DENVER (AP) – When Colorado residents vote to borrow money to build new schools, a library or a recreation center, the crusader behind the curtain is often the investment banker who gets paid to sell the bonds.
For those pushing bond issues in tough economic times, help from a bond underwriter can mean the difference between election-day success and defeat. But the prevalence of bond-house involvement – everything from polling to designing yard signs – also raises concerns from critics who worry they exert undue influence in a campaign.
At worst, critics and experts say, governments pay bond companies extra to help pass tax increases, a potential violation of Colorado law.
“It does seem like a backdoor way of using public funds (to finance campaigns),” said Colorado Ethics Watch director Luis Toro. “To say there’s no chance of corruption is totally out of touch.”
The Denver Post analyzed 15 successful Colorado bond campaigns backed by large contributions from investment banks. In every case, the bank that helped finance the campaign sold the bonds.
The Post found that individual school districts took as much as $137,500 from a single bond company, and that in six of the 15 campaigns, bond company donations amounted to a majority or nearly half of all contributions.
By comparison, no person can give more than $1,100 to a Colorado gubernatorial candidate, and corporate gifts to state candidates are forbidden.
The Post also found that in several cases, a school district paid an unusually high fee for the amount of bonds sold after an investment bank contributed election services to the campaign.
That is a potential violation of the state Fair Campaign Practices Act, which forbids government bodies to “expend any moneys from any source, or make any contributions, to urge electors to vote in favor of or against any” local ballot issue.
Does paying an underwriter extra money for campaign help violate that law?
“My understanding is that’s the case,” said Brett Johnson, Colorado’s deputy state treasurer.
At the same time, Johnson sympathizes with the plight of small school districts, which must seek voter approval before borrowing money to build or repair schools but may lack resources and expertise to conduct an effective campaign.
“It’s hard to figure out how a small school district can actually navigate this process,” he said. “They’re kind of in a pickle.”
The underwriters’ role in bond campaigns may begin months or years before the election. With the help of political consultants and pollsters, they offer campaign as well as financial services. They identify activists and potential contributors. They compile lists of registered voters and target parents, write direct-mail appeals and design campaign logos.
After a failed bond election in Cripple Creek, for example, a political consultant to investment bank Stifel Nicolaus intervened with a message that its schools lacked sprinkler systems.
“So I created a piece of direct mail with some burning books on the cover,” consultant Steve Welchert recalled in a lawsuit deposition on a matter unrelated to the campaign. “And the campaign committee was a little alarmed, but I said, you know, you only get one bite at the apple. We only had money for one piece of communication.”
The burning books worked. “They got the money they needed for their schools and their sprinkler systems, and off they went,” Welchert said.
Welchert also sent an email to Piper Jaffray in 2009 that recommended offering a poll or two to the Aurora school district, adding that “it’s a very cheap price to pay for stealing 90m.”
In Adams County’s Mapleton district, George K. Baum hired a pollster who learned that just 9 percent of its active voters identified as parents. The pollster recommended “strong efforts to get younger, less fiscally conservative voters to vote,” Baum reported on its website.
The company said it also assisted the campaign committee with “poll-driven issue framing, messaging and branding, developing direct mail, yard signs, walking maps for canvassing, call lists for phone banking, print ads, fundraising strategies, get-out-the-vote efforts and more.”
When critics complain that these companies are promoting tax increases for their own profits, the bond houses call on the school lobby to protect a mutually beneficial relationship.
In 2004, a Colorado Senate bill tried to prohibit bond underwriters from helping with school bond elections, then selling the bonds. Phil Fox, then-deputy executive director of the Colorado Association of School Executives, summarized what happened next in an e-mail to his membership headed “Bonds of Brotherhood.”
The bill “sent the Colorado bond industry into a twitterpated panic, which drew in the education lobby in the final days,” he wrote.
“The bond houses were up in arms and enlisted our help in disposing of” the bill, he wrote. “Because of Colorado K-12’s $5B in construction debt, K-12 has a symbiotic relationship with the bond industry. When they catch a cold, we sneeze.”
The Post found that symbiotic relationship remains strong today. For example:
Four companies – George K. Baum, Stifel Nicolaus, Piper Jaffray and RBC Capital Markets – have reported Colorado campaign donations totaling at least $667,000 since 2004. Most supported school bonds, but campaigns for libraries, fire districts, cities, water projects and mass transit benefited, as well.
Baum was paid more than five times the rate it proposed when the Mapleton school district in Adams County chose it as an underwriter. Mapleton officials defended the fee as payment for three years of campaign work.
Stifel Nicolaus reported donating campaign services worth $100,000 or more to two different school districts: Aurora and Brighton. It collected a $1 million in total fees from those two districts after bond issues passed.
Steven Bell, the chief operating officer for Jefferson County schools, served as public finance director at Stifel Nicolaus from 1999 through 2009.
He traces the growing involvement of Denver investment banks in bond campaigns to the Taxpayer’s Bill of Rights, the 1992 Colorado referendum requiring voter approval of tax increases.
TABOR limited school districts and other government bodies to one bond vote per year, on election day. The result: cluttered ballots, a higher risk of losing bond campaigns – and potentially less business for investment banks.
In response, “many of the local investment banking firms chose to retain political consultants,” Bell said. “We could say to our clients, we have a way to help you with soliciting voter approval.”
Bell said his firm contributed to bond campaigns only after local governments chose it as the underwriter, and the company charged no additional fees for its political consultant and pollster. “It was simply an overhead expense,” he said.
