SAVING GRACE

Gardena, Calif., residents have been stopping police officers to gush over the city’s bright new red curbs, which, for years, were weathered to a barely traceable pink. Freshly painted tow-away zones may not raise eyebrows in most communities, but in Gardena, they symbolize a new day. With two infamously cursed business schemes that left the city on the hook for more than $26 million and an ousted city manager who served jail time on several charges, including embezzlement, city employees say the 1990s were like a black cloud. Today, they say life here, like the new curbs, is vibrant.

But more than the curbs, Gardena residents are grateful police officers are even around to hear their comments at all. Public safety was just one of many city services that were scaled down in the decade it has taken Gardena to rebuild its finances and finally commence work on the economic development that could take it from being a Freeway City to the kind of place people want to settle down. It has been a long road to renewal, but the journey would not have had a chance of ending successfully without the dedication of Gardena’s City Manager Mitchell Lansdell. For his savvy, patience and determination in pulling his city out of the red and saving it from ruin, American City & County has chosen Lansdell as the 2007 Municipal Leader of the Year.

A city’s fall

In the South Bay area of Los Angeles County, Gardena may be more notorious for its local government’s blunders than for its showy card clubs, such as Larry Flynt’s Hustler Casino. But, it was not always that way. In the 1980s, Gardena was thriving. By 1985, the city’s general fund had a $12 million reserve, community programs were healthy and one-third of the city’s police-vehicle fleet was replaced every year.

But as the 1990s approached, the city — with a tax base comprised of property tax, sales tax, card club revenue, utility user fees and a percentage of motor vehicle license fees — continued to spend money at the same rate even though revenues were decreasing. Eventually, the city dipped into its surplus until it was gone.

To generate additional revenue, a few council members devised two business projects local media would later describe as “colossally miscalculated.” The first program made Gardena, in 1993, the first city in the United States to sell liability insurance to other cities. The city formed Municipal Mutual Insurance Co. (MMIC) and borrowed $10 million from Gardena’s general fund, with the idea of regaining its initial investment plus profits in a market where municipal insurance rates were soaring. In some cases, insurance carriers would not cover cities at all.

But, in the years it took for the state to approve MMIC’s permit, the insurance market changed, and local governments began finding cheaper liability insurance. In the first couple years of the program, MMIC sold one policy — to the city of Gardena. With seven total policies sold by the mid-’90s, MMIC was unable to pay back the $10 million and had picked up additional debt.

By 1995, instead of disbanding and cutting its losses, MMIC abandoned the municipal insurance business to focus on the workers compensation insurance market. But, the company again foundered. When all was said and done, MMIC put Gardena in the hole for $20.6 million.

In 1991, the city launched its second business venture, the First-time Homebuyers Program, which loaned money to first-time homebuyers for their down payments. After five years of enjoying interest-only loans, program participants were expected to refinance their mortgages to pay off the city.

That program, too, was jinxed. The real estate market crashed, and 33 of the 73 loans the program issued went to foreclosure. The city stopped issuing loans in 1997, but by then, the general fund had accrued an additional $6.2 million debt.

The total debt of $26.8 million from the two failed programs consumed most of the $40 million general fund. “Basically, both programs were well-thought-out and served a good public purpose,” Lansdell says. “Unfortunately, we just did not implement them in a way that allowed them to be successful.”

Two Japanese banks held the notes for Gardena’s debts and aggressively began seeking repayment. In 1997, facing an unbalanced budget, the city council was projecting to spend a considerable amount of money more than was available.

While Gardena was hemorrhaging dollars in its insurance and real estate businesses, its former city manager was discovered using precious city funds for personal vacations that included high-priced hotel rooms, first-class plane tickets and other unmentionable expenses. Following a grand jury investigation, the city manager was charged with several counts, including embezzlement, falsification of public records and misappropriation of city funds. He was fired and ultimately convicted on several of the charges.

Lansdell, who as assistant city manager had been watching his city plummet, was appointed acting city manager in 1997. He may not have had big shoes to fill, but when Lansdell took charge, the challenge before him was larger than life.

The matter of running a city

Working on the sidelines since 1985, Lansdell hit the ground running. According to his colleagues, he assessed the damage and set in motion the steps toward a long-term solution to his city’s fiscal crisis. However, first he had to stave off the city’s creditors long enough to get organized. By 1999, both banks allowed the city to pay interest only on their loans for five years.

Next, he had to secure the trust and confidence of city employees for his plan. He held several meetings to explain to everyone the challenges that lay before them. The city would have to operate on a shoestring until the debt could be repaid. “For years, the problems weren’t really talked about,” says Gardena Chief of Police Ed Medrano. “I think whatever they could keep close to the cuff they did, so when Mitch took over, he had to expose everything that was going on — all of the problems that people were not paying attention to. But we were always informed, and he didn’t pull any punches. He didn’t say, ‘Things are going to be great, just hang tight.’ He told us it was going to be difficult. But we have a plan.”

