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Managing City Legal Costs:
Are We Busting the Budget?
Finance Chair Tom McGreal and Mayor Dwight Worden

Questions have been raised about whether the City of Del Mar’s legal costs are putting a strain on the budget and creating undue financial risk. In a prior issue the Sandpiper addressed some of the questions in its News Update Column entitled “City Suits.” We also asked Mayor Dwight Worden, a retired lawyer and prior city attorney, and Tom McGreal, Chair of the City Finance Committee, to provide us with a deeper look. The following is their report.

Background. Every city has a City Attorney. Larger cities typically hire an in-house counsel who works full time for the city. This is typically the most expensive route to go given all the related employment costs and benefits. Moreover, one or even two in-house attorneys can never have expertise in all the subject matters that cities face requiring significant additional budgets for hiring outside specialist counsel at higher hourly rates when needed.

Del Mar follows the more cost-effective approach of hiring a contract legal firm to provide city attorney services. Currently, that firm is Devaney, Pate, Morris & Cameron (DPMC) containing lawyers and staff with deep background and experience in all phases of municipal law. Cost savings come to Del Mar in that the city only pays for the lawyers and services it needs and the law firm carries the burden of insurance, benefits, and overhead, keeping lawyers in a variety of fields on standby. This is by far the most cost-effective way for Del Mar to access legal services. Del Mar hires its contract law firm through a competitive process, gives its city attorneys regular performance reviews, and retains the option to go back out to the market to change firms when needed.

The Range of Legal Services. Del Mar’s contract with its city attorney firm calls for payment of a monthly retainer of $18,000 per month. This amount covers all services except for litigation, claims, and “special projects.” Litigation, claims, and special projects are billed separately on an hourly basis. Special projects include those that are anticipated to require more than 20 hours of attorney time and must be pre-approved by the Council.

Litigation and Claims. The city faces regular claims for damage, arising from sewer backups, pothole damage, trip and fall claims, and so on. In addition, the city occasionally gets sued, or initiates a suit -- for example, to enforce city laws/ordinances -- sometimes recovering money for the city. Estimates to cover these costs are included in the budget if they are known at the time that the city prepares the budget, or the budget can be adjusted during the mid-year budget review process.

Special Projects. These are projects the city deems important that require significant additional legal services beyond what is covered by the retainer. These include review of major developments like the City Hall project, Watermark, the Garden redo, the Bully’s makeover, our new roundabout, short term rental regulations, law enforcement services, and the North Bluff Resort. An estimate for these legal services is also included in the budget if the city knows these costs at the time the budget is prepared or they can be adjusted for during the mid-year budget process. In the case of large developments, legal costs are passed through to the developer or offset by development fees.
How is Del Mar Doing? Here are some reasonable benchmarks for evaluating how Del Mar is doing in the legal arena:

1. Does the City Budget cover the Legal costs? Yes. Below is the explanation of the Legal costs and the Budget.

Legal Cost forecast for 2018:

  6 Month Actual 2018 Forecast
City Attorney Retainer $108,000 $216,500
Litigation / Claims $387,500 $667,400
Special Projects $76,500 $188,800
Total Legal Costs $572,500 $1,072,500

2018 Budget available for Legal Costs:

Budget for 2018 $432,000
Transfer from Self Insurance Reserve $225,000
Remaining Carryover from 2017 Budget $417,400
Total Legal Cost Funding $1,074,400


In addition the City has a Special Projects budget in the amount of $648,000 as of the Mid-Year Budget, which can also be used to pay legal expenses that might exceed the above Budget.

2. Is the City initiating a lot of expensive litigation? No. Recent litigation initiated by the city has been to recover money from third parties and has been successful.

3. Is the city losing a lot of cases requiring payouts? No. In the past several years the city has lost no cases. DPMC hasn’t lost any cases since its lawyers were retained in 2009. In addition, DPMC has been successful knocking cases out of court well before trial saving the City from trial costs.

4. Is the city taking actions that generate lawsuits by third parties? The answer is mixed. Most of the actions taken by the city, even when controversial, do not result in litigation. Good up front “special project” legal services assure the city’s actions are defensible, reducing litigation exposure. There are times when the City gets sued because the party is not happy with the outcome of the City’s decision. Suits the city has faced recently include Short Term Rental regulation, Public Records Request process, personnel-action/termination, City Hall CEQA EIR approval, private property parking enforcement, and a train accident on NCTD property.

5. Is the city undertaking special projects that bring high legal costs? Over the past several years the city has taken on many large special projects important to the community: our first roundabout, a new civic center, new sidewalks, a Climate Action Plan, studying policing options, affordable housing options, regulating short term rentals, and more. These incur legal expenses, which may then be covered by the Special Projects budget.

6. Are there other factors driving legal costs? Yes and no. Major new development projects initiated by outside third parties are pending at the City that necessitate special project legal services. These projects have the potential to dramatically change Del Mar, for better or for worse, and require a high level of planning and legal review. They include: Watermark, The North Bluff Resort, the Garden Project redo (now called 941), and the Bully’s makeover. To do a good job of reviewing these projects requires extra legal services. Many legal fees incurred are being passed through to developers at no cost to the City. As a result the city has incurred higher than normal special project legal expenses for good reasons, but many are being passed on to developers.

7. Does the City have Insurance that covers litigation costs and claims? The City has insurance coverage of $50 million subject to the $100,000 deductible, to cover legal expenses of litigation and payouts of litigation claims. This means that the City’s out-of-pocket costs in most litigation are limited to the deductible of $100,000. The City’s insurance does not cover claims relating to “intentional” illegal conduct by the City, which would be against public policy. Plaintiffs may allege intentional misconduct or plead for punitive damages, but findings of this nature must meet a very high legal standard. The City believes that all active and pending litigation would be covered by insurance.

8. Are legal expenses busting the city budget? The City has covered its legal costs in the 2018 Budget and is well insured for litigation-related risks, as outlined above.

 

 

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