School bond reforms sought

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.

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.

County treasurers and some public finance professionals have written to the federal Municipal Securities Rulemaking Board complaining that school districts frequently ask securities brokers for political donations. Piper Jaffray officials wrote that the firm has encountered the practice the most in California and Colorado.

A securities broker in California, who spoke on the condition that his name not be used, said underwriters and other financial professionals practically get shaken down to donate to school bond campaigns.

“Right out of the chute we’ve been asked, ‘Will you support ballot measures?’ ” the broker said. “This is overt. The number of times this goes on is egregious.”

In a survey of five major firms that underwrite California school bonds, The Times found that in 65 issues over the last three years, virtually every securities broker that was hired by a district contributed to the measure’s political campaign, according to records from the federal Municipal Securities Rulemaking Board.

A recent study by New York University and the University of Colorado, which focused on California school bond measures, found that postelection fees paid to underwriters that contributed to bond campaigns were on average $27,576 higher than those paid to brokers that did not donate.

“The behavior reflects lingering concerns over pay-to-play practices ... while raising serious questions about the circumvention of state and local regulations restricting the use of public resources in election campaigns,” wrote professors Todd Ely of Colorado and Chad Calabrese of NYU.

Some of Lockyer’s concerns are apparent in the way Measure A played out for Garden Grove Unified, the state’s 12th largest district. George K. Baum & Co. was the only underwriter to make a proposal to Garden Grove.

Company documents submitted to the district in October 2009 spelled out that the firm would provide all campaign services free of charge if the measure failed. If it passed, Baum would receive 1.1% of the value of the bonds sold.

The amount was significantly higher than the average of 0.6% charged by underwriters for the type of bonds Garden Grove eventually sold, according to a 2010 annual review by the Bond Buyer, which covers the municipal securities market.

During the campaign for Measure A, a variety of construction companies donated from $2,000 to $24,000 each, records show. While those supporters contributed the most as a group, Baum was the only underwriter -- and the largest single donor with contributions of $25,000 in cash, plus campaign services the firm valued at $10,000, according to campaign disclosure statements.

On election day, 63.8% of district voters approved the $250-million bond issue. Baum was never specifically paid for its campaign donations but received $1.43 million from the first bond sale.

Baum officials and the district declined to answer specific questions about the bond campaign, except to say their relationship was proper and the firm’s political donations and campaign services did not play a role in its hiring.

Garden Grove spokesman Alan Trudell said “unequivocally” that district officials were unaware of Baum’s contributions of money and services until after their measure passed.

School board President George West and Vice President Lan Quoc Nguyen declined to comment on the bond issue, which was the first their board had handled.

Two other board members said they did not know that Baum had offered any campaign support when they approved the contract.

David Walrath, a spokesman for the Small School Districts Assn. in California, said any hint of pay-to-play impropriety could be avoided if school districts relied on competitive bidding to select underwriters.

And if Wagner’s bill passes, campaign services and contributions like Baum’s would be outlawed.

Such reforms, however, have faced opposition in Sacramento from the financial industry and education groups representing school districts, superintendents and school boards.

Three other bills to ban donations from underwriters and one measure to require competitive bidding have been introduced in the past eight years.

All died in committee.

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dan.weikel@latimes.com