At Lansdell’s first city council meeting as the acting city manager in November 1997, his plan to trim $2.8 million out of the adopted budget was approved. The city cut staff levels 14 percent across the board by instituting a hiring freeze to avoid layoffs, drastically reduced capital projects (including sidewalk, street and tree maintenance) and cut operational expenses to keep the general fund deficit to $5.2 million, as opposed to the projected $7 million to $10 million in 1998.

When the five-year, interest-only period on the loans ended, Lansdell presented the banks with a revitalization plan that included revisiting fee increases, the potential of tax increases, and the sale of city assets. Discussions and proposals continued between the city and the banks until January 2006, and while Lansdell was keeping the city running and providing only the most necessary services, Gardena was still far from being able to pay off the $26 million principal.

Talk of bankruptcy plagued city hall, and when news that Gardena had contracted a law firm that specializes in municipal bankruptcy became public, the town panicked. “Eliminating the debt by any means possible was the only thing that was going to save the city,” says D. Christine Hach, assistant city manager.

The turning point

By January 2006, Sumitomo and Union banks were fed up with negotiating with Lansdell and asked for a meeting with Mayor Paul Tanaka. “They weren’t getting an agreement [from me],” Lansdell says. “They wanted to be fully paid, and I still wanted to pay them what I thought I could afford to pay.”

Bank officials hoped that talking to someone else would yield different results. “In Japan, much like other parts of the world and even in a couple of major cities in the United States, they recognize one person and one person only as being the true ‘boss’ of the city,” Tanaka says. “I told Mitch, ‘I’m the elected official, but you’re the expert, you’ve been handling this thing for years.’ He said, ‘They’re done talking to me.’ So I had to do an exhaustive study on this entire debacle.”

Lansdell briefed the mayor on what he thought the deal points would be. After listening to the bankers’ positions, the mayor, in a decisive gesture, told the representatives that they would either work out a repayment deal with Lansdell by the end of the day, or the city would file for bankruptcy. “It did take all day, but at the end of that day we came up with the memoranda of understanding that was approved by city council in March of 2006,” Lansdell says.

The agreement required Tanaka and Lansdell to convince Moody’s and Standard and Poor’s to re-establish the city’s rating and apply for new bonds that would pay back Sumitomo and Union banks the full principal at 85 cents on the dollar. Lansdell decided to seek a repayment plan comparable to a home loan by turning its existing adjustable-rate, interest-only, five-year balloon payment into a 30-year, fixed-rate mortgage. The payments would be more affordable, interest would not fluctuate, and there would be no more fees of several hundred thousand dollars every time the loan needed to be refinanced, which was happening almost every six months.

“We then had to go out and meet with the financial institutions Moody’s and Standard and Poor’s because we were basically junk,” Tanaka says. “Nobody would invest in us. After I told them my own personal story, my commitment to the city and the fact that I believed we had the best leader a city could have in Mitch Lansdell, they gave us an investment-grade rating, and within four hours, 21 or 22 million dollars worth of bonds were sold at 85 cents on the dollar that the banks had agreed to, and the entire cloud of bankruptcy was lifted. It was an amazing day.”

The future, finally

Since the city’s debt restructuring was completed and Gardena has been financially solvent for the past two years, Lansdell has begun rebuilding city staff and green-lighting previously stalled capital projects. The first priority was to re-staff the police department, which should employ 100 officers, according to Medrano, but in 1999, had declined to 65. “We’re up to 92 officers already, and I’m well on my way to getting 100,” he says.

In the past two years, the city council has approved Lansdell’s recommendations to purchase five new patrol cars as well as an asphalt roller and a trailer for the public works department — the first new equipment purchased with general fund money in a decade. Gardena’s general plan also was updated in 2006 for the first time in 30 years, and Lansdell is setting his sights on economic development for mixed use in several neglected areas of the city, although voters have defeated the formation of a redevelopment agency three times. Lansdell is pursuing designation of certain areas as enterprise zones for state tax credits.

Lansdell also has launched the Artesia Specific Plan to develop 23 acres off one of the many freeways surrounding the city. Last year, Artesia Square, a 7-acre development approximately in the middle of the 23 vacant acres, was approved. The grading permit has just been issued, and the development includes 13,380 square feet of commercial-retail space, 4,764 square feet of restaurants, 63 residential units and 35 live-work units. Mixing uses on one property is a popular concept in neighboring communities, but Artesia Square will be the first for Gardena. A $52 million dollar transit facility also is under construction and will figure significantly in revitalizing the north end of town.

It is hard to imagine that one person could have single-handedly reversed the tides leading Gardena to blight and bankruptcy, but those who work with Lansdell insist that is the case. “There is no one person who is more responsible for turning the city around,” Tanaka says. “He’s smart. He’s politically astute. He has an incredible work ethic. And, I think most importantly, he’s just a good person. That makes a big difference. He’s got a good heart, and when you combine all those attributes, you get a great leader.”

Lynn Peisner is an Atlanta-based freelance writer.