BILL ANALYSIS
SENATE LOCAL GOVERNMENT COMMITTEE
Senator Dave Cox, Chair
BILL NO: SB 1461 HEARING: 5/5/10
AUTHOR: Ashburn FISCAL: No
VERSION: 4/12/10 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 or financial
advisors that 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, the treasurers want the Legislature to prohibit
the bundling of bond underwriting, financial advisor, or
legal services with bond campaign activities.
Proposed Law
Senate Bill 1461 prohibits a local agency from entering
into a financial advisory, legal advisory, 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 1461 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 1461 defines "bond campaign services" as including
SB 1461 -- 4/12/10 -- Page 3
fundraising, 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 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.
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
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. SB 1461
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
officials' discretion in selecting bond underwriters and
financial advisors, the Committee may wish to consider
amending SB 1461 to clarify that existing prohibitions
SB 1461 -- 4/12/10 -- Page 4
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, the Committee may wish to consider imposing
a January 1, 2014 sunset date on local officials' ability
to issue GO bonds at negotiated sales. Legislators may
also wish to 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 can 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 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.
5. Try again . SB 1461 replicates SB 799 (Wiggins, 2009),
which was never heard by a committee. The bill is also
similar to AB 2011 (Cook, 2008), which failed in the
Assembly Local Government Committee.
Support and Opposition (4/29/10)
Support : California Association of County Treasurers and
Tax Collectors.
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Opposition : George K. Baum & Company.