New's November 1: Middle of the Arc

San Angelo Mayor Alvin New had a busy November 1, 2011.  He chaired the first City Council meeting of the month, where council addressed employee and retiree health insurance.  Sometime that same day New signed an affidavit indicating his substantial conflict of interest in MedHab LLC, a firm in negotiations with the City of San Angelo for economic development assistance.

Affidavit Mayor New; MEDHAB, LLC 12-159

During the summer budget process City Council prioritized economic development for an $800,000 increase.

Council made sure health insurance stayed low on the priority list in budget deliberations..

After Council budgeted no increase in health insurance, it entertained an exclusive provider arrangement with Community Medical Center, projected to save $483,000 in 2012.  .City Council refused to consider using ERRP funds for the second year in a row.  The projected $480,000 in ERRP money could've kept Shannon as a provider, while the city's health insurance bill remained reasonable.

Council approved the money saving, exclusive provider arrangement on November 15.  It addressed capital items at their next meeting..

Mayor New clearly stated his desire to use health insurance savings for capital budget items.    On December 20 Council decided to use ERRP money in 2012 to "avoid federal strings."  This combination should free up a huge amount of health insurance money.

Watch upcoming budget amendments for financial sleight of hand.  To think that health insurance money could fund the new Business Resource Center, well that's appalling.  It fits with a Council that wiped out local ethics standards for economic development assistance.  Mayor New and MedHab are dual benefactors.

Much of the arc remains to play out on all three issues, health insurance, capital projects and MedHab's $3.6 million incentive.  However, there are enough clues to be concerned about the trajectory..

(To see all MedHab posts click here)

City Council Minutes Hapless on Ethics Change

How far can the bar fall in San Angelo City Government? Below are the minutes from the January 3rd City Council meeting relative to MedHab LLC's $3.6 million in economic development incentives.

16. Page 234 Minutes Vol. 103 January 3, 2012 RECESS At 11:41 A.M., Mayor New called a recess.EXECUTIVE/CLOSED SESSION At 12:17 P.M.,

Mayor Pro Tempore Charlotte Farmer chaired the meeting as Mayor New was in Australia.

The minutes have Mayor New calling a closed session to discuss economic incentives.

Council convened in Executive Session under the provision of Government Code, Title 5. Open Government; Ethics, Subtitle A. Open Government, Chapter 551. Open Meetings, Sub-chapter D. Exceptions to Requirement that Meetings be Open, Section 551.087 to discuss an offer of financial or other incentive to accompany or companies with whom the City of San Angelo is conducting economic development negotiations and which the City of San Angelo seeks to have, locate, stay or expand in San Angelo.

The absent Mayor New "concluded the Executive/Closed Session" on MedHab, then reconvened the Open Session at 1:01 pm.

Council reconvened, and the following business was transacted: CONSIDERATION OF MATTERS DISCUSSED IN EXECUTIVE/CLOSED SESSION APPROVAL OF A RECOMMENDATION BY THE CITY OF SAN ANGELO DEVELOPMENT CORPORATION (COSADC) BOARD TO AMEND THE CITY OF SAN ANGELO DEVELOPMENT CORPORATION GUIDELINES FOR JOB CREATION ASSISTANCE SECTION ENTITLED ELIGIBILITY OF APPLICANTS AND REVISING OUTDATED CONTACT INFORMATION.

The proposal related to elected officials and city leaders holding an economic interest in a venture.  Such holdings made the venture ineligible for economic assistance.

Development Coordinator Robert Schneeman presented background information. A copy of the presentation is part of the Permanent Supplemental Minute record. Council member Morrison expressed his concern regarding the amendments to the application eligibility criteria noting that the current criteria rules have been styled to prevent elected and appointed officials from receiving funds from the City of San Angelo Development Corporation. He expressly spoke in opposition of the amendment.

Council members Alexander, Hirschfeld, and Adams spoke in favor of the amendment and proposed MedHab incentive (item immediately following this item). Motion, to approve the amendment to the Guidelines, as presented, was made by Council member Hirschfeld and seconded by Council member Alexander. AYE: Alexander, Adams, Hirschfeld, and Farmer. NAY: Morrison and Silvas. Motion carried 4-2.

With Mayor New's impediment removed, Council moved on to the $3.6 million incentive for MedHab referred to in the minutes as "background information.".

