A recent front page story in the Los Angeles Times raised the curtain on a dirty little secret that local school officials don’t want the public to know. Many school boards throughout California have indulged in a process that can best be described as “bribery and money laundering” which grossly inflates the cost of bond debt — the result of which is higher taxes on homeowners.
Here is how it works. A school board determines it wants to pass a bond that will be paid for by property owners. Because government officials are prohibited from using taxpayer dollars to promote a ballot measure, they cut a deal with a bond underwriter to fund the effort and provide expert campaign assistance. In return, the underwriter is guaranteed the commission on the sale of the bonds.
The Times provides the example of the Garden Grove Unified School District that hired a securities firm without competitive bidding. Guaranteed the school district’s business, the underwriter gave $35,000 to help pass the bond measure as well as providing campaign services, and in return earned $1.43 million on the sale of the first $130 million in Garden Grove notes. For the guys in the bond business, this is great ROI (return on investment).
Those involved in this sleight-of-hand will be quick to point out that nothing that was done is illegal, and they might be correct. And, securities brokers are not the only ones who contribute to these bond campaigns. Construction companies and suppliers anticipating fat contracts can usually be counted on to chip in.
But the involvement of bond underwriters comes with an additional cost, studies show. Negotiated deals with a single underwriter outnumber competitive deals by about 6 to 1, even though interest rates can be reduced by as much as .77% through competitive bidding. This, over the life of a typical $100 million bond, can amount to millions of dollars.
Enter Assemblyman Don Wagner, (R-Irvine), who along with others, including State Treasurer Bill Lockyer, is alarmed by the trend away from competitive bidding for bond sales. Wagner has introduced AB 621, which would bar government officials from hiring securities companies that provide contributions or campaign assistance in support of bond measures.
However, as with all reforms, there is strident opposition from those who benefit from the status quo. School officials claim that the limits Wagner would impose would reduce school districts’ “flexibility” and potentially deny underwriters their first amendment freedoms. Missing from their complaints are any concerns about the cost to property owners of deals made with underwriters that provide those firms with inflated profits in return for their political intervention in local bond elections.
At the Howard Jarvis Taxpayers Association we have a saying, “It may be legal but that does not make it right.” This cozy relationship between school district officials and bond brokers is not only wrong, but lawmakers must make it illegal, too.
Jon Coupal is president of the Howard Jarvis Taxpayers Association – California’s largest grass-roots taxpayer organization dedicated to the protection of Proposition 13 and the advancement of taxpayers’ rights.