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School bond reforms sought

Critics say districts' use of underwriters to campaign is unfair to opponents and, ultimately, taxpayers.

June 03, 2013|Dan Weikel
  • State Treasurer Bill Lockyer has begun calling for bond reform.
State Treasurer Bill Lockyer has begun calling for bond reform. (Robert Durell / Los Angeles…)

When the Garden Grove Unified School District was preparing to seek voter approval for a $250-million bond measure, it hired a securities broker to play a key role in the campaign.

State law bars school districts from spending money to influence the outcome of elections, but not brokers such as George K. Baum & Co.

The firm gave $35,000 in political contributions and, in accordance with its contract, polled voters, wrote the ballot language and provided campaign services.

The 2010 bond measure passed, and Baum -- hired without competitive bidding -- earned $1.43 million for selling the initial $130 million in Garden Grove notes.

For The Record
Los Angeles Times Tuesday, June 11, 2013 Home Edition Main News Part A Page 4 News Desk 1 inches; 45 words Type of Material: Correction
School bonds: An article in the June 3 Section A about the influence of underwriters in school bond campaigns gave an incorrect name for one of the authors of a study of California school bond measures. He is Thad Calabrese of NYU, not Chad Calabrese.

Across the state, bond underwriters have come to play a vital role in ballot campaigns to get hundreds of millions of dollars in school bonds approved.

Their involvement, though, raises questions: Do they play an unfair and improper role in pushing bond measures? Is it against state law?

Alarmed by the trend, county treasurers, legislators and state Treasurer Bill Lockyer have begun calling for reform. They say that campaign support from underwriters contributes to an uneven playing field, where opponents of bond measures are outgunned by powerful private interests that can make generous donations.

Critics also are concerned that because many of these deals are signed before the campaign, they are often done without competitive bidding, which is not required by law but typically can mean lower costs for taxpayers.

"The pay-to-play aspects are troubling," said Assemblyman Donald P. Wagner (R-Irvine), who has introduced a bill to prohibit government entities from hiring financial companies that provide donations or campaign services for bond measures. "It's not in the public interest that this be allowed to continue."

Educators and securities dealers say there is nothing illegal about the practice and no link between a firm's selection and its political contributions or campaign work.

If campaign donations and services provided by underwriters, bond attorneys and financial advisors are restricted, education officials say, it could deny school districts flexibility and violate the 1st Amendment rights of financial firms.

"School boards and school district officials make an honest and sincere effort to do everything they can to fund facilities in their districts," said Jeff Vaca, the government affairs director for the California Assn. of School Business Officials.

About 15 years ago, more government bonds, particularly school bonds, were sold in California by underwriters selected through competitive bidding. After voters approved an issue, brokers would vie for business by offering the lowest fees and interest rates.

According to numerous studies, competitive bidding usually produces the lowest cost. Research shows that interest rates can be reduced as much as 0.77%, compared with dealing with a single broker, known as a negotiated sale. The lower interest can cut debt payments by millions of dollars over the 20- to 30-year life of a $100-million bond issue.

The national Government Finance Officers Assn. recommends competitive bidding, and in Los Angeles, for example, the method is written into the city's administrative code as the favored course.

But school districts have faced a problem. Unable by law to use public funds to support a bond campaign -- a requirement to maintain a district's neutrality -- local educators have turned to private firms that might benefit from the bond sale, such as construction companies, building suppliers and financial professionals.

High on the list are underwriters, who have an incentive to contribute to make sure bond issues succeed. School districts often sign contracts with them before an election, setting the broker's fee and outlining the firm's role in the campaign.

Today, negotiated deals involving a single underwriter outnumber competitive deals almost 6 to 1, compared with less than the 2-1 ratio 10 years ago, according to the state treasurer's office.

The arrangement can tread a fine line. Public money cannot be used to reimburse companies for their campaign work, but determining what is a reimbursement is not easy when a company is paid a single fee for selling the bonds.

Companies cannot provide campaign donations in exchange for getting a contract, which amounts to a bribe. But the incentive for companies to donate is so strong that districts often don't even have to ask.

"It's expected that you kick in money to bond campaigns," said Kern County Assistant Treasurer Jordan Kaufman. "Underwriters have a financial stake in the outcome. If the measure doesn't pass and the bonds aren't issued, they don't get paid."

Still, some districts actively solicit campaign donations.

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