California Sen. Hertzberg authored legislation to improve bond disclosure.

LOS ANGELES — The California Senate, reacting to an embezzlement case involving community development bonds, approved legislation that requires the state's issuers to step up disclosure of their bond payments and use of proceeds.

Senate Bill 1029, which was sponsored by California Treasurer John Chiang, was approved Tuesday on a 39-0 vote by the state Senate and goes to the governor for his consideration. The Assembly approved the measure on Aug. 19.

Authored by Sen. Bob Hertzberg, D-Los Angeles, SB 1029 would require state and local issuers to submit an annual debt accountability report to the California Debt and Investment Advisory Commission showing adherence to bond payments and also that the money was spent on what voters intended.

"This bill ensures that bond management is transparent and accountable to taxpayers, and it helps prevent lax oversight that can lead to mismanagement or misuse of bond proceeds," Hertzberg said. "Accountability and transparency are essential elements of making sure government works as it should."

Issuers also must certify they have adopted local debt policies and that the debt issuance is consistent with those policies. The bill requires the state to track reports on all new state and local government debt until it is fully repaid or redeemed.

The legislation was sparked by an investigation into the 2014 embezzlement of $3.9 million in San Francisco community development district bond proceeds from a conduit issuer operated through the Association of Bay Area Governments.

Clarke Howatt, the long-time director of financial services for ABAG's Finance Authority for Nonprofit Corporations, pleaded guilty to a felony charge of wire fraud in federal court and acknowledged he stole millions of dollars from bond funds.

"California relies heavily on borrowing to build its schools, highways, and other critical public infrastructure. In just the last three decades alone, California and her local governments have issued more than $1.5 trillion in debt," Chiang said in a statement. "If signed by the Governor, SB 1029 will not only impose greater accountability and transparency requirements on government borrowers but will empower the public to be citizen watchdogs."

The only substantive amendment made to the bill originally introduced by Hertzberg requires the treasurer's office to consult with debt issuers before approving a reporting method to determine how to minimize reporting burdens and inefficiencies, according to a Hertzberg spokesman.

The bill garnered support groups ranging from the treasurer's office to taxpayers and firefighters, Hertzberg said. The only concerns that were raised by local issuers regarded the difficulties of providing more disclosure to the state and possible duplication.

Hertzberg said he and other legislators in the Senate's Governance and Finance committee, which he chairs, worked with the treasurer's office to avoid any duplication in reporting.

"There was no annualized oversight," Hertzberg said. "It should now be harder for something like what happened in San Francisco to occur."

The former bond attorney — Hertzberg worked with the treasurer's office in the 1980s — said he and Chiang's office will be monitoring the program closely to see if any tweaks are needed after it goes into effect. If the governor signs the bill, it would take effect in January.

In response to the San Francisco case, Chiang appointed the Treasurer's Special Task Force on Bond Accountability to identify best practices for managing bond proceeds and strategies to increase transparency and oversight of the use of bond funds.

SB 1029 builds upon recommendations made by Chiang's task force on best practices on fiduciary care of bond proceeds, and the Senate Governance and Finance Committee, which produced an oversight report on the ABAG case.

"Since borrowed money must be repaid with interest, the public, which is often on the hook, should be provided tools to hold officials accountable for their borrowing decisions," Chiang said in a statement. "My deepest thanks go to Senator Bob Hertzberg for partnering with me on this critical legislation to protect taxpayers."

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