Report 2011-118/2011-613 All Recommendation 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 #1 To: Fair Political Practices Commission

The FPPC should adopt regulations that clarify whether the analysis in the
McEwen advice letter is intended to apply to the factual circumstances presented in this audit.

60-Day Agency Response

In October 2012 the FPPC informed the California State Treasurer 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)

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

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

Recommendation #3 To: Municipal Finance 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.

1-Year Agency Response

No consultant retained by the CMFA compensates any of its employees that provide services directly or indirectly to the CMFA on a commission basis or pursuant to any other method of compensation that is based on the volume of bonds sales by the CMFA.

The Board of the CMFA, on February 1, 2013, approved an amendment to the professional services agreement with its consultants. Consistent with the Fair Political Practices Commission reporting requirements of a public official or employee, the amended agreement requires all consultants to disclose the amount of compensation provided to individual employees, including disclosing whether any of this compensation is tied to the volume of bond sales.

California State Auditor's Assessment of 1-Year Status: Fully Implemented

As it indicated in its one-year response, Municipal Finance has amended its contract with Sierra to require Sierra to annually provide a written statement as to whether any of the amounts paid to its employees was directly tied to the volume of bond sales. The amended contract also requires Sierra's consultants to annually disclose their gross compensation amounts within ranges, such as less than $1,000, between $1,001 and $10,000, between $10,001 and $100,000, or greater than $100,001. Further mitigating the risks for conflicts of interest, in July 2013 Municipal Finance engaged an executive director who receives a fixed annual compensation to review and make recommendations to the board on all proposed bond transactions. Under the new structure, Sierra no longer makes recommendations to the board on proposed bond transactions.

6-Month Agency Response

No consultant retained by the CMFA compensates any of its employees that provide services directly or indirectly to the CMFA on a commission basis or pursuant to any other method of compensation that is based on the volume of bonds sales by the CMFA.

The Board of the CMFA, on February 1, 2013, approved an amendment to the professional services agreement with its consultants. Consistent with the Fair Political Practices Commission reporting requirements of a public official or employee, the amended agreement requires all consultants to disclose the amount of compensation provided to individual employees, including disclosing whether any of this compensation is tied to the volume of bond sales.

California State Auditor's Assessment of 6-Month Status: Will Not Implement

See one-year response evaluation

60-Day Agency Response

Municipal Finance stated that a subcommittee of its board members is reviewing proposed contract language that will prohibit its consultants from compensating their employees on a commission basis or any other method that is based on the volume of bonds sales. Municipal Finance indicated that the proposed contract language will also require all consultants to disclose the amount of compensation provided to individual employees. (See 2013-406, p. 32)

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

Recommendation #4 To: Statewide Communities Development Authority, California

In implementing its January 2012 contracting policy, California Communities should either periodically subject existing contracts to competitive bidding or perform some other price comparison analysis to ensure that the public funds it oversees are used effectively.

Annual Follow-Up Agency Response From September 2015

A new program administrator contract was awarded on December 4, 2014 to Bridge Strategic Partners for a 3.5 year term effective July 1, 2015. The contract is attached. With the award of this contract, CSCDA has demonstrated that all service contracts are competitively bid.

California State Auditor's Assessment of Annual Follow-Up Status: Fully Implemented

Annual Follow-Up Agency Response From August 2014

The Commission issued requests for proposals (RFP) for auditor and issuer's counsel with a term of three years, allowing for a two-year extension. A new auditor contract was awarded at the June 27, 2013, meeting per the attached minutes. A new issuer counsel contract was awarded at its December 19, 2013, meeting per the attached minutes.

In addition, the Commission appointed an Executive Director at its meeting on January 16, 2014, as an independent third party to review and recommend financings to the Commission received from the current Program Manager, HB Capital, and to begin the RFP process for Program Manager Services. CSCDA issued an RFP on May 8, 2014, for Program Manager Services on behalf of the Commission. The RFP timeline calls for a selection of the Program Manager(s) by the Commission on September 11, 2014.

California State Auditor's Assessment of Annual Follow-Up Status: Not Fully Implemented

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: Not Fully Implemented

1-Year Agency Response

The Commission issued requests for proposals (RFP) for auditor and issuer's counsel with a term of three years, allowing for a two-year extension. A new auditor contract was awarded at the June 26, 2013 meeting per the attached minutes. The issuer counsel RFP is currently under consideration and tentatively scheduled to be awarded in September, 2013.

In addition, the Commission will be hiring an Executive Director as an independent third party to review and recommend financings to the Commission received from the current Program Manager, HB Capital. This appointment is tentatively scheduled for November, 2013. The Commission will then direct the Executive Director to begin the RFP process for Program Manager services.

California State Auditor's Assessment of 1-Year Status: Partially Implemented

California Communities issued requests for proposals (RFPs) for auditor and issuer's counsel in March 2013. It awarded a new auditor contract on June 27, 2013, and is tentatively scheduled to award the contract for issuer's counsel in September, 2013.

