Saturday, January 07, 2012

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 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. 


Jim Turner said...

A critical point that needs to be clarified. Under state law, any investment of over $15,000 creates a conflict of interest situation. According to the forms that MedHab has filed with the SEC the minimum investment they would accept was $25,000. That means that both New and Brooks had to have invested at least $25,000 in the company. By state law that is a substantial investment.

I'm not sure where the city is doing their research but Texas Local Government Code 171.002 states that ownership of "$15,000 or more of the fair market value of the business entity" constitutes substantial interest.

PEU Report/State of the Division said...

Thanks Jim for the clarification. As I found the information on the City's website, I thought it was city ordinance.

I'll correct the body of the piece.

Jim Turner said...

There are additional conflict of interest requirements for Council Members (which includes the Mayor)in the City Charter.

The conflicts are primarily concerned with selling or providing service to the city. Past interpretations of this section of city charter lead me to believe that it probably doesn't apply to the current situation but I'm no lawyer. I don't know that city legal has actually looked at this. This being in City Charter means it can't be changed except by a charter election. This is stricter than the State laws, but that is allowed. Cities can be more restrictive than the state, not less.

PEU Report/State of the Division said...

Jim, I noted the City Charter in my piece:

It depends how profits are defined. It seems broader than taxable income used by the state. Mayor New could profit from his equity stake in MedHab in a number of ways.

The City Charter is where the Mayor faces scrutiny, now that Council eliminated the any holding restriction.

Mayor New told me he wanted to accomplish specific things while in office, Hickory water, downtown development.etc. The question is whether MedHab's incentive was one of those items, given New's connection prior to his election.

PEU Report/State of the Division said...

Jim, many thanks for your contributions and observations. Somehow I left that out of my last comment. My apologies!