LOS ANGELES – Los Angeles Controller Ron Galperin claimed in a report that the city has paid $47 million in unnecessary bond payments, because it issued bonds for stormwater clean-up before it was ready to deploy the money for projects.
Galperin said he found that the city was making millions of dollars in unnecessary interest payments on its bonds during an audit of Proposition O, the 2004 measure that financed stormwater cleanup.
Proposition O authorized $500 million in bonds to bring the city into compliance with the federal Clean Water Act, and increase flood and habitat protections and recreational opportunities.
During the audit, Galperin said he and his auditors noticed large balances in the accounts associated with Proposition O and that the city regularly issued bonds for Prop O's long-term construction projects long before the bills came due.
In many cases, bonds were issued long before contracts were even awarded, according to the audit.
The result was that even though the borrowed money was invested, those investments typically yielded rates of return 2.0% to 2.5% lower than the rates the city paid out to its bondholders.
"No savvy investor would borrow money and then leave it sitting dormant in a bank account. And yet, that's exactly what the City has been doing," Galperin said in a statement.
In the case of Prop O, auditors determined that the City spent $6.8 million on unnecessary interest payments over five years. To see if this was a fluke, auditors looked at four other bond programs and found the same pattern of premature issuance. Auditors estimated that city taxpayers may have paid as much as $47 million in excess interest on these bond programs over an eleven-year period.
City policy has been to require that a department have all cash on hand to pay for the full amount of a multi-year construction contract at the time the contract is signed. In the report, Galperin recommended that the city change its procedures so it issues bonds closer to when the money is needed.
"Changing our practices and becoming more efficient in how we finance construction projects will translate into savings for taxpayers," Galperin said.
Overall, the audit found that while Prop O projects are taking longer to complete than planned and some administrative processes are in need of improvement, the city agencies with key roles—the Bureau of Engineering, the Bureau of Sanitation and the City Administrative Office—have done a commendable job in implementing the complex program.
"LA has taken important steps toward becoming a better steward of its environment," Galperin said. "Now the City needs to become a better steward of the people's money."
For example, using funds provided by the bond measure, the city outfitted stormwater catch basins throughout the city with screens to stop trash from flowing into waterways, rehabilitated Echo Park Lake, began to restore the ecosystem at Machado Lake, and created a wetlands park in South Los Angeles at a former bus and rail yard. Measurements by the regional water quality control board and by the Bureau of Sanitation indicate that Proposition O projects have contributed significantly to improved ocean water quality.
"Our goal has always been to be accountable to the voters who approved Prop O, and Controller Galperin's exhaustive audit helps make that possible," said Adi Liberman, director of the Proposition O Citizens Oversight Advisory Committee. "Controller Galperin's bond issuance recommendations have the potential to free up additional funds that we could use to build even more environmental projects that would make a difference to the Los Angeles community."