State of CA worsened Desert Hot Springs’ financial problems

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.”Desert hot springs

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

 

8 comments

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  1. Rex the Wonderdog!
    Rex the Wonderdog! 19 November, 2013, 10:22

    They got hat the deserved. Muni’s refusing to negotiate market damages in lawsuits is the rule, because they KNOW if the jury comes back with a large liability judgment, they will get it reversed by federal judges, at the trial court or the 9th. And most f the time that is true. That is why you do a deal, so you do not have the uncertainty of trial. Just think if criminals could go to trial, and if found guilty could et a new trial because the judge gives them a long sentence. That never happens, but in civil litigation that is what always happens with muni’s.

    Reply this comment
    • Denise
      Denise 1 September, 2016, 14:06

      Your statement of they got what they deserve. LOL thats laughable. Originally the City of Desert Hot Springs was a retirement community. Unfortunatly for those residents at that time. The County of Riverside started telling the parole’s and mental patients with no where to go upon release, Should move to Desert Hot Springs. The rents are affordable and their are lots of public service jobs available in the valley. The county continued this process for years on end. The lack of community services at that time were huge. More schools were needed as these new residents had children and most needed assistance. It wasent until Corky Lawson donated her time to the city of desert Hot Springs was there any hope in sight. The City has been clever but looking back for instance the first police department of Desert Hot Springs i belive that was 1982 or close to that. They the officials of the actual police department turned out to me convicts from Florida if i recall correctly. they were all arrested and the police department was closed. I mean seriously who in history has such an experience of corruption from within? Not to mention Desert Hot Springs was home to Al Capone. Their are tunnels and underground dwellings sprinkled through out Desert Hot Springs. Its rich in history.. It suffers from Greed at the top and extremely bad management.

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  2. Wayne Lusvardi
    Wayne Lusvardi 19 November, 2013, 16:07

    The point of this article is that in Hotel California there is no way out as the Eagles song lyrics say.
    Desert Hot Springs can not contain its costs because the state has imposed an unfunded mandate of picking up the costs to serve an illegal mobile home park subdivision that drains city revenues. Desert Hot Springs can’t resolve their financial problems with bankruptcy or by business as usual. This might be another city that disincorporates and merges with the county. And if they were smart they might just try to do that if the County would allow it.

    Reply this comment
  3. Rex the Wonderdog!
    Rex the Wonderdog! 19 November, 2013, 23:06

    The city could have worked with the park owners, they didn’t, they rolled the dice on a lawsuit and it came up snake eyes, and like I said, this is very common in gov.

    Reply this comment
  4. Hondo
    Hondo 22 November, 2013, 00:15

    It appears to me that both California and Mineral hot springs have made running a small community complicated to the point of mental illness. What happened to simple, sound fiscal management. They might as well have taken the cities treasure down to the casino in Banning and tried their luck there. Blackjack is far less complicated that the insane court case lottery they lost.
    Mineral Hot Springs was the setting of the classic cop novel ‘The Secrets of Harry Bright”. How anyone could screw up a simple little town like that is a mystery.
    Hondo…….

    Reply this comment
  5. DesertSeeker
    DesertSeeker 17 June, 2014, 17:43

    I wonder where those city council members are today who rejected the measures that would have resulted in income to the city instead of the nightmare they left us with.

    Reply this comment
    • PJ
      PJ 23 October, 2014, 19:38

      Good question Desert Seeker. I will look into that. Thanks

      Reply this comment
  6. Denise
    Denise 1 September, 2016, 13:44

    Its HORRIBLE!!!!
    I have experienced Desert Hot Springs California since 1964. The changes have been unfathomable. The land there is exquisite. In all honestly the view East of Pierson looking toward the Coachella is Better then Clancy lane of the upper eshilance of Palms Desert . View.. Point being it has cleaner air then Palm Desert. Its has great water and Greed, greed and more greed has turned Desert Hot Springs what it is today. The history of that area is awesome. The scent of the desert there. Its not like Palm Desert where they turned it into a tropical golf course mini metropolis.. Desert Hot Springs is drier and more of what the coachell valley used to be. Its quite obvious that if you want a piece of the coachella valley Desert Hot Springs has great potential and more clear land… Look at rest of the valley… Frank Sinatra Drive raw land sold for 20.00 yes that twenty dollars and acre. I say get that land while you can. When its gone you can’t get anymore.

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