WALNUT CREEK, Calif. — California’s largest conduit bond issuer and its private contractor are on the defensive after recent attacks on its roles both in and out of the state.
The rumblings include a state lawmaker’s recent call for an audit of two large conduit issuers structured as joint powers authorities — the California Statewide Communities Development Authority and the California Municipal Finance Authority — and reactions around the country to the opening last year of a CSCDA-linked conduit issuer in Wisconsin that handles nationwide deals.
The recent allegations are reminiscent of a battle three years ago that ended with the California Legislature in 2009 passing a bill demanding more transparency from joint powers authority conduits.
The CSCDA is operated by HB Capital Resources Ltd, a private firm that won the original contract to run the conduit issuer in 1988 from the authority’s co-sponsors: the California State Association of Counties and the League of California Cities.
The authority has become a lighting rod because it is the state’s largest conduit and a model for using private contractors to operate a nominally governmental bond issuer.
Critics have voiced concerns over transparency and conflicts of interest. But the allegations have especially focused on HB Capital’s fee percentages and employee compensation in light of the recent public pay scandals in California.
James Hamill, a program manager for the CSCDA and nephew of one of its founders, Stephen Hamill, in an interview at HB Capital’s Walnut Creek, Calif., office, said the firm’s compensation must be weighed against its public benefit over a long history.
He said the CSCDA has helped facilitate a great deal of affordable housing, heath care facilities and manufacturing jobs.
“There are no taxpayer dollars going into this, there are no public pensions,” Hamill said. “It is at the risk to us. If the tax-exempt market drops off tomorrow and there are no deals for three years, we are not here, we go away.”
Hamill said HB Capital is an “open book” and has no problem complying with the proposed audit.
Last month, Assemblyman Mike Feuer, D-Los Angeles, sent a letter to the head of the state’s Joint Legislative Audit Committee asking for the state auditor to investigate the conduits.
In the letter, Feuer raised concerns about transparency and public benefit. Specifically, he alleged HB Capital’s compensation is based on how much debt the CSCDA issues, demonstrating a likely conflict of interest because it’s in the interest of the firm for the board to approve deals.
The lawmaker also cited Los Angeles County’s January withdrawal from the authority, citing a desire to retain local control over bond financings and unease about securities law and potential litigation.
The audit committee is set to hear the request in August after a review by the state auditor.
More than 500 cities, counties and special districts are members of the CSCDA. It has issued more than $44 billion of debt through more than 1,300 bond transactions.
The agency issued $3.18 billion of debt in fiscal 2010, according to its audited financial report. In calendar 2010, it sold $1.57 billion of bonds, making it one of the nation’s top 50 issuers after it sold $4.1 billion to be the seventh-largest a year earlier, according to Thomson Reuters.
The CSAC and the League of Cities split $3.4 million from the conduit’s $16 million of revenue that comes mainly from fees in fiscal 2010, according to the financial report. HB Capital and its subsidiaries made $9.27 million, or 58% of revenue.
The CSCDA spent the remaining $3.3 million mainly on “deposits returned and other,” including $89,000 to bond counsel, the financial report said.
In light of public pay scandals, HB Capital’s perceived high salaries have come under new fire from its critics. The criticism has focused on HB Capital founders Stephen Hamill and Gerald Burke.
How much Hamill and Burke actually make is unknown; in required state disclosure documents, they simply check the box for compensation above $100,000, the largest category available on the forms.
The forms also show their ownership of HB Capital is worth more than $1 million, also the largest category available.
“Sometimes your competitors — and the state of California is one of those competitors — don’t like the fact that we use a different business model, that we have relied on contract staff as opposed to building a staff of public employees and that we are able to move as quickly as we can,” said Chris McKenzie, executive director of the League of California Cities,
McKenzie said the CSCDA’s business is so successful because its fees are competitive, it offers a range of services and it is responsive to its members.
California Treasurer Bill Lockyer has been a long-time critic of the conduit issuers and has doubled-down on his criticism since the authority has again come under scrutiny.
“We have long believed that CSCDA is a private business being run out of a government agency,” Lockyer spokesman Tom Dresslar said recently in reaction to the audit request. “A thorough scrubbing of their books and their operations is long overdue.”
The treasurer’s office operates several conduit issuers, including the California Health Facilities Financing Authority. Other conduits are run out of other state agencies and joint powers authorities compete with the CSCDA.
A major complaint alleged by Lockyer has been the authorities’ lack of transparency.
The CSCDA and other joint powers authority conduits were not required to file an audited financial statement until the Legislature required it in 2009. They were also forced to tighten board membership and meeting notice requirements.
McKenzie said the CSCDA has local hearings on their projects and must get approval from local agencies to fund them.
“We have a process that is more transparent than the state’s process, which the treasurer is involved in,” McKenzie said. “We don’t do a financing if a local government doesn’t want us to do a financing, unlike the state, which is doing this many times without the knowledge of the local government.”
One source with experience doing business with both the authority and conduits sponsored by the treasurer’s office said the CSCDA is typically more hands-off and efficient with the deals that go through them, while the state conduit issuers take a closer look at the deals and impose more restrictions.
The state conduits, especially the California Health Facilities Financing Authority, developed a reputation for politicization. In 2006, a union at nonprofit Sutter Health persuaded allies on the CHFFA board, headed by then-Treasurer Phil Angelides, to hold off on a planned bond issue by the hospital chain. That deal eventually went forward in 2007 after Lockyer took office as treasurer and signaled that he wanted to make the CHFFA a more competitive option for issuers.
The CSCDA acts as a one-stop shop for borrowers, instead of going to several different state issuers for different types of deals, such as for health care facilities or affordable housing.
Hamill said the accusations against the CSCDA don’t hold water.
“Our record speaks for itself; we have had one default, one real, true default out of those 1,300 issuances in our 24-year history,” Hamill said. “That is a testament to our risk profile.”
He said the authority rejects 50% to 60% of the deal applications before they even get to the board for approval.
HB Capital has taken its business model to Wisconsin, where it staffs the Public Finance Authority, a conduit issuer created to operate with a nationwide scope.
Hamill said the Wisconsin officials, along with the National Association of Counties and the National League of Cities, went to HB Capital and asked them to consult on starting up a conduit issuer that could function across state lines.
“We were not involved in the formation,” Hamill said.
Legislation that would have authorized the CSCDA to operate nationally failed in the California Legislature in 2007.
Orrick, Herrington & Sutcliffe, the largest bond counsel firm in the country, which also serves as the authority’s counsel, helped draft the Wisconsin legislation creating the Public Finance Authority. After the PFA was created last year, HB Capital responded to a request for proposals and won the contract, according to Hamill.
So far, the PFA has issued bonds for projects in Colorado, Florida, Georgia, New York, and Wisconsin.
The PFA says it to saves multi-state entities money by allowing them to use one issuer and helps smaller municipalities overcome technical hurdles.
The new authority provoked strong reactions from some state conduit agencies, with some states passing or introducing legislation to ban out-of-state issuers from working with in-state projects.
“PFA was not established to subvert anything that the state issuers are doing,” Hamill said. “There was not really an entity out there that could go across state lines.”
As with the global economy, Hamill said, it is more efficient to remove boundaries between states in the tax-exempt market. He said HB Capital now has people in Wisconsin and across the country helping to set up issues through the PFA.
“This is what CSCDA and PFA do for a living — all we do is issue tax-exempt bonds,” Hamill said. “This is bringing more professionalism to the tax-exempt bond world.”
