“Every one of the 12 companies that contributed more than $5,000 to the Grossmont Union High School District's Proposition U campaign in 2008 won a contract from the district.” – Voice of San Diego
Reprinted with permission from Voice of San Diego
Link to original story by Will Carless and Wendy Fry
Posted February 19, 2013 (updated February 27, 2013)
From the Reporters:
We wanted to know whether major donors to school bond campaigns are likely to win contracts from school districts once the bond passes.
We looked at every school bond campaign in San Diego County since 2006, and focused on companies that donated more than $5,000 to campaigns. Then we approached each district to see whether the same companies won contracts from the district that were paid for with bond dollars.
We found a significant correlation between major donors and contracts in 13 of the 17 districts we studied. In some districts, that correlation was striking. In the business of bond underwriting in particular, almost every major donation was followed by the company winning a contract from a district.
Overall, more than 70 percent of companies that donated more than $5,000 to those campaigns also won bond-funded contracts.
And several donors were awarded contracts without going through an open, competitive process. Rather, they were hand-picked by district officials and school boards, or were chosen by a selection process that bypassed long-standing safeguards designed to ensure the public is getting the best possible deal.
Passing a school bond in California takes serious money.
There are consultants to pay and mailers to print. There are campaign signs to erect and robocalls to record. It's a complicated, costly process that can take months of planning and often requires tens or even hundreds of thousands of dollars.
"You can't bake-sale your way to a bond measure," Tim Baird, superintendent of the Encinitas Union School District, likes to say.
Luckily for California districts, private companies are willing to spend big cash to boost bond campaigns. Construction firms, architects, lawyers and investment banks all stand to make a lot of money from school districts if their bond measures are successful.
Those donations aren't supposed to influence districts when it's time to start handing out work to finance and build projects paid for by the bonds. School officials and trustees are supposed to pick the firms that will give taxpayers the best deals on loans, financial and legal advice, and construction work.
But in some districts, the number of big donors that also received contracts was striking.
Eight companies donated more than $5,000 each to the campaign for Poway Unified School District's Proposition C, which passed in 2008. Seven of those firms won contracts with the district.
Five companies gave the Oceanside Unified School District's Proposition H campaign more than $5,000 in 2008. They all won contracts to work on the bond program.
Every one of the 12 companies that contributed more than $5,000 to the Grossmont Union High School District's Proposition U campaign in 2008 won a contract from the district.
The subjectivity involved in handing out hundreds of millions of dollars in taxpayer-funded work, combined with the fact that large campaign donors often end up winning contracts, has government watchdogs, lawmakers and other regulators concerned.
"This is a quid-pro-quo that would be illegal in just about any other circumstances," said former Assemblyman Chris Norby, who introduced a recent bill aimed at barring bond underwriters from contributing to school bond campaigns. "Can you imagine a politician getting money from a company and then saying, 'You're going to get all of my business from now on?' He'd be in jail for sure."
Donations aren't a guarantee of work. At some districts, donations of more than $10,000 did not result in contracts for the donors. Similarly, some of the biggest winners from local school bond programs didn't donate a cent to bond campaigns.
School district officials across the county said donations to bond campaigns have no impact on who is selected for contracts. The staff members who choose which companies win contracts often don't have any idea who has donated money, officials said.
However, aware of the negative connotations of awarding contracts to big donors, some local districts have started to limit the donations they take from firms that will later compete for their business.
And even in districts that have no limits, officials acknowledged the current system is far from perfect.
'A Little Awkward'
Last fall, Scott Buxbaum was trying to get the Proposition C bond campaign for the Cajon Valley Union School District in El Cajon across the finish line. So, Buxbaum, the district's deputy superintendent of business services, picked up the phone.
He called an investment bank that underwrites hundreds of millions of dollars in school bonds nationwide and is a generous donor to local school bond campaigns.
He heard something he wasn't expecting.
