BILL ANALYSIS Ó
AB 621
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Date of Hearing: May 7, 2013
ASSEMBLY COMMITTEE ON ELECTIONS AND REDISTRICTING
Paul Fong, Chair
AB 621 (Wagner) - As Amended: April 25, 2013
SUBJECT : Local government: bonds.
SUMMARY : Prohibits a local agency from entering into specified
relationships with an individual or firm with respect to a new
issue of bonds requiring voter approval if the individual or
firm provides bond campaign services to the bond campaign.
Specifically, this bill :
1)Prohibits a local agency from entering into a financial
advisory, legal advisory, underwriting, or other similar
relationship with an individual or firm, with respect to a new
issue of bonds that requires voter approval on or after
January 1, 2014, if that individual or firm, or an employee,
agent, or person related to an employee or agent of the
individual or firm, provided or will provide bond campaign
services to the bond campaign.
2)Provides that "bond campaign services," for the purposes of
this bill, includes fundraising, donation by the individual or
firm to the bond campaign, public opinion polling, election
strategy and management, organization of campaign volunteers,
get-out-the-vote services, development of campaign literature,
and advocacy materials.
3)Provides that "bond campaign services" does not include advice
and support related to the preparation of tax rate statement
and other documentation required for inclusion in the voter
pamphlet published by the applicable county registrar of
voters or public opinion polling that is conducted before a
bond measure is placed on the ballot for the purposes of
gathering information regarding, and evaluating the potential
for, the adoption of the bond measure by the electorate.
4)Provides that the term "related," for the purposes of this
bill, includes, but is not limited to, a family relationship,
an affiliation between business associations, or business
associations with directors or principals in common.
EXISTING LAW :
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1)Makes it unlawful for any elected state or local officer,
including any state or local appointee, employee, or
consultant, to use or permit the use of public resources for a
campaign activity, or personal or other purposes which are not
authorized by law, and provides for civil penalties for a
violation of this provision.
2)Makes it a felony for an officer of the state, or of any
county, city, town, or district of the state, to use public
moneys for any purpose not authorized by law. Provides, for
the purposes of this provision, that "public moneys" includes
the proceeds derived from the sale of bonds.
3)Makes it a crime to use school district or community college
district funds, services, supplies, or equipment to urge the
support or defeat of any ballot measure or candidate.
4)Requires counties, cities, and school districts to get voter
approval for long-term debt.
5)Requires the governing board of a school district or community
college district, before selling bonds, to disclose specified
information about the method of sale, the identity of the bond
counsel, underwriter, and financial adviser involved in the
sale, and cost estimates. Requires the governing board, after
the bond sale, to present actual cost information for the sale
at its next scheduled public meeting, and to submit an
itemized summary of costs of the sale to the California Debt
and Investment Advisory Commission.
6)Allows local agencies to issue and sell general obligation
(GO) bonds through the negotiated sale method, and imposes
nearly identical requirements as apply to school districts and
community college districts, as identified above, on any city,
county, city and county, or special district that sells bonds
at a negotiated sale.
FISCAL EFFECT : Keyed non-fiscal by the Legislative Counsel.
COMMENTS :
1)Purpose of the Bill : According to the author:
Currently, it is illegal for school officials to use public
funds to hire political consultants to pass a bond measure.
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However, all over the state, school districts are having
their banks or outside financial advisors hire political
strategists to run the bond campaigns.
When the bonds are approved they end up costing the
taxpayers millions of dollars. For example, one $22 million
borrowing will end up costing taxpayers nearly $280
million. The reason that it grows to such a large amount of
debt being that these are capital appreciation bonds, which
no payments are required for up to 40 years while interest
builds; interest which the taxpayers have to cover.
AB 621 seeks to close this loophole that is being exploited
for the sake of a desire to build with taxpayer money. It
will prevent any local agency from entering into these bond
services with any individual or firm that provided any type
of campaign service for the bond campaign. And in the end,
this will hopefully save taxpayers millions of dollars.
