SAN FRANCISCO — Firms that work as financial advisors helping California school districts issue bonds after serving as campaign consultants on the preceding bond measure have a conflict of interest and are engaged in a form of “pay-to-play,” critics say. 

Such firms, a small subset of the financial advisor sector in California, walk the school districts through the bond election process, then help the them select and negotiate prices with underwriters and bond counsel for the subsequent sale.

In many cases, they are paid both by the political action committee formed to pass the bond measure, which receives contributions from underwriters and the bond counsel, and then by the district.

“It is a conflict of interest,” said state Assemblyman Chris Norby, R-Fullerton, who authored an unsuccessful bill last year to try to stop financial professionals from running bond campaigns. “A bond election should reflect the wishes of the local community and taxpayers who are going to be backing up the bond. It shouldn’t be financed by those whose sole motivation is making money off the bond.”

California law does not prohibit such activity, though Norby and others have tried to change that, so far without success.

Those involved in the practice defend their roles as essential to helping schools finance needed facilities during a time of tight budgets.


“School finance is rampant with pay-to-play in one form or another,” said Douglas Baron, director of public finance for the Los Angeles County treasurer and tax collector’s office.

Timothy Schaefer, who runs Newport Beach, Calif.-based independent financial advisory firm Magis Advisors, said FAs that run bond ballot campaigns and get paid by the political action committee supporting the measure demonstrate a clear conflict of interest.

Schaefer said the practice raises questions about advisors’ adherence to fiduciary responsibility standards in the Dodd Frank Wall Street Reform and Consumer Protection Act. He said the law now specifically requires financial advisors to put the client’s economic interests ahead of the firm’s.

“I can only speak for myself. I do not do this. I do not do it for a very specific reason,” Schaefer said. “I don’t think I should ever be an advocate for you being in debt; it is as simple as that.”

Schaefer said he has lost business because he did not give contributions or provide election services to school districts.

Baron said he’s also concerned that some bond underwriters provide election services.

“Our view essentially is that the financial professionals that work on the bond transaction should not contract for actual financing work until the bond election has passed,” said Baron, whose office under county Treasurer Mark Saladino has targeted misuse of taxpayer money in school bond sales.

The Municipal Securities Rulemaking Board recently increased ballot measure campaign-disclosure requirements for bond underwriters, prompting more scrutiny of their practices.

A review earlier in the year by The Bond Buyer found that nearly every time an underwriter gave to a successful California school bond campaign, it worked on the following bond deal.

Financial advisors also make contributions to bond campaigns, but they are not under the same disclosure rules as underwriters.

State law prohibits public funds from paying for campaign activities. Critics say the practice of entangling election and finance advisory services ultimately causes unnecessary public expenditures.

“Pre-packaged campaign and underwriting relationships may result in higher fees and less favorable terms in bond issuances conducted in a negotiated sale, making taxpayers the ultimate losers,” legislative staff wrote in a report summarizing Norby’s argument for AB 1045, which cleared the Assembly in 2011 before stalling in the Senate.

“Tax collectors report that the higher costs of underwriting that they see in negotiated bond sales are attributable to 'free’ campaign services that are being covered in the bond sale,” according to another legislative staff report on the bill.

Hiring one consultant for both election services and subsequent bond advisory work simplifies the complex process, say firms that provide such one-stop-shop solutions.

“Small schools in particular have relied on firms that are staffed to provide multidisciplinary services at a more efficient and substantially reduced price,” one firm, Caldwell Flores Winters Inc., said in a fact sheet it distributed in opposition to Norby’s bill. “Without these types of firms, the vast majority of school district bonds that have passed would have either never been attempted or would have failed.”

PAC in Action

The mechanics of the arrangement are illustrated in campaign finance records related to a school bond campaign in Rialto, in San Bernardino County.

The political action committee, “Citizens for Rialto Schools — Yes on Measure Y,” said in its filing that it paid Caldwell Flores more than $30,000 for its consulting services, campaign literature and reimbursements for its election expenses.

The PAC received around $75,000 of contributions, mostly from groups or firms that hoped to benefit from a successful bond election, such as architecture and construction companies, according to campaign finance records.

“We were running the campaign,” said Rialto’s PAC treasurer Barbara Zupanic. “I don’t know what [Caldwell Flores Winters] were paid for.”

The Rialto Unified School District board hired Caldwell Flores in March 2010 initially to evaluate a potential bond measure, paying it $18,000 to conduct a poll, according to meeting minutes.

The board then hired bond counsel Orrick, Herrington & Sutcliffe LLP in July and underwriters Piper Jaffray and Stone & Youngberg in October, agreeing to pay them contingent on a successful bond campaign.

The three firms then gave money to the PAC, which was recorded in campaign finance documents filed after the November 2, 2010, election.

Orrick contributed $5,000 to the committee on Nov. 1, 2010. Stone & Youngberg gave $8,500 on Nov. 9, 2010, and Piper Jaffray contributed the same amount on Jan. 6, 2011.

When asked about the late contributions, Zupanic said they had been promised earlier.

The underwriters were among five broker-dealer firms that contributed more than $700,000 to California local school bond campaigns during 2010, according to MSRB records.

The broker-dealers have said they have policies in place to only make contributions in districts where they already have a formal banking relationship.

Roger Davis, head of Orrick’s public finance practice, said the firm makes contributions to bond campaigns in districts where it has an existing client-attorney relationship.

“The contribution is unrelated to the assignment,” he said. “The purpose of the contribution, of course, is to support passage of the bond measure, something in which we and our client have a common interest.”

Caldwell Winters Flores did not return calls about this story.

Rialto school board member Michael Ridgway said the district had to rely on financial professionals to guide them through the process. He also said he didn’t know about Caldwell Flores’ involvement.

“When it gets to a certain point, we shut up and let the political action committee take over,” Ridgway said, adding that some board members volunteered to work on the campaign in their free time.

The bond measure was approved with well more than the required 55% margin, authorizing $98 million of bonds. 

In March 2011, the district sold $37 million of bonds. The issuance cost Rialto USD $1.75 million, according to the California Debt and Investment Advisory Commission — $189,000 to the underwriters, $128,000 to FA Caldwell Flores and $55,000 for bond counsel, and $91,812 in “other expenses.”

The district spent $643,000 on Assured Guaranty bond insurance.


Only underwriters are required by industry regulators to disclose contributions in support of bond measures.

Financial advisors and bond counsel do not have the same restrictions. As a result it’s difficult to measure the scale of their contributions in California, as campaign finance records for local bond elections are maintained by the state’s 58 counties, many of which do not put the data online.

Ernesto Lanza, the MSRB’s deputy executive director and chief legal officer, said earlier this week that it is having “very active discussions” about whether it should expand the rules governing underwriters beyond just requiring them to disclose contributions to bond campaigns.

The MSRB offered similar restrictions on contributions by financial advisors, also called municipal advisors, to bond ballot election campaigns in a new proposed rule — Rule G-42 — last August, but temporarily withdrew it until the Securities and Exchange Commission finalizes its definition of a municipal advisor in its registration rules. The SEC is not expected to release those final registration rules for financial advisors until at least the last quarter of this year.

Norby said he will not give up. However, his bill last year — which would have prohibited the bundling of bond underwriting, financial advisors, or legal services with bond campaign activities — followed in the unsuccessful footsteps of four similar bills introduced since 2008, according to legislative staff reports.

“It is almost like you have this unholy alliance,” Norby said of the opposition. “Conservatives tend not to like to bash Wall Street and the liberals don’t want to bash the public schools.”

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