He saw nothing wrong with offering campaign experts to potential government clients. “My experiences were very positive, using the election and polling consultants,” he said.
Critics of the bond companies’ involvement in Colorado campaigns see their services as potential violations of state election laws.
In the Mapleton district, for example, the Baum company proposed to sell up to $10 million in bonds for a .79 percent fee and lower fees for larger amounts, adding that the rate was negotiable.
When Mapleton voters finally passed a $64 million bond issue on the district’s fourth try, Baum sold just $9.67 million of those bonds for the district. The balance was sold by the state, which had approved Mapleton for a matching grant.
Under its proposed rate, Baum would have been paid $76,393. But the district actually paid Baum nearly 5 1/2 times as much – $416,173, a reward for the entire amount approved.
Russ Caldwell, a Denver investment banker who has grown critical of his industry’s involvement in bond campaigns, calls that an election law violation.
“No taxpayer in Mapleton should stand for that kind of business practice with public dollars. It’s clearly outrageous,” he said.
He also criticized Mapleton’s request to banks as a pay-to-play solicitation, noting the district asked them to list “in-house and outside consultants who would be assigned to the district” to advise the campaign.
“I think there’s a real problem when public officials solicit campaign services from members of the securities industry,” Caldwell said. “Our job is to organize and structure debt, analyze credit and sell the bonds. We are not supposed to be political hacks.”
Whei Wong, the Mapleton district spokeswoman, said Baum began working with the district when it was trying to finance its projects without a state matching grant. Although Baum ultimately “was only selling a portion of our bonds, we benefited from the entire project,” and the school board agreed, she said.
Robert Dalton, Baum’s vice chairman, said its arrangements with Mapleton were based on a $64 million project. “Without our efforts, it is unlikely that Mapleton Public Schools would have received any funds for badly needed school buildings,” he said.
He said its fee met “the letter and the spirit of the law.”
Baum also was one of four companies chosen to sell the state bonds for the Mapleton project – and was paid by the state as well, records show.
Some Colorado school districts, particularly large and affluent ones, do not count on campaign help from investment banks or sign deals with them before elections.
Cherry Creek, for example, seeks competing bids after an election and does not get campaign assistance from bond sellers.
Spokeswoman Tustin Amole said the district believes competitive bids bring lower interest rates on bond sales. “(And) we have always been fortunate to have a large, supportive community (of volunteers),” she said.
Denver also held a successful $454 million bond campaign in 2008 without assistance from bond underwriters.
This year, however, it signed a contract with Baum that included disseminating “information about the district’s operating and facility needs” and aiding “public outreach strategies.”
It canceled that contract with Baum’s consent after The Post reported in March that Mapleton paid an extraordinary fee to Baum for the volume of bonds sold. The Denver district’s chief financial officer, David Hart, said the newspaper story caused the district to reconsider the contract.
“Out of concerns that it might be misconstrued,” he said, “we will not have any formal contract with any one firm.”
The Post identified 46 bond campaigns since 2004 supported by contributions from four investment banks, then used a federal website of bond sales to find bond underwriters. Many of those measures were defeated, some involved small contributions, and inconsistencies between federal and state records made others difficult to track.
The Post did find 15 bond sales that followed successful campaigns supported by contributions of $1,600 to $105,000 from the four banks. In each case, the contributor sold the bonds. The banks donated a total of $293,205 to those campaigns, sold $701 million in bonds and collected $5,683,221 in fees.
Stifel Nicolaus tended to report its nonmonetary assistance in large round numbers. In 2008, it reported giving $100,000 in election services to the Aurora school district, which included poll development, political consulting, direct mail development, speakers, fact sheets, media advertisements, voter outreach, a campaign website and a logo. The company also kicked in $5,000 cash.
When the bond issue passed, Aurora paid Stifel Nicolaus $636,888 to sell them.
Stifel Nicolaus also reported donating a total of $137,500 in consulting services, campaign development, analysis and oversight to the Brighton school district from 2005 through 2008 for bond campaigns.
In 2006, when voters said yes to a $74 million bond issue, Brighton paid Stifel Nicolaus $366,300 to sell them.
During the recession, these donations became a riskier gamble. Last year, Piper Jaffray gave $39,685 to a Pueblo County school bond campaign and RBC gave $10,000 to a Douglas County school campaign. Voters shot both down.
Mapleton was not the only district where Baum charged an unusually high fee after donating election services, bond documents show.
Last year, it charged $501,491 to sell $34.9 million in bonds for Ignacio, a rural school district in southwest Colorado – more than twice the average rate for school bonds in recent years.
Ignacio had been collecting puny amounts of cash – $10 here and there at community meetings – before Baum swept in to give $7,565 for advice and preparation of election materials, direct mail and yard signs. Altogether, Baum provided 92 percent of Ignacio’s donations.
The election ended in a tie. In a recount, the bond issue passed 524 to 523.
At Baum, Dalton said the company “secured an excellent credit rating for the school district” and helped Ignacio secure a state grant, saving its taxpayers money.
Ignacio Superintendent Rocco Fuschetto said the one-vote margin will enable his district to build a new school and transportation building, modernize other schools, lay an eight-lane running track, and improve its baseball and football fields.
“The whole town is going to be different in five years,” he said.
He believes the half-million-dollar payment to Baum was worth every penny.
After the vote, the company took him and two school board officials to San Francisco to talk with credit-rating agencies. Its representatives were there on election day and again during the recount, making sure every yes vote was counted.
“They even checked obituaries for the past year to see if somebody voted illegally,” he said. “They were very thorough.”