2)Competitive Sales vs. Negotiated Sales of Bonds : "Competitive
sale" and "negotiated sale" are the two principal methods that
public officials use to select an underwriter to purchase
bonds and resell them to investors. In a competitive sale,
underwriters deliver sealed bids and public officials award a
contract to the lowest bidder. In a negotiated sale, public
officials negotiate with an underwriter on terms and prices.
Until recently, schools districts and community college
districts were the only local agencies authorized to sell GO
bonds at a private sale using the negotiated bid method.
However, AB 1388 (Hernandez), Chapter 529, Statutes of 2009,
authorized cities, counties, and special districts to sell GO
bonds at a negotiated sale. Proponents of AB 1388 argued that
negotiated sales would give local agencies greater flexibility
with regard to the timing of the bond sale, and would allow a
bond underwriter to work with the local agency to pre-market
bonds to investors to enhance the sale effort. Proponents
further maintained that negotiated bond sales, by providing
greater certainty to the bond underwriters, could reduce the
interest rates on bonds due to a reduced need to build in
allowances for risk.
When local agencies issue bonds at negotiated sales, they may
reach agreements with underwriters or financial advisors to
provide a package of bond-related services, including campaign
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services. Since existing law prohibits the use of public
funds for campaign purposes, a local agency cannot use public
money (including the proceeds of bond sales) to pay for the
costs of those campaign services. In light of this
restriction, according to full service financial advisors that
provide services to local agencies in California, a full
service firm that is providing campaign services typically
will have a separate contract with the campaign committee to
provide those campaign services. That contract is funded by
campaign contributions received by the campaign committee.
Proponents of this bill, on the other hand, are concerned that
the nature of negotiated bond sales could allow firms to
recover campaign costs through fees that agencies pay for
other bond-related services, resulting in campaign costs being
indirectly paid for with public funds. To support these
allegations, the author points to an investigative report from
the Orange County Register from February that detailed
extensive campaign activities by an underwriting firm that has
issued dozens of bonds for local agencies in California. In
addition to violating long standing prohibitions against the
use of public funds for campaign purposes, the proponents of
this bill argue that such arrangements can drive up the costs
to the public of local bond sales. If firms are recovering
campaign costs through inflated fees for other bond-related
services, it would be expected that firms that provide
campaign services as part of a negotiated sale would charge
higher fees to local agencies for other bond-related services
than the local agencies would pay for similar services without
a campaign component. However, committee staff is not aware
of any comprehensive analysis that demonstrates whether
negotiated sales for bond-related services result in higher
costs for the non-campaign related services provided.
3)Restrictions on Campaign Contributions : Unlike previous
similar legislation, which is described below, this bill
provides that donations to a bond campaign by an individual or
a firm is a basis for prohibiting an agency from entering into
an advisory or underwriting relationship with that individual
or a firm with respect to an issue of bonds. This new
provision appears to be in response to the Orange County
Register investigation discussed above. In that
investigation, it was reported that the underwriting firm had
made a contribution of $25,000 to a campaign committee in
support of a bond measure for which the firm had been hired by
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the agency proposing the bond to provide bond-related
services.
Notwithstanding the author's concerns about such campaign
contributions, donations to a bond campaign are not "bond
campaign services" that are comparable to other services
identified in this bill. The committee may wish to consider
whether such donations should remain in the sphere of
permissible political activity.
4)Capital Appreciation Bonds : Notwithstanding the author's and
the supporters' stated concerns about local governments
issuing capital appreciation bonds (CABs) that have interest
costs that are several times the amount of money that is
borrowed, it should be noted that this bill does not prevent
the issuance of such CABs, and the provisions of this bill are
not applicable solely to CABs, but rather apply broadly to any
issuance of bonds by a local agency. Furthermore, committee
staff is unaware of any evidence that the relationships that
would be prohibited by this bill have any effect on the
likelihood of a local government issuing a CAB.
5)Arguments in Support : The California Association of County
Treasurers and Tax Collectors writes, in support:
AB 621 would reform some current practices in
negotiated bond sale in order to eliminate the
"pay-for-play" atmosphere. Treasurers and Tax
Collectors throughout the state report that in many
cases, the negotiated sale of bonds leads to higher
underwriting costs, which are then passed on to the
taxpayer?.
