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Audit of Conduits Sought

MAY 24, 2011 6:17pm ET
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SAN FRANCISCO — A California lawmaker has called for an audit of two of the state’s largest third-party bond issuers, citing concerns about transparency, conflicts of interest and public benefit.

Assemblyman Mike Feuer, D-Los Angeles, sent a letter to the head of the state’s Joint Legislative Audit Committee asking for an investigation of the California Statewide Communities Development Authority and the California Municipal Finance Authority.

“With hundreds of millions of dollars in public money involved, we must assure that all financial transactions conducted by these authorities are done at the lowest possible cost and maximize taxpayer value,” Feuer said in a statement Monday. “Those making decisions about public resources must adhere to the highest ethical and conflicts-of-interest standards.”

Critics have voiced concerns about the two conduit issuers for years because the authorities are run by private businesses yet work as government agencies.

The CSCDA is operated by HB Capital Resources Ltd., which earlier this year began running another conduit issuer in Wisconsin, the Public Finance Authority, which handles deals nationwide.

The businesses’ compensation is based on how much debt the authorities issue, Feuer said in the letter to Ricardo Lara, D-Bell Gardens, the head of the audit committee.

Feuer said the audit should include the two authorities’ finances, employee compensation, procedures used to select bond lawyers and consultants, relationships with municipalities, fee structures, compliance with state laws and default rates.

For an audit to occur, the audit committee must first vote in favor. Then the state auditor would take up the investigation, which could result in advice on possible legislative reform.

California Treasurer Bill Lockyer has been a strong critic of the two authorities. “We have long believed that CSCDA is a private business being run out of a government agency,” said Lockyer spokesman Tom Dresslar. “A thorough scrubbing of their books and their operations is long overdue.”

Lockyer’s office operates several third-party issuers, including the California Health Facilities Financing Authority.

Dresslar said the CSCDA’s business model goes against the state’s conflict of interest laws. He added that the CMFA has a similar business model.

The CSCDA did not respond to requests for comment.

John Stoecker, a financial advisor for the CMFA, said the authority has no problem complying with an audit.

“We are happy to provide any information requested by any organization. We believe strongly in transparency and welcome working with any organization to ensure they understand the public benefits that CMFA financings provide,” Stoecker said in an e-mailed statement.

He noted that his organization donates 25% of its financing revenue to local nonprofits through its charitable foundation, the California Foundation for Stronger Communities.

In January, Los Angeles County withdrew from the CSCDA, citing a desire to retain local control over bond financings and  concerns about securities law and litigation.

In 2009, the California Legislature passed a bill that imposed disclosure requirements — such as placing meeting agendas on the Internet — on joint-powers authorities that serve as conduit issuers.

The League of California Cities and the California State Association of Counties created the CSCDA in 1988 under the state’s joint-powers law that allows any two or more government agencies to create a joint-powers agency. The authority has a membership of more than 500 municipalities and has issued more than $40 billion since its inception.

The CSCDA was California’s ninth-largest bond issuer in 2010, selling more than $1.5 billion, according to Thomson Reuters.

The CMFA, formed in 2004 along with the nonprofit California Foundation for Stronger Communities, has a membership of 125 local governments.

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