APPROVAL OF AN OFFER OF ECONOMIC INCENTIVES TO MEDHAB, L LC, A MEDICAL DEVICE COMPANY CONSIDERING LOCATING IN SAN ANGELO INCLUDING, BUT NOT LIMITED TO, A TAX REBATE, JOB CREATION GRANT, BUILDING RENOVATION GRANT, AND LEASE ASSISTANCE

Community and Economic Development Director Shawn Lewis and Economic Development Coordinator Donna Osborne presented background information. A copy of the presentation is part of the Permanent Supplemental Minute record.

17. Minutes Page 235 January 3, 2012 Vol. 103 Council members Hirschfeld, Alexander, Silvas, and Mayor Pro Tempore Farmer spoke in favor of the incentive.Motion, to authorize the incentive, as presented, was made by Council member Adams and seconded by Council member Hirschfeld. AYE: Alexander, Silvas, Adams, Hirschfeld, and Farmer. NAY: Morrison. Motion carried.

Here's how the minutes ended:

ADJOURNMENT Motion, to adjourn, was made by Council member Adams and seconded by Council member Morrison. Motion carried unanimously.The meeting adjourned at 2:01 P.M. THE CITY OF SAN ANGELO

___________________________________ Alvin New, Mayor (conflicted and absent)

ATTEST:_______________________________Alicia Ramirez, City Clerk Annexes A-G In accordance with Chapter 2, Article 2.300, of the Official Code of the City of San Angelo, the minutes of this meeting consist of the preceding Minute Record and the Supplemental Minute Record.

Following these minutes, I might believe Alvin New directed things in abstentia.

Update 2-9-12:  The City cleaned up the minutes for final approval.

MedHab: Mayor New's Substantial Conflict of Interest

San Angelo Mayor Alvin New filed this affidavit in May 2011 indicating his substantial conflict of interest regarding MedHab LLC. At the time of this filing the Mayor was prohibited from any ownership position in a company doing business with the city.

Affidavit Mayor New; Medhab May 2011

Mayor New filed a second affidavit regarding MedHab LLC in November 2011 as the city neared a final deal with MedHab. City leaders presented that deal on January 3, 2012.

Affidavit Mayor New; MEDHAB, LLC 12-159

City Council changed their local conflict of interest policy to keep Mayor New in compliance. Leaders did not reveal the contents of New's affidavits or his board position and board compensation arrangements, which often involve equity awards.

Council approved a $3.6 million incentive package for MedHab LLC, which the company will accept, at least that was staff's promise.  That's a nice $2.95 million nondebt, nonequity cash injection.

There are many if's to solve for MedHab to become a viable enterprise.  Should that come to pass, my guess is Alvin New won't be Mayor when MedHab's founders and early investors cash in. How much will taxpayer cash aid MedHab investors, including San Angelo's Mayor New?  It remains to be seen.

Update 1-19-12:  Scripps Howard papers in West Texas stated "New and Brooks do not have substantial interest in the company."  Yet New filed two affidavits declaring his substantial conflict of interest in MedHab.  One reporter got taken.

Update 4-17-12:  Did Alvin New invest once MedHab's Steprite patent was approved?  

MedHab: City Council Made New Compliant

Had San Angelo's City Council not changed local regulations, Mayor Alvin New faced a major conflict of interest.  New would've had to resign or sell his stakes for MedHab to get an incentive package. 

During the ethics debate, Council members argued that San Angelo needed 227 jobs, as if those positions were guaranteed.  Hardly,  MedHab projected 85 jobs for its knee-and-below rehabilitation product.  It's other three product lines remain in the conceptual stage.

Jim Turner at ConchoInfo researched MedHab's high tech product for knee rehab.  He found MIT worked on shoe sensors in 2006 and a year later tested wireless pressure sensors in a shoe.  Nike and Apple have patents dealing with shoe sensors that measure pressure, motion and temperature.  Their patents mention training and rehabilitation. 

MedHab submitted their idea in 2008.  Jim believes MedHab's one patent is shaky, given strong prior art in the space. To produce the product, Jim believes MedHab will need to license other firms' patented technology, especially in the wireless arena.

The $2.95 million cash incentive is based on jobs provided and capital investment made.  Add in-kind incentives and the total grows to $3.6 million.  Council can say "no jobs, no investment, no incentives."

