BILL ANALYSIS Ó
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: AB 621 HEARING: 6/12/13
AUTHOR: Wagner FISCAL: No
VERSION: 6/4/13 TAX LEVY: No
CONSULTANT: Weinberger
LOCAL BOND ISSUES
Prohibits firms that provided bond campaign services from
providing bond services.
Background and Existing Law
The California Constitution requires counties, cities, and
school districts to get voter approval for long-term debt.
Counties, cities, school districts, community college
districts, and most special districts can issue general
obligation (GO) bonds, secured by ad valorem property tax
revenues, with 2/3-voter approval, with two exceptions:
Bonds to repair, reconstruct, or replace
structurally unsafe schools require majority-voter
approval, and
Bonds to build, rehabilitate, or replace schools
require 55% voter approval.
"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, school districts and community college
districts were the only local agencies authorized to sell
GO bonds at a private sale using the negotiated bid method
(SB 1118, Alarcon, 1999). In 2009, the Legislature
authorized cities, counties and special districts to sell
GO bonds at a negotiated sale (AB 1388, Hernandez, 2009).
Before selling bonds, the governing board of a school
district or community college district must disclose
specified information about the method of sale, the
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identity of the bond counsel, underwriter, and financial
adviser involved in the sale, and cost estimates. After a
bond sale, the governing board must present actual cost
information at its next scheduled public meeting and submit
an itemized summary of costs to the California Debt and
Investment Advisory Commission (CDIAC) (AB 1482,
Canciamilla, 2006). The 2009 Hernandez bill imposed nearly
identical requirements on any city, county, city and
county, or special district that sells bonds at a
negotiated sale.
State law prohibits local officers, appointees, employees,
or consultants, from using or permitting others to use
state public resources for a campaign activity and imposes
civil penalties for intentionally or negligently violating
this prohibition (AB 1714, Canciamilla, 2002). It is 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 (SB 82, Kopp,
1995).
Some local agencies issue bonds at negotiated sales using
underwriters or financial advisors who also provide
campaign services to help win voter approval for the bonds.
Arguing that these arrangements allow firms to recover
bond campaign costs through the fees that agencies pay for
other bond-related services, some public officials want the
Legislature to prohibit the bundling of bond underwriting,
financial advisory, or legal services with bond campaign
activities.
Proposed Law
Assembly Bill 621 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 bond issue that requires voter approval on
or after January 1, 2014, if that individual or firm
provided, or will provide, bond campaign services to the
bond campaign.
AB 621 defines "individual" as a person engaged in the
business of providing financial advice, legal advice,
underwriting, or other similar services.
AB 621 -- 6/4/13 -- Page 3
AB 621 defines "bond campaign services" as including
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. The bill specifies that "bond campaign
services" does not include either:
Advice and support related to the preparation of
tax rate statements 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.
State Revenue Impact
No estimate.
Comments
1. Purpose of the bill . When the 1995 Kopp bill
strengthened the prohibition against using school district
resources on campaigns, it declared that "the use of public
funds in election campaigns is unjustified and
inappropriate. No public entity should presume to use
money derived from the whole of taxpayers to support or
oppose ballot measures or candidates." Local officials
shouldn't pay indirectly for activities that state law
clearly prohibits them from paying for directly. When
firms provide both bond campaign services and underwriting
or financial services under no-bid agreements with local
agencies, it looks like public officials are spending
public funds on bond campaigns. Taxpayers can't tell if a
negotiated bond sale embeds campaign costs in the
underwriter's spread or fees for other services. AB 621
stops this misuse of public funds by prohibiting firms from
bundling support for bond campaigns with other bond
services.
2. Too restrictive . Legislators should not limit the
tools that local agencies use to issue GO bonds.
Negotiated bond sales can offer advantages during periods
of market volatility, lowering borrowing costs by giving
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underwriters greater control over the timing of bond sales
and by providing an opportunity to pre-market bonds to
ensure sufficient interest among potential investors.
There is nothing inherently improper about an agency
selling bonds at a negotiated sale with an underwriter that
managed or supported the campaign to approve the bonds.
State law already prohibits using public funds to pay for
campaign activities. Rather than restricting local
officials' discretion in selecting bond underwriters and
financial advisors, the Committee may wish to consider
amending AB 621 to clarify that existing prohibitions
against using public funds on bond campaigns include
indirect forms of compensation, like paying inflated rates
and fees for other bond-related services.
