ALAMEDA, Calif. — Los Angeles County has withdrawn from the California Statewide Communities Development Authority, the state’s largest conduit issuer.
The withdrawal was finalized last week, after a process that began in 2008 when the county’s staff reviewed its conduit bond policies. The county’s action effectively cuts the CSCDA out of conduit issuance in unincorporated Los Angeles County, home to almost 1.1 million residents.
“The County of Los Angeles wishes to retain local control of conduit financings through the determination of which projects best support county policies and to ensure that our policy requiring credit enhancement is met,” Douglas Baron, public finance director for the county treasurer, Mark Saladino, said in e-mail.
Baron said the county is also concerned about recent trends in securities law and litigation that may extend potential liability to third parties, such as the county, that participate in debt issues that ultimately fail. The county’s withdrawal also revives concerns that critics have made about the CSCDA and another conduit issuer with a similar organizational structure, the California Municipal Finance Authority.
The two conduits “are not governed by elected officials and are not subject to the same reporting and oversight rules that apply to the county and the state, resulting in a relative lack of public scrutiny and transparency,” Baron said.
The comments echo a debate that played out in the Legislature in 2008 and 2009, culminating in the 2009 passage of a bill imposing more disclosure requirements on joint-powers authorities that serve as conduit bond issuers. They imposed modest requirements on the issuers, such as placing meeting agendas on the internet.
Among the critics is state Treasurer Bill Lockyer. His office operates several conduit-bond authorities, such as the California Health Facilities Financing Authority, that offer the same services as the CSCDA and CMFA.
Lockyer is critical of a financial structure in which private firms operate the ostensibly governmental organizations. CSCDA is operated by a private firm, HB Capital Resources Ltd.
“It’s a government agency that’s been turned into a profit-making enterprise for a private entity,” said Tom Dresslar, Lockyer’s spokesman. “We consider this type of setup a perversion of the law that governs joint powers authorities.”
The CSCDA was created in 1988 with the sponsorship of the California League of Cities and the California State Association of Counties, under California joint powers law, which allows any two or more government agencies to join forces to form a JPA. The authority claims more than 500 members, including every California county except Los Angeles County. It was California’s ninth-ranked bond issuer in 2010, according to Thomson Reuters, selling more than $1.5 billion.
The CSCDA responded with an e-mail statement defending the general value of its work and a defense of its public accountability practices.
“In addition to adhering to all federal tax code and state volume cap requirements, each California Communities transaction is locally approved by the elected governing body following a public hearing, ensuring accountability and transparency for all project financings,” the statement said. “This rigorous multi-step review and approval process ensures that financed projects provide economic development growth and public benefit to communities throughout California.”
In a staff report to the Los Angeles County Board of Supervisors, county chief executive William Fujioka said the withdrawal from the CSCDA would not deprive any project of financing. The county never joined the CMFA.
“The treasurer and tax collector will process all conduit financing requests in Los Angeles County,” the report said. “In each case, the county or one of its affiliated authorities can serve as the bond issuer.”
The county can better protect its own interests by serving directly as a conduit issuer for projects in its territory, Fujioka wrote in another staff report. Securities litigation has evolved toward extending potential liability to third parties who participate in failed bond issues but do not make statements directly to bondholders.
“This trend increases the risk that the county could become involved in litigation or a work-out situation simply by having approved an issuance of bonds by CMFA or CSCDA if the borrower is unable to meet its debt-service obligations,” he wrote.