July 19, 2001

 Examiner Asks Grand Jury to Investigate “Economic Development” Organizations

Are Tax Dollars Being Diverted to Prop Up the Western Baseball League?

$170,735 in Contracts for Bob Linscheid & Associates through phony non-profits

The following letter has been sent to the newly empaneled Butte County Grand Jury. We print it here for public review.

July 18, 2001

Butte County Grand Jury
Butte County Superior Court
One Court Street
Oroville CA 95965

Members, Butte County Grand Jury,

I would like to bring your attention to several matters that fall under your charge of examining the functioning of governments in your jurisdiction. All these matters are related to non-profit economic development corporations that are funded by the cities of Chico and Oroville and by the County of Butte. My concerns range from matters of efficiency and responsible use of tax dollars, to matters of fairness and properly following contracting and bidding procedures, to, in my opinion, criminal matters.

Overview

There are in Butte County about a dozen organizations devoted in full or part to "economic development," including:

Chico Economic Development Corporation (CEPCO), 
Butte County Economic Development Corporation (BCEDC), 
Oroville Economic Development Corporation (OEDC),
Team Chico,
Chico Chamber of Commerce
Oroville Chamber of Commerce
Private Industry Council of Butte County (PIC),
Tri-County Economic Development Corporation (TCEDC),
Butte Economic Partnership,
Butte College Small Business Development Center,
Butte College Center for International Trade Development,
Butte College Career Training Center,
CSU, Chico Center for Economic Development, and
California Employment Development Department.

In addition, the cities of Chico, Oroville, and Gridley, as well as the County of Butte, have staff members and/or departments devoted to economic development.

All of the above organizations are funded in whole or in part with tax dollars. It is nearly impossible to assess the total amount of money going into these organizations, but the sum is certainly on the order of several million dollars. The City of Chico alone estimates that it spends over a quarter of a million dollars a year on economic development.

A question of Goals

Given the tremendous amount of public money going into these enterprises, it is imperative that we ask to what end the money is being spent, and is it being spent wisely. But there is a political dimension to this discussion that makes it difficult for elected officials to ask, much less answer, these questions; put bluntly, no politician wants to be perceived as being "anti-business," and funding these organizations gives them something to point at when their support for business is questioned. It is therefore proper that the grand jury asks, and answers, the questions.

Each of the above organizations has mission statements, yet they are notoriously vague, being more feel-good platitudes than statements of purpose. Many of these could be interchangeable. Take, for example, these "goal" statements take from some of the organizations internet web sites:

CEPCO: "The primary goal of CEPCO is to create new jobs through retaining existing businesses and attracting new compatible businesses that will export their service and goods outside of Chico."
BCEDC: "The mission of the Butte County Economic Development Corporation is to foster economic development in order to alleviate high unemployment, create job opportunities and stabilize the economic base of Butte County."
TCEDC: "Tri-County Economic Development Corporation (TCEDC) is a private, non-profit corporation established in 1988 in order to coordinate the economic development efforts in Butte, Glenn and Tehama Counties."

One has to question whether we really need three organizations to accomplish what is in fact one goal. Could not our tax dollars be better spent by centralizing these efforts into one office, with one staff and one set of administrative expenditures?

Moreover, there is a Byzantine overlapping of membership in the Board of Directors of the organizations, and of staff, with one individual alone receiving payment as Executive Director to two of the organizations and as consultant to at least three of the others. (More on this below.)

Considering the complexity and interchangeability of the organizations involved, it would appear that economic development efforts are top-heavy in administration. Fiscal common sense dictates that the entire organizational system of local economic development efforts be revamped and simplified.

The inability to assess the value of Economic Development Programs

But even if these organizations could be streamlined and administrative costs trimmed, I ask: to what end? Is there a definable goal, with a way to measure results? Can we assess the performance of the people we hire to do these jobs? No, we can't. In fact, there exists no industry standard by which we can assess the effectiveness of economic development organizations, no yardstick by which to measure the people hired to do the job. And, when local governments fund these organizations, they never set out a stated performance standard. 

