BILL ANALYSIS Ó SENATE COMMITTEE ON GOVERNANCE AND FINANCE Senator Robert M. Hertzberg, Chair 2015 - 2016 Regular ------------------------------------------------------------------ |Bill No: |SB 1236 |Hearing |4/13/16 | | | |Date: | | |----------+---------------------------------+-----------+---------| |Author: |Hernandez |Tax Levy: |No | |----------+---------------------------------+-----------+---------| |Version: |3/28/16 |Fiscal: |Yes | ------------------------------------------------------------------ ----------------------------------------------------------------- |Consultant|Weinberger | |: | | ----------------------------------------------------------------- Local government Enacts statutes governing the City of Industry's city-owned housing occupancy, annual audits, city councilmembers' compensation, and contracting practices Background Encompassing an area of nearly 12 square miles in southeastern Los Angeles County, the City of Industry is a charter city which incorporated in 1957 for the purpose of promoting commerce and industry. The City is governed by a city council comprised of five members who serve four year terms. Councilmembers are subject to at-large elections, although the City has rarely had to hold competitive elections. With approximately 440 residents, the City accommodates very little residential housing within its boundaries. For many years, the City of Industry's government has attracted attention over allegations of corruption, misspending, and mismanagement. Just last year, an internal city audit reportedly found that the city had paid more than $300 million to companies owned by the city's former mayor and his relatives and that the payments were often not supported by accurate invoices or other documentation. In response, the Los Angeles County Board of Supervisors unanimously approved a resolution calling upon for the District Attorney to investigate possible SB 1236 (Hernandez) 3/28/16 Page 2 of ? fraud, corruption and illegal activity by Industry's former Mayor and City Council. The board's resolution also requested the State Controller to conduct an audit of the city's government transactions and contracts. In January, 2016, after conducting a review in the City of Industry, the Controller's Office released a report on its findings, which included widespread deficiencies in the city's internal controls, questionable expenditures, inadequate oversight of financial and operational activities, and irregular compensation and personnel practices. These reports raise concerns about a lack of honesty, fairness, and accountability in how the City of Industry is governed. In response, some state elected officials want to impose limits on city officials' discretion over matters that include city council compensation, city contracting procedures, and the use of city owned housing by city officials and their relatives. Proposed Law Senate Bill 1236 imposes the following requirements on a city that is incorporated to promote commerce and industry, is located wholly within the County of Los Angeles, and had no residentially zoned land within its boundaries as of January 1, 1992: No more than 5 percent of the city's total city-owned housing may be occupied by: o Employees or officers of the city, including the family of employees or officers of the city. o Persons that contract with the city, including employees of persons or companies that contract with the city, and including the family of persons who contract with the city and the family of employees of persons or companies that contract with the city. The city must make an annual disclosure of all property owned by the city, wherever that property is situated. The city must conduct an annual audit that utilizes internal control components and elements based on the guidelines established by the Government Accountability SB 1236 (Hernandez) 3/28/16 Page 3 of ? Office's Internal Control Management and Evaluation Tool. The city must substantially comply with those guidelines. Compensation for service on the city council must not exceed $1,000 per month. The California Public Contract Code must apply to contracts entered into by the city, including contracts for the provision of waste collection and management services, notwithstanding existing law that applies the Public Contract Code's provisions to charter cities only in the absence of an express exemption or a city charter provision or ordinance that conflicts with the relevant provision of the Public Contract Code. SB 1236 specifies that the above requirements remain in effect only until January 1, 2028. The bill contains extensive legislative findings and declarations relating to concerns about corruption in small charter cities. State Revenue Impact No estimate. Comments 1. Purpose of the bill . After auditing the City of Industry's administrative and internal controls last year, the State Controller reported finding pervasive deficiencies in the city's accounting practices. The Controller's staff found that 67 the 79 control elements evaluated pertaining to the City of Industry's internal controls were considered inadequate. None of the City's 16 evaluated control elements relating to integrity and ethical value, commitment to competence, and management oversight and control were found to be adequate. The Controller's review "identified numerous contracts and transactions that, at least in appearance, raised questions about City Council's lack of due diligence, including potential conflicts of