WASHINGTON - As the Municipal Securities Rulemaking Board prepares to receive another batch of quarterly filings on bond ballot contributions July 31, a 2014 article from an academic journal may influence the discussions.
Bond measure campaigns cannot be aided by public funds or public officials, so outside influence and money to persuade voters can be a significant factor. Pay-to-play refers to a person making political contributions to help in election campaigns of state or local officials or bond initiatives with the expectation they will then receive government contracts.
The Municipal Securities Rulemaking Board has several rules limiting contributions to elected officials' campaigns directly and indirectly, but the capability of a firm to contribute to a bond ballot campaign remains an area of concern for those watching the market. The MSRB gathers data on those contributions under its Rule G-37 on political contributions, which requires underwriters to disclose their ballot contributions.
Todd L. Ely, a professor in the School of Public Affairs at the University of Colorado Denver, and Thad D. Calabrese, a professor in NYU's Wagner School of Public Service looked at ballot measure contributions in their 2014 study, "To Give Is to Get: The Promotional Role of Investment Bankers in Local Bond Elections," published in American Review of Public Administration.
It observed referendum and underwriting activity in California between 2007 and 2012 and concluded that underwriters who contributed to campaigns received higher fees in their deals, likely because the underwriters were recouping their contribution costs. The average rate of return for contributing underwriters was about $1.70 per dollar spent.
The study's authors noted the findings reflected lingering concerns about pay-to-play because the higher fees are eventually passed off to taxpayers.
"We believe that it is the indirect payment of campaign contributions with public funds that is most troubling, along with the commonly held notion that these election contributions and services are tied directly with to securing the underwriting work," the authors wrote. "The empirical results presented here demonstrate quid pro quo behavior in a direct democracy setting."
The deals in the study with high underwriter involvement were those organized as negotiated sales instead of competitive, because the issuer chooses the underwriting firm in advance.
Craig Holman, a government affairs lobbyist with Public Citizen, said the study raised two "troubling" concerns; the ability for dealers and underwriters to evade G-37, and that the cost of the underwriters' support is often calculated into the eventual bond deals, to be footed by taxpayers.
"Even though many of the bond measures are negotiated prior to the campaign contributions, there is often - perhaps almost always - a wink and a nod by the underwriters that they will indeed finance the ballot measure campaign once it gets to the ballot," Holman said.
The MSRB amended G-37 in 2010 to start bringing in data on underwriter contributions and increased its information collection again in 2013 to see if the contributions were a cause for concern.
"The MSRB first required public disclosure of dealer contributions to bond ballot campaigns in 2010 and began collecting more data in 2013. The greater transparency around these contributions enables regulators, academics and the public to analyze potential connections between dealers' financial contributions and the awarding of bond business, and will inform any future action to address real or perceived pay-to-play activities in the market," said Lynnette Kelly, the MSRB's executive director.
The MSRB is also weighing extending the rules governing municipal underwriter contribution disclosure to municipal advisors. It published a request for comment in August on a new draft of G-37 that would accomplish that goal.
The proposal drew support from industry groups, including Bond Dealers of America and the Securities Industry and Financial Markets Association, which both submitted comment letters.
