CALIFORNIA ELECTIONS / TREASURER : Brown Seeks to Tie Hayes to Claims of Bond Money Misuse

California Health Facilities Financing Authority, incumbent Treasurer Thomas W. Hayes and others are being sued by two counties for allegedly mismanaging a $200-million health facilities bond issue, according to documents released Tuesday by Kathleen Brown, the Democratic candidate for treasurer.

Santa Cruz and Stanislaus counties contend in the unusual legal action that they have lost millions in interest payments while investment bankers, brokers and even the health facilities’ authority have reaped huge financial benefits from handling the $200-million bond issue.

The bond issue touches the administrations of the three officials who have held the office since 1986: the late Treasurer Jesse M. Unruh, who died in August, 1987; Elizabeth M. Whitney, a former Unruh aide who served as acting treasurer, and Hayes, who was confirmed in January, 1989, and is running for the office as a Republican.

The Hayes campaign immediately denounced the release, contending that both the lawsuit and Brown’s press statements were politically motivated and meant to embarrass Hayes.

Hayes aides, in turn, released a petition filed by the office of Atty. Gen. John K. Van de Kamp, a Democrat, seeking to dismiss the case. It argues, in part, that “it is highly likely that Hayes was named solely for the damage it could bring to him and his reputation.”

Specifically, the suit, which was filed in San Jose and alleges securities fraud, asks a federal court to freeze interest earnings from the $200-million proceeds of the health facilities bond sale.

Since 1986, only $56 million of the $200 million has actually been lent to nonprofit agencies to construct health facilities. The counties contend that a Swiss bank, with a branch in the Cayman Islands, alone earned $2.7 million in loan administration fees “during a period when virtually no loans were approved.” Fees also were earned by E.F. Hutton & Co. and Lehman Bros. Inc., both of which also were named in the lawsuit.

The suit is the first to be filed by an agency served by the California Health Facilities Financing Authority.

In January, before the suit was filed, two Santa Cruz County supervisors wrote Hayes a letter complaining that “the chief beneficiaries of the bond issue seem to have been the financial institutions and law and accounting firms which acted with or for the (health facilities) authority.”

William M. Marticorena, a Costa Mesa attorney who is representing Santa Cruz and Stanislaus counties, said, “The state sold this program as a means to help counties provide health facilities at a low cost. Unfortunately, a whole lot of people made a whole lot of money--everyone except the counties.”

Marticorena conceded that many of the causes of action listed in the suit occurred before Hayes became treasurer. But he said that for the last six months, Hayes’ office has been heavily involved in the program.

Suzanne Burton, an assistant state treasurer who sits on the health facilities authority as a proxy for Hayes, called the suit “nonsense.” She said all fees paid to banks, lawyers and consultants were strictly in line with industry standards.

Brown said even though much of the action occurred before Hayes took office he should have stepped in and seen to it that the bond money went for health facilities. “This is another example of Hayes being asleep at the switch,” she said.

The issue marks the latest chapter in the bruising race between Brown and Hayes for the treasurer’s job.

Last week, Hayes cited a report by the California Commission on State Government Organization and Economy, known also as the Little Hoover Commission, sharply criticizing financial practices of the Los Angeles Unified School District during the six years Brown served on that board.

Among other things that Hayes pointed to was a commission finding that the district had “mismanaged” $1.8 billion in taxpayer dollars during the decade of the 1970s.

Brown said she so far has been unable to obtain a copy of the report and would not comment until she did. “I will have a specific response after I’ve had a chance to look at it,” she said.