Report 2011-118/2011-613 Recommendation 2 Responses

Report 2011-118/2011-613: Conduit Bond Issuers: Issuers Complied With Key Bond Requirements, but Two Joint Powers Authorities' Compensation Models Raise Conflict-of-Interest Concerns (Release Date: August 2012)

Recommendation #2 To: Statewide Communities Development Authority, California

To be better informed about the compensation of their consultants, including any potential conflicts of interest, California Communities and Municipal Finance should require the consulting firms that staff their organizations to disclose the amount and structure of compensation provided to individual consultants, including disclosing whether any of this compensation is tied to the volume of bond sales.

Agency Response*

On October 11, 2012 California Communities Legal Counsel submitted a report, and the California Communities Commission adopted the recommendation to amend the HB Capital contract. As the report outlined, the amendment requires that HB Capital, acting as staff to California Communities, not compensate it employees in any manner tied to bond volume or number or transactions completed. California Communities has been informed by HB Capital that this amendment reflects HB Capital's past and current practices concerning individual employee compensation.

The Commission also considered the related recommendation that HB Capital be required by contract to disclose the amount of compensation paid to each of its employees. The Commission concluded that this recommendation was neither necessary nor appropriate.

California Communities has hired an Executive Director who is engaged by contract at an hourly rate of $115 per hour, and for 2014 her compensation as disclosed in California Communities annual financial statements was $62,493.88.

  • Response Type†: Annual Follow Up
  • Response Date: September 2015

California State Auditor's Assessment of Status: Will Not Implement


Agency Response*

Please refer to our one-year response.

  • Response Type†: Annual Follow Up
  • Estimated Completion Date:
  • Response Date: October 2013

California State Auditor's Assessment of Status: Will Not Implement


Agency Response*

On October 11, 2012 California Communities Legal Counsel submitted the attached report, and the California Communities Commission adopted the recommendation to amend the HB Capital contract. As the report outlined, the amendment requires that HB Capital, acting as staff to California Communities, not compensate it employees in any manner tied to bond volume or number or transactions completed. California Communities has been informed by HB Capital that this amendment reflects HB Capital's past and current practices concerning individual employee compensation.

The Commission also considered the related recommendation that HB Capital be required by contract to disclose the amount of compensation paid to each of its employees. The Commission concluded that this recommendation was neither necessary nor appropriate. See attached 60 day response for supporting documentation and reasoning.

  • Response Type†: 1-Year
  • Response Date: September 2013

California State Auditor's Assessment of Status: Will Not Implement

In its one-year response to the audit, California Communities indicated that it would not fully implement the recommendation. Specifically, it stated that it considered requiring HB Capital to disclose the amount of compensation paid to each of its employees, but that its commission concluded that this was neither necessary nor appropriate.

Its decision is supported by a letter that the Fair Political Practices Commission (FPPC) sent to the California State Treasurer in October 2012 in response to our recommendation that it adopt regulations that clarify whether the analysis in the McEwen advice letter is intended to apply to the factual circumstances presented in the audit. In the letter the FPPC stated that pursuant to its McEwen advice letter and other advice letters it has issued in the past, the compensation models of the joint powers authorities included in the audit (California Communities and Municipal Finance) do not violate the political reform act. (See 2013-406, p. 32)

Although California Communities does not plan to fully implement the recommendation, it did take steps to address the potential for conflicts of interest associated with its compensation to HB Capital. On October 11, 2012 it amended its contract with HB Capital to state that HB Capital shall not compensate any of its employees providing services directly or indirectly to California Communities on a commission basis or pursuant to any other method of compensation that is based on the dollar amount or volume of bonds issued by California Communities. The contract amendment further stipulates that, except for the compensation authorized by the contract, HB Capital shall not receive any additional compensation, payment or other financial benefit from any person in connection with California Communities' issuance of bonds in any manner tied to bond volume or number or transactions completed.


Agency Response*

California Communities indicated that its commission considered requiring HB Capital Resources, Ltd. (HB Capital) to disclose the amount of compensation paid to each of its employees. However, the commission concluded that it does not have discretion over such compensation. Instead, California Communities amended its contract with HB Capital in October 2012 to require HB Capital not to compensate its employees providing services directly or indirectly to the joint powers authority on a commission basis or pursuant to any other method of compensation that is based on the dollar amount or volume of bonds issued by the joint powers authority. (See 2013-406, p. 32)

  • Response Type†: 60-Day
  • Response Date: November 2012

California State Auditor's Assessment of Status: Partially Implemented


All Recommendations in 2011-118/2011-613

†Response Type refers to the interval in which the auditee is providing the State Auditor with their status in implementing recommendations made in an audit report. Auditees must submit a response regarding their progress in implementing recommendations from our reports at three intervals from the release of the report: 60 days, six months, and one year or subsequent to one year.

*Agency responses received after June 2013 are posted verbatim.


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