Private firm HB Capital Resources has rich role in municipal bonds
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.
Though the CSCDA markets itself as a low-cost alternative, a Times analysis of public records shows that it charges its clients higher fees, per dollar borrowed, than the large government-run financing agencies with which it competes. Last year the CSCDA charged fees ranging from 80% to 400% more, per dollar borrowed, than the leading state-run bond issuers in California — the California Health Facilities Financing Authority and the California Educational Facilities Authority.
Competitors said the pursuit of fees has led HB Capital’s agencies to take on riskier borrowers.
A dozen CSCDA bonds have encountered credit difficulties since 2009, said Matt Fabian, an analyst at Municipal Market Advisors, a leading bond research firm. Among the thousands of municipal bond issuers in the United States, only one, the Illinois Finance Authority, has had more deals that struggled to pay back investors over the same time period, he said.
The new Wisconsin agency has already shown a willingness to underwrite deals that traditional agencies have refused.
The SearStone retirement community in Cary, N.C., in December received approval from the Public Finance Authority to issue as much as $125 million in municipal bonds after the North Carolina Medical Care Commission turned down the transaction as too risky for investors.
Hamill said his agencies’ fees and credit standards are comparable to those of other issuers, and that competitors have been critical because they “may be threatened by a positive choice and a new and better way of issuing public-benefit bonds.”
He said the lone default on which investors lost money was an unusual $155-million financing deal that the CSCDA arranged for United Airlines facilities at San Francisco International Airport.
HB Capital has been accused by state and local bond authorities of skirting public oversight. The state-run bond agencies in California answer to the state treasurer and are legally required to post their staff reports, meeting minutes and financial data on their websites. The CSCDA has, until recently, been subject to less stringent rules about posting of such information and giving advance notice of its meetings.
Hamill said his staff does a lengthy screening of any bond being considered and gets approval from elected officials in the project area, ensuring public accountability.
Public finance authorities are generally run by salaried government bureaucrats; at California’s state-run agencies, the most anyone earns is $120,000 a year. Hamill and Burke came up with a different model when they left Alameda County and founded HB Capital in 1987. They channeled fees from the public organization to their own firm, pocketing the profits.
Over the last two years, the CSCDA has issued conduit bonds on behalf of a variety of nonprofits and developments including nursing homes, low-income housing developments and a private airport. Nearly two-thirds of its total revenue, or $19 million, has gone to the staff at HB Capital, with most of the rest going for marketing, CSCDA records show.
The salaries of government employees at traditional financing agencies are public information. The CSCDA, however, declined to release the compensation received by Hamill and Burke, citing HB Capital’s status as a private contractor.
Public records do show that Hamill, 60, and Burke, 64, both own homes in the Bay Area that assessors have valued at about $3 million each. Hamill also has a Lake Tahoe home assessed at $3 million, and Burke has a beachfront property in Hawaii for which he recently took out a $2.5-million mortgage, records show.
Hamill has a 1988 Lotus sports car that carries the license plate “BONDZ4U,” according to state Department of Motor Vehicles records.
Hamill said the money that he and Burke make is “irrelevant” and that their agencies’ fees differ from those of traditional issuers because they offer a wider range of products.
“We’re out there providing a public service, and a byproduct of that is that HB Capital is compensated,” Hamill said.
HB Capital first sought to go national from California, pushing state legislation that would have allowed it to issue bonds anywhere in the country. That effort died after a report by Senate staffers indicating that the CSCDA’s fees were higher than those of state issuers and that the agency was not subject to the same oversight.
HB Capital got a friendlier reception in Wisconsin, where the new Public Finance Authority is making decisions on bond issues for borrowers such as a Colorado charter school and a Florida housing project.
Keith Langenhahn, the chairman of the PFA’s board, defended his board, saying, “If we can make good decisions in our state, why wouldn’t we be capable of making good decisions in Colorado?”
Times staff writer Marc Lifsher contributed to this report.
