LOS ANGELES — The alleged $1.3 million embezzlement from a Bay Area conduit bond issuer has spurred action in Sacramento, triggering legislation, a task force and an audit.
California Treasurer John Chiang and Senate President Pro Tempore Kevin de Le-n are planning to conduct bond oversight hearings and are forming a task force on bond accountability.
Controller Betty Yee will conduct an audit of ABAG's internal administrative and accounting controls initially focusing on fiscal years 2012-13 and 2013-14.
"The ease in which one of ABAG's leaders allegedly fleeced more than a million dollars in bond funds raises concerns regarding whether there are sufficient safeguards at the thousands of state and local agencies which are responsible for nearly three-quarters of a trillion bond dollars," Chiang said.
The long-time director of financial services for ABAG's Finance Authority for Nonprofit Corporations, Clarke Howatt, is suspected of misdirecting $1.3 million from a bond account to his personal benefit. Howatt has retained an attorney and is cooperating with the FBI, said Brad Paul, ABAG's deputy executive director.
Chiang and de Le-n are working together on efforts to "conduct legislative oversight hearings to ensure that monies raised through the sale of government bonds are safe from fraud, abuse, and mismanagement," according to a joint statement.
"The misuse of taxpayer funds by public officials is a violation of the public trust and will not be tolerated," de Le-n said. "The Senate will engage in vigorous oversight to ensure fiscal safeguards are in place to protect public funds and prevent waste, fraud and abuse."
Paul said the Oakland-based regional planning organization welcomes actions taken at the state level.
"This sounds good," Paul said. "They are trying to increase transparency and take steps to prevent this from happening again, which is the same kind of thing we are doing."
ABAG has been working on a request for qualifications seeking a forensic auditor and also bond counsel to review bonds Howatt worked on.
The controller's office plans to officially start its own audit on Feb. 20, although it has already begun requesting documents from ABAG.
"We have our own responsibility independent of that to make sure state funds are secure and internal funds are in place," said Yee spokesman John Hill. "We are the state's fiscal watchdog."
The audit is expected to take around two months, he said. Depending on what auditors find after reviewing the first two years of documents, the probe could extend back further, he said.
"As California's chief fiscal officer, when public money goes missing, I need to determine how it happened and whether effective controls are in place," Yee said in a statement.
In addition to the oversight committee, Chiang established a special task force charged with developing best practices guidelines on the fiduciary care of bond proceeds that will be issued to all state and local government issuers of debt.
The task force will be co-chaired by Jay Goldstone, managing director of the public finance group at Mitsubishi UFJ Financial Group and former chair of the Municipal Securities Rulemaking Board; and Assembly Speaker Pro Tempore Fred Keeley, a former Santa Cruz County treasurer.
The multidisciplinary group will be comprised of current and former securities regulators, local treasurers, and public agency fiduciaries, along with academicians and finance industry experts. It will be charged with developing best practices guidelines for how bond proceeds should be managed in order to reduce the risk of fraud, waste, and abuse. Additionally, the task force will consider strategies to increase transparency and oversight of the use of bond funds.
State and local agencies issue debt to finance a variety of projects and services. The proceeds of the sale of debt are generally deposited into an account to be used by the public agency for specified public purposes. The arrangement between the controlling documents, the rules governing disbursements and payments, and the roles of responsible parties, however, differ greatly among public agencies depending on the type of debt, the uses of the proceeds, and the administrative practices of the agency.
Sen. Bob Hertzberg, chairman of the Senate Committee on Governance and Finance will lead the oversight hearings.
"I look forward to working with Pro Tem De Le-n, Senator Hertzberg and the task force," Chiang said. "Public agencies commonly have procedures for the fiduciary care of other governmental funds that include internal controls to protect against the misuse and fraud"
Chiang added that the management and spending of bond proceeds may employ different and sometimes less rigorous practices.
"These practices may in some cases expose the agency to a greater risk of fraud and abuse, which could ultimately lead to the loss of public funds," the treasurer said.
