Former City Manager Nelson Oliva last year was actively soliciting an out-of-town contract for his daughters' company while collecting his $18,650 monthly salary from the city of Hercules, an activity that may have violated his employment agreement.
The outside activities also may have an impact on Oliva's severance package, of which only half has been paid.
Along with Mike Sakamoto, who's also a former Hercules city manager and the man who managed Hercules' Municipal Utility, Oliva traveled to Lompoc in Santa Barbara County last May. They were seeking a $350,000 contract for NEO Consulting Inc., doing business as Affordable Housing Solutions Group, a company formerly owned by Oliva that had operated the Hercules affordable housing program for nearly seven years.
“Affordable Housing Solutions Group saw your notification of funding availability and we thought it was a great opportunity for us to come forth and provide an alternative to what seems to be a problem with several communities in California when it comes to foreclosure, dilapidated properties,” Oliva told the Lompoc City Council in a videotaped meeting May 18, 2010.
Sakamoto, an NEO consultant who was Hercules city manager until 2007, introduced Oliva as the “founder of the company.” Sakamoto never once mentioned that the company was no longer Oliva’s or that Oliva was the current city manager in Hercules, which was one of the NEO “clients” listed in Oliva’s PowerPoint presentation.
“I have to tip my hat to you this evening for the actions you have taken to address some of these issues in your community. You are not alone. These things happen all over the state,” Oliva said, going on to describe NEO: “Who are we? Our history is we incorporated in 2000 down in Apple Valley in San Bernardino County.”
NEO, which stands for “Nelson E. Oliva,” is an affordable housing consultancy previously owned by the city manager. He claimed to have divested himself of any interest in the firm in 2007, when Hercules hired him as city manager.
The Lompoc presentation is the second documented appearance Oliva has made for NEO is as many years, a matter raising serious questions about both his perceived conflict of interest and whether such appearances might have violated his employment contract with the city of Hercules.
“This can’t be ignored anymore,” said City Councilwoman Myrna de Vera. “[City Attorney] Mick Cabral has said there was no conflict, but I think this is just the tip of the iceberg.”
The council is investigating to determine whether Oliva’s appearances on behalf of NEO may have violated his employment contract and provide legal grounds for canceling his severance package, which in January, with the remainder due when the city hires his permanent replacement.
"We're hopeful one of the prosecuting agencies will be able to fully vet this out," said City Councilman John Delgado, noting he knew of no criminal investigation currently underway. "You can't have this kind of conflict of interest and have people trust in city government."
Cabral said he was unaware of Oliva’s appearance in Lompoc until Hercules Patch brought it to his attention.
“Your inference regarding the contradictory messages pertaining to NEO is sound,” he said via email. “I cannot presently reveal what the City Council is doing with regard to Mr. Oliva and NEO except to say that the council is considering its options. I have made some recommendations that the council should be acting on in the near future.”
Oliva could not be reached for comment. And when a call was placed to Sakamoto's home, a family member said Sakamoto "wasn't interested in speaking."
Asked whether he had issued any formal opinion on Oliva’s perceived conflicts of interests, Cabral said his communications with the City Council were confidential. Cabral referred any further analysis to the city’s response to a civil grand jury inquiry, which he helped draft last year.
In its report, titled "The Crumbling Pillars of Hercules," the Contra Costa County Civil Grand Jury questioned the no-bid contracts awarded to NEO over the years. The lack of transparency raised questions about the cost-effective use of taxpayer money, the report said.
“Decisions, for the most part, are handled by subcommittees of the City Council which do not record meetings or maintain minutes,” the report noted. “Loans were made to family, members of staff and elected officials. These practices raise the specter of impropriety and diminish the public trust.”
In its reply, the city concluded that any conflict questions were resolved by the sale of the company last summer to Walter McKinney, NEO’s general manager and a man Oliva had known for at least 15 years.
Oliva had hired McKinney as chief of the newly formed police department of Hawaiian Gardens, while serving as administrator for that Southern California city in 1995. It was a controversial and short-lived move for the small city, which had historically contracted with the Los Angeles County Sheriff’s Department for public safety. But the doors to the Hawaiian Gardens Police Department were closed within two years due to a lack of funding.
“That sale [to McKinney] has closed, thus, members of the City Manager's
family have no ownership interest in the company, whatsoever,” Hercules
concluded in its reply to the Grand Jury. “The 'appearance of impropriety' is yet another baseless accusation. ... [J]ust because something looks wrong does not mean something is wrong. Such is the case with Hercules.”