interest and favoritism." Although city officials are working to correct many of the problems identified in the SB 1236 (Hernandez) 3/28/16 Page 4 of ? Controller's report, other concerns about the city's governance remain unresolved. The district attorney's office is reportedly investigating the city's contracting practices. A June 2, 2015 city council election also generated controversy by placing three new members on the council who immediately replaced the city manager and city attorney who had worked for the previous council. Ongoing uncertainty about the integrity, stability, and honesty of the City of Industry's government is not good for city residents or for the businesses located within the City. The questions raised about the City's government also cast a broader shadow of mistrust over municipal government in general. SB 1236 is a reasonable and targeted response to these problems. The bill imposes a few common-sense restrictions on City of Industry practices that are raising concerns among auditors, law enforcement professionals, and members of the general public. 2. Charter city . The California Constitution allows cities that adopt charters to control their own "municipal affairs." In all other matters, charter cities must follow the general, statewide laws. Because the Constitution doesn't define "municipal affairs," the courts determine whether a topic is a municipal affair or whether it's an issue of statewide concern. Despite the fact that the City of Industry is a charter city, SB 1236 says that its statutory provisions apply to the city. To support this assertion, the bill includes a legislative finding and declaration that having an open, honest, and transparent government is a matter of statewide concern, and not a municipal affair. Ultimately, the courts may decide whether SB 1236's provisions can apply to a charter city. To avoid any uncertainty about whether City of Industry can be subject to general law restrictions, it would be necessary to amend the California Constitution. For example, until voters approved a 1970 constitutional amendment proposed by the California Constitution Revision Commission (Proposition 2), the Constitution did not allow cities with a population of less than 3,500 residents to become charter cities. Restoring this population threshold in the Constitution would guarantee that the City of Industry could be subjected to greater regulation under state law. 3. Impairment of contract . SB 1236 caps, at five percent, the share of city owned housing that can be occupied by city employees, city officers, or their relatives. It is unclear SB 1236 (Hernandez) 3/28/16 Page 5 of ? whether, if the bill becomes law, the City would be required to evict current occupants of city owned housing in order to comply with the new cap. Article I, Section 9 of the California Constitution prohibits the Legislature from passing laws that impair obligation of contracts. To the extent that current occupants of city-owned housing entered into lease agreements with the city, state law may not be able to force the city to break the terms of those leases. The Committee may wish to consider clarifying the intended effect of the 5% cap by specifying that it will apply to city owned housing only after current leases on those houses expire. 4. Will it work ? Responsive local democracy depends on aware and attentive residents' holding public officials accountable for their actions. Maintaining the integrity of the relationship between the governed and those who govern is hard in the dozen California cities that have fewer than 1,000 residents. In cities in which the population is very small, familial and business relationships often connect most of the cities' residents. As a result, it becomes difficult for city voters to act as a truly independent check on the municipal powers exercised by elected officials who are also, in many cases, their relatives, employers, landlords, or business partners. SB 1236 seeks to regulate some aspects of city administration that appear to have been mismanaged by City of Industry officials, but the bill does not address the fundamental structural problems that may allow the City of Industry's government to be operated for the benefit of individuals at the expense of the greater good. To address this underlying structural problem, the Legislature could consider ways to impose independent checks and balances on the City of Industry's government. For example, establishing an independently appointed and funded ombudsman's office within the city government could provide some ongoing monitoring and accountability that cannot be provided by the city's small pool of registered voters. 5. Mandate . The California Constitution requires the state to reimburse local governments for the costs of new or expanded state mandated local programs. Because SB 1236 imposes new duties on City of Industry officials, Legislative Counsel says that it imposes a new state mandate. SB 1236 requires the state to reimburse local agencies if the Commission on State Mandates determines that the bill imposes a reimbursable mandate. SB 1236 (Hernandez) 3/28/16 Page 6 of ? 6. Special legislation . The California Constitution prohibits special legislation when a general law can apply (Article IV, §16). SB 1236 contains findings and declarations explaining the need for legislation that applies only to the City of Industry. Support and Opposition (4/7/16) Support : Unknown. Opposition : City of Industry. -- END --