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.

Annual Follow-Up Agency Response From October 2018

CSCDA Commission has determined with the implementation of an Executive Director model wherein consultants are not directly making recommendations to the Commission such compensation disclosure is not necessary.

California State Auditor's Assessment of Annual Follow-Up Status: Will Not Implement

Annual Follow-Up Agency Response From September 2015

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.

California State Auditor's Assessment of Annual Follow-Up Status: Will Not Implement

Annual Follow-Up Agency Response From October 2013

Please refer to our one-year response.

California State Auditor's Assessment of Annual Follow-Up Status: Will Not Implement

1-Year 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.

California State Auditor's Assessment of 1-Year 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.

60-Day 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)

California State Auditor's Assessment of 60-Day Status: Partially Implemented

All Recommendations in 2011-118/2011-613

Agency responses received after June 2013 are posted verbatim.