Additionally, in its one-year response to the audit, California Communities stated that it will also be hiring an executive director as an independent third party to review and recommend financings received from its current program manager, HB Capital. California Communities is tentatively scheduled to appoint the new executive director in November, 2013, and indicated that once it makes this appointment, it will direct the new executive director to begin the RFP process for program manager services.

6-Month Agency Response

At the January 24, 2013 meeting of the CSCDA Commission action was taken to appoint an ad hoc committee to establish protocol, review standards, timing and any other necessary items for review of contracted professional services. At the February 21, 2013 commission meeting, the ad hoc committee recommended that the Commission approve putting out requests for proposals (RFP) regarding both the auditor and issuer's counsel with a term of three years, allowing for a two-year extension, and asked staff to prepare an action item for the March 28, 2013 Commission meeting to initiate the two RFPs. The ad hoc committee is considering other actions and is still working on a recommendation pertaining to HB Capital's staff contract. The ad hoc committee will report back to the Commission at a later date regarding the staff contract.

California State Auditor's Assessment of 6-Month Status: Pending

60-Day Agency Response

California Communities stated that the term of its contract with HB Capital does not expire until June 2015, and that the contract automatically extends for another two years unless California Communities gives written notice to HB Capital prior to May 2013 that it does not desire to extend the contract. California Communities indicated that at the beginning of 2013, its commission will consider whether to provide such notice and conduct a competitive bid process for selecting a program manager for a term commencing in July 2015. California Communities added that at the beginning of 2013, its commission will be reviewing each of its other consultant contracts to determine whether it would be timely to conduct a competitive bid process for one or more of these contracts. (See 2013-406, p. 33)

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

Recommendation #5 To: Municipal Finance Authority, California

Municipal Finance should follow its July 2012 policy that describes how it will select contractors and periodically review existing contractors' services and prices to ensure the public funds it oversees are used effectively.

60-Day Agency Response

In July 2012 Municipal Finance's board compared Sierra Management's services and prices to other conduit bond issuers and concluded that it is receiving the best value for the public funds it oversees. Municipal Finance also sought competitive bids for issuer/special counsel services in November 2012, which it stated was a result of its review of the services it was receiving. Municipal Finance affirmed that it will continue to follow its July 2012 policy, stating that for any engagement for professional services with a duration of at least one year, its board will conduct a review on a periodic basis to assess and evaluate the performance of the service provider. It added that it expects to conduct a review on an annual basis each January. (See 2013-406, p. 33)

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

Recommendation #6 To: Statewide Communities Development Authority, California

As suggested by the Government Finance Officers Association guidance, California Communities and Municipal Finance should include provisions in their contracts prohibiting consultants from engaging in activities on behalf of the issuers that produce a direct or indirect financial gain to the consultants, other than the agreed-upon compensation, without the issuer's informed consent.

60-Day Agency Response

In October 2012 California Communities amended its contract with HB Capital to prohibit HB Capital from receiving any additional compensation, payment, or other financial benefit from any person in connection with the issuance of bonds by the joint powers authority, except for the compensation authorized by its contract. (See 2013-406, p. 33)

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

Recommendation #7 To: Municipal Finance Authority, California

As suggested by the Government Finance Officers Association guidance, California Communities and Municipal Finance should include provisions in their contracts prohibiting consultants from engaging in activities on behalf of the issuers that produce a direct or indirect financial gain to the consultants, other than the agreed-upon compensation, without the issuer's informed consent.

1-Year Agency Response

Without the informed consent of the CMFA, the consultants to the CMFA shall not engage in activities on behalf of the CMFA that produces a direct or indirect financial gain to the consultants other than the previously agreed upon compensation. The Board of the CMFA, on February 1, 2013, approved an amendment to the professional services agreement with its consultants. The amended agreement states that the consultants shall not engage in activities on behalf of the CMFA that produces a direct or indirect financial gain to the consultants other than the previously agreed upon compensation, without the informed consent of the CMFA.

The Dodd-Frank Act requires that any consultant, acting as a municipal advisor, owes a fiduciary duty to its municipal client. Sierra Management, as a municipal advisor to the CMFA, voluntarily restricts itself to serve only the CMFA and no other financing authority. Sierra's single purpose focus on the CMFA ensures that the CMFA receives an undivided commitment for its programming.

California State Auditor's Assessment of 1-Year Status: Fully Implemented

On February 1, 2013, Municipal Finance amended its professional services agreement with Sierra to address the recommendation.

6-Month Agency Response

The Board of the CMFA, on February 1, 2013, approved an amendment to the professional services agreement with its consultants. The amended agreement states that the consultants shall not engage in activities on behalf of the CMFA that produces a direct or indirect financial gain to the consultants other than the previously agreed upon compensation, without the informed consent of the CMFA.

