I received the original agenda for tonight’s meeting on Monday, then an amended agenda containing this report yesterday. This subject was originally brought up June 2, but somebody raised a Brown Act issue. I bet!
I went ahead and posted the whole report, sorry for the hasty cut and paste job.
The Nature Center runs a for profit day care center, and they haven’t been showing their books. When I asked for their finance reports at a meeting, Mark Sorensen told me, “that’s enough Juanita!”
Why isn’t the center being offered to a group that can manage it properly? Why is this group so in the red? $250,000 in expenses for running kid’s camps? Why won’t they provide all their financial information, salaries, etc?
Here’s the link to the whole agenda:
REPORT IN BRIEF: The City Council will consider several options related to a loan provided to the Chico Creek Nature Center that is currently in default. Options include forgiving the loan to deferring or calling the loan. At its May 20, 2014 meeting, Council authorized staff to prepare Amendment No. 4 to the agreement that would: (1) reset the accumulated interest and penalties owed for the period beginning July 15, 2009, through April 15, 2014, to zero ($0) so that only the current principal balance of $181,026.95 is owed; (2) adjust the interest rate from 1.80 percent per annum to 3.42 percent per annum from July 15, 2014 forward; and (3) establish interest only payments for one year beginning with the payment due July 15, 2014. Staff prepared Amendment No. 4, however, the CCNC did not agree with these terms and, as of the date of this staff report, has not signed the Amendment resulting in the loan falling into a default status.
RECOMMENDATION That the City Council authorize the City Manager to execute an amendment to the “Restated Loan Agreement for the Construction of New Exhibit and Classroom Facility, Chico Creek Nature Center, Inc.” to either: Option 1 – Loan Forgiveness – Forgive the Chico Creek Nature Center of its loan obligation. Option 2 – Loan Foraiveness with conditions – Forgive the Chico Creek Nature Center of its loan obligation with conditions as specified by the City Manager. Defer loan payments for a period not exceeding August 1, 2015 until successful negotiations on agreements conclude. If agreement is not reached, proceed with Option 4. Option 3 – Defer Loan Obligations – Defer all payment of interest until July 1, 2016. Option 4 – No Action – City Council takes no action and City Administration works with City Attorney’s Office to proceed with available remedies specified through the agreements with the Chico Creek Nature Center. FISCAL IMPACT: The “Restated Loan Agreement for the Construction of New Exhibit and Classroom Facility Chico Creek Nature Center, Inc.” establishes quarterly loan payments, in the amount of $3,397.43, due on the 15th of January, April, July, and October. The original loan amount was $185,000 and the total annual loan payment is $13,589.72. Loan payments not received within 15 days of the due date are to bear a penalty of additional interest at a rate of one-half percent (0.5%) per month which has been waived for the majority of the deferred payments. Because the loan was made from a development impact fund, the City Attorney’s Office advises that if the loan obligation were to be forgiven, the General Fund would be required to reimburse Fund 347 – Zone I Neighborhood Parks for the current principal balance plus accumulated interest, a total of approximately $205,539.71.If the two year deferral request is granted without penalty, and the interest rate is adjusted to 3.42 percent per annum, then the deferred payments will be added to the end of the amortization schedule and interest will continue to accrue. If the loan’s accumulated interest and penalties are reset to $0 and an adjusted interest rate of 3.42 percent per annum is applied to the current principal balance of $181,026.95, then the Nature Center’s payments would be approximately $1,547.78 per quarter ($6,191.12 peryear).The Nature Center would be required to request in writing by April 1 st of each year to continue interest only payments or to advise that it can begin payments of both principal plus interest. The City may periodically review and adjust the interest rate in accordance with the City’s actual rate of return on investment. An interest only payment would provide a small revenue stream to the City until such time as the Nature Center can resume full loan payments.
