Thursday, January 28, 2016
A.G. Warns School Districts on Bond Promotion Deals
By a MetNews Staff Writer
A school or community college district may not use public funds by contracting for services related to a bond election campaign if the services can be fairly characterized as campaign activity, Attorney General Kamala Harris has opined.
In a published opinion made public yesterday, Harris added that the districts are precluded from engaging in other practices that may bring the district’s neutrality into question. Depending on circumstances, these may include entering into an agreement with a financial firm for pre-election services in return for an exclusive contract to provide bond-sale services if the vote supports the bond issue or using bond sale proceeds to reimburse a financial firm for such pre-election services, the attorney general said.
Harris also said that a company that provides services to a bond-measure committee in exchange for an exclusive agreement with the district to sell the bonds must report the value of those services as a contribution to the campaign.
In an opinion requested by state Treasurer John Chiang, Harris explained that it has become commonplace for investment bankers, financial consultants, and bond attorneys to offer to contract with school districts to provide necessary pre-election services, free or at a discount, in exchange for related post-election business.
This enables the firm to recoup whatever it loses on pre-election services from the much greater remuneration for post-election services from successful campaigns. Harris cited as an example the 2010 Garden Grove Unified School District bond issue, in which the underwriter reportedly agreed to charge the district nothing if the bond issue failed, but 1.1 percent of the value of the issue if it passed.
The issue did pass, resulting in the issuance of $130 million in bonds and fees of more than $1.43 million for the underwriter. These types of arrangements have provoked suspicion, the attorney general said, that districts are using them to circumvent the prohibition against spending public funds to campaign in favor of a bond issue.
The 1976 state Supreme Court decision establishing that prohibition, Harris explained, now codified as Education Code §7054, has given rise to a “campaign/informational dichotomy,” with public entities and anti-spending groups litigating over whether an expenditure by the entity constituted illegal campaign spending or the lawful use of public funds to provide information to enable voters to make an informed decision on how to vote.
•“[T]hat a school district violates prohibitions against using public funds to advocate passage of a bond measure by contracting for services related to a bond election campaign if those services may be fairly characterized as campaign activity”;
•“[T]hat a contingent-compensation agreement between a school district and a municipal finance firm violates California prohibitions against using public funds to advocate passage of a bond measure if the district enters into the agreement for the purpose (sole or partial) of inducing the firm to support the contemplated bond-election campaign”;
•“[T]hat a contingent-compensation agreement between a school district and a municipal finance firm also violates California prohibitions against permitting others to use public funds to advocate passage of a bond measure if the firm’s fee for the bond-sale services is inflated to account for its campaign contributions, and the district fails to take reasonable steps to prevent this inflated fee”;
•“[T]hat a school or community college district violates California law concerning use of bond proceeds if it reimburses a municipal finance firm for the cost of providing pre-election services (of any sort), from the proceeds raised from the bond sale, as a component of the fees the district pays to the firm in connection with the bond sale”;
•“[T]hat a school district violates the laws concerning use of bond proceeds if the district reimburses a firm for pre-election services from the proceeds of a bond sale, whether or not the services are itemized as a component of the fees charged in connection with the bond sale”; and
•“[W]here an entity provides campaign services to a bond-measure committee in exchange for future financial consideration, such as an exclusive agreement with the district to sell the bonds, the entity has an obligation to report the value of the services as a contribution to the bond-measure campaign in accordance with state law, if the value of the contribution totals $10,000 or more in a calendar year.”
The opinion is No. 13-304 and was prepared by Deputy Attorney General Manuel M. Medeiros.
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