BILL ANALYSIS
SENATE LOCAL GOVERNMENT COMMITTEE
BILL NO: SB 623 HEARING: 8/20/10
AUTHOR: Ashburn FISCAL: No
VERSION: 8/9/10 CONSULTANT:
Weinberger
LOCAL BOND ISSUES
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 underwriter
with the lowest bid. In a negotiated sale, public
officials negotiate with an underwriter over the terms and
prices.
Until this year, 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
(SB 1118, Alarcon, 1999). Last year, legislators approved
AB 1388 (Hernandez, 2009), which authorized cities,
counties, and special districts to sell general obligation
bonds at a negotiated sale.
Before selling bonds, the governing board of a school
district or community college district must 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. After a
bond sale, the governing board must present actual cost
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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). Last year's 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).
County treasurers report that many local agencies issue
bonds at negotiated sales using underwriters 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 the
agencies pay for other bond-related services, the
treasurers want the Legislature to prohibit the bundling of
bond underwriting services with bond campaign activities.
Proposed Law
Senate Bill 623 prohibits a local agency from entering into
an underwriting or similar relationship with an individual
or firm, with respect to a bond issue that requires voter
approval on or after January 1, 2011, 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.
SB 623 defines "related" as including a family relationship
by blood or marriage, a financial relationship, an
affiliation between business structures, or the sharing of
one or more common principals.
SB 623 defines "bond campaign services" as including
fundraising, public opinion polling, election strategy and
management, organization of campaign volunteers, get out
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the vote services, development of campaign literature, and
advocacy materials. "Bond campaign services" do not
include:
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.
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.
Comments
1. Unjustified and inappropriate . 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
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. SB 623 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
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
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officials' discretion in selecting bond underwriters,
legislators could have introduced legislation 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. Think again . While the appropriate method for selling
bonds can depend on the specific details of each individual
debt issuance, GO bonds are usually "plain vanilla" issues
that lend themselves to competitive sales. Legislators
approved the 2006 Canciamilla bill in response to claims
that competitive sales of GO bonds usually cost less than
negotiated sales. In light of the additional concerns
about negotiated GO bond sales being used to pay for
campaign costs, legislators could have considered imposing
a January 1, 2014 sunset date on local officials' ability
to issue GO bonds at negotiated sales. Legislators could
also have authorize CDIAC to report to the Legislature,
comparing the borrowing costs of local agencies' GO bonds
and examining local agencies' negotiated GO bond sales with
underwriters that provide campaign services. With more
information about actual costs, legislators may want to
reconsider their earlier decisions.
4. 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 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.
5. What's changed ? SB 623 is nearly identical to SB 1461
(Ashburn, 2010), which failed earlier this year in the
Senate Local Government Committee by a 2-3 vote. Unlike SB
1461, SB 623 specifies that the definition of "bond
campaign services" does not include public opinion polling
to be used in preparation for submitting a bond measure to
the electorate. SB 623 also differs from SB 1461 by
applying only to bond underwriting firms, and not to firms
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that provide financial advisory or legal advisory services.
Because the potential for misusing public funds is not
exclusive to local agencies' relationships with bond
underwriters, the Committee may wish to consider whether
state law should also prohibit a local agency from entering
into a financial advisory or legal advisory relationship
with an individual or entity that provides bond campaign
services.
6. Other legislation . SB 623 is similar to AB 2011 (Cook,
2008), which failed in the Assembly Local Government
Committee and SB 799 (Wiggins, 2009), which was never heard
by a committee.
7. Gut-and-amend . When the Senate passed SB 623 on May
21, 2010, the bill allowed the State Personnel Board to
extend Limited Term appointments for up to two years under
specified circumstances. The May 24 Assembly amendments
deleted that language and converted the bill into a measure
to prohibit bundling bond underwriting services with bond
campaign activities. Because this topic was never heard in
the Senate, the Senate Rules Committee has referred the
amended bill under Senate Rule 29.10 to the Senate Local
Government Committee for a hearing on the Assembly's
amendments. At its August 20 hearing, the Committee has
four choices:
Send the bill back to the Senate Floor,
recommending concurrence.
Send the bill back to the Senate Floor,
recommending nonconcurrence.
Send the bill back to the Senate Floor, without
recommendation.
Hold the bill.
Assembly Actions
Assembly Local Government Committee: 5-2
Assembly Floor: 61-7
Support and Opposition (8/18/10)
Support : California Association of County Treasurers and
Tax Collectors, California County Superintendents
Educational Services Association, Delano Union School
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District, Greater Bakersfield Chamber of Commerce, and Kern
County Superintendent of Schools Christine Lizardi Frazier.
Opposition : Alhambra Unified School District (USD), Bonita
USD, Del Norte County USD, Garden Grove USD,
Placentia-Yorba Linda USD, Dos Palos-Oro Loma Joint USD
Superintendent Brian Walker, Ed.D., Greenfield Union School
District Assistant Superintendent Melody Canady, Kernville
Union Elementary School District Superintendent Robin
Shive, Keyes Union School District Superintendent Karen
Poppen, Kings Canyon Joint USD Superintendent Juan Garza,
Klamath-Trinity Joint USD Business Manager Cyn Van Fleet,
Lennox School District Superintendent Brude McDaniel,
Ed.D., Ojai USD Assistant Superitendent Dannielle Pusatere,
Rohnerville School District Superintendent Robert E.
Williams, Ed.D., South Bay Union School District Assistant
Superintendent Scott Buxbaum, Southern Humboldt Unified
School District Superintendent Michael McAllister, Wasco
Union High School District Superintendent Elizabeth McCray,
Association of California School Administrators, California
School Boards Association, George K. Baum & Company,
Community College League of California, .