The company would only write a check to the campaign if the district was prepared to sign a contract stating that it would underwrite Cajon Valley's bonds, Buxbaum said.
"I told them, 'No, well that’s not going to happen,'" and hung up, Buxbaum recalls. "I felt a little awkward."
When districts issue bonds, an underwriter agrees to buy the whole bond issue for a fee, often hundreds of thousands of dollars. The company then sells the bonds to investors, netting a profit on the transaction.
Bond underwriters, often large Wall Street banks, are typically some of the highest-paid of all the firms that contract with a school district. And they're big donors to school bond campaigns.
Unlike construction firms, which are usually awarded contracts only after a district has considered bids from several companies, underwriters seldom undergo a competitive bidding process to win a district's bond business.
Rather, school boards negotiate bond sales directly with underwriters — they agree on a fee and negotiate over the interest that will be paid on the bonds. In large deals, minute differences in interest rates could amount to hundreds of millions of extra dollars the taxpayers will ultimately pay to borrow money.
That has long concerned some California legislators, bond industry regulators and industry insiders, who worry that underwriters can buy access to bond business with large campaign donations.
In 2011, a bill sponsored by Norby sought to ban underwriters from working on bond programs to which they had previously donated. It died in a state Senate committee.
Norby said the bond campaign process has been "hijacked by Wall Street." Expensive campaigns are now bolstered by Wall Street banks, a far cry from PTA groups going door to door to promote school bonds, he said.
"There's no honest community debate," Norby said.
Two similar bills sponsored by then-state Sen. Roy Ashburn in 2010 also died in a Senate committee.
A letter to Ashburn from Stratford Shields, then-managing director of Morgan Stanley, laid out the bank's reasons for supporting tighter rules on donations.
"There are many cases where there is an appearance that only the contributing firms to a bond ballot election committee have an opportunity to compete to provide financial services for the bonds," Shields wrote.
School bond underwriting across San Diego County has been dominated by six firms since 2006. In that time, those companies donated more than $280,000 to bond campaigns between them. Almost every time an underwriter donated more than $5,000, it won a lucrative contract to underwrite the district's bonds.
In 2011, the underwriter Stone & Youngberg netted $813,751 for underwriting Poway Unified School District's now-infamous billion-dollar bond deal.
Poway's bond campaign committee had received $25,000 from Stone & Youngberg four years earlier.
The Sweetwater Union High School District paid two underwriters almost $1 million combined to buy their bonds in 2008. One of those underwriters was Alta Vista Financial, Inc., which donated almost $50,000 to Sweetwater's bond campaign committee 16 months earlier.
Trading bond underwriting work for campaign donations is against the law, according to the California Legislative Counsel Bureau, which provides nonpartisan legal advice to state legislators.
"It is our opinion that a school district or other local agency may not condition the award of an agreement to provide bond underwriting services on the underwriter also providing campaign services in support of that bond measure," Legislative Counsel Diane F. Boyer-Vine wrote in a 2010 letter to then-state Sen. Roy Ashburn.
The bond underwriters contacted for this story did not respond to calls for comment.
A spokeswoman for one company, Piper Jaffray & Co., emailed a statement:
"We will not make, or indicate a willingness to make, any financial contribution as a condition to being retained as an underwriter," she wrote.
The Rise of the Lease-Leaseback
Once a school district has sold its bonds, it's time to hire construction firms: architects to design the buildings, construction managers to oversee projects and general contractors to run each construction site.
Traditionally, a California district would hold an open bidding process for those jobs. It would solicit bids, and choose the company that could perform the work for the lowest price.
That method of choosing contractors is fast disappearing in San Diego County. It's being replaced by a process called "lease-leaseback."
In a lease-leaseback, a school district leases a piece of property to a developer, usually for $1 a year. The developer then leases that property back to the district while it is building on the site. The "rent" the district pays over time for this second lease finances the cost of the project's construction.
This method allows a district to contract directly with a developer without holding a competition to see who can build the project for the lowest price.
