Creative financing: dozens of municipal projects in Los Angeles County have been financed using bondlike instruments called COPs, which critics charge have allowed officials to enter into long-term financial obligations without voter approval

Insight on the News, April 15, 2002 by Kelly Patricia O'Meara

Since the downfall of Enron and the crippling of the former energy giant's accounting firm, Arthur Andersen, a great deal of attention and concern has been focused on big business. To be more precise, the focus has been on whether the well-being of a corporation is real or imagined, and how one can get to the facts by running the maze of complicated financing packages and misleading accounting techniques set up by experts to confuse, obfuscate and obstruct. While most of the hubbub is centered on the private sector, the public sector is by no means exempt from such shenanigans.

For instance, one need take but the barest peek at the funding of municipal projects in Los Angeles County -- a microcosm of the nation's local funding policies -- to see that accountancy in county and municipal governments can be just as opaque where there is a desire to deceive. Just as Enron shareholders blindly followed management's hype, taxpayers in the County of Angels appear to have drifted into a trance when confronted with how their civic monies are handled. What is clear is that the taxpayers -- call them shareholders in the county -- pay their money into the system and then look the other way. Where the money goes, how it is used and who gets the equity it buys is anyone's guess.

Nowhere is this more evident than with the increasingly used financial instruments known as certificates of participation (COPs). It's fair to say that those who run Los Angeles County prefer COPs. Literally dozens of municipal projects involving hundreds of millions of dollars have been financed using these financial instruments, which for all intents and purposes are bonds or debentures backed by county or municipal credit.

INSIGHT recently decided to take a close look at the financing of the Van Nuys Courthouse, just one of the COPs-funded municipal projects. After nearly a month of chasing public records and interviewing county officials about the courthouse project, this magazine found that not one person in the county government was willing to admit to being fully knowledgeable about the deal. Not County Auditor J. Tyler McCauley, not County Counsel Frederick Bennett and not any of the county employees who have handled the Van Nuys project since its inception.

Whether these people are ignorant of the details or just lost in the contrived confusion of the deal, now in its second decade, is unclear. What is clear, however, is that it would take an army of accountants and lawyers to unravel the highly questionable funding mechanisms being used. Even so, based on the sketchy documentation provided by the Los Angeles County, here is how COPs have been manipulated in the Van Nuys Courthouse project and why such funding may be of interest to voters nationwide where this appears to have become the funding method of choice among tax-sensitive municipalities.

In 1984 the Los Angeles County Board of Supervisors approved the formation of a private corporation to be known as the Los Angeles County Courthouse Corp. (LACCC). The supervisors then appointed five people to serve as directors of the corporation, which qualified as a tax-exempt organization under Section 401(c) of the Internal Revenue Code.

Michael Antonovich, head of the Los Angeles County Board of Supervisors, appointed Michael J. Farrell to the LACCC in 1984, just a year before the young lawyer also was appointed to the U.S. Bankruptcy Court and two years later to the bench of the Van Nuys Municipal Court. This has raised questions about a potential conflict of interest in his participation on the board of an LACCC that gets its funding from court fines and fees. Antonovich declined to be interviewed by INSIGHT.

But here is the kicker: For all intents and purposes Judge Farrell, as a board member of the LACCC, is owner of the building in which fines are levied to benefit renovation and construction of future courthouse projects, and from which millions in courthouse rents were paid to the LACCC.

Despite the fact that Farrell is very much an integral part of this peculiar corporation, he claims to have little knowledge of it. He tells INSIGHT that the extent of his participation is to "attend a meeting of the corporation every now and then." The judge claims to have had no idea that the corporation of which he has been a board member since 1984 had collected millions in rents and did not even deed the Van Nuys Courthouse to the county until 1997. He says his understanding of his responsibilities to the LACCC were to "see that the county got a good deal on building the courthouse."

The fact that the courthouse was transferred to the county by a quit-claim deed in 1997 raises several issues, including who actually owned the building from the beginning. While county officials and LACCC board members repeatedly assured INSIGHT that the corporation was a governmental entity, the fact remains that to deed the property to Los Angeles County, the corporation first had to own it. In fact, common sense dictates that the county could not deed itself property that it already owned.