SAN FRANCISCO — California's state auditor recommended lawmakers clarify a law to make sure private firms operating conduit issuers avoid conflicts of interest.

State auditor Elaine Howle said in the report released Thursday that it's legally unclear whether the California Statewide Communities Development Authority and the California Municipal Finance Authority, joint-powers agencies staffed by employees of private consulting firms, have violated conflict of interest laws by paying fees to the firms based on how many bonds they sell.

The release of the report prompted state Treasurer Bill Lockyer, a long-time critic of the two conduit issuers that compete with the treasurer's own conduits, to ask Attorney General Kamala Harris to investigate the concerns.

For their work, the CSDA, known as California Communities, paid the consulting firm HB Capital Resources Ltd. $50 million, or 59% of revenues, from July 2006 through June 2011, and the CMFA, or Municipal Finance, paid its consultant Sierra Management Group LLC $4.6 million, or 49% of revenues, over the same period, according to the audit.

"This method of compensation raises a concern under the Political Reform Act of 1974, which prohibits public officials — including consultants performing the work of public officials - from making, participating in or attempting to influence certain governmental decisions in which they have a material economic interest," Howle said in the report.

The report said it would be helpful for the state Legislature or the Fair Political Practice Commission to provide a clear direction on whether the contingency fees should be permissible under state conflict-of-interest laws.

"As the report points out, both California Communities and HB Capital have been advised by counsel that the structure of the relationship between both organizations is in full compliance with all applicable conflict-of-interest laws," California Communities said in a letter to the auditor in response to the report.

In response to that letter, the auditor reiterated in the report that "as our report indicates, we were unable to reach a definitive legal conclusion on this [conflicts of interest] issue."

The audit also recommended that the two joint powers authorities should examine ways to ensure they have competitive contracts in place with HB Capital and Sierra Management because they have not periodically bid out the services.

Lockyer, who urged the Joint Legislative Audit Committee in August 2011 to conduct the audit, has been a long-time critic of the two competing conduits, characterizing them basically as private firms supplanting the role of the government.

 "The Legislature and governor should enact our legislation to ban these compensation arrangements and require the JPAs to competitively bid their contracts. That's the best way to provide the clarity recommended by the auditor," Lockyer said in a statement.

Neither of the two agency's operations are directly funded by taxpayers.

Both of the two conduits agreed with the recommendations laid out by the auditor and focused on the fact that the report found they issue bonds to the letter of the law.

"In evaluating the issuers' compliance with other laws and requirements, we found that the Health Financing Authority, California Communities, and Municipal Finance, all issue conduit revenue bonds in accordance with key federal and state laws," the audit said.

Conduit bond issuers help local governments, nonprofits or other projects with a public benefit sell and manage bonds.

The CSCDA and the CMFA are not the only conduit issuers in California but they are the only ones run by private companies. Each of the issuers is governed by a board of directors that votes to approve issuances at public hearings.

The CMFA is a joint-powers authority created in 2004 by municipalities and special districts and is managed by Sierra Management Group.

The CSCDA is one of the largest conduit issuers in the country. HB Capital won the original contract to run the JPA in 1988 from the authority's co-sponsors, the California State Association of Counties and the League of California Cities.

The audit also included a review of the treasurer's California Health Facilities Financing Authority. Howle raised a key difference between the health care financing agency and the other two — as a state agency, it doesn't need to hold a hearing in a local jurisdiction and typically holds its hearings in Sacramento. The auditor recommended it explore ways to remedy the issue.

The auditor's report found that all three conduit issuers provide a public benefit, with Municipal Finance providing the most with 40% of its fee revenue going to either member communities or to a charitable foundation.

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