Economic Development Contract Compliance Study Incomplete

After three months of work the review of San Angelo's various economic development agreements remains unfinished.  Here are highlights from the City Council background packet:

Summary 
As of the date of this memo the review for contract compliance is not complete. Staff continues to provide information being requested by the audit agency of Armstrong, Backus and Company

History
On behalf of COSADC, staff signed an engagement letter on June 23, 2010 for a review of all contracts pending or outstanding as of September 2013. The review commenced on the week of July 14 and continues to date.

Reviewed by
Michael Dane , Assistant City Manager September 6 , 2014 

Hirshfeld Energy Systems failure to perform has been hidden this year.  It will be interesting to see what comes out of the study, whether it is presented to council in public session and if the public will have access to the document.

I hope someone asks these questions as well as the obvious one, when will it be completed?

MedHab's Major Update

MedHab CEO Johnny Ross spoke the following words at a recent City of San Angelo Development Corporation Board meeting.

"A little bit more on our Progress Report.  We moved our manufacturing from Athens, Texas. for right now our interim manufacturer, to Watertown, South Dakota.  The reason being is we've gone through a few manufacturing runs and this is what has put us behind a little bit, you know we expect time delays with technology.  We're creating a trail.  we're not walking a trail, so there's going to be these type of delays, longer than I would like but we've overcome alot of this and ready to start rolling now.  Regardless, a company in Athens, Texas that was tasked to build our devices repeatedly failed in smaller runs, couldn't get it right and that has to be right, because whether it's the retail market or the health care market, that product is built by FDA regulated quality systems.  That's our requirement, they couldn't do it.  So, we terminated the contract and moved it to Spartan for right now.  Some of that business will come back to San Angelo, Texas when we're ready.

We're in a silent launch mode right now with RPMSquared, the idea, we we have a major announcement we'll talk about in the very, very near future and we will move that from a silent to a global marketing campaign.  Our FDA filing, we expect that to be in 45 days to 60 days.  It depends on when we get our electrical test back.  As I said we expect to have three products on the market by February.  One being RPMSquared, two being the StepRite product, pursuant FDA approval which takes three or four months, five months in some cases, and then this third product that I mentioned that we're working with UTA to develop.  

We've hired six employees, actually our sixth employee here last week.  As you know we put a lot of stock in Angelo State University and every time you see me I talk about that because what Angelo State University, the students have done, Nike failed to do, MIT failed to do and these students over here did it.  It's absolutely amazing to think about the software that they have developed. We have contracted with five students, thirty plus hours for the last two years and we have hired four Angelo State University students.  As you know, it's our goal to retain those students and that talent here in San Angelo. Texas because we are tired of seeing it leave.

For those of you that don't know me I grew up here in San Angelo.  I've watched it for years.  We need to keep those people here.  We hope to do our best to do that. 

To date we have not requested any financial support from the COSADC.  As you know we have a five year contract.  With six employees I don't feel it necessary to do that at this point in time.  It's a waste of your time and energy probably looking at such a small number so there's no liability or risk on your part at this point in time. I, ya, when the numbers are right, I'm thinking 25-30 employees than I'll talk with Mr. Pena and Mr. Schneeman as to when the best time might be to do that.

Last but not least and I'll open it up for questions, we have a very big surprise announcement to make, actually two weeks from now.  There's one person in the room, Dave Erickson who knows what we're going to present.  I'm not going to tell you today what that is, but it's enormous potential for our company and I'm going to invite each of you to MedHab and show you some of the things that we're doing again and make that announcement at that point in time.  I believe that announcement will be the catalyst that spars the growth and revenue generation that MedHab needs, not only to sustain our business but to create the jobs we intend and have contracted to do. With that I want to thank each of you for your time and open it up for any questions you might have.

Questions arose about the agreement and contract, which COSADC staff did not have in front of them.  Ex-Mayor Alvin New remains on MedHab's Board of Directors.  Board member Tommy Hiebert asked Ross what do you have in San Angelo now?

Can you be a little bit more clear on what you mean? 

Hiebert clarified it with what operations, administrative functions, manufacturing are here?  What's happening at the incubator?

Right now all of our software development, IT is here.

Except for the software UTA students are employed to develop MedHab's third product which will focus on healthcare prevention.  

IT will remain here.  All of our distribution is here and yhat department will grow as revenue dictates.  As stated our contract manufacturing is done at Spartan South Dakota, but Medicare requires redundancy sites.  So we will always continue to have presence in South Dakota to do manufacturing, but we will bring some of that manufacturing here as well.  We will do that with all products that we manufacture.  