The agreement between a public agency and bond
underwriters can be non-competitive. These
relationships are unique. Design and construction of
facilities funded by the proceeds of bonds are awarded
through a competitive process. Yet, the financial
advisor, legal counsel and underwriting contracts can
and most often are awarded without a competitive
process.
In many cases, underwriters also provide
campaign-related services "pro bono" to public
agencies as part of the negotiated agreement. Tax
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Collectors report that the higher costs of
underwriting that they see in negotiated bond sales
are attributable to the "free" campaign services that
are being recovered in the bond sale. Stated another
way: taxpayers are paying for political campaigns.
6)Arguments in Opposition : In opposition to this bill, the
Small School Districts' Association (SSDA) writes:
Many small school districts rely upon professional
assistance in enacting local General Obligation bonds.
These districts rely upon the expertise of entities
which include financial services providers. SSDA
believes AB 621 would restrict school district's
flexibility to make a judgment on the most
cost-effective means of conducting a campaign and
providing information to their citizens.
The state is no longer helping fund new school
facility projects for small, poor school districts.
These districts do not have wealthy businesses or
citizens that will fund local school bond campaigns.
They do, however, have the need to ensure safe, clean
school facilities for their students, just as wealthy
districts and students receive. By restricting
campaign contributions, AB 621 would result in small
district community organizations not being able to
raise campaign funds needed to pass local school
bonds. That situation will effectively force the
school districts to continue using inadequate school
facilities.
7)Previous Legislation : Several attempts have been made to
enact the provisions of this bill. AB 1045 (Norby) of the
2011-12 Legislative Session, was substantially similar to this
bill, except that it did not include campaign donations in the
types of activities that are considered "bond campaign
services." AB 1045 was approved by the Assembly on a 48-14
vote, but subsequently failed passage in the Senate Governance
and Finance Committee.
SB 1461 (Ashburn) of the 2009-10 Legislative Session, was
similar to AB 1045. SB 1461 failed passage in the Senate
Local Government Committee on a 2-3 vote.
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SB 623 (Ashburn) of the 2009-10 Legislative Session, was gutted
and amended in the Assembly with virtually the same language
as SB 1461. SB 623 was approved by the Assembly on a 61-7
vote, but died in the Senate Local Government Committee.
SB 799 (Wiggins) of the 2009-10 Legislative Session, was another
similar bill that was never heard in committee. Another
similar bill, AB 2011 (Cook) of the 2007-08 Legislative
Session, failed passage in the Assembly Local Government
Committee on a 1-3 vote.
8)Double Referral : On April 17, 2013, this bill was approved by
the Assembly Local Government Committee on a 7-2 vote.
REGISTERED SUPPORT / OPPOSITION :
Support
California Association of County Treasurers and Tax Collectors
California Taxpayers' Association
Howard Jarvis Taxpayers Association
Kern County Superintendent of Schools
State Treasurer Bill Lockyer
Opposition
Anderson Union High School District
Baker Valley Unified School District
Bennett Valley Union School District
Black Oak Mine Unified School District
Cabrillo Unified School District
California Association of School Business Officials
California School Boards Association
Chico Unified School District
Cloverdale Unified School District
Coalinga-Huron Joint Unified School District
Corning Union Elementary School District
Delhi Unified School District
Encinitas Union School District
Enterprise Elementary School District
Guerneville School District
Hueneme Elementary School District
Junction Elementary School District
Lincoln Unified School District
Morgan Hill Unified School District
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Mt. Diablo Unified School District
Reef-Sunset Unified School District
Roseland School District
Shasta Union High School District
Small School Districts' Association
Somis Union School District
Southern Humboldt Unified School District
Southern Trinity Joint Unified School District
Summerville Union High School District
Taft City School District
Wasco Union High School District
West Hills Community College District
West Sonoma County Union High School District
Wheatland Union High School District
Whittier City School District
Wilmar Union School District
One individual
Analysis Prepared by : Ethan Jones / E. & R. / (916) 319-2094