When pressed on the issue of effectiveness, both government officials and people involved in the economic development industry point at certain anecdotal evidence as proof of their effectiveness. But this "proof" remains questionable at best, and facts are manipulated and "spun" in order to put the organizations in the best possible light and sway the political process in favor of continued funding for the organizations. 

For example, some years ago CEPCO announced that it had "brought" the Western University of Health Sciences to Chico, and that the University would be setting up operation in Craig Hall. This announcement was made with much fanfare, including press releases and presentations in front of the Chico City Council, the main government funder of the organization. The announcement was the subject of several front-page articles in the Enterprise-Record, and several more articles by that paper's business reporter, Laura Urseny. The University even got its own freeway sign. The supposed attraction of Western University was used by CEPCO to justify its continued funding, both on the organization's web site and in publications and reports given to the City Council. And yet, when the University closed up shop and left town, nary a word was mentioned. CEPCO made no presentation to the City Council about the University's departure, no press releases were issued, and Urseny wrote no articles. Even the freeway sign came down without comment, a work crew being dispatched in the dead of night lest someone notice, apparently.

Likewise, much was made of the "attraction" of United HealthCare to town, and how their call center would produce "good jobs." The fact that the company moved to Chico in order to bust its union shops in Long Beach and the East Bay was not mentioned, nor the fact that the "good jobs" started at $5.50 and hour.

My point is that relying on anecdotal evidence as justification for spending millions of dollars in taxpayer money is fool-hardy, to say the least. But that is all that can be used given the lack of a better yardstick. 

And yet, despite the fact that there's no definitive way to measure their performance, the people running the economic development organizations get paid plenty, and their salaries keep going up. Here are some salaries or contract expenses as examples, taken from tax forms filed by the organizations for the most recent year available:

 In 1999, CEPCO contracted with Bob Linscheid & Associates for $90,735 for "Program Management."
* In 1999, BCEDC contracted with Bob Linscheid & Associates for $80,000 for "Management and Administrative Services."
* In 1999, BCEDC also contracted with Jennifer Faughn for "Business Recruitment and Attraction Services" for $82,368.
* In 1998, PIC paid William Finley, Executive Director, $82,347.
* In 1998, PIC paid Daryl Turner, Assistant Director, $49,706.
* In 1998, PIC paid Bonnie Evans, Assistant Director, $49,763.
* In 1998, TCEDC paid Marc Nemanic, Executive Director, $56,774.
* In 1998, TCEDC paid John Gregory, Deputy Director, $55,140.

There are of course many other people involved with these organizations, and who work directly in the employ of the governments; I list the above figures only as a representative sample.

If there is no standard by which to judge the effectiveness of the individuals involved in economic development, then how do local governments agree to funding levels that include such salaries? Sadly, it appears that people are hired or contracted with not on the basis of their effectiveness (which can't be measured), but rather by who they know. Pardon the vernacular, but this industry is based in large part on shuck and jive, back-slapping and glad-handing, and one's ability to move gracefully through cocktail parties. 

Contracting for Economic Development Services: a Way to Get Around Government Bidding Laws

The social nature of the business is underscored by the manner in which governments contract with the economic development organizations and by how the organizations in turn contract with for-profit businesses. This process, in my assessment, is a willful and purposeful arrangement to avoid government bidding laws.

Let's start with the simple question: Why should governments contract with organizations in the first place? Why can't the governments hire people directly to run in-house programs? 

But instead of hiring people and putting them on the public payroll, and using normal government purchasing arrangements for supplies, we have this curious arrangement of contracts three and more levels deep.

Take, for example, CEPCO. The City of Chico contracts with CEPCO for economic development purposes. CEPCO's Executive Director is Bob Linscheid. But Linscheid doesn't receive a salary for his work. Instead, CEPCO contracts with Bob Linscheid & Associates, a management consultant firm owned solely by Linscheid, to provide management services. Similarly, Butte County contracts with BCEDC, which likewise has Linscheid as Executive Director, and again, BCEDC contracts with Bob Linscheid & Associates for management services. To make matters even murkier, all of the above organizations-CEPCO, BCEDC, and Bob Linscheid & Associates-occupy the exact same office at 426 Broadway in downtown Chico. Linscheid also is President of the Western Baseball League, and that too is run out 426 Broadway. Each of the four organizations has a different phone line, but the same person answers no matter which number you call. 

