An Overlooked Feature of Bond Measures for School Districts: Fees to Underwriters and Financial Service Firms

Print Friendly

Under contract to Fair and Open Competition – Sacramento, I’ve developed a modest web site presenting an argument against Measures Q and R, two proposed bond measures at the Sacramento City Unified School District. It’s not a pretty web site, but it’s packed with information obtained from primary source material – information not available anywhere else. See Vote No on Sacramento’s Measures Q and R.

If voters in the school district approve these ballot measures at the November 6, 2012 election, the school board of Sac City Unified will have authority to borrow up to $414 million for construction by selling bonds to investors. Property holders in the district will pay that back – with interest – through taxes. Current debt for the school district’s two previous bond measures totals $522 million. Basically, these proposed new bond measures will create a billion-dollar debt for this school district.

During my research, I decided to investigate how much the district has paid in fees to underwriters (bond brokers) and other financial service firms that assess fees when bonds are prepared and sold. The total comes to almost $6 million.

Bond Issue Financial Transaction Fees
Official Statement – Sacramento City Unified School District – $50,000,000 – General Obligation Bonds, Election of 1999, Series A 2000 $404,375.42
Official Statement – Sacramento City Unified School District – $52,310,000 – General Obligation Refunding Bonds 2001 $592,524.77
Official Statement – Sacramento City Unified School District – $45,000,000 – General Obligation Bonds, Election of 1999, Series B 2001 $394,463.50
Official Statement – Sacramento City Unified School District – $45,000,000 – General Obligation Bonds, Election of 1999, Series C 2002 $486,543.56
Official Statement – Sacramento City Unified School District – $80,000,000 – General Obligation Bonds, Election of 2002, Series A 2003 $483,000.00
Official Statement – Sacramento City Unified School District – $64,997,966.35 – General Obligation Bonds, Election of 1999, Series D 2004 $615,158.17
Official Statement – Sacramento City Unified School District – $80,000,000.00 – General Obligation Bonds, Election of 2002, Series 2005 $737,700.00
Official Statement – Sacramento City Unified School District – $64,997,966.35 – General Obligation Bonds, Election of 2002, Series 2007 $757,134.42
Official Statement – Sacramento City Unified School District – $79,585,000 – General Obligation Refunding Bonds 2011 $522,897.60
Official Statement – Sacramento City Unified School District – $113,245,000 – General Obligation Refunding Bonds 2012 $849,939.95
Total Fees $5,843,737.39

Supporters of Measures Q and R might defend these fees by pointing out they only comprise 1.4 percent of the total amount of $420 million borrowed under the authority of Measures E (1999) and Measures I (2002), and the fees paid for the sale of the three refunding bond series were offset by the resulting reduced cost of interest payments. Fair enough, but don’t claim in your ballot arguments for Measures Q and R that “Every penny from Measures Q and R will stay in our community” and “ALL of the money raised by these measures will stay in our community.” That’s just not true. Set aside the issue of interest payments to wealthy individuals and institutional investors in New York City and other financial centers – the $5.8 million in transaction fees is proof that some of the money did NOT stay in the community.

I suspect such statements from proponents reflect a lack of understanding of municipal bonds or a cynical recognition that ordinary voters don’t understand municipal bonds.

One thing I did not research was whether or not the underwriters who assessed these fees were donors to the campaigns to pass Measure E (1999) and Measure I (2002). Here is another excerpt from the Vote No on Sacramento’s Measures Q and R web site:


Learn How Bond Brokers, Bond Dealers, Bond Underwriters Spend a Little Money to Make a LOT of Money Selling Bonds for California School Districts.

Not all bond brokers improperly influence school boards. In fact, some have high integrity and are speaking out against the inappropriate conduct of some underwriters in their industry.

But clearly things have gotten out of control since California voters narrowly approved Proposition 39 in November 2000. Borrowed money began gushing into California school districts, and everyone wanted a piece of the action.

In fact, a September 13, 2012 letter to the Municipal Securities Rulemaking Board from the California Association of County Treasurers and Tax Collectors urged the Board to consider a complete prohibition on brokers, dealers, and other municipal finance professionals from making political contributions to campaigns of local governments (such as the Sacramento City Unified School District) to get voter approval to borrow money from investors by selling bonds. The letter identifies the origin of the problem as Proposition 39.

The issue of bond brokers being major donors to campaigns to pass bond measures has not gained much attention, but it should. A specialty publication –The Bond Buyer – and a news service – California Watch – have been the leaders on investigating this obscure but significant scheme. Here are some articles that reveal the problem:

Brokers’ Gifts That Keep Giving – The Bond Buyer – January 13, 2012

When broker-dealers give money to California school bond campaigns, it appears to be money well spent. A review of campaign finance records by The Bond Buyer found a nearly perfect correlation between broker-dealer contributions to California school bond efforts in 2010 and their underwriting subsequent bond sales…

With Campaign Donations, Bond Underwriters Also Secure Contracts –California Watch – May 3, 2012

Leading financial firms over the past five years donated $1.8 million to successful school bond measures in California, and in almost every instance, school district officials hired those same underwriters to sell the bonds for a profit, a California Watch review has found…

Critics Struggle to End ‘Pay to Play’ in School Bonds – California Watch – May 14, 2012

Critics of the practice in which financial firms help pass school bonds that they profit from are continuing to push for reforms, but so far have faced resistance and failure. In California, underwriting companies hired by school districts to sell bonds often make campaign contributions to help convince voters to pass the bond measures…

Some California FAs [Financial Advisors] Use Pay-to-Play Tactics, Critics Say –The Bond Buyer – May 24, 2012

Firms that work as financial advisors helping California school districts issue bonds after serving as campaign consultants on the preceding bond measure have a conflict of interest and are engaged in a form of “pay-to-play,” critics say. Such firms, a small subset of the financial advisor sector in California, walk the school districts through the bond election process, then help the them select and negotiate prices with underwriters and bond counsel for the subsequent sale. In many cases, they are paid both by the political action committee formed to pass the bond measure, which receives contributions from underwriters and the bond counsel, and then by the district…

Underwriters Paying to Pass Bond Issues Face Scrutiny – Business Week – May 24, 2012

Over the past five years, underwriters gave $1.8 million to successful school-bond campaigns in California and got almost all the work selling the approved bonds, California Watch reported earlier this month.

Underwriter Bought Meals For Poway Board – San Diego Union-Tribune – September 1, 2012

The underwriter of Poway Unified’s controversial $105 million bond deal hosted $2,200 in dinners for the school district’s officials in recent years — most of which they accepted and initially failed to report on state-mandated disclosure forms. In March, the officials belatedly disclosed the meals dating back several years, as the District Attorney’s Office prosecution of South Bay school board members for failing to report such meals made the news…

Muni Groups Urge More Action on Bond Ballot Campaigns – The Bond Buyer – September 18, 2012

Municipal analysts and other muni market participants are urging the Municipal Securities Rulemaking Board to strengthen a proposal to tighten bond-ballot campaign contribution reporting requirements for dealers. In comment letters filed in recent days, several participants urged the board to do more to attack corruption and protect the voting public, with some suggesting there should be an outright ban on such contributions rather than disclosure requirements.

California Capital Appreciation Bonds Have Unintended Consequences – The Bond Buyer – September 20, 2012

The recent controversy over the way some California school districts use capital appreciation bonds may reflect the law of unintended consequences…

Feds Urged to Crack Down on Donations to Bond Measures – California Watch – September 21, 2012

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.

Comments are closed.