While that's true, the multimillion dollar package makes it more likely, Medhab will be able to borrow money and recruit new investors.  Many small firms want to grow enough for a bigger company in the same space to buy them out.

It's possible MedHab's venue shopping for incentives will markedly increase the company's value.  Nearly $3 million in cash is one heck of a nonequity, nondebt capital injection.  

Jim couldn't shake the feeling of snake oil around City Council's two moves.  He reminisced about past firms with big employment promises, Apex-Maxima, SafeCar and CCI, Bill Robinson's faith based prison.  AgriLight sent jobs to San Antonio and R.G. Barry closed after City Council funded their RFID machine.

Economic development guru Shawn Lewis promised MedHab would come to San Angelo if Council approved the package.  Mayor New's $25,000 MedHab investment isn't considered a conflict of interest.  MedHab will provide 227 jobs.  And Jim Turner knows where you can buy snake oil

PEU Warning: City Council & Staff Not Angels

San Angelo's Economic Development Coordinator Donna Osborne presented a $3.6 million incentive package for MedHab.  During her time Osborne defended the apparent conflict of interest two city leaders had under city rules.

Osborne shared history, includingd MedHab's sponsorship by the Concho Valley Angel Network (CVAN).  Interestingly, Donna Osborne is CVAN's administrator.  Their website states (under membership):

Membership is by invitation only and may require a short screening process. For more information regarding membership or for an application to join, please contact our Administrator, Donna Osborne, at cvan@cvan.org or 325-652-9214.

Osborne played a key role in the incentive contract associated with lowering the ethical standards bar for government leadership.  State ethics law ignores investments, instead focusing on income.

City Council wiped away their local requirement that no city official have any conflicted contract with the city until six months after they leave their position, doing so in a 4-2 vote.

Mayor Alvin New's holdings, a minimum $25,000 if bought in either of two equity floats filed with the SEC, would be in excess of state law (more than $15,000 in fair market value of a company) and thus a conflict of interest.  

Recall the issue is elected leaders holding a financial interest in a company under contract to the city.  Here's what council members said:

Dwain Morrison called it a direct conflict of interest, saying the city was changing bylaws to make unethical behavior right.

Paul Alexander said we grow or dry away, that leaders cannot invest in San Angelo.  Leaders should not be disqualified from financial health.  It's the structure of what we've done in America through corporations.

Kendall Hirshfeld applauded those who've done well for San Angelo, those doing well and those who will do well for San Angelo in the future.  Nothing should hurt, slow down or detract from investment.  Keep good strong people, regardless of business background, on boards and commissions.  Shouldn't discriminate against those who've been successful. 

Fredd Adams said he is for the creation of 227 jobs, for creation of 220 jobs that are going to pay a living wage, allow 227 people to invest in our tax base.   The City doesn't have six months for the Mayor and Randy Brooks to resign.  MedHab will chose soon.  Adams hated to lose jobs on a technicality.

Johnny Silvas noted cities are struggling to keep unemployment down.  This deal could be a shot in the arm for the community.  Let Mayor New and Randy Brooks do their thing and not sleep if it's wrong.  If it goes away, it will hurt us, especially the 227 people struggling to support their family. 

Note MedHab's 227 jobs, of which 142 are highly speculative.  Only 85 positions are associated with a patented product.

Charlotte Farmer banged the gavel in Mayor New's absence.  She beiieves in rules, favors guidelines.  The way the current ethics guideline is written, it will make it more difficult to recruit members.  The policy needed to be amended to fit today's times and needs. 

The need is for wealthy people to invest in start up companies milking various local, state and federal programs for capital.  When investors lever taxpayer cash, returns are magnified. 

How long before other City Council leaders shepherd their investments toward economic incentives?  Greed does that.

P.S.  Thematically, this post could sit on my PEU Report blog.  PEU Report tracks private equity underwriters (PEUs) and their distorting impact.  The Concho Valley Angel Network members include "Active, SEC accredited private equity investors."  Members only...

Update 1-10-12:  KLST did a story on the city's deal with MedHab.  They interviewed the Mayor.   It took a city council vote to eliminate the Mayor's conflict of interest.