There is a disturbing mixing of resources between non-profit and for-profit corporations at work here, which ought to be examined in detail by the Grand Jury, which has power to subpoena the records of all the corporations involved. 

I note in passing that the Western Baseball League is in dire financial condition, mostly because of the failure of several teams in the league. Several teams have folded in recent years, and the Marysville team has filed for bankruptcy, leaving the local Redevelopment agency with an unsecured, and unpaid, million dollar note, and area private vendors unpaid as well. Even the League's most successful team, the Chico Heat, has seen gate receipts plummet as attendance drops significantly due to the lack of competition.

Because the economic development administrative offices are bundled with Western Baseball League administrative offices, it appears that tax money earmarked for economic development purposes is being used instead to subsidize the operation of the Western Baseball League; if so, the Grand Jury should consider criminal indictments against the principals of both Bob Linscheid & Associates and the Western Baseball League.

This three-level organization also shields the inner-workings of the operations from public view. If the economic development efforts were conducted entirely by government employees, the public would have a right to inspect all budgets and all documents related to the work. This public access is shielded somewhat when the efforts are conducted by a non-profit corporation, but still the public has access to certain tax and budgeting information, including salaries and major expenditures. But public oversight is stymied entirely when the work is shuffled off to a for-profit company (Bob Linscheid & Associates), which is under no obligation to release any information whatsoever to the public.

Interesting enough, the "non-profit" corporation (CEPCO) is the vehicle for considerable profit at the taxpayer expense. The City of Chico has certain rules and regulations-some dictated by state law, others as part of the City Charter-that govern how it contracts with outside entities. In essence, these rules require the City to put large purchases and contracts out to bid, and for it to award the contract to the "lowest responsible bidder." For almost everything the City contracts for-from road projects to garbage pickup at City Hall to the spraying of pesticides in Plaza Park-the City goes through an exhaustive process that includes Requests for Proposals, acceptance of sealed bids, a public opening of bids, and final approval by City Council, all of which is done to ensure that tax money is spent in the most efficient way possible and that no "back room deals" or other corruption occurs. But there is an exception to the City's bidding rules: the City can contract with a non-profit corporation without going to bid. This is what allows the City to contract directly with CEPCO without entertaining other possible firms.

In short, the City can not contract directly with Bob Linscheid & Associates without going to bid, but CEPCO can. It's a very convenient arrangement, and a perversity of everything "non-profits" should stand for.

The problem of contracting doesn't stop at the third level of organization, however, but goes to a fourth level. Take, for example, the subcontracting for web site development. BCEDC, to mention just one instance, in putting forward its "Tourism Development" program to Butte County, said it would contract for the building of a web site pushing County attractions. The web site is projected to cost $20,000, and the contract for it, between BCEDC and Matson & Isom Technology Consulting, will not be subject to County government bidding procedure. Matson & Isom certainly is up to the job technologically speaking, but there are many such firms in our area, and it's an open question as to whether some other firm could have done the job more cheaply. Again, this is public money ending up in the hands of a for-profit corporation without any public oversight whatsoever.

A similar arrangement for web site services was made between the CSU, Chico Center for Economic Development and Matson & Isom for use at the North State Summit of last summer.

The City of Chico's Failure to Scrutinize CEPCO

Of course, these concerns wouldn't arise if the funding governments would better scrutinize the economic development organizations. But, unfortunately, they don't.

A case in point is the City of Chico's failure to seriously look at the budget of CEPCO, and to demand better accountability for the tax dollars given to that organization. 

CEPCO was formed as a private organization in 1985 that took great pride in the fact that it didn't receive nor ask for government subsidy. It did, however, ask then-Chico City Manager Fred Davis to be a member of the Board of Directors, a position he gladly accepted. So even though the City gave no tax dollars to CEPCO, by virtue of Davis' position on the Board of Directors, the City was sent detailed reports each month from then-CEPCO Executive Director Harold Regan, listing in exhaustive detail all the expenditures of CEPCO. These budget updates sometimes ran to twenty pages and more, and listed each telephone bill, every payment to secretaries, and in fact every bill paid whatsoever.