BACKGROUND: The Chico Creek Nature Center (CCNC) leases property, including two City owned buildings, in Bidwell Park along East Eighth Street between Cedar Grove Picnic Area and the Deer Pen. As consideration for such use, and in lieu of the payment of rent, the CCNC operates a nature museum and conducts educational classes and programs on nature and the environment for the benefit of the public. The lease was executed July 1, 1996, amended on July 21, 2005, and terminates December 31, 2027. One of the City owned buildings, the administration building, was destroyed by an arson fire in April 1998. By City Council motion on November 10,2005, the City Council approved a request from the CCNC for a loan in the amount of $185,000, bearing an interest rate of 5.24 percent per annum, to cover the balance of increased construction costs for the new exhibit and classroom facilities within the new building that were not covered by grant funds, insurance proceeds, or existing donations. It was the intention of the CCNC to conduct fundraising activities to generate funds to make the loan payments and, in the event fund raising activities failed to generate sufficient funds, the CCNC had agreed to use interest generated from its Paradise Community Foundation endowment as security for the loan to make the loan payments. Upon completion of construction, the first loan payment was made July 15, 2008. After making four quarterly payments, the CCNC requested a deferral of loan payments for three years due to unanticipated costs associated with the completion of the new facility which required the Nature Center to divert operating funds to capital expenses and to use the interest generated from its Paradise Community Foundation endowment for operating expenses, making the endowment funds that had been identified as security for the loan unavailable. The Finance Committee recommended deferral of the loan payments that were due July 15, 2009, through April 15, 2010, with associated penalties, and the deferral of the loan payments due July 15, 2010, through April 15, 2011, without penalty, but recommended that deferral of the third year of payments be considered following staff analysis of a business plan to be submitted by the CCNC. Subsequently Council authorized the City Manager to execute Amendment No. 1 to the agreement subject to these conditions. The Finance Committee recommended the third year of deferred loan payments (July 15, 2011, through April 15, 2012), without penalty, based on staff review of the CCNC’s business plan which showed they were making progress toward financial stability and could potentially be in a position to resume quarterly loan payments in fiscal year 2012-13. Council approved the recommendation at which time Councilmember Holcombe suggested staff review the loan’s interest rate relative to the City’s actual rate of return on investment and that Council consider a future discussion regarding forgiveness of the loan. Council authorized the City Manager to execute Amendment No. 2 to the agreement subject to these conditions. In 2012 the Finance Committee considered the CCNC’s request for an additional three years of deferred loan payments (July 15, 2012 through April 15, 2015). In addition, as requested by Councilmember Holcombe, staff reviewed the City’s actual rate of return on investment and recommended that the interest rate be adjusted from 5.24 percent per annum to 1.80 percent per annum to more accurately reflect the City’s actual rate of return on investment The Finance Committee recommended to Council that only a two year deferral be granted, through April 15, 2014, and that the interest rate be adjusted to 1.80 percent per annum retroactive to the payment due July 15, 2009. Council authorized the City Manager to execute Amendment No. 3 to the agreement subject to these conditions.By letter dated April 2, 2014, the CCNC requested an additional two year deferral of loan payments, from July 15, 2014 through April 15, 2016. When the Finance Committee considered this request Committee Member Stone was in favor of forgiving the loan, Committee Member Sorensen was not in favor of forgiving the loan, and Committee Member Gruendl was absent. The request was forwarded to the City Council without a Committee recommendation. At its May 20, 2014 meeting, Council authorized staff to prepare Amendment No. 4 to the agreement that would: (1) reset the accumulated interest and penalties owed for the period beginning July 15,2009, through April 15, 2014, to zero ($0) so that only the current principal balance of $181,026.95 was owed; (2) adjust the interest rate from 1.80 percent per annum to 3.42 percent per annum from July 15, 2014 forward; and (3) establish interest only payments for one year beginning with the payment due July 15, 2014. Staff prepared Amendment No. 4; however, the CCNC did not agree with these terms and, as of the date of this staff report, has not signed the Amendment. DISCUSSION: Since the City and the Chico Creek Nature Center (CCNC) have not been able to execute a 4’h amendment to modify the loan agreement as directed by Council, the CCNC is in default of the original loan agreement. Based on the loan’s history and the actions taken over the past years, there is high likelihood that the CCNC will not be able to ever repay the loan. The loan proceeds went into improving a building that is and will remain City property. At this point, the City must take a final action on whether to call the loan or forgive it. In March 2015, to minimize the impact on the City, the City Council approved the use of one-time, General Fund, carry over funds from 2013-14 to move the debt obligation from Fund 347 – Zone I Neighborhood Parks Fund to the General Fund. This still results in an accounts receivable; however, if the City forgives the loan, the City would not have to identify funds to cover the loan obligation in the neighborhood parks fund. City staff are requesting the City Council consider four options on resolving the loan. Request from CCNC
The CCNC indicates that the City’s decision to reduce community based organization funding in 2014-15 has created significant financial difficulties for the CCNC and in October 2014, the CCNC provided a written request to the City to reconsider the relationship between the City and the CCNC. The letter requested the City consider four options or an alternative if none of the four options were acceptable. The requested options include that the City: 1) assume the CCNC loan; 2) provide funding to CCNC for visitor services and the subsidizing of programs for local families; 3) provide the CCNC a place at the table when discussing Transient Occupancy Tax decisions; or 4) become a significant funder of the CCNC Alternative: the CCNC wants the City to fund the Bidwell Park visitor information services and the CCNC will then begin paying off the loan. The nature of the request was more expansive than the City Council considered during the May 2014 meeting. Further, funds the City would provide to CCNC under option 2 would appear to be used to pay the loan which is essentially the City paying itself. As a result, this CCNC options do not appear to be viable option for the City. City Proposed Options City staff prepared several options for the City Council’s consideration to either resolve the loan, continue the past practice of deferring the loan, or proceed with enforcement of the agreement default provisions. These options and considerations are provided below.