But what happens is the product is actually, the harness if you will, all the components are put together now in South Dakota, sent to Rhode Island and put into the inserts, the polymer, and then it comes back here for distribution.  So we have, like I said, the six employees here.  The vast majority of their functions today is IT development and they are now building the services and website necessary to support the call center which will be here and the technical support, which we anticipate hiring a few of those right after the new year.  

We may need to do it sooner than that because we're actually doing a phase 1 clinical trial with Steve Martin over at West Texas Rehab right now.  Once that clinical trial is done, it's about a 45 day trial capturing data and then from there it moves to a phase 2 trial that our medical director Dr. John Early is doing at UT Southwestern.  September 1 is the kickoff date for the University of Southern California to do their study and now this new one with Colorado is coming up.  As you can see we're going to have to start making sure those systems are in place so we can create the jobs to support that.  But distribution and IT is what we're doing right now today.

Hiebert asked what dictates moving a portion of production from South Dakota to San Angelo?

I don't think workforce is a problem.  It's a matter of, the first step that we need to do is make sure that the consistency that we can have a manufacturing process that allows for a 1% failure rate or less.  We're moving to that very quickly in the short runs.  Once that process is cast in stone.  The FDA is going to go to South Dakota.  They're going to check that to make sure that it is what it is.  Once that's done and revenue dictates, because we can't do this in the incubator.  There's not enough space.  We've developed machines, they're not big machines but they're tabletop machines and we have to continue to bring more and more of those in to test and manufacture the product.  Once all those are done and in place, all the systems they are in place, we'll move that here.  I don't anticipate that happening until we have our own building because we don't have the space here.  That building, if you've been in there lately, is all chopped up.

Hiebert noted getting manufacturing jobs here is a huge, huge thing and asked COSADC staff to help MedHab secure a location.

We've talked about it and I can't tell you if it will be three months from now or a year from now.  I don't know because it's all revenue dependent.  I can tell you there's a number in my mind, which is 20,000 units.  That is when we have to start looking because we know we have to ramp up at that point in time.  I believe the announcement that we're going to make next week and what we're doing with that will have a big part in getting that unit.

If we think what's going to happen with this announcement we start generating the revenue that we believe we'll generate, then we'll need to start looking at a building.

Hiebert encouraged Ross to do that as quickly as humanly possible to get the jobs here.  Hear, hear!

I hope to see everyone in about ten days at MedHab.

It's been eleven business days, so that announcement should come soon.

Update 9-14-14:  MedHab announced a white paper of their product review by Dr. Kelly Brooks from February 2013.  Presently, she serves as the Editor-in-Chief for the Journal of Sport and Human Performance.

Creation of Primary Jobs: Hirschfeld Energy & MedHab

San Angelo's City Council approved a $5.6 million economic incentive package for up to 225 jobs at Martifer-Hirschfeld Energy Systems and a $3.6 million deal for up to 227 jobs at MedHab, which planned to locate its production site in San Angelo.  The deals came from the COSADC, the city's development corporation.

Hirschfeld (minus Martifer) Energy received funds for employing 181 people through December 31, 2011.  However, they backslid in 2012 dropping to 155 employees in Q4.  That meant Hirschfeld owed the city for 26 jobs, as they didn't last the required three years.   Here's how the COSADC 2012 Annual Report described the situation:

COSADC and Legal staff are currently working with the company to determine the long range employment goals for the company and a schedule for repayment of any funds due.

City Council considered this subject in April 2014, moving it from the public agenda to executive session.  Neither Council nor COSADC have publicly addressed this issue since this executive session discussion.

Hirschfeld's 2013 performance should be in by now.  How did they do last year with their focus on oil and gas tanks/vessels?  The public has a right to know how that potential $5.6 million in public subsidy turned into actual jobs. 

COSADC board member Tommy Hiebert spent considerable time emphasizing the development corporation's legal obligation to fund primary job creation with half cent sales tax money in last month's meeting.  Coincidentally, MedHab founder and CEO Johnny Ross gave an update that very meeting.

Hiebert heard Ross explain how MedHab moved their high tech shoe insert production from Athens, Texas to Watertown, South Dakota.  Ross seemed unmoved by Hiebert's request to move his company's primary manufacturing site to San Angelo, however he did dangle MedHab's charger assembly as a good fit for production here.  Ross stated they'd make the charger and sell it to themselves.  Reading between the lines, it sounded like the charger business might be a separate company.  We'll see if a separate economic incentive arises for MedHab's charger assembly.