In 1996, however, Bob Linscheid became the Executive Director of CEPCO, and the organization asked for, and received, subsidy from the City of Chico. Without further comment, CEPCO's letterhead and memo masthead changed from saying, "A privately funded organization dedicated to the future of Chico" to "Quality of Life Begins With a Good Job."

In any event, as CEPCO went from being a private organization to a publicly financed one, the budget information it gave the City went from Regan's minutely detailed correspondence to Linscheid's simple submittal of a three page budget outline once a year. The 2001-01 "Expenditure Information Sheet" that the City requires CEPCO to fill out, for example, has exactly twelve budget lines. These expenditures are in broad categories such as "Consumable supplies" and "equipment expense," and give no further detail or breakdown. There was simultaneously submitted the "Chico Economic Planning Corporation Annual Budget," with seven budget categories broken into thirteen items of detail. 

But the "Expenditure Information Sheet" and the "Annual Budget," as well as the third sheet, the "Employee Information Sheet, do not correspond, and the three of them do not correspond with CEPCO's tax return for the year 1999. (I have attached all of these documents for your consideration.) 

You'll note that the sheets submitted to the City for 2000-01 funding also contain final figures for the 1999-00 budget year. The figures in the tax return are for the exact same fiscal year, that is, from July 1, 1999 to June 30, 2000.The numbers are so incongruent as to make them unintelligible. Frankly, one or the other set of figures is not just mistakenly wrong, but a conscious fiction, i.e. a lie. 

None of the budget categories in the documents correspond. 

* "Total Revenue" on the tax form (Page 1, line 12), for example, is $110,561. "Total Revenue" in the Annual Budget submitted to the City, however, is $109,217. 
* "Total Expenditures" on the tax form (page 1, line 17) is $107,714. "Total Expenses" on the Annual Budget is $113,575. And "Total Expenditures" on the Expenditure Information Sheet is $129,061.
* Revenue details of fundraisers are listed as follows (tax form, page 14, "Statement 2", versus Annual Budget):
Clay Shoot-tax return, $3,710; Annual Budget, $5,270
Fashion Show-tax return, $6,481; Annual Budget, $8,243
Annual Dinner-tax return, $10,177; Annual Budget, $10,151

Similar inconsistencies abound throughout the documents, but the most blatant inconsistency concerns salaries and/or contracted services. Recall that CEPCO's tax return shows no money paid at all for salaries (page 7, "Schedule A," Part 1), yet the "Expenditure Information Sheet" submitted to the City shows, in the Salaries/Employee Benefits category, shows an expense of $49,380. Likewise, the tax return shows an expenditure of $90,735 to Bob Linscheid & Associates for contracted services, yet the Expenditure Information Sheet shows only $24,000 for "consultant expenses." Even if salaries were separated out from contract expenses for the sake of the City form, the numbers don't add up to the $90,735 reported on the tax form.

In short, CEPCO is giving the City cooked books, and the City is not demanding enough detail and documentation to ensure that tax dollars are being spent for their intended purpose. Clearly, the minor "auditing" that occurs doesn't even entail looking at CEPCO's tax return.

At the very least, the City ought to demand tax returns from non-profit corporations it funds. More to the point, the City ought to stop funding CEPCO, which has a demonstrable shoddy bookkeeping practice and which serves, in my opinion, as more of an organization geared toward the private enrichment of Bob Linscheid than for the public good.

The failed Economic Development consultant process

The City has made some small steps toward addressing some of the flaws noted above. It has, through the Economic Development subcommittee of the City Council, begun the process of hiring a consultant to analyze the City's expenditures for economic development. The process, alas, seems geared toward only rubber stamping the status quo.

The Request for Proposal sent out to prospective consultants, for example, says that the firm hired to do the "analysis," will merely contact fifty companies who have moved to Chico and post on a web site the (alleged) number of jobs created, at what salaries, and how much tax money this has brought in. 

There is no opportunity for the consultant to ask critical questions, to analyze organization budgets, to suggest de-funding organizations, and so forth. 

In short, the "economic development study" appears to be nothing more than a dog and pony show meant to justify, and continue, the gravy train.

