SAN FRANCISCO - Saying they are acting to protect the integrity of California's municipal bond market, state Treasurer Phil Angelides and Attorney General Bill Lockyer Monday filed legal papers challenging the validity of roving joint-power authorities.
A state lawmaker from Fresno also said he will introduce legislation to close perceived loopholes that might allow roving JPAs to sell bonds.
Lockyer and Angelides are taking their stand by focusing on the validity of one pending issue, which may have been structured in such a way to intentionally sidestep recent legislation that was supposed to stop such financings. Their statements yesterday also outlined what type of standards they expect from the state's public finance professionals.
"Abuse of the state's bond financing laws is illegal and economically dangerous," Lockyer said. "The sophisticated scam artists who attempt to circumvent the law are in our sights."
One issue in question would be sold by the Rancho Lucerne Valley Joint Powers Authority. It is scheduled to borrow $15 million of Marks-Roos bonds this month through underwriter Pacific Genesis Group Inc., a firm that has come under intense fire from state officials for its business practices and bond structures.
David Fitzgerald, chairman of the board, said that while he has not seen the challenge, he called it irrelevant. He said there are many mechanisms available to complete the financing for the development.
A joint-powers authority traditionally allows several issuers - such as cities, school districts, redevelopment agencies, and port districts - to pool borrowing needs into one deal to take advantage of economies of scale.
The members then use the proceeds for a project that benefits each of the members, such as a stadium, or they divvy up the proceeds to all the members to use on their own individual projects.
On the other hand, a roving JPA such as Rancho Lucerne Valley is one in which the members sell debt for projects that often are located hundreds of miles away from the members. The JPA members instead, earn money by charging a fee to have their name on the bond deal, but earn no direct benefit from the project.
The deals are often speculative, with proceeds being used to build infrastructure such as roads and sewers for commercial shopping centers, golf courses, and private subdivisions.
According to state officials, the upcoming Rancho Lucerne bond will be used to build a golf course in San Bernardino County, some 300 miles away from the two principle members, Waterford and San Joaquin.
On Monday, Angelides and Lockyer filed what is known as an "answer" to a validation action submitted to the court by the authority. Filing the answer forces a trial to determine if the issue can move forward. Usually, a court validation is approved by a judge without a third-party invention.
The validation trial will take place in San Bernardino County Superior Court.
After Pacific Genesis Group first introduced the roving JPA structure in 1995, then-Treasurer Matt Fong and the California Debt and Investment Advisory Commission called on state and federal regulators to probe such deals as well as Pacific Genesis' business practices.
The state's Department of Corporations later sued the firm for alleged violations of state securities laws. Earlier this year, the firm settled the accusations out of court.
Because of the perceived abuses, lawmakers effectively banned the use of roving JPAs last year by passing a law that required there be a geographical connection between the agencies issuing the bonds and location of the project to be financed.
In the Rancho Lucerne deal, the golf course developer formed what is known as a mutual water company located on the project site to join the JPA, therefore fulfilling the geographical requirement. A mutual water company is a private company owned by the people to whom it supplies water.
That structure led the Stanislaus County district attorney to ask Lockyer to issue an opinion on whether a mutual water company can be considered a member of a JPA. That opinion is still pending.
The county DA last year charged Waterford's vice mayor and city attorney for criminal conflict of interest and misappropriation of funds in connection with a roving JPA deal sold last July. That case is set to go to trial later this summer.
The action by Angelides is his first on the topic since taking office in January.
He said during his campaign last year that he will make it a priority of his administration to protect the state's bond market and to stop fraudulent and unscrupulous bond practices.
He said he will not, however, subject the industry to additional regulation. He has begun working with Lockyer to come up with a set of recommendations to improve enforcement of the state's bond laws.
"Where we see illegal practices that we believe will undermine the integrity of California's public finance markets, we will take action," Angelides said Monday. "The last thing that we want to do, or ought to be doing, is setting up a regulatory scheme that penalizes the 99% (of market participants) that are good actors, that are doing good things, and being creative within the law."
"The problem is that when people clearly try to skirt the law, as they are doing in this instance, it can then shake the foundation and the balance of the market," he added.
Also on Monday, Assemblyman Dean Florez, D-Fresno, sponsored legislation that would forbid a mutual water company from joining a member of a JPA for the specific intention of allowing a bond deal to proceed.
The legislation would also seek to eliminate the fees that entice issuers to participate in roving JPAs.
But in a more far-reaching action, Florez said he would like to see legislation that would make bond counsel more liable for signing off on these deals as well as require issuers to provide a third-party verification that the revenue projections backing the issuance are accurate.
"The bond counsel are the ingenious folks thinking these things up. Believe it or not, it's not the underwriters," Florez said. "We need to work very carefully with bond counsel in terms of some legislation that would make them somehow verify that the issuance in their opinion is a proper issuance."
Florez said he has asked the speaker of the Assembly to form a select committee to look at reforming local government finance in California.
"We want to go to some of these cities, bring in some of these underwriters such as Pacific Genesis and others to really ask them the hard questions and to really get at the heart of this problem," he said.
