Bill Lockyer’s big stick

October 19, 2012

I wish that I knew how to put on a conference, because we need a muniland event with Bill Lockyer, California’s state treasurer, as the headliner. I would invite all the state treasurers and attorneys general to learn how state officials can wield their power to protect local governments from unscrupulous underwriters, bond counsels and financial advisors.

Here is Lockyer at The Bond Buyer conference in California:

Treasurer Bill Lockyer put underwriters, advisors and bond counsel on notice Wednesday that if they are not willing to renegotiate some of what he called the more egregious capital-appreciation bonds issued by the state’s school districts, his office may cut them off.

“I wish the firms that underwrote those bonds would renegotiate those deals,” Lockyer said. “I have the list, I know the underwriters, financial advisors and bond counsel who did them, and they are going to face constraints with my office when the state issues bonds.”

Lockyer paused, then looked out to audience members and said, “You get to make the choice.”

The bond deals that Lockyer was likely referring to were capital appreciation bonds (CABs) issued by the Poway Unified School District and others. These bonds gained national attention after Voices of San Diego reporter Will Carless began his investigative work on them. The bonds netted the Poway school district about $105 million in upfront cash, but they require almost $1 billion in repayment because of their structure. Carless caught up with Treasurer Lockyer after his speech at the Bond Buyer conference for a follow-up:

Lockyer said high-interest school bond loans are an important issue statewide:

“I think there are lots of examples of really bad deals that were made. In the last dozen years, there were over 1,000 [capital appreciation bonds] done by school districts. We’re still analyzing the data. There are a number of these deals where the repayment ratio is, like, 30-1. I just think they’re disgraceful, and I would hope the people that underwrote or helped make those deals would make a genuine effort to renegotiate them.”

He said the deals were being driven by consultants:

“There’s a group of financial advisers who kind of circuit ride and pitch these products to people.”

On Poway’s billion-dollar deal, Lockyer harkened back to his early political career, when he served on a school board:

“I would fire staff that made a deal like this. And if I were a voter, I’d pick a different school board. But that’s just how I react to how egregious I think this deal is.”

I asked Lockyer about another element of Poway’s deals: the fact that it squeezed millions of extra dollars out of its bonds, a move the state Attorney General’s Office said was illegal:

“I agree with the attorney general’s opinion. I don’t think [Poway] can legally do that. And that somebody pitched that as part of the deal I think adds to the odor around it. If somebody did something illegal at some point, obviously, there’s going to be an enforcement action against that. I don’t know who does that, or when that occurs, but I think that happens eventually.”

Carless could probably host his own conference to teach reporters how to dig into bond deals and find the truly abusive ones.

The biggest problem with muniland is that bond offerings are not reviewed before they are brought to market. Neither state securities regulators, the Municipal Securities Rulemaking Board or the SEC do any preview of municipal bond offerings. The only recourse is some type of enforcement action by the SEC after rules have been broken. And even then, by law, the SEC can only prosecute muniland participants for securities fraud. This makes the need for an independent financial advisor even more important.

Treasurer Lockyer is waving a big stick by denying future business to muni professionals, and it signals that they must get in line. Muni professionals generally rely on repeat business within a state. If they spoil their reputation with state officials, they could cut themselves off from local bond business.

This is a shout out to the Pew or Kauffman foundations — Can we get some funding for this conference?

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