Bookkeeping practices at San Diego City Hall were so muddled that officials last year stopped auditing Mission Bay percentage leases, the lucrative rental agreements that direct a portion of tenants’ profits to the public treasury, an independent report has found.
The decision by Mayor Todd Gloria and his aides to suspend routine oversight of bayfront leases for nine months raised the city’s risk of losing money at the same time it was confronting major shortfalls in revenue.
It also prevented San Diego from imposing late fees and other penalties on tenants that failed to pay rent on time or otherwise meet the terms of their leases, the City Auditor’s Office reported.
“The treasurer’s revenue-auditing role was hindered by a moratorium implemented by city management,” the Mission Bay and San Diego Regional Parks Improvement Funds audit said.
“We could not confirm that all Mission Bay lease revenue payments in (fiscal year) 2024 have been applied appropriately and the correct amount of funds were transferred to (the park improvement funds),” it added.
City officials told the auditors they stopped the monthly lease reviews in July 2024 because they were so far behind.
Last December, the Economic Development Department revoked the treasurer’s access to the reporting software it relies on to reconcile the monthly payments, the audit said. Officials also denied the Auditor’s Office access to the data to compile its review.
“Therefore, many planned audits could not begin and completed audits by the treasurer could not be issued,” the outside audit said.
The treasurer’s reviews were reinstated in April.
“According to EDD, a moratorium was necessary to allow for a true opportunity to improve business processes for accurate reporting, improve customer experience and improve resource allocation of affected city staff,” the report said.
The city’s formal audit response was signed by the mayor himself. Gloria agreed with each of the audit recommendations, although he reserved the right to stop reconciling percentage-lease revenue again if needed.
“Management recognizes that in rare circumstances, it may be necessary to temporarily suspend or defer lease audit activity when doing so is in the city’s overall best interest,” the mayor wrote to City Auditor Andy Hanau.
“However, should a moratorium or suspension be required in the future, city management will promptly notify both the Office of the City Auditor and the chair of the audit committee,” Gloria added.
The audit also noted that more than a third of the Mission Bay leases are on holdover status, meaning they have expired and generally converted to month-to-month status. Most of those contracts lapsed eight or more years ago.
City rules require holdover leases to be appraised to make sure they comply with fair-market rates. They also require the Economic Development Department to seek City Council approval for renewals or extensions.
“However, EDD has not renewed the expired leases, sought council approval or conducted site appraisals to ensure the expired lease agreements have provided revenue to the city at fair-market rent rate,” the audit said.
“As a result, the city is potentially receiving less than fair market rent rate for Mission Bay properties,” it said.
The audit, which was released earlier this month and presented to the council’s audit committee last week, is part of an ongoing review of the park-improvement funds that are used to pay for routine improvements to public open spaces.
Under existing policy, the first $20 million a year is directed to the city’s general fund. The Mission Bay Improvement Fund and San Diego Regional Parks Improvement Fund share the balance, which is generally millions of dollars a year.
In 2023, the latest year for which data was included, the Mission Bay fund generated $12.8 million in revenue and $7.7 million in spending. The regional parks fund took in $6.8 million and spent $1.5 million.
Stricter oversight of the leases along Mission Bay could raise city revenues, the audit found. During the budget season that ended in June, the city struggled to close a more than $250 million gap between revenue and spending.
The city’s precarious budget prompted the mayor and council to approve a spate of service cuts and new fees, including parking in Balboa Park.
The independent report also was released as the Gloria administration pushes ahead with efforts to remake three Mission Bay properties, two aging marinas and a seafood restaurant.
Earlier this year, after the state refused to exempt the three properties from the Surplus Lands Act, the city proposed declaring them surplus to attract developers. But council members put the brakes on that effort amid public criticism, and the Mayor’s Office later walked back the plan to instead work with senior state officials for exemptions.
The new 46-page audit included five specific recommendations aimed at preventing logjams in monitoring the percentage-lease contracts going forward — and doing more to ensure leases are generating appropriate revenue.
They include issuing written guidance that discourages imposing future moratoria on internal audits, verifying lease terms at least annually and developing stronger policies and control checks on rental agreements.
They also include making sure that expired leases are evaluated and brought to the City Council and that the two park-improvement committees are provided more details about upgrades and new projects.
Gloria said it would take time to implement the recommendations but estimated they would be completed by the end of next June.