SACRAMENTO — California lawmakers Wednesday green-lighted a wide-ranging audit into conduit bond issuers run by private contractors to make sure they are complying with state law.
The Joint Legislature Audit Committee agreed to have the state auditor move forward with a probe of the California Statewide Communities Development Authority and the California Municipal Finance Authority.
The hearing drew unusual testimony from California Treasurer Bill Lockyer, who has been an outspoken critic of the two issuers that operate as state joint-powers authorities but are run by private contractors.
“I am really here as a whistleblower,” Lockyer said. “I have tried through public records act requests; I have tried through encouraging the controller to use his authority to audit; and there has been nothing but stonewalling from these particular JPA entities.”
Even with Lockyer’s testimony, the audit only passed with a minimum of member votes, four from both houses, after the committee expanded the audit to include other state conduits, including some within the treasurer’s and governor’s offices.
The treasurer’s office operates several conduit issuers, including the California Health Facilities Financing Authority. Other conduits are run out of other state agencies and joint powers authorities compete with the CSCDA.
“As long as they are looking at everybody, we are happy to submit to it,” said James Hamill, a program manager at the CSCDA and a nephew of one of the founders of the private company that runs it, Stephen Hamill. The authority objected to the audit during the hearing until it was expanded, alluding to a “competitive advantage” for other state issuers.
As one of the largest conduit issuers in the country, the CSCDA is operated by HB Capital Resources Ltd, a private firm that won the original contract to run the conduit issuer JPA in 1988 from the authority’s co-sponsors, the California State Association of Counties and the League of California Cities.
In light of recent public pay scandals, HB Capital’s perceived high salaries have come under new fire from its critics. The criticism has focused on HB Capital founders Stephen Hamill and Gerald Burke.
The six to seven month audit by state auditor Elaine Howle will examine the conduit’s business and compensation structures to make sure they comply with conflict-of-interest laws, have a public benefit for taxpayers and are in line with transparency laws. She will compare the CSCDA and CMFA with other state conduits.
Howle said the audit will examine finances and deals from 2006 through 2010.
“A central question before us is whether these two JPAs, which are publicity funded entities, operate in a way which unreasonably enriches private parties,” Assemblyman Mike Feuer, D-Los Angeles, who requested the audit, said during the hearing.
Even though it has only had one financial default, Feuer said the CSCDA has had 27 material events reported on bonds issued through them.
Aside from the CSCDA, also called California Communities, HB Capital also runs a nationwide government purchasing cooperative, called U.S. Communities. Some of the same staff working on the bond side also work on purchasing, according to the websites for the two entities.
HB Capital, based in Walnut Creek, Calif., also operates the Public Finance Authority, a conduit issuer founded last year in Wisconsin that handles nationwide bond issues.
The CSCDA took a strong stand against the audit during the hearing to make sure it was expanded to include other issuers in the state.
“We are very concerned, approaching alarmed, that this has been done to create or promote a competitive advantage in a marketplace that this audit will not thoroughly examine,” said Gene Erbin, a lobbyist who represented the CSCDA during the hearing. “We object to the notion that we resist transparency, accountability.”
The recent allegations are reminiscent of a battle three years ago that ended with the California Legislature in 2009 passing a bill demanding more transparency from joint-powers authority conduits. The audit will review whether the two entities have been complying with the legislation, SB 99.
The controller has also attempted to audit the CSCDA but the conduit objected to what it called the wide scope of the probe. During the hearing, a representative from the controller’s office said the scope of the new audit appeared much broader than the controller’s earlier attempt.
Feuer said the CSCDA wanted to “love the audit to death” by expanding its scope to make it burdensome.
John Stoecker, a financial advisor for the CMFA, did not take a stand against the audit but noted the strengths of his much smaller conduit. He said his organization donates 25% of its financing revenue to local nonprofits through its charitable foundation.
The CSCDA was the main focus during the hearing.
More than 500 cities, counties and special districts are members of the authority, which has issued more than $44 billion of debt through more than 1,300 bond transactions.
The agency issued $3.18 billion of debt in fiscal 2010, according to its audited financial report. In calendar 2010, it sold $1.57 billion of bonds, making it one of the nation’s top 50 issuers after it sold $4.1 billion to become the seventh-largest the year before, according to Thomson Reuters.
The CSAC and the League of Cities split $3.4 million from the conduit’s $16 million of revenue that comes mainly from fees in fiscal 2010, according to the financial report. HB Capital and its subsidiaries made $9.27 million, or 58% of revenue.