While school district staffers usually evaluate various bids before awarding a lease-leaseback contract, this process breaks with longstanding requirements to award public construction contracts to the lowest bidder, said Kevin Carlin, a local attorney.
Carlin is suing the Sweetwater Union High School District over its use of lease-leasebacks. He said the requirement to award a contract to the lowest bidder removes any subjectivity from the decision-making process and keeps the system fair.
And he said the lease-leaseback method has been bastardized from its original purpose — to help districts that couldn't afford to fund projects upfront.
Local school district officials and private construction firms have begun to use lease-leasebacks primarily to avoid awarding contracts based solely on price, Carlin said.
"Anytime you introduce the possibility to deviate from the lowest sealed bid, you introduce the opportunity for influence, favoritism, possibly fraud, possibly corruption," Carlin said.
In recent years, large construction firms that donated to local bond campaigns have consistently been awarded such contracts by local school districts.
In Poway, two local construction firms wrote large checks to the school district's Proposition C campaign in 2008. Douglas E. Barnhart, Inc. donated $49,999. Echo Pacific Construction, Inc. donated $60,000.
Barnhart was awarded two lease-leasebacks. Echo Pacific hit the jackpot — it was awarded 13 lease-leasebacks under the district's bond program.
In Sweetwater, two of the four companies chosen to complete lease-leasebacks for the district's Proposition O bond, which passed in 2006, had earlier contributed more than $5,000 to the bond campaign.
'It's Our School District'
David Dudley's company, West Coast Air Conditioning, donated $10,000 to the Cajon Valley Union School District's Proposition D campaign in 2007. Dudley's family trust donated another $20,000 on the same day.
West Coast Air was subsequently awarded a lease-leaseback to build the Cajon Valley Middle School, the largest project built with Proposition D dollars.
Dudley acknowledged that some local districts have earned bad reputations for their bond practices, but said not all districts, or all companies, should be tarred with the same brush.
West Coast Air has been building projects for the Cajon Valley district since 1962, he said.
"It’s our school district," Dudley said. "My kids have gone through the school district. A lot of the people who work here's kids are in the district, so we’ve had a long, long relationship with them performing work and also on the community side."
School district officials across the county similarly cautioned against drawing connections between donations and lease-leaseback contracts.
Lease-leasebacks offer districts — and taxpayers — all sorts of benefits that don't exist when companies are chosen simply on the basis of cost, said Baird of Encinitas Union.
Just as an individual homeowner wouldn't necessarily choose the cheapest craftsman to repair his home, Baird said, districts should be able to choose contractors based on experience and their prior relationship with the company.
And the notion that districts can be bought for a few thousand dollars is ridiculous, he said.
Avoiding a 'Subconscious Response'
The need to ask companies for money, combined with a district's ability to hand out contracts based on factors other than cost, creates an atmosphere that's ripe for corruption, said Bob Stern, former president of the Center for Governmental Studies, a now-defunct watchdog group in Los Angeles.
"They're not going to say that they look upon donors favorably," Stern said. "But studies always show that there's a subconscious response in these situations."
To avoid even the perception of pay-to-play, some districts have started to proactively limit the amount they will take from donors.
Buxbaum said the Cajon Valley district's 2012 bond campaign placed a $2,000 limit on contributions, specifically to send a message that contracts couldn't be bought.
Other districts haven't followed suit.
The second-largest successful school bond campaign in San Diego County last year was Proposition AA at the San Dieguito Union High School District. The measure asked voters to approve the district selling almost half a billion dollars' worth of bonds.
The campaign contributions list for Proposition AA is a who's who of construction and bond finance firms.
Five companies each donated $25,000 to the district's bond campaign, including one underwriter, three architects and one large construction firm.
If history is any guide, those five companies stand a very good chance of being awarded a contract at some point in the near future.
Update: We've changed the reference to NBC7 to more accurately reflect the station's involvement in this story.