MedHab has six employees as of last week.  That's nearly 70 short of their stated commitment of 75.  Hirschfeld was 70 short of their commitment, but that data is twenty months old.  MedHab CEO Johnny Ross finally showed up.  Maybe Hirschfeld will do likewise.

Look for a report from someone soon.  It's their primary job to create primary jobs and report how deals have worked out.

Update 3-11-15:  The City of San Angelo is suing Hirschfeld Energy for failure to fulfill its economic development agreement.  

City Staff Control Board Appointments

The answer finally came as to why four board applications for the Animal Shelter Advisory Board never received any action, much less a response.  City Clerk Alicia Ramirez

"I work very closely with the individual board liaisons to make these appointments."

"Board liaison" sounds like she might be working with members from the individual boards to get new blood.  I looked up board liaison on the city's website.  Nope, it's city staff.  That means Animal Shelter Board Liaison Julie Vrana screened out these four applications in favor of two other appointees.

"Whenever I receive applications to serve on these different boards, the criteria, membership criteria says preferred.  We don't always get individuals that meet that criteria.  We try real hard to recruit individuals with that background experience.  But sometimes if a council member comes to me saying, "No, I want this person appointed," then I submit it to the council as a whole and that's where it's approved."

This language is twisted given the four applicants are strong leaders in local nonprofit animal service organizations and the two appointees were not.

Alicia Ramirez implied that City Councilman Johnny Silvas forced an appointee who wants community cats starved and poisoned in violation of state laws against animal cruelty.  Silvas did withdraw the application for one meeting after these concerns were shared.  Yet, he resubmitted it with the following justification:

The City Staff were in total agreement with her appointment.  Many thought that she would bring a "balance" to the group as a whole.   

Silvas cited staff's, not his strong desire, for this appointee.  This is the typical, maddening mix of responses frequently offered by city staff and elected leaders.

So how have these appointees done in their new term on the Animal Shelter Advisory Board?  The public has no idea, given the website only shows four agendas.  There are no meeting minutes from January, February, April or July.  It's now September.

City Council repeated has used the policy board excuse to go light on staff not performing their jobs.  City Council members invite the public to serve on these boards.  They have a right to know that applications are treated with respect and dignity.

Animal advocates, the people donating significant time, money and other resources to care for San Angelo's lost, injured or unwanted animals are the kind of folks the city requires be on the board.  Why the situation is otherwise deserves exploration and examination.

Council not only has the right to ask for this, it has the obligation.  That is if Council wants the community to believe public service is truly desired. vs. club dealing.

Update 9-15-14:  Jim Turner has a thoughtful piece on San Angelo's various boards on his ConchoInfo blog.  It's worth the read.

City 2014-2015 Budget Surprises

City Council removed the 2014-15 budget from the consent agenda.  I found the following Council observations interesting.

City engineering has gone down

The city's resources in both engineering and water engineering are depleted.  If the city is budgeting for less people, expect lots more consulting arrangements at multiples of the cost.  Remaining engineering staff are overwhelmed and lengthy delays are costing the city huge amounts.  The PaulAnn Street extension rose $250,000 or 50%.  That's for a project with a third less street surface.  City Engineer Ryan Ward said the majority of the increase is for materials. 

What does a 50% materials increase do to City Manager Daniel Valenzuela's street plan?  It turns an eight year plan into a twelve year plan, which is where the city started.  

Master developer will be carried over if project is not complete September 30

The city knows this project will not be completed this month.  Council recently approved Phase 2 of Downtown Master Development.   In addition most city leaders know the employment of a master developer is contractual requirement.

Maintenance has not gone up.  The City needs to do preventive maintenance.

The city is contracting out nearly every maintenance trade.  Staff made no comments on the city's strategies for maintenance.  No one on City Council asked why the city recently issued numerous RFP's for maintenance.

Training and travel is ample for City Council and top City leaders.  It's lacking for other departments in city government.

The city lacks an organization wide education and training plan.  Funds are available for top leaders, staff and elected.  The message is lower level people don't need to keep up to date.

Alvin New Still on MedHab Board

The City of San Angelo Development Corporation heard its second public update by MedHab CEO Johnny Ross since the city granted a  $3.6 million economic development incentive package.  City Council approved the package in January 2012, inking the contract in August of the same year.  Council changed the city's ethics standards such that Alvin New could remain Mayor, as well as a significant MedHab investor and member of the company's Board of Directors.  City leaders tried to pass off Mayor New's role as a member of MedHab's Advisory board.  This blogger caught that lie, which the Standard Times Kia Collier kindly broadcast. 

