California treasurer seeks probe of municipal bond agency

California Treasurer Bill Lockyer has asked the state attorney general to investigate whether conflict-of-interest laws were broken at one of the state’s biggest issuers of municipal debt.

Lockyer’s request follows the release of a report by the State Audits Bureau that said the compensation arrangements at the California Statewide Communities Development Authority raise concerns about possible violations of the Political Reform Act. The law prohibits public officials from making, participating in or influencing decisions that affect them financially.

The audit bureau couldn’t conclude that the compensation structure used by the agency to pay consultants that do its work violates the law, according to the report.

The report said the authority employs HB Capital Resources of Walnut Creek, Calif., for management services under a no-bid contract that pays the company a percentage of the debt issued. The agency has sold more than $48 billion of securities since it was set up.

“The problems identified in the auditor’s report are sufficiently serious and substantial to warrant an investigation by the attorney general to determine if conflict of interest laws have been violated,” Lockyer said Thursday in a statement.

The management arrangement gives HB Capital a financial interest in persuading local officials to approve bond sales by the authority, Lockyer said. The Joint Legislative Audit Committee ordered the study a year ago at Lockyer’s urging.

The treasurer voiced concern at the time that the joint-powers law that provides the bonding agency’s legal foundation had been hijacked to produce gains for non-government firms.

“We’re pleased but not surprised that the auditor found California Communities’ business practices to be in full compliance with the law,” Larry Combs, the authority’s chairman, said in a statement that also represented HB Capital’s response. “We’re very proud of California Communities’ positive 24-year track record.”

The audit report called for better transparency regarding how the authority’s management company compensates its own employees and for periodically seeking bids for the contract held by HB Capital. It also called on the Legislature to enact an exemption to the conflict-of-interest law for the firm and others that do similar work for conduit agencies.