SAN FRANCISCO – California Treasurer Bill Lockyer sent a letter Monday to the state attorney general asking for an opinion on whether it is legal for bond underwriters to provide election services to school districts. 

Lockyer, a former attorney general, said in the letter to Kamala Harris that some school districts in recent years have been awarding business to underwriters in return for pre-bond election campaign services.

The letter asked Harris to answer five legal questions about the role of underwriters in school bond elections, which includes community college districts.

“These arrangements raise substantive questions about whether school district officials have violated state law by using public funds for campaign services related to advocating of bond measures,” the letter said.

School bond underwriters have conducted community outreach for the bond election measures, voter opinion surveys, ballot arguments or providing campaign consultants to the bond election campaign committee, according to the treasurer.

Lockyer has copies of the agreements demonstrating the involvement of underwriters, which the treasurer has not named, according to his spokesman Tom Dresslar.

Robert Doty, a financial adviser at Government Financial Strategies in Sacramento, Calif. and a critic of pay-to-play by bond professionals in school bond elections, said the letter could provide the political pressure necessary to stop the problems.

“Given the creativity of bond market professionals who engage in these activities, one of the most significant practical impacts of the Treasurer’s letter and a ruling by the AG (if one is forthcoming) may be a political impact that discourages the patterns of behavior,” Doty said. “It may draw to the attention of school officials the fact that they suffer the greatest risks.”

However, Doty said, after a preliminary read of the letter, it may not address the dubious involvement of financial advisors in school bond campaigns, arrangements that have not been put down on paper, or the role of campaign contributions.

Doty said there are already two legislative counsel opinions on the subject, which appear to have been ignored, and that one could expect further attempts to look for perceived loopholes.

A review by The Bond Buyer last year of campaign contributions found a near perfect correlation between underwriter donations to school bond election committees and their subsequent work on a bond deals.

Piper Jaffray, De La Rosa, Stone & Youngberg, George K. Baum and RBC Capital Markets all lead negotiated school bond transactions after contributing to election campaigns, a review of Municipal Securities Rulemaking Board records found.

Those firms still dominate school bond deals in California, which sees by far the most contributions by underwriters to school bond measure campaigns.

Another story by The Bond Buyer last year also highlighted the significant role financial advisors, which typically help hire underwriters and bond counsel, play in the school bond elections. They also are typically paid when the school bonds are issued. Some even advertise their ability to get school bond measures passed.

Dresslar said the Treasurer is aware of the other questionable behavior tied to school bond elections.

“We haven’t seen pre-election agreements with financial advisors, only the underwriters,” Dresslar said. “The treasurer is also troubled by the apparent connection between campaign contributions and attaining bond underwriting work but there is no law prohibiting that. We have a law that says you can’t spend public money for campaign-related purposes.”

In February, the Municipal Securities Rulemaking Board sent a proposal to the Securities and Exchange Commission that would increase the disclosure by underwriters about their contributions to bond ballot campaigns and their resulting roles in the following deals.

The proposal, which would amend the G-37 rule, would require underwriters to disclose the value and nature of “in kind” contributions, meaning goods and services “provided to, on behalf of, or in furtherance of” bond ballot campaigns, and the date the contributions were made.”

That rule already requires underwriters to disclose contributions to bond ballot campaigns and to issuer officials.

In California, an attorney general’s opinion on a subject does not have the same force of law that a court ruling would have, but is still considered influential.

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