State To Consider Outlawing Emery Style School Bond Corruption
A school district wants money to improve its facilities so they put a school bond on the ballot for voters to decide. The district accepts money from a bond underwriting corporation to fund the election campaign in favor of the bond. Then after the election is won at the polls, the school district turns around and gives the bond underwriting contract, worth millions of dollars, to the same corporation that "donated" money for the election campaign.
It's a disturbing scenario for those who favor transparency in government and democracy as a general thing and it's exactly what happened in Emeryville in 2010 when the bond underwriting corporation Caldwell, Flores and Winter "donated" $10,500 and its vice president chipped in $1000 to help fund the Measure J campaign, a $95 million school bond. After Measure J passed, the Emery Unified School District awarded Caldwell, Flores and Winter the contract to issue the bonds, a contract worth millions of dollars and paid by Emeryville taxpayers.
As is the case with all public sector/private sector pay-to-play schemes, it's all perfectly legal as long as Emery School District continues to insist that there was no prior agreement, no quid pro quo with Caldwell. Barring any paper trail or recording that would point to such an agreement, there's no way the State could prove any malfeasance on Emery's part.
There may be change coming however. The Bay Citizen reports on corruption in school bond issuance across the State; a county treasurer said that when contributions influence the hiring of an underwriter instead of a competitive process, "we all end up paying for that as taxpayers."
It's a major shake-up in the nexus between school districts and private bond underwriters that Emery Unified School District is right in the middle of. If the State gets its way, what Emery did in 2010 will be illegal.
Here's the Bay Citizen story:
Regulators urged to crack down on donations to bond measures
Federal board seeks feedback on proposal to expand disclosure of contributions
Critics of political donations to school bond campaigns from companies that profit from the bonds are urging federal regulators to take bolder steps against what they call a “pay to play” practice.
The California Association of County Treasurers and Tax Collectors, as well as some financial firms, called on the Municipal Securities Rulemaking Board this month to consider banning donations from bond underwriters to bond campaigns.
The federal board had solicited feedback, much of which came in just before the Monday deadline, on a more cautious proposal to expand public disclosure of such donations. The board stated that enhanced transparency would help it decide whether more regulations – including a ban on the donations – would be necessary.
A financial industry trade association pushed back on some of the proposed regulations, and a conservative legal organization, the Center for Competitive Politics, argued that a ban would be unconstitutional.
An earlier story by California Watch, sister site of The Bay Citizen, found that leading bond underwriters gave $1.8 million over the last five years to successful school bond measures in California, and in almost every case, school districts gave underwriting contracts to those same firms.
In Alameda County last year, for example, a $63 million bond measure campaign for the Newark Unified School District received $20,000 from the underwriter hired by the district, De La Rosa & Co.
Underwriters are middlemen who buy bonds from school districts and sell them to investors. While critics believe the campaign contributions affect school districts’ hiring of specific underwriters, the companies and school officials insist there is no influence.
Federal authorities already mandate disclosure of the contributions, but the proposed changes would require more information, such as the contribution date and the date an underwriter is hired. The changes also ask for more complete reporting of in-kind contributions, such as election-related work provided free of charge.
The additional information would help the Municipal Securities Rulemaking Board determine whether more restrictions are needed, said Ernesto Lanza, deputy executive director and chief legal officer.
Lanza said stories by California Watch and The Bond Buyer, a trade publication, helped trigger the new proposed rules.
"We want to make sure we have a very good handle on the level of potential problems being created in the marketplace," Lanza said. "You have groups of people who give (contributions) and the same people by and large get the business, but is it causal or not?"
The California county treasurers group supported the changes and advocated [PDF] that the board "go one step further" in banning the contributions outright.
Wayne Hammar, president of the association and Siskiyou County treasurer, said in an interview that when contributions influence the hiring of an underwriter instead of a competitive process, "we all end up paying for that as taxpayers."
Hammar said he hoped strengthening disclosure would keep underwriters "on their toes so that they know that people are watching them."
Two California companies that serve as financial advisers to local governments on bond issues, Magis Advisors and Government Financial Strategies, also pushed for more public disclosure – requiring more timely and searchable reporting of campaign contributions. Some financial advisers also make contributions to bond measures.
"Government Financial Strategies is concerned about the lack of transparency in how school bond campaigns are funded, frequently by interested parties and in significant amounts, and how this leads to corruption," according to the Sacramento firm's statement [PDF] to the board.
On the other hand, the Securities Industry and Financial Markets Association, whose membership includes underwriting companies that make campaign contributions, objected [PDF] to some of the proposed regulations.
The association stated that its members "generally support transparency as a way to eliminate any possible perception of impropriety," but argued that some additional reporting requirements could cause "false positives," rousing suspicion where none is warranted. The group also said it could be impossible to pinpoint the exact date an underwriter is hired by a local government.
The Center for Competitive Politics, which advocates and litigates against campaign finance regulations, warned [PDF] securities officials that they are treading on constitutionally shaky ground. Any effort to curtail contributions probably would be challenged in court, said Allen Dickerson, the center's legal director.
The courts have upheld limiting contributions directly to candidates, but not to ballot measures. Candidates can be corrupted, the logic goes, but ballot measures can't.
The Center for Competitive Politics helped give birth to the current era of super political action committees through a case called SpeechNow.org v. Federal Election Commission. That case expanded on the U.S. Supreme Court's decision in Citizens United v. FEC, which struck down limits on corporate and union political spending.
Even the bond board's proposed disclosure requirements are problematic, Dickerson said – it seems officials are trying to "manufacture" evidence of a problem that hasn't been proven.
"To put out a regulation that will impose burdens on organizations just because we thought it might be interesting isn’t a great way to regulate," he said.
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