State’s bond marketing procedure shielded from political interference

With Gov. Schwarzenegger pushing for more than $70 billion in state
infrastructure bonds, Sacramento has turned into a lobbying and political
feeding frenzy. And while bond houses stand to make millions of the sale of
those bonds, a set of closely-followed, self-imposed regulations limit their
role in advocating for new state bonds.

For the underwriters who get the state’s bond business, the payoffs will be
huge. One employee of an underwriting house, who asked not to be named, said
that states usually pay between 0.1 percent and 0.5 percent, depending on
the type of bond and other factors. With multiple ideas on the table,
including Democrats’ $30 billion counterproposal, total underwriting fees
could range from $30 million to $350 million.

But bond houses and their employees are barred from giving political
donations according to rules approved by the Securities and Exchange
Commission and issued by the Municipal Securities Rulemaking Board. The MSRB
is a private, self-governance body for the securities industry, but its
rules must be approved by the SEC, said executive director Chris Taylor.

Contributors cannot be involved in a company’s municipal bond business, and
cannot use donations to solicit business. Breaking these rules can result in
a two-year ban on doing business with a particular state, meaning that
companies have an incentive to police their own employees.

“Most of the big investors in bonds have fairly strict programs,” Taylor

However, most underwriters are part of larger securities firms with business
and consumer-focused arms as well. These firms can legally give campaign
contributions and engage in lobbying.

Financial services companies have been especially active in initiative
campaigns in recent years. In 2000, UBS Paine Webber gave $350,000 to a
campaign to lower the vote threshold for local school bonds from two-thirds
to 55 percent.

Over the last three years, financial firms have given money, both for
campaigns and for lobbyists, through the California Public Securities
Association. The CPSA has paid the lobbying firm Aaron Read & Associates
$295,000 over that time–and they have focused on legislation related to
bonds. Read lobbied on bills including SB 1069, which dealt with
redevelopment bonds, and AB 1433, which addresses publicly-financed

More recently, the Public Securities Association gave $250,000 to
Proposition 1A, the 2004 measure which protects local government revenues
from being raided by state budget makers.

Then there was last month’s hearing on toll roads held by the Senate
Transportation Committee. Goldman Sachs sent their new consultant, former
House leader Dick Gephardt, to argue for greater uses of private toll roads.
The company has brokered two deals in the Midwest for a private Spanish and
Australian consortium to buy toll roads.

But these companies and their employees have also found ways to spread money
around to campaigns, despite fairly strict rules around giving. J.P. Morgan
Chase gave $10,000 to Californians for Schwarzenegger in each of the last
two years, but also gave smaller amounts to Controller Steve Westly and the
California Democratic Party. In 2002, the firm contributed to both Gov. Gray
Davis and Phil Angelides for his reelection campaign for treasurer.

Angelides, who chooses the members of the state’s bond underwriting pool in
his role as state treasurer, has also received contributions from employees
of bonding houses. Since the beginning of the year, for instance, Merrill
Lynch employees have given his campaign $4,600. Since the beginning of 2005,
employees of the state’s legal counsel on bonds, Orrick Herrington, have
given $16,950, while the firm itself gave $1,100. Schwarzenegger received
$6,000 from Goldman Sachs employees.

All of this is perfectly legal, Taylor said: The Merrill and Goldman
employees are not involved in the company’s public bond business, while
Orrick is not bound by MSRB rules.

The bond houses have been major lobbying players in recent years. JP Morgan
has spent more than $530,000 on lobbying since 2003. Merrill Lynch has spent
more than $400,000 in the same period.

While some of these firms have spend hundreds of thousands of dollars trying
to influence California decision makers, their lobbying activity has mainly
been focused on consumer-related legislation, according to James Gross, a
partner at Merrill Lynch’s California lobbying firm, Nielsen Merksamer. For
example, he said, two years ago Nielsen worked on the compromise package
around a privacy bill put forth by Senator Jackie Speier, D-Hillsborough.
“We have not been tasked with anything related to the infrastructure bond,
and I’m not aware that they’re doing anything,” Gross said of his client.

One thing California voters should be happy about is that the state will get
its money far cheaper than private companies, said Garth Salisbury, managing
director of public finance for the Western Region at J.P. Morgan. Public
bonds, he said, are a high-volume, low-margin business.

“The state receives much lower fees than other issuers, due to [its] size
and the competition involved,” Salisbury said. “States in general do, and
California in particular.”

Want to see more stories like this? Sign up for The Roundup, the free daily newsletter about California politics from the editors of Capitol Weekly. Stay up to date on the news you need to know.

Sign up below, then look for a confirmation email in your inbox.


Support for Capitol Weekly is Provided by: