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L.A. County won't sell bonds to school bond campaign donors

The county treasurer will end business with banks that donate to school bond campaigns, saying it influences hiring of underwriters. Other counties may follow.

August 06, 2013|By Dan Weikel

In an action that could influence government finance officials statewide, the Los Angeles County treasurer announced Tuesday that his office will no longer do business with securities brokers that make political contributions to school bond campaigns.

Mark J. Saladino, whose agency is one of the largest issuers of municipal bonds in California, said he adopted the policy to prevent campaign donations from influencing the hiring of underwriters by school districts, and to increase competition between dealers who often charge millions of dollars for their services.

Underwriters are financial institutions that buy government bonds and sell them to investors.

Saladino also has been concerned that some firms try to recover their donations in their underwriting fees, contrary to a state law that prohibits schools from using public funds to support campaigns that try to convince voters to pass such measures. Bonds are typically repaid from tax revenues over a period of years.

Under the new policy, underwriters must not donate to school bond measures if they want to qualify for the treasurer's list of investment banks and securities dealers eligible to sell county bonds. The restriction applies to monetary donations, non-monetary contributions and pre-election services, such as polling, voter outreach and consulting.

The roster of financial firms — now 40 dealers that include some of the nation's largest banks and brokerages — is reviewed and revised every five years. Saladino said the next evaluation is in 2016.

"If they are giving to school bond campaigns, we won't do business with them," Saladino said.

According to the treasurer-tax collector's office, most, if not all, of the current participants already have agreed to the restriction.

Saladino said he had informed other county treasurers about the new rule and planned to notify state Treasurer Bill Lockyer and encourage him to adopt the same restrictions.

Mendocino County Treasurer-Tax Collector Shari L. Schapmire, president of the California Assn. of County Treasurers and Tax Collectors, said her organization supports Saladino's policy. She added that there was potential for some of the large counties in the state to adopt similar measures.

"This is an interesting first step. It's in the right direction," said San Diego County Treasurer-Tax Collector Dan McAllister. Banning such a potential conflict of interest "has been raised for years in the state Legislature. We've gotten a big goose egg. Nothing to show for it. But what is really required is a statewide comprehensive effort that involves all the stakeholders to bring change about."

The latest bill to restrict donations from financial firms stalled in the Senate Governance and Finance Committee this year. The author, Assemblyman Donald P. Wagner (R-Irvine), can still pursue the measure in 2014.

Representatives of the California School Boards Assn. were unavailable for comment Tuesday, and the California Assn. of School Business Officials did not return phone calls. David Walrath of the Small School Districts Assn. said such a restriction, if widely adopted, would create a problem, especially for small school systems in rural areas where little financial support exists for bond campaigns.

Saladino said his policy stemmed from a nationwide effort by major investment banks to prevent underwriters from donating to bond ballot measures.

Last month, 12 financial institutions pledged not to make contributions to bond measures they seek to underwrite. They include Morgan Stanley & Co., Wells Fargo Securities, J.P. Morgan Securities, Goldman Sachs, Barclays Capital and Merrill Lynch.

The group notified the federal Municipal Securities Rulemaking Board, which has been considering whether to prohibit underwriters from contributing to the agency's bond campaign if they are seeking business from that agency.

Lockyer, county treasurers and many investment bankers are concerned that campaign donations can create an uneven playing field for bond businesses at the expense of taxpayers.

In statewide surveys by The Times and other publications, virtually every securities broker hired by a school district contributed to the district's bond campaign and was retained without competitive bidding.

According to numerous studies, competition among underwriters often produces lower interest rates and fees, which can save taxpayers millions of dollars in debt payments for large bond issues.

In addition, a recent study by New York University and the University of Colorado, which focused on California school bond issues, found that post-election fees paid to underwriters that made donations were on average $27,576 higher than those paid to brokers that did not contribute. Researchers said the finding raises serious questions about the circumvention of state and local regulations restricting the use of public resources in election campaigns.

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