Update 8-30-14:  MedHab CEO presented for the first time on his company's progress under the economic development agreement.  The company has 6 employees in San Angelo, with one hired last week.  It turned out there was plenty of time for Mayor New and Randy Brooks to resign and MedHab still get the package.  Fredd Adams resigned from City Council after his third DWI conviction, but just resurfaced as a member of the Zoning Board of Appeals.  Neither his resignation letter or his board application referred to his felony conviction and steps made to rehabilitate since. 

New-Angel-MedHab Timeline

When did Alvin New became an investor and board member of MedHab LLC?  Where in the following timeline did his initial investment occur and when was he elected to the board?  These could be two different dates.

1.  MedHab is introduced to the Concho Valley Angel Investor community by Lee Pfluger.  Discussions begin with the City of San Angelo (2008)

2.  Alvin New meets MedHab's Johnny Ross at an investor presentation.  New volunteers to help MedHab with negotiations with the City of San Angelo, the Chamber of Commerce and State of Texas (prior to October 2009).

3.  MedHab's Johnny Ross supports Alvin New in his bid for Mayor via a Standard Times Letter to the Editor in October 2009.  Ross indicates he will select a plant site in the coming year (2010).

4.  Mayor New wins election in December 2009.  Turnout is low as citizens are focused on Christmas.

5.  MedHab's floats $255,000 in equity in October 2010.  Eight investors are shown on the SEC filing.  Minimum stake is $25,000.

6.  MedHab offers another $1.8 milllion in equity in May 2011.  The minimum investment remains at $25,000.

7.  Mayor New files an affidavit on his relationship and holdings with MedHab (not published).

8.  San Angelo City Council approves a change in its conflict of interest policy to allow elected representatives to hold an equity stake in companies doing business with the city.  Council drops their previous standard which would have caused Mayor New to choose between his MedHab stake and being Mayor.  (January 2012)

9.  City Council gives MedHab a late Christmas present, $3.6 million in economic incentives.  (January 2012)

Obviously Mayor New's investment came before Item #7.  Maybe New's affidavit will add light to this rough timeline.

MedHab Floated Equity Twice in Last Two Years

SEC filings indicate MedHab LLC offered equity stakes of $2,055,000 the last two years.  The first offering was $255,000 in October 2010, where eight investors bought stakes.  The second offering of $1.8 million showed a May 2011 filing date.  They intend to move the whole amount within a year.  The minimum investment accepted by MedHab is $25,000 under both filings. 

What impact might a $3.6 million economic incentive from the City of San Angelo have on MedHab's investment sales pitch?  Government support valued at twice the investment offering would be rather compelling.

COSA's proposal mentioned MedHab's pursuing EB2 financing.  San Angelo Chamber of Commerce Director John Dugan stressed "interesting EB3 funding," which originate mostly from China, but include other foreign nationals.   Dugan expects EB2 and EB3 to attract a great deal of interest in our area.

No one said EB2 and EB3 are designations for employers to import skilled foreign workers.   Does the money come from saving on wage and benefits via importing cheaper, high skilled foreign labor? How many of the 227 proposed jobs would be occupied by foreign workers, i.e. not area citizens?  Immigration Blog reported:

USCIS Director Alejandro Mayorkas announced recently in a blog post several new initiatives to encourage entrepreneurs and high-skilled workers to bolster the U.S. economy and stimulate job growth. Director Mayorkas noted that the U.S. has a long history of welcoming innovative entrepreneurs and skilled workers into our country, and in turn they would fuel the nation's economy by creating jobs, and promoting new technologies and ideas.

MedHab's Johnny Ross is from San Angelo, but Tim Sanghera was born Jagdeepinder Singh Sanghera.  Sanghera may be the key to any capital financing available to EB2 workers.

San Angelo's Mayor Alvin New invested in MedHab and sits on its Board of Directors.  City leaders said they began their discussions with MedHab in 2008.  New was elected Mayor in December 2009.  Turnout was light as citizens focused on Christmas.  

MedHab's Johnny Ross wrote a letter to the editor supporting New.  The Standard Times ran it in October 2009.  It stated:

Upon meeting New at a business presentation, he immediately volunteered his services to assist MedHab’s efforts working with the city of San Angelo, the Chamber of Commerce, the economic development council and the state.

MedHab could be capitalized in a major way by San Angelo taxpayers.  Investors and international financiers, could be the benefactor.

San Angelo:  Cornpone, Uptown for some,  Money for Goodtimes