Harris, 012616 CAAGO, AGO 13-304

Case DateJanuary 26, 2016
CourtCalifornia
KAMALA D. HARRIS Attorney General
MANUEL M. MEDEIROS Deputy Attorney General
AGO 13-304
No. 13-304
California Attorney General Opinions
Office of The Attorney General State of California
January 26, 2016
         THE HONORABLE JOHN CHIANG, CALIFORNIA STATE TREASURER, has requested an opinion on the following questions:          1. Does a school or community college district violate California constitutional and statutory prohibitions against using public funds to advocate passage of a bond measure by contracting with a person or entity for services related to a bond election campaign?          2. Does a school or community college district violate California prohibitions against using public funds to advocate passage of a bond measure if the district enters into an agreement with a municipal finance firm under which the district obtains pre-bond-election services in return for guaranteeing the firm an exclusive contract to provide bond-sale services if the election is successful?          3. In the case of an agreement as described in Question 2, does a school or community college district violate California law concerning the use of bond proceeds if the district reimburses the municipal finance firm for the cost of providing the pre­election services from the proceeds raised from the bond sale?          4. In the scenario described in Question 3, does a school or community college district violate California law concerning the use of bond proceeds, even where the reimbursement is not an itemized component of the fees the district pays to the firm in connection with the bond sale?          5. Does an entity providing campaign services to a bond measure campaign in exchange for an exclusive agreement with the district to sell the bonds incur an obligation to report the cost of such services as a contribution to the bond measure campaign in accordance with state law?          CONCLUSIONS          1. A school or community college district violates California constitutional and statutory prohibitions against using public funds to advocate passage of a bond measure by contracting with a person or entity for services related to a bond election campaign if the pre-election services may be fairly characterized as campaign activity.          2. A school or community college district violates prohibitions against using public funds to advocate passage of a bond measure if the district enters into an agreement with a municipal finance firm under which the district obtains pre-election services (of any sort) in return for guaranteeing the firm an exclusive contract to provide bond-sale services if the election is successful, under circumstances where (a) the district enters into the agreement for the purpose (sole or partial) of inducing the firm to support the contemplated bond-election campaign or (b) the firm's fee for the bond-sale services is inflated to account for the firm's campaign contributions and the district fails to take reasonable steps to ensure the fee was not inflated.          3. In the case of an agreement as described in Question 2, a school or community college district violates California law concerning the use of bond proceeds if the district reimburses the municipal finance firm for the cost of providing pre-election services from the proceeds raised from the bond sale.          4. In the scenario described in Question 3, a school or community college district violates California law concerning the use of bond proceeds if the district reimburses the municipal finance firm for the cost of providing pre-election services from the fees the district pays to the firm in connection with the bond sale, whether or not the reimbursement is evident as a component of the fees the district pays to the firm in connection with the bond sale made on an itemized service-by-service basis.           5. Where an entity provides campaign services to a bond-measure committee in exchange for an exclusive agreement with the district to sell the bonds, the entity has an obligation to report the value of its services as a contribution to the bond-measure campaign in accordance with state law.          ANALYSIS          In this opinion, we consider several questions on the topic of school construction bonds. We have been asked about the propriety of certain practices related to bond elections, in particular the process for securing the voter approval necessary for a school or community college district to issue such bonds. Our central task is to determine whether these practices constitute permissible uses of public funds. Because it is illegal to use public funds to influence the outcome of an election1 (which would include advocating or campaigning for the passage of a bond measure), and because there are constitutional and statutory restrictions on how bond proceeds may be used, we must carefully examine each of the practices and methods described here. Before delving into the specific questions posed, however, it will be useful to provide some background to show how the bond practices in question work, and how they have come under scrutiny.          School district bonds and bond elections          "'The usual method of funding new school construction in California has been for school districts to obtain voter approval for the issuance of general obligation bonds .....          The bonds are repaid by an annual levy of an ad valorem tax on real (and certain personal) property located within the area of the district.'"2 The governing board of a school or community college district3 may submit a proposed bond measure to the voters "when in its judgment it is advisable."4          Bond elections typically involve a range of pre-election activities, which can include: conducting opinion surveys to evaluate voters' attitudes toward a bond issue; developing a financial plan; determining appropriate bond issuance size and tax rates; drafting documents needed to place a bond measure on the ballot; conducting a public-information program; training staff to inform the community about funding needs and bond financing; preparing a tax-rate statement for the voter pamphlet; providing information to the election campaign; conducting informational workshops; and preparing the ballot question itself. Although district staff may be able to provide some or all of these functions, it is common for districts to contract with private vendors to perform or support them.          A practice has developed within the municipal financing industry whereby investment bankers, financial consultants, and bond attorneys (collectively referred to here as "municipal finance firms" or "firms") offer to contract with a school district to provide the pre-election services that the district seeks. Under such an arrangement, the firm agrees to provide the pre-election services at no, or reduced, charge to the district in exchange for the district's promise to select the firm as its contractor to provide post-election bond services, if the bonds are approved by the voters.5 Naturally, it is within the firm's financial interest to be awarded the contract to provide post-election bond services.          If the bond measure passes, the municipal finance firm under an arrangement like this will recoup the cost of the pre-election services from its substantially greater post­election earnings.6 Indeed, the comparative value to the firm of the post-election earnings is manifest in the fact that these firms risk losing the value of their pre-election services in exchange for an opportunity to provide post-election services related to the bond sale.          Providing bond services can be quite lucrative, typically allowing a percentage of the bond sale as compensation.7 Bond-issuance costs, including underwriting costs, are a charge against the bond sale and, therefore, reduce the amount of revenue garnered by the school district.8 One commentator has observed: "In 2003, state and local governments in the United States issued over $452 billion in debt. Investment banks contract with state and local governments to sell the debt in the form of bonds. If investment banks collected even 0.75% of that in fees, investment banks received $3.39 billion in 2003."9Recently the Los Angeles Times reported that one underwriter earned $1.45 million from selling the initial $130 million in notes issued by the Garden Grove School District in 2010.10 The underwriter was said to have agreed to provide all campaign services free of charge if the bond measure failed. If it passed, the underwriter would receive 1.1% of the value of the bonds.11          State law prohibits school districts from campaigning in support of a bond measure—a restriction that we will discuss further. However, a municipal finance firm is free to contribute to a campaign. Indeed, under an arrangement like this, it is clearly in the firm's financial interest to do so.12 This is the primary circumstance that gives rise to suspicions that such contracts between school districts and a municipal finance firms allow school districts to circumvent the law's restriction on the use of public funds for campaign purposes.13 Not only do these contingent-compensation contracts implicate important constitutional issues involving the proper use of public funds, but it may also reasonably be inferred that the costs to school districts from these underwriting agreements are higher than if the contracts were competitively bid.14 However, school districts are not legally required to allow competitive bidding for consultant contracts.15          All of this brings us to the questions posed here, which call for consideration of rulings articulated in 1976 by our Supreme Court in Stanson v. Mott.16 That case involved a dispute about whether the Department of Parks and Recreation was authorized to spend more than $5,000 of public funds to promote passage of a bond issue for the...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT