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Reporting from New York — Stephen Hamill and Gerald Burke do jobs normally reserved for public employees. They just make a lot more money doing it.
The former Alameda County public servants have made tens of millions of dollars for their private company by coming up with a novel method of issuing tax-free municipal bonds.
By law, these bonds must be issued by government agencies to finance projects with a public benefit, such as highways and hospitals. Hamill and Burke have harnessed this process for profit by working with a little-known public agency they helped to create called the California Statewide Communities Development Authority.
The CSCDA has emerged as one of the nation's municipal bond kings, issuing $8.1 billion in debt in the last two years — more than the states of Texas and Florida, according to Thomson Reuters, the New York data company.
Though the CSCDA is overseen by a board of public officials, the board farms out almost all of the work to HB Capital Resources, the private firm Hamill and Burke run out of a seventh-floor office suite in Walnut Creek. In addition, Hamill and Burke serve as the agency's general managers.
The CSCDA has collected nearly $32 million in fees from borrowers in the last two years, most of which has gone to HB Capital, public records show.
The agency's board includes the retired city manager of Fairfield and the assistant city manager of Roseville. Minutes from board meetings, however, show that the board usually approves the decisions made by HB Capital's staff with little discussion.
A Los Angeles County staff report concluded in 2008 that CSCDA is a "shell entity operated solely by a private contractor."
The CSCDA specializes in so-called conduit bonds, which are typically used by nonprofit institutions and private companies to finance such entities as nursing homes and charter schools. Hamill said these groups prefer to work with the CSCDA and HB Capital because they provide better service than the government agencies that have traditionally issued muni bonds.
"We represent positive alternatives and effective choices," said Hamill, who along with Burke became an expert on municipal bonds while working as an Alameda County bureaucrat. "We're all about competition."
But there are growing concerns that HB Capital is exploiting what should be a public process for private gain, which could present a potential conflict of interest by encouraging the issuance of tax-free bonds for projects with questionable public benefit.
On Monday, Assemblyman Mike Feuer (D-Los Angeles) asked the Legislature's audit committee to evaluate whether CSCDA complies with state law and is cost-effective.
Feuer also called for an audit of the California Municipal Finance Authority, which was created with the guidance of a former HB Capital employee and operates in similar fashion to the CSCDA. He noted that "issues have been raised about the authorities' effectiveness and transparency."
The Los Angeles County Board of Supervisors in January ended its relationship with the CSCDA over concerns that the agency's credit standards weren't strict enough to protect bondholders or its government clients.
HB Capital is now exporting its financing model nationwide through an agency it launched late last year in Wisconsin. Known as the Public Finance Authority, or PFA, it was given unusual power by the Wisconsin Legislature to issue municipal bonds anywhere in the country.
Officials in some states, including Rhode Island, are urging their legislatures to block the PFA from doing deals in their areas.
"This isn't what municipal finance is about," said Robert Donovan, the head of one of Rhode Island's largest public-bond-issuing authorities. "Pay to play is a dirty word. Now we're looking at pay to issue."
Municipal bonds are attractive to investors because the interest income is free from federal and sometimes state and local taxes. In exchange for the tax benefits, investors are willing to accept lower rates of return, allowing governments to borrow more cheaply.
The CSCDA has become a major player in the business in part by paying millions to municipal groups that steer borrowers its way.
The League of California Cities and the California State Assn. of Counties, which both supported the creation of the CSCDA, got more than $1.5 million each last year for touting the agency to members and helping to run its board. The Wisconsin affiliates are set to receive similar payments, public records show.
The National League of Cities recommends the CSCDA to members because "many of the governments do not have the ability to understand these transactions," according to Cathy Spain, a league official.