The Contra Costa Times reported last month that in April 2009 Oliva had
traveled with Sakamoto to Soledad in Monterey County, where he
fielded questions from City Council members who had recently awarded NEO a contract. That was around the same time Hercules was angling to annex land for its ball field, a failed scheme to build replica-Major League parks that never materialized and cost the city $2 million.
Oliva’s presentation in Lompoc also came at a critical time for Hercules, which was on the cusp of issuing $13 million worth of bonds for the Hercules Municipal Utility, a city-owned electricity provider that has operated in the red for the better part of the decade. Sakamoto managed the utility district through his company, Municipal Management Enterprises LLC, which was paid $205,000 in fees by the city from December 2008 through 2010.
NEO Consulting collected $4.3 million from city
Oliva’s company, doing business as Affordable Housing Solutions Group, was
hired late in 2003 to manage Hercules' affordable housing program, which had
been shut down the year before following a federal investigation leading to the arrest and conviction of a city employee. Sakamoto was city manager at the time and had known Oliva since the 1980s, when they worked together in Bellflower in Los Angeles County.
The contract proved to be a lucrative one for NEO/Affordable Housing Solutions Group. By early 2007, the company had collected slightly more than $1 million from Hercules. In March of that year, Sakamoto stepped down as city manager, and Oliva took his place in April.
The top management seat provided Oliva with a $185,000 salary, free use of a city-owned car and even an interest-free loan of $250,000 to buy a house. But it specifically prohibited him from engaging in any outside employment, saying in no uncertain terms that the city manager’s job was “not a part-time position and will require Oliva to work greater than a customary forty-hour week.”
Not only was Oliva forbidden from taking on other work, he was required to “confer with the mayor and/or city council before undertaking any projects for organizations other than the city which may require a substantial time commitment.”
So Oliva handed the company over to his daughters, one who was in high school at the time and the other in college. Under their stewardship, the company went on to collect another $3.2 million from the city.
Since January 2004, NEO has been paid nearly $4.3 million in fees and expense
reimbursements by the city. According to city records, NEO received a little over $1 million before Oliva became city manager and $3.2 million after he was hired to replace Sakamoto. This from a city of about 24,000 residents with a general fund expected to be just $12 million in the coming year.
Much of NEO’s increased compensation after Oliva became city manager can be
attributed to a series of contract amendments – eight in all – quietly authorized by the City Council as items on its consent calendar with virtually no public debate and quick pro-forma approvals.
Over time, theses amendments greatly expanded NEO’s mandate from simply managing affordable housing programs and passing out small business loans, for which it had originally been hired, to administration of the troubled project, involvement with city beautification and cleanup activities, general administrative support to Oliva in his role as city manager and executive director of the city’s redevelopment agency and services related to wastewater treatment.
Since April of 2007, NEO/Affordable Housing Solutions Group under its expanded responsibilities submitted scores of invoices to the city totaling hundreds of thousands of dollars but containing little detail on precisely what services had been performed – simply billing for “Beautification” and “Clean-up Services” ($334,609); “General Administrative Services” ($438,000); “Sycamore Downtown,” “Sycamore North” and “Sycamore Project Services” ($481,500) and beginning in July 2010, “Wastewater Services” ($33,750).
In most cases, the council actions authorized Oliva himself to conduct contract negotiations with his former business associate, McKinney, who became NEO general manager after Oliva went on the city payroll. At the time, McKinney technically worked for Oliva’s daughters, who claimed to have become the company’s sole stockholders after ethics issues were raised over Oliva’s involvement with the company. Ultimately, McKinney said he purchased the company from Oliva’s daughters last summer. He did not reply to a telephone message left at his Southern California office, where an office worker said he was in a meeting.
NEO’s relationship with Hercules in January when the city moved its affordable housing operations in-house.
An internal evaluation of Oliva’s performance as city manager during the 2009-2010 fiscal year suggests the conflict of interest problems had been nagging the city manager for a few years.
“Potential conflict of interest issues began to arise in 2008 and continued to escalate in 2009 and 2010,” the evaluation report said. “Although the conflicts appeared to be perceptive rather than legal conflicts, significant damage has been done to Mr. Oliva’s credibility, and by association to the credibility of the City Council and the City Attorney.”