Option 1 – Loan Forgiveness – Forgive the Chico Creek Nature Center of its loan obligation. City staff presented this option in May 2014. The loan was used to benefit City owned property, and an argument could be made that the City directly benefited by the expenditure of loan funds to improve the area leased by the CCNC. However, the recitals to the loan agreement indicate that the loan agreement was to cover the increased construction costs for the new exhibit and classroom facility at the CCNC, items that may not have been constructed but for the CCNC’s intended use. The current situation involves the CCNC not being able to make payments for over five years. Consequently, there is increasing likelihood that our external auditors will view the loan obligation as bad debt. The City Council’s action in May 2015 to move the debt from Fund 347 – Zone I Neighborhood Parks to the General Fund as an account receivable provided a buffer to the City’s operations as well as address the issues auditors may have had with bad debt. If the City had liquidated the loan prior to taking this action, the City would have had to identify sufficient funds to cover the debt. To the extent that it happens during a fiscal year, finding additional resources may impact operations. Finally, eliminating the loan would also eliminate another complicated relationship that is unique among other lease agreements with non-profit entities.
Option 2 – Loan Forqiveness with conditions – Forgive the Chico Creek Nature Center of its loan obligation with conditions as specified by the City Manager. Defer loan payments for a period not exceeding August 1, 2015 until successful negotiations on agreements conclude. If agreement is not reached, proceed with Option 4. Same explanation as provided in Option 1. The City has undertaken a review of City leases in order to establish a citywide policy governing leases and creating more consistency from one lease to another. Currently, the CCNC has a lease which expires in 2027. The City wishes to keep leases to no more than 2-3 years with voluntary extensions to 5 years until the City engages in a more thorough vetting of leases going over 5 years. Additionally, the City needs to strengthen records retention and audit provisions, establish more explicit performance standards, and introduce more comprehensive reporting requirements to leases. The loan situation with the CCNC offers a win-win solution where the City can forgive the loan while modifying its lease agreements to obtain changes meant to protect the City’s assets and the viability of the organizations leasing the assets. This option would provide the CCNC and City time to revise the lease agreement while retaining the ability to enforce loan provisions in the default situation.
Option 3 – Defer Loan Obligations – Defer all payment of interest until July 1, 2016. This options continues the past practice of delaying the obligation. If this option is selected, the City would evaluate the CCNC’s ability to operate as a going concern in order to better advise the City Council in addressing the loan in 2016 Option 4 – No Action – City Council takes no action and City Administration works with City Attorney’s Office to proceed with available remedies specified through the agreements with the Chico Creek Nature Center. The agreements with CCNC include default provisions that may result in the City taking legal action on the loan note. Ultimately, this option would negatively impact the CCNC and result in the City buildings remaining vacant for the foreseeable future. Currently, the CCNC pays utilities and conducts basic maintenance to sustain the status quo of the facilities. The City would become responsible for these costs should the CCNC lose possession of the buildings.
CONCLUSION: The options provided in this staff report should address the long standing deficiency in the Chico Creek Nature Center’s (CCNC) performance on its loan and lease agreements. Actions taken previously buffer the City from an unforeseen financial impact from having to address the loan against the Neighborhood Parks Fund.Opportunity exists for the City to revise the CCNC agreements to better meet the City’s goals related to its property leases while also providing an opportunity for the CCNC to achieve its goal of being a viable organization.