California State Auditor's Assessment of 6-Month Status: Fully Implemented

See one-year response

60-Day Agency Response

Municipal Finance indicated that it is reviewing proposed contract language that would prohibit its consultants from engaging in activities on its behalf that produces a direct or indirect financial gain to the consultants without its informed consent. Municipal Finance added further that Sierra Management voluntarily restricts itself to serve Municipal Finance and no other financing authority. (See 2013-406, p. 33)

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

Recommendation #8 To: Statewide Communities Development Authority, California

Once the Securities and Exchange Commission (SEC) finalizes its definition of
municipal advisor, California Communities should have its legal counsel review whether HB Capital should register with the Municipal Securities Rulemaking Board.

Annual Follow-Up Agency Response From August 2014

After extensive review of the newly proposed definition of a Municipal Advisor by the U.S. Securities and Exchange Commission (SEC), HB Capital Resources, Ltd. has made the determination to register a Municipal Advisor subsidiary with the SEC and MSRB effective June 2014. The Commission approved the assignment of a portion of the CSCDA Program Manager Services contract to GPM Municipal Advisors, LLC, a wholly owned subsidiary of HB Capital Resources, Ltd., at its meeting on June 26, 2014, per the attached meeting minutes. GPM Municipal Advisors, LLC will serve as a Municipal Advisor to California Communities.

California State Auditor's Assessment of Annual Follow-Up Status: Fully Implemented

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: Not Fully Implemented

1-Year Agency Response

The SEC finalized the definition of municipal advisors on September 19, 2013. California Communities Legal Counsel is currently conducting an independent review.

California State Auditor's Assessment of 1-Year Status: Pending

The Securities and Exchange Commission (SEC) finalized its definition of municipal advisor on September 20, 2013. In its one-year response to the audit, California Communities indicated that its legal counsel is currently conducting an independent review to evaluate whether HB Capital will register with the Municipal Securities Rulemaking Board.

6-Month Agency Response

The SEC still has not finalized the definition of municipal advisors, and has extended the temporary definition until September 30, 2013. California Communities' Legal Counsel will continue to monitor SEC communications for when the definition is finalized and conduct an independent review.

California State Auditor's Assessment of 6-Month Status: Pending

California Communities noted that the SEC has not finalized the definition of municipal advisors, and has extended the temporary definition until September 2013. California Communities stated that its legal counsel will continue to monitor SEC communications for when the definition is finalized and conduct an independent review. (See 2013-406, p. 34)

60-Day Agency Response

California Communities noted that the SEC has not finalized the definition of municipal advisors, and has extended the temporary definition until September 2013. California Communities stated that its legal counsel will continue to monitor SEC communications for when the definition is finalized and conduct an independent review. (See 2013-406, p. 34)

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

Recommendation #9 To: Health Facilities Financing Authority, California

To provide more accessible venues for citizens to understand the financing of projects and to voice their opinions, the Health Financing Authority should either hold local approval hearings in each jurisdiction in which a project will be built or create a cost-effective technological solution (streaming video, teleconference, etc.) to provide more public accessibility.

60-Day Agency Response

The Health Financing Authority indicated that it will now provide telephone access for all of its local approval hearings so members of the public may participate via a toll-free phone call. The Health Financing Authority demonstrated its new process using an October 2012 hearing for the city of Hope. The Health Financing Authority published notices for this hearing in both The Sacramento Bee and in the Los Angeles Times. These notices included the date and time of the hearing, an address for members of the public who wished to attend in person, and a toll-free number and participation code for members of the public who wished to participate remotely. (See 2013-406, p. 34)

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

Recommendation for Legislative Action

If the Legislature believes that the compensation model is appropriate, whereby the private firms that employ consultants are paid a percentage of the fees associated with bond issuances, the Legislature should enact legislation that creates a clearly stated exemption from California Government Code Section 1090. On the other hand, if the Legislature believes that this compensation model is not appropriate, it should enact legislation that clearly proscribes, or limits, such a model.

Description of Legislative Action

Legislation has not been introduced to address this recommendation.

California State Auditor's Assessment of Annual Follow-Up Status: No Action Taken

Description of Legislative Action

N/A

California State Auditor's Assessment of Annual Follow-Up Status: Unknown

Recommendation for Legislative Action

To ensure that all issuers of conduit revenue bonds make their activities sufficiently transparent to the public, the Legislature should consider amending state law to provide deadlines for issuers to post the information SB 99 requires on their Web sites and to specify how long issuers must keep this information posted.

Description of Legislative Action

Legislation has not been introduced to address this recommendation.

California State Auditor's Assessment of Annual Follow-Up Status: No Action Taken

Description of Legislative Action

N/A

California State Auditor's Assessment of Annual Follow-Up Status: Unknown

All Recommendations in 2011-118/2011-613

Agency responses received after June 2013 are posted verbatim.