California State Treasurer John Chiang convened a task force after reports that $1.3 million was embezzled from a bond fund at a Bay Area conduit issuer.

LOS ANGELES - Many public agencies in California do not have an internal control system to manage their bond funds, according to a draft report commissioned after $1.3 million in bond proceeds were embezzled from a conduit issuer.

According to the task force's draft staff report, California public agencies have issued $1.4 trillion in debt during the past 25 years with only a few cases of fraud leading to misuse or loss of bond funds.

But, without adequate internal controls, the report said, public managers cannot profess with a reasonable assurance that bond funds are being used for their intended purposes.

State Treasurer John Chiang formed a task force in February after it was learned that community development district bond proceeds were siphoned from a conduit issuer operated through the Association of Bay Area Governments.

The long-time director of financial services for ABAG's Finance Authority for Nonprofit Corporations, Clarke Howatt, is suspected of embezzling the money from a bond account.

Howatt's attorney and prosecutors have been negotiating a plea agreement and restitution in anticipation of a pre-trial disposition of the case.

Howatt is expected to enter a plea at a Nov. 18 hearing, according to court documents.

Chiang charged the task force with developing best practice guidelines on the use of state and local bond proceeds.

The task force's staff outlined 16 guidelines in the draft report to help agencies establish better internal controls to insure that bond funds are appropriately managed.

Staff also recommended that agencies receive advice on how to implement the guidelines through educational programs and that more information be disseminated to the public about how the bond proceeds are being used.

The report, however, is not yet the work of the task force, but a report from its staff, which they believe captured the essence of testimony, said the task force's chair, former state Assemblyman and Santa Cruz County Treasurer Fred Keeley.

A bevy of public finance experts including investment bankers, auditors, treasurers and finance directors testified at task force meetings earlier in the year.

At its Oct. 8 meeting, the 12-member task force will review the guidelines and the findings and prune the guidelines to target areas that need strengthening, Keeley said.

The task force plans to have a final report in November and to approve the report's recommendations in December, after which they will be forwarded to the state legislature and the treasurer.

The task force will have the opportunity to say the report is on or off the mark, Keeley said.

"I agree in principle, and in concept, with what is in the report, but I am reserving the right to make changes," Keeley said. "In general, I believe the report is on the mark."

One challenge identified in the report is that the public agencies issuing bonds in California range in size from small joint powers authorities and special districts to the state government. They all play different roles, have different staffing and organizational structures, and different financial and administrative policies.

The staff report did find some areas for improvement.

For instance, though Proposition 39 requires citizens' bond oversight committees for school district general obligation bonds, such oversight groups are absent in most other market sectors. Joint powers authorities, lease financings, Mello-Roos, and assessment districts don't have them.

Staff also found that the indentures on some bond issues do not contain in sufficient detail the accounting and administrative procedures needed to enact the agency's control system.

In its report, staff said it found that the controls applied by an agency to government funds are not consistently applied to the expenditure of bond proceeds.

"It is not uncommon, therefore, to find that claims for travel reimbursement are subject to a greater level of review than a request for a draw on bond funds and yet both represent the expenditure of public funds," the report said.

Chiang recognized public agencies have a number of manuals and instructional guides describing how to administer their bond funds, but they lack a comprehensive set of practices that can help to provide these agencies the assurance that their bond funds are being spent properly, according to the report.

The report includes a debt accountability and management checklist and an internal control checklist. The guidelines are based on best practices recommended by the Government Finance Officers Association.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.