Tag Archive for California Attorney General’s Opinion Targets School Bond Practices

California Attorney General Opinion Says Frequently-Used School and Community College Bond Deals Are Illegal

On January 26, 2016, the California Attorney General issued an opinion on a practice regarding bond measures that has long been questionable but continues to be rampant at California school and college districts: contracting with a firm to provide both pre-election bond measure “financial planning services” and post-election bond measure “financial advisory services.” That firm then typically makes a major contribution to the campaign to pass the bond measure.

The practice is described in Chapter 7 of the July 2015 California Policy Center report For the Kids: California Voters Must Become Wary of Borrowing Billions More from Wealthy Investors for Educational Construction.

Not surprisingly, the practice was determined to be illegal under most circumstances. The Howard Jarvis Taxpayers Association called it “good news” for taxpayers and a “long-overdue slap-down” of “the incestuous behavior of school districts with political consultants and bond salesmen.” See Attorney General Reins In Shady Bond Practices – January 31, 2016.

California Attorney General Opinion

OPINION of  KAMALA D. HARRIS, Attorney General – MANUEL M. MEDEIROS, Deputy Attorney General – No. 13-304 – January 26, 2016 (see the five questions and answers, below)

School and community college districts throughout the state have adopted such contracts. Often these items are listed on board agendas with vague language, probably to disguise the purpose from the public.

Some Examples

Martinez Unified School District approved this contract on September 29, 2015: http://laborissuessolutions.com/wp-content/uploads/2015/09/2015-09-29-Isom-Advisors-AKA-Urban-Futures-Contract-with-Martinez-USD-for-Bond-Measure-Services.pdf

Pay to Play San Rafael City Schools Connect the DotsSan Rafael City Schools gave a financial service firms a no-bid contract in June 2015 for $15,000 in pre-election and $65,000 in post-election advisory services for two bond measures. The firm contributed $9500 to the campaign to pass the bond measures.

Solano Community College District: Critic Questions Actions of Measure Q Bond Underwriters – Fairfield Daily Republic – September 13, 2015

News Coverage

California School Bonds Can Be Source of Scandal – commentary by Dan Walters – Sacramento Bee – February 8, 2016

Many other districts have used the same loophole to avoid competitive bidding on contracts and also solicited bond issue campaign funds from financial houses.

State Treasurer Bill Lockyer, and later successor John Chiang, were concerned about the practice, and asked Attorney General Kamala Harris whether it’s legal for those in the bond financing business to get involved in the campaigns. Harris, in an opinion issued last month, declared that it is illegal for firms to provide “pre-election services” in return for a promise to get the underwriting business should the bond measure pass.

…if school districts are cut free from the state’s underwriting of school construction, they need some new ethics standards.

California AG’s Opinion Targets School Bond Practices by Kyle Glazier – The Bond Buyer – January 28, 2016

School and community college districts violate California law if they hire outside firms to campaign for bond ballot measures or purposely incentivize municipal finance professionals to advocate for passage of a bond measure, the state’s attorney general said in a formal legal opinion…

A previous Bond Buyer investigation found a nearly perfect correlation between broker-dealer contributions to California school bond efforts in 2010 and their underwriting of subsequent bond sales, and financial advisors have similarly been accused of using “pay-to-play” tactics. Former California Treasurer Bill Lockyer questioned the legality of the practices…

California Muni Dealers Can’t Fund Bond Campaigns to Get Hired by Darrell Preston – Bloomberg – January 28, 2016

Former Treasurer Bill Lockyer, who sought the opinion in 2013, praised the ruling, and said it could open up school districts and vendors to prosecution.

“It makes it clear that prior practices of this sort are illegal,” Lockyer said in a telephone interview Thursday.

Lockyer sought the opinion after finding school districts in the state entered agreements with underwriting firms in which the districts award the dealers the right to sell the bonds in return for providing services to pass an initiative.

He said at the time the agreements raise “substantive questions” about whether school officials broke the law by using public money to advocate passage.


THE HONORABLE JOHN CHIANG, CALIFORNIA STATE TREASURER, has requested an opinion on the following questions:

1. Does a school or community college district violate California constitutional and statutory prohibitions against using public funds to advocate passage of a bond measure by contracting with a person or entity for services related to a bond election campaign?

2. Does a school or community college district violate California prohibitions against using public funds to advocate passage of a bond measure if the district enters into an agreement with a municipal finance firm under which the district obtains pre- bond-election services in return for guaranteeing the firm an exclusive contract to provide bond-sale services if the election is successful?

3. In the case of an agreement as described in Question 2, does a school or community college district violate California law concerning the use of bond proceeds if the district reimburses the municipal finance firm for the cost of providing the pre- election services from the proceeds raised from the bond sale?

4. In the scenario described in Question 3, does a school or community college district violate California law concerning the use of bond proceeds, even where the reimbursement is not an itemized component of the fees the district pays to the firm in connection with the bond sale?

5. Does an entity providing campaign services to a bond measure campaign in exchange for an exclusive agreement with the district to sell the bonds incur an obligation to report the cost of such services as a contribution to the bond measure campaign in accordance with state law?

CONCLUSIONS

1. A school or community college district violates California constitutional and statutory prohibitions against using public funds to advocate passage of a bond measure by contracting with a person or entity for services related to a bond election campaign if the pre-election services may be fairly characterized as campaign activity.

2. A school or community college district violates prohibitions against using public funds to advocate passage of a bond measure if the district enters into an agreement with a municipal finance firm under which the district obtains pre-election services (of any sort) in return for guaranteeing the firm an exclusive contract to provide bond-sale services if the election is successful, under circumstances where (a) the district enters into the agreement for the purpose (sole or partial) of inducing the firm to support the contemplated bond-election campaign or (b) the firm’s fee for the bond-sale services is inflated to account for the firm’s campaign contributions and the district fails to take reasonable steps to ensure the fee was not inflated.

3. In the case of an agreement as described in Question 2, a school or community college district violates California law concerning the use of bond proceeds if the district reimburses the municipal finance firm for the cost of providing pre-election services from the proceeds raised from the bond sale.

4. In the scenario described in Question 3, a school or community college district violates California law concerning the use of bond proceeds if the district reimburses the municipal finance firm for the cost of providing pre-election services from the fees the district pays to the firm in connection with the bond sale, whether or not the reimbursement is evident as a component of the fees the district pays to the firm in connection with the bond sale made on an itemized service-by-service basis.

5. Where an entity provides campaign services to a bond-measure committee in exchange for an exclusive agreement with the district to sell the bonds, the entity has an obligation to report the value of its services as a contribution to the bond-measure campaign in accordance with state law.