Fast forward to today, where City Council members can no longer remain in their position if the City provides economic development money to an entity they own or in which they have a stake.  This change came about from Mayor New's replacement, former City Councilman Dwain Morrison, the sole dissenter in awarding the MedHab incentive package.

MedHab CEO Johnny Ross held his cards close to his chest on prior promises and future plans of employment, the main reason for the incentive award.  Over thirty months ago City Council leaders' eyes danced with visions of 227 new jobs.  The August 27, 2014 COSADC agenda packet said MedHab had 4 jobs in San Angelo.  Ross noted with the hiring of one last week, the company now had six San Angelo employees. 

Ross's presentation felt like a sales pitch.  The series of slides on product features may have been impressive for a physical therapy convention, but seemed overkill for an economic development board.

Of his twenty or so slides only one dealt with MedHab's progress, with remarkably little on the $3.6 million incentive package.

One COSADC member was relieved to learn that Alvin New remains on MedHab's Board.  New intends to make big money from his series of investments in MedHab.  I imagine his board service provides significant equity compensation, which would be realized in any sale of MedHab.

COSADC board members learned MedHab's production site moved from Athens, Texas to Watertown, South Dakota.  This does not fit with MedHab's public language, saying San Angelo would be the company's production and manufacturing site.

"It's a manufacturing facility, so it's the primary type of job we would like to have," Mayor Alvin New said. "It's not recirculating money."

Numerous COSADC members encouraged Ross to move MedHab's South Dakota manufacturing jobs here.  Think about that this Labor Day weekend.

Fredd Adams Back After Felony Conviction

San Angelo's City Council appointed Fredd B. Adams II to the Zoning Board of Adjustments.  The unanimous vote came with no discussion.  Citizens may recall Adams third degree felony conviction in January 2013, where he plead guilty to his third driving while intoxicated (DWI) offense.  The Standard Times reported:

Adams was sentenced to seven years in prison, but the sentence was suspended. He was placed on probation for seven years, fined $1,500, given 160 hours of community service, and sentenced to 10 days in jail as a condition of his community supervision. Woodward read out the conditions of probation: 

• Adams will be allowed only restricted travel outside the state. 
• He will pay a $60 monthly community service support fee starting in March. 
• He will pay or make arrangements to pay his fine plus a Crime Stoppers fee, court costs and a DNA fee. 
• He is prohibited from committing other offenses, possessing or consuming narcotics or illegal drugs except under a doctor's prescription, going to bars, consuming alcohol or associating with other felons. 
• He will meet with a probation officer once per month, take a DWI intervention program, and attend Alcoholics Anonymous meetings twice per week. 
•  He will perform 160 hours of community service at a minimum rate of 10 hours per month. 
• He is prohibited from driving, and his license is suspended for two years. 
• He is on curfew every day from 10 p.m. to 6 a.m., with exceptions possible that involve his work as a funeral home director.

One might have expected Fredd to be there in person to talk about his actions since his conviction, how he's made restitution and wishes to contribute to the community again.  He did not.  No one spoke to Fredd's public arrest/conviction or his compliance with court imposed conditions of probation.

To be a San Angelo firefighter a candidate must be "of good moral character with temperate habits.  Applicants with a felony conviction will not be accepted under state laws."

The application Fredd completed states in small print at the bottom:

If you been convicted of a MISDEMEANOR or FELONY, and/or placed on probation, fined or given a suspended sentence such as pretrial diversion or deferred adjudication in court within the last ten years, disclosure of such should be forwarded under separate cover. For a complete copy of the Code of Ethics, contact the City Clerk at 657-4405. 

Did Adams complete the required disclosure?  If so, why was this information withheld from the public?  City Council ordinances state:

It is the responsibility of council members to publicly share substantive information that is relevant to a matter under consideration that they have received from sources outside of the public decision- making process with all other council members and the public prior to taking action on the matter. 

City Councilman Fredd Adams resigned in a firestorm seventeen months ago.  He returned to public service as a member of the Zoning Board with no discussion on what happened since and what makes him an ideal candidate today.

The public deserves to know the "method behind the City's madness," a phrase used several times by Public Information Officer Anthony Wilson as to why and how the city does what it does.

Citizen Jim Turner, also a member of the Zoning Board of Adjustments, cited the city's moves to share less information on several fronts as it purports to be more open with the public.  The information void on the reappointment of Fredd Adams to public service may or may not fit into this category, however I expected some discussion on Fredd's arc since his precipitous fall.  Council and staff failed to address the elephant in the room.  There's no denying that.