Other Issues Related to Economic Development Programs:

Political Work

Before the June 5, 2001 election in Chico, both the Chico Chamber of Commerce and CEPCO actively worked on behalf of one side of the issue. In fact, the "Yes on Measure A" office was inside the Chamber of Commerce. CEPCO, for its part, held weekly organizing meetings in which the Otterson Drive issue was discussed. Both organizations contributed to the Yes on A campaign.

The Chamber of Commerce has formed a second organization, the Chico Chamber of Commerce Political Action Campaign, which is a registered PAC. The Chamber claims that the two organizations are completely separate, but the arrangement begs for further investigation and comment from the Grand Jury. At bottom, the question should be asked: Should the City of Chico be giving tax dollars to an organization that does active political work?

CEPCO, though, has no PAC filing, and is in fact organized as a 501(c)3 non-profit corporation. Such status clearly prohibits political work, and so CEPCO has violated its non-profit tax status. Again, should the City be funding an organization actively involved in political work?

Tourism Program

This year the Butte County Supervisors have handed every penny generated by the County bed tax, some $11,700 through June 30,2002, to BCEDC, of which Bob Linscheid is Executive Director. BCEDC is to use the money to develop a Tourism Program.

The contract for the Program was awarded on recommendation of the County Treasurer's Office; Susan Peterson was the County staffer in charge of overseeing the program. Peterson, it's worth noting, was once an employee of Bob Linscheid.

The County received four bids for running the program, from BCEDC, the Chico Chamber of Commerce, and from Tao Stadler and Jane Pearse, two individuals who have expertise in Tourism development. BCEDC did not submit the lowest bid, but the contract was awarded to them anyway because Peterson judged them the best bidder "based on their experience."

Besides the questionable manner in which the contract was awarded, there is a broader question of purpose that has not been properly addressed. The major project of the Tourism program is apparently the web site construction noted above. (As of this writing, however, the web site does not exist, which appears to violate the terms of the contract.) Is this really the best use of tax dollars, or is there a better use? The fact is that nobody has ever developed any concrete proof that tourism programs actually work, and even if they do, that they are cost effective. Perhaps the money would be better spent if bed tax receipts were simply put in the County's General Fund.

Avoiding Prevailing Wage Law

One other item should be noted. Earlier this summer, Stephen Smith, a Director with the California Department of Industrial Relations, ruled that Chico Developer Doug Guillon violated state prevailing wage laws while constructing the South County Employment Center in Oroville. (Prevailing wages are to be paid for any work done on buildings intended for government use.) While the judgement was against Guillon, the underlying issue concerns the Private Industry Council and its relationship with the County Welfare Office.

Guillon built the South County Employment Center, located at 78 Table Mountain Boulevard, with a lease in hand to PIC, which in turn had already signed three subleases with the Welfare Department. "All three subleases," wrote Smith in his ruling, "are for a term of 15 years. In each of the three subleases, Guillon agreed to pay for and perform certain tenant improvements and those tenant improvements are similar in each of the three spaces. It is apparent that Guillon is entering into an agreement to lease space to a public entity..." concluded Smith, citing identical terms in the master lease and subleases, and requirements in the leases that Guillon build to County specs.

Smith's letter suggests that PIC's involvement was merely a scheme to avoid paying prevailing wages. Moreover, one reading of Smith's determination letter would conclude that the scheme was supported by the Butte County government. If so, County employees consciously violated the law.

Moreover, it appears that when the North County Employment Center was constructed in Chico, the same arrangement was used, thereby also violating prevailing wage laws and cheating workers out of wages they should have been paid.

Conclusion

I have above outlined a series of problems with economic development issues in Butte County, which can best be examined, and solved, by the Grand Jury, both because the Grand Jury is a non-political body that can objectively assess the issues and because it has the subpoena power to get to the bottom of things.

I have great hope that you will take these issues up with the public's interest in mind. I am most willing to provide more information or to testify before the Grand jury in person, if you desire.

Thank you for your selfless service to the citizens of Butte County.

Sincerely,

Tim Bousquet
(530)894-1324
PO Box 4627
Chico CA 95927