Bond scandal now has villain; prosecutor, come on down

Feb. 18, 2013

By Chris Reed

The steadily building scandal involving school districts and capital appreciation bonds now has a specific villain — and the potential for a criminal investigation by Orange County’s district attorney or the state attorney general. CABs, in which school districts borrow money that they don’t begin to repay for 20 years or more, came into focus last summer with reports that the Poway Unified School District had borrowed $105 million at a long-term cost of $981 million — and couldn’t refinance the bonds. Normally, 30-year borrowing costs about twice the amount borrowed.

GKB-logoA comprehensive Los Angeles Times report found that about 200  school districts had taken out the bonds. But the scandal still had no central focus. Now it may have, thanks to an excellent investigative report by Melody Peterson in the Orange County Register.

“According to an analysis of data from the state treasurer’s office, [the Kansas City, Mo.-based George K. Baum firm] has issued more than 60 capital appreciation bonds for California school districts since 2007, including the single most expensive such loan. That debt – $283,612 borrowed by San Bernardino County’s Rim of the World – will cost future taxpayers 23 times the principal. …

“The story of how Baum pushed California schools into complex bond deals that charged payments to future taxpayers is one of naïve public officials, sophisticated financiers, and laws, rules and guidelines ignored:

“•It is illegal for California school officials to hire political consultants with public funds to help pass bond measures. Using the bank’s political consultants is not a legal way around that law, according to the state Office of Legislative Counsel.

“•Finance experts advise school districts to sell bonds through public auctions to get the lowest interest rate and to employ independent financial advisers to review the details. Placentia-Yorba Linda, like most of Baum’s California school clients, did neither.

“•State law requires that donated consulting work on an election be reported as an in-kind, or non-cash, political contribution. Baum did not disclose its consulting role on state campaign filings in three elections the Orange County Register reviewed. …”

A road map for prosecution

Peterson focuses on Baum’s extensive political role in the Placentia-Yorba Linda district in a way that provides a road map for prosecution:

“California law is clear: It is illegal for school officials to use public money to hire political consultants to pass bond measures.

“You wouldn’t know that if you followed Baum executives around the state.

“In dozens of presentations, the executives have explained how schools get far more than a bank with decades of experience in bond underwriting. The schools also get step-by-step instructions on putting a bond measure on the ballot, the bankers explain, as well as aid from its political strategists.

“If the measure fails, the bank assures schools, they owe nothing. …

“The bank has ‘a full-service, in-house election team comprised of a campaign specialist, a pollster, copywriters, graphic designers and database professionals,’ according to its website. …

“Downey, the board’s president, insisted that Baum’s work for Placentia-Yorba Linda did not include political consulting. She said no school funds were paid to Baum for political work.

“But documents and interviews show that the bank was deeply involved in the election.”

Bond firm illegally ran political campaign

This next paragraph makes it seem like a disgruntled former Baum employee leaked dirt to the Register.

“According to a 52-page campaign report the bank’s political strategists prepared for Placentia-Yorba Linda officials in 2006, their pollsters surveyed 400 residents by phone to determine their likelihood of voting for the bonds and what political messages worked to persuade them. …

“In addition to the political consulting, the bank gave $25,000 to the campaign. Its donation was quickly followed by other large contributions from law firms, architects, construction contractors and other companies hoping to profit from the bonds and building projects. In all, companies from outside the community gave more than 90 percent of the $150,000 collected by the political committee.

“A company paying employees to work on a campaign in California must report the value of those services as a contribution, according to the state Political Reform Act. Breaking the law can result in fines of up to $5,000 per violation.

“But Baum did not report any in-kind donations for political consulting ….”

The article lays the blame a bit too entirely on Baum. School board members aren’t all naive. Some are just looking for easy ways to avoid making tough fiscal decisions and angering the local teachers union.

But this scandal needs a villain to keep the media motivated and the general public interested. And anything that keeps the focus on school finances makes it more likely that the media will eventually focus on the bond scandal that’s even bigger than capital appreciation bonds: the use of 30-year borrowing to pay for short-lived electronics and the most routine maintenance, almost always to free up funds to provide teachers with the automatic raises most get for 15 of their 20 years on the job.



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