Conflict-of-Interest Concerns in California Bond Market

Conflict-of-Interest Concerns in California Bond Market

A report issued last month by California's state auditor has raised questions about whether conflict of interest laws were broken by two of the state's largest issuers of municipal debt. The audit's findings, though inconclusive, cast suspicion on the practices of two joint powers authorities (JPAs), the California Statewide Communities Development Authority (California Communities) and the California Municipal Finance Authority (Municipal Finance), which issue conduit revenue bonds on behalf of private businesses and nonprofits. 
 
"Although we found that the compensation model of the joint powers authorities raises concerns, we cannot conclude that it violates California's conflict-of-interest laws," the report stated. 
 
The trouble is the JPAs are entirely staffed by private consulting firms, which receive a percentage of the fees associated with each conduit issue. California Communities paid its consultants about $50 million from July 2006 through June 2011, according to the auditor's report. The state's Political Reform Act of 1974, however, bars public officials from taking part in decisions in which they have a financial interest. The issue is whether that law also applies to employees of private firms performing the work of public officials. 
 
California Treasurer Bill Lockyer was evidently concerned enough about it to call on Attorney General Kamala Harris to investigate. 
 
"The problems identified in the auditor's report are sufficiently serious and substantial to warrant an investigation by the attorney general to determine if conflict of interest laws have been violated," he said in a statement.  

But California Communities chose to focus on the positive. 
 
"We're pleased, but not surprised, that the auditor found California Communities' business practices to be in full compliance with the law," the authority's chairman, Larry Combs, said in a statement. "We're very proud of California Communities' positive 24-year track record." (BLOOMBERG, CALIFORNIA STATE AUDITOR) 

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