SACRAMENTO DESK - Sale of questionable Marks-Roos municipal bonds in Fresno County and elsewhere has prompted a new State Corporations Department investigation. Hundreds of thousands of dollars are missing from municipal trust accounts which may have been manipulated in connection with questionable joint-powers municipal-bond sales by Fresno County cities and many others.
Peter Schaafsma, director of the California Debt and Investment Advisory Commission, informed State legislators on the Joint Legislative Audit
Committee that there are serious irregularities in the accounts of the cities of Avenal, Coalinga, Waterford, Atwater, Dos Palos, Lake Elsinore, Placerville, Wasco, Selma, San Joaquin, Ione and Oroville.
The Audit Committee, in turn, ordered state Auditor Kurt Sjoberg to
begin a probe to determine if there is criminal activity involved in the missing funds.
Schaafsma, found that the cities named in the probe have issued tax-exempt bonds to finance private, speculative real-estate developments under local bond pooling.
Schaafsma said '...[W]e received reports from officials and concerned citizens in some of these communities to the effect that portions of the monies raised by these bond sales cannot now be properly accounted for...
underwriters may have pressured city and trust-company officials to
improperly shuffle money between different bond accounts to maintain
[the appearance of] legally required balances...efforts have been made to cover up accounting and financial irregularities...In one case...a city official had received a memo from a bond counsel instructing him how to create an audit trail to explain the disappearance of funds from an eight-year-old bond issue.'
City officials declined comment.
Matt Fong, State treasurer told reporters 'What is at stake is the integrity of the municipal-bond market...Some of these land-based deals smell worse than a city sewer.'
Other civil and criminal probes have come from the state attorney general, the Department of Corporations, the Stanislaus County District Attorney's Office and the U.S. Securities and Exchange Commission.
Bond pooling was created so that small governmental agencies could
issue pooled securities to reduce their costs and to obtain better interest rates. In return for putting the municipality name on the bonds, these entities collect fees from the underwriter.
But the proliferation of pooled bonds has alarmed state and local regulators, who fear that underwriters are using the statute to market highly risky securities to often-naive investors.
The California Department of Corporations has been worried that bond underwriters are helping Fresno County cities and others to form roving
joint-powers authorities to finance private sports facilities, golf courses, casinos, housing developments, and a proposed baseball stadium in Fresno that have no public purpose. The trouble, they believe, stems from a loophole in the bonding law, which lets underwriters sell bonds for projects outside the municipalities sponsoring the issue.
G.W. McDonald, the Department of Corporation's assistant commissioner in charge of enforcement told reporters, 'The deals are now being used to prop up private real-estate developments under the guise of municipal financing. ... The public's being misled.'
For example, the Department of Corporations points to the Fresno County City of Mendota. Mendota received $105,750 in fees for allowing its name to appear on pooled bonds of $6.15 million issued in 1996 by the Malibu Canyon Public Finance Authority. The bond offering was to provide working capital to develop 207 acres of canyon land near Calabasas in northwest Los Angeles County.
The City of Mendota, was to share none of the obligation to repay the notes. That burden was to remain with the private developer. The short-term notes were set to be retired on Jan. 15, but investors failed to receive payment.
Concerns over deals like Mendota's Malibu Canyon bonds prompted the department in November 1997 to file a lawsuit in Sacramento County Superior Court against Pacific Genesis, the bond-pooling underwriter. The complaint alleges that the underwriter violated state securities laws by failing to disclose important financial information to investors. Additionally, the firm allegedly broke department regulations by marketing securities that were unsuitable for its customers' objectives and needs.
Department lawyers, however, failed to persuade Superior Court Judge
John R. Lewis to grant a temporary restraining order or preliminary
injunction against Pacific Genesis's current marketing and disclosure
practices. Instead, the judge approved an agreement between the state and
the company requiring an 'independent reviewer' to oversee Pacific
Genesis's future bonding activities.
Further complicating the situation, now the State Treasurer's office has appointed a select task force to look for ways to rein in or eliminate roving joint powers authorities.
Fresno City Hall may be contemplating the use of the bond-pooling techniques to finance its proposed downtown baseball stadium. But, State senator Quentin Kopp, is promoting new legislation to prohibit municipal authorities from issuing pooling-bonds to pay for sports projects.
'When you see some golf-course builder using bonds issued by a joint-powers public agency 300 miles away, you know it's become a racket' said Kopp. The bill cleared the Senate last year and is expected to be heard in the Assembly later this month.
Fresno City Hall Series
