163,200	$18,441,600	$184,416
2006	558	$134,500	$75,051,000	$750,510
2005	1,006	$131,700	$132,490,020	$1,324,902
2004	1,132	$129,000	$146,028,000	$1,460,280
2003	540	$119,100	$64,314,000	$643,140
2002	149	$109,000	$16,241,000	$162,410
2001	39	$101,200	$3,946,800	$39,468
2000	23	$108,400	$2,493,200	$24,932
1999	3	$109,600	$328,800	$3,288
1998	2	$127,500	$255,000	$2,550
1997	4	$135,900	$543,600	$5,436