“It apparently was not clear to the City Council or to the City Attorney that the company was sold to Mr. Oliva’s daughters, both of whom were under 21 at the time of sale, and a Walter McKinney, who was a former colleague of Mr. Oliva’s. Mr. Oliva’s statement that his daughters were emancipated, true or not, stretched credulity, and was not widely believed. Their ages, college commitments and lack of direct experience as a Chief Executive Officer and a Chief Financial Officer simply did not appear possible.”
Oliva helps city sink deeper in debt
Having officially divested himself of any interest in the company that bore his initials, Oliva began managing Hercules’ city business, which was brisk in 2007. That was the year Hercules decided to stop payments to a developer, a tactic costing the city $1 million in legal fees and $55 million in an .
Then, at the end of 2007, the , which is run essentially by the city manager and council wearing different hats, issued $60 million worth of bonds to pay for things like:
- Victoria Crescent, a 6.5-acre tract that was supposed to have been a shopping center serving residents in Victoria by the Bay. It was purchased by the agency in 2009 for $3.4 million.
- Wal-Mart, also known as Parcel C, was 17 acres at the end of Linus Pauling Drive that cost the redevelopment agency $13.9 million plus legal fees in two separate lawsuits with the retailer.
Today, both parcels are vacant lots.
The bonds were underwritten by Kinsell, Newcomb & DeDios, a firm that just months before had hired former city manager Sakamoto as a senior partner. And the lion’s share of the bond proceeds – – was earmarked in a special account for the developer Hercules stopped paying, even though no lawsuit had yet been filed.
The following year, Oliva received a $15,000 raise and a 20 percent performance bonus of $37,500. And his total compensation package continued to rise. In 2009, he was awarded a $40,000 performance bonus and another pay raise. By 2010, Oliva was making $225,000 a year. But his salary wasn’t the only number rising like mercury in the city of Hercules.
So was .
At the time Oliva took over as city manager – and executive director of both the city’s Redevelopment Agency and Public Financing Authority – Hercules had $72.6 million in principal bond debt outstanding, not including the $53.1 million in interest that would be paid over the life of the bonds. Within a few months of Oliva moving into city hall, additional bonds were being sold to investors: three issues by the redevelopment agency in 2007 totaling $86.4 million; one issue in 2009 by the financing authority for $10 million and three more financing authority issues in 2010 totaling $25 million.
All told, during Oliva’s tenure as Hercules’ top administrator, the principal amount of bonded indebtedness doubled, with the city being committed to an additional $242.8 million in bond principal and interest payments over the next 30 years and boosting the city’s total obligations for repayment of principal and interest on all of its bonds to $342.3 million – about $14,263 for each of the city’s approximately 24,000 residents. ()
How did this happen?
The internal evaluation concluded that Oliva’s centralized approach to project management allowed for little collective institutional insight into key city projects and may have contributed to overleveraging the city.
“Mr. Oliva provided creative deal-making skills related to the use of Redevelopment Agency funding. His ability to grasp the nuances of contract and development agreements, and then act in the interest of the Agency is exceptional. Unfortunately, the combination of the investments in the redevelopment agency projects has created a short-term elevated risk scenario,” the internal evaluation report said.
“The city’s Redevelopment Agency and Municipal Utility (HMU) represent both high asset value and high risk. During Mr. Oliva’s tenure as city manager, the Redevelopment Agency sold over $100 million in bonded indebtedness, much of which has been invested in raw land, rental facilities and development agreements for housing and future retail.
"The investments to date have not generated the revenue necessary to cover the payments on the bonded indebtedness. The ratios between the amount of city investments and the amount of developer investment seem disproportionate, e.g., the city has more invested than the developers.”
Then, last May, Oliva and Sakamoto traveled to Lompoc to request a $350,000 contract for NEO Consulting from that city’s redevelopment agency. The idea was to buy foreclosed homes, fix them up and resell them to low-income buyers. The contract was awarded, but never signed, according to Linda Wertman, who coordinated Lompoc’s redevelopment program.
“I think it was probably like eight months where we tried to get them to sign loan docs,” she said. “The original gentleman who I spoke with [Sakamoto], I guess he got tied up on some local projects up there, so our project got shifted to the south because he said he was not familiar with our local area.”
The “south,” Wertman said, refers to Valencia, where NEO is now based under McKinney’s stewardship. And McKinney, who had signed the original application with Lompoc, decided to withdraw, she said.
She has no idea why.
“He just thought it was better to pull out, so he did.”