3. Worth the wait ? In a March 18 letter to Attorney
General Kamala Harris, State Treasurer Bill Lockyer
requested a formal legal opinion on five questions about
whether specified types of agreements between school
districts and bond underwriters constitute a misuse of
public funds or violate other laws. In the letter, the
Treasurer noted that some arrangements between school
districts and bond underwriters "raise substantive
questions about whether school district officials have
violated state law by using public funds for campaign
services related to advocating the passage of bond
measures." Obtaining a formal legal opinion from the
Attorney General's Office can be a lengthy process,
sometimes lasting two or three years. However, a formal
legal opinion might help inform policymakers about the best
way to clarify and strengthen state laws to prevent misuse
of public funds in bond issues. The Committee may wish to
consider whether it is premature to act on AB 621 before
the Attorney General's office issues a formal legal opinion
on issues that are central to the bill.
4. Donation dilemma . Unlike similar bills introduced in
previous legislative sessions, AB 621 includes campaign
donations from an individual or firm in the definition of
"bond campaign services" that are subject to the bill's
provisions. Limiting campaign donations raises complex
questions related to the U.S. Constitution's First
Amendment protection of political speech. While some
federal court decisions have found that corporate political
speech, in the form of campaign expenditures, is protected
under the First Amendment, other decisions have found that
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corporate political speech can be restricted to prevent
corruption or the appearance of corruption. The Committee
may wish to consider whether the limitations that AB 621
imposes on contributions to bond campaigns will invite
legal challenges.
5. Split the difference . AB 621's proponents want to
prevent firms from using public funds to subsidize campaign
expenses by inflating their fees in negotiated contracts
for underwriting, financial advisory, legal, and other bond
services. AB 621's opponents want to preserve local
governments' discretion to negotiate contracts with bond
service providers of their choosing. A compromise approach
might be to allow a local agency, for any particular bond
issue, to contract with a firm that provides campaign
services, or a firm that it chooses to contract with
through a negotiated process, but not both. If a local
agency were to select a particular financial adviser for a
particular bond issue, then it would lose the option to
receive campaign services from that same firm. Conversely,
if a local agency were to avail itself of a particular
firm's campaign services, then it would have to use a
competitive process to award contracts for bond services
provided by that firm. The Committee may wish to consider
amending AB 621 to prohibit any individual or firm that
provides bond campaign services to a bond campaign from
contracting for underwriting, financial advisory, legal
advisory, or other services related to the bond issue,
unless the contract is awarded through a competitive
process to the lowest responsible bidder.
6. Cat and mouse . The laudable goal of stopping local
agencies from indirectly compensating companies that
support bond campaigns may prove difficult to achieve.
When substantial sums of money are at stake, recent
experience shows that malfeasance easily evolves to evade
changes in state laws. Curbing "roving JPAs" and other
abuses of the Marks-Roos Bond Pooling Act required multiple
bills over nearly a decade. Legislators should not be
surprised if underwriting or financial advisory firms find
ways around even the most well-intentioned legislative
efforts to separate their campaign activities from their
contracts to provide other bond-related services.
7. Try again . AB 621 is substantially the same as AB 1045
(Norby, 2011), which failed passage in the Senate
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Governance & Finance Committee. The bill also is similar
to SB 1461 (Ashburn, 2010) and SB 623 (Ashburn, 2010), both
of which failed passage in the Senate Local Government
Committee. It also is similar to SB 799 (Wiggins, 2009),
which was never heard by a committee, and AB 2011 (Cook,
2008), which failed in the Assembly Local Government
Committee.
Assembly Actions
Assembly Local Government Committee: 7-2
Assembly Elections and Redistricting Committee: 7-0
Assembly Floor: 51-10
Support and Opposition (6/6/13)
Support : California State Treasurer Bill Lockyer,
California Association of County Treasurers and Tax
Collectors; California Taxpayers' Association; Howard
Jarvis Taxpayers Association; Kern County Superintendent of
School Christine Lizardi; Richard Raushenbush, Larry
Tramutola.
Opposition : Black Oak Mine Unified School District;
Cabrillo Unified School District; Cotati-Rohnert Park
School District; Morgan Hill Unified School District; Mt.
Diablo Unified School District; Shasta Union High School
District; Southern Humboldt Unified School District; Wilson
Elementary School; Association of California School
Administrators; California Association of School Business
Officials; California School Boards Association; Small
School Districts' Association.