By Joel Thurtell
I was perplexed this morning, January 9, 2009, as I read a New York Times story claiming to offer “a rare glimpse into a long-simmering investigation of…wrongdoing throughout the municipal bond business.”
The practice of bond sales people ripping off governments is common, so why is the “glimpse” so rare?
Because journalists mostly are not looking.
If they bothered to see for themselves, rather than let themselves be prodded by investigators, they’d find that the bond scandal is an old one.
That’s what I found 16 years ago when I delved into this fascinating but arcane world with its private argot strewn with obscure words like “zeroes” and “basis points” describing fairly simple things in language you need a special dictionary to comprehend. It’s an industry with specialized documents that seem encrypted so that people like you and I will have trouble understanding them.
Because most journalists are lay people not indoctrinated into these clubby ways, and because municipal bonds are not well known as the powerful economic motors they are, journalists don’t look closely at this business that accounts for trillions of spending with virtually no accountability and the lightest of pseudo-regulation.
Suddenly, the Times has discovered the shady world of munis.
But only because, as the story says, “three federal agencies and a loose consortium of state attorneys general have been gathering evidence of what appears to be collusion among the banks and other companies that have helped state and local governments take approximately $400 billion worth of municipal notes and bonds to market each year.”
When Authority speaks, it’s Page One news.
Where do I begin?
Collusion is what it was all about when I studied Capital Appreciation Bonds, a particular form of muni being foisted on Michigan school taxpayers in the late 1980s and early 1990s.
Reporters encounter the lingo of munis at election time, when governments propose that voters approve borrowing sums of money to build schools, city halls, fire and police stations, sewers, water works and so forth. Finding someone in local governments who actually understands what voters are endorsing with their “yes” votes is hard. States collect information on bonds and to some extent monitor their issuance, but archiving data is not monitoring. I found people in Michigan’s state government who were aware of the shakiness of these deals, but felt they lacked the power to prevent what amounted to a collossal screw job. Even on those rare occasions when state financial overseers ordered special precautions, the state’s demands were ignored.
In Michigan, there was and probably still is a sort of cartel of school bond issuing, with — in the early 1990s — two bond underwriters sharing nearly all the business; two law firms were also cut into the deals, as was an Ann Arbor financial advising firm. I learned of lavish trips to New York ostensibly paid for by the supposedly independent financial adviser, who introduced school officials to bond rating officials in Manhattan, although those meetings produced nothing of benefit to the schools and the cost of the trips, together with Broadway plays, was eventually billed by the “independent” adviser right back to the schools. See Story 7 for more on junkets, aka bribes.
Because of my Detroit Free Press stories on April 5, 1993, one school superintendent who went on such a junket lost his job. Tip of the iceberg. Also, the state Legislature banned future issues of Capital Appreciation Bonds and ordered that future bond issues be competitively bid rather than rigged through a process the underwriters euphemistically termed “negotiation.”
It was huge that CABs were banned, because as you will read in these stories, schools were piling up enormous debt to be paid by future taxpayers. Imagine the predicament schools would have found themselves in had such debt been allowed to continue accumulating into today’s depressed economy. Debt payback was predicated on rosy assumptions called “present value” that predicted large increases in real estate valuation ad infinitum. Today, we easily perceive the folly of that notion, but in the early 1990s, boundless optimism about the economy engendered a credit card mentality that led to over-borrowing.
The stories were widely read among bankers, bond underwriters and bond attorneys as well as by Michigan school officials. They won the 1994 Michigan Education Association School Bell Award. They had important statewide impact, but they failed to spark a national movement towards regulating the industry.
I decided to post these 16-year-old news stories in hopes of showing that what’s being discovered today about abuses in the municipal bond industry is not new. This story has been with us for a long time, and despite some prosecutions which may or may not occur this time around, the system is likely to keep on with its old clubhouse collusion and profiteering unless really strong steps are taken to stop it cold.
The following Detroit Free Press articles are reprinted with permission from the Free Press.
Contents
1. MICHIGAN SCHOOLS LOAD THE FUTURE WITH DEBT
2. ONE KEY FIGURE HAS TAKEN THE BUSINESS WITH HIM
3. PONTIAC SCHOOLS SUE LAW FIRM OVER ISSUE
4. SUPERINTENDENT IS SATISFIED, BECAUSE THE KIDS WILL PAY
5. ROMULUS USES HEAVY DEBT TO BUY CHANGING TECHNOLOGY
6. FEWER DISTRICTS OPEN UP THEIR BOND SALES TO BIDDING
7. ALLEN PARK BOARD SUSPENDS SCHOOLS CHIEF DURING PROBE
8. MAIN CAB STORY — COMMENTS ON UNCUT VERSION
1. Headline: MICHIGAN SCHOOLS LOAD THE FUTURE WITH DEBT
Sub-Head:
Byline: JOEL THURTELL FREE PRESS STAFF WRITER
Pub-Date: 4/5/1993
Memo: BUYING NOW, PAYING LATER; SEE CHARTS ON MICROFILM,
PAGES 8A AND 9A
Correction: CORRECTION RAN APRIL 22, 1993
GETTING IT STRAIGHT
* A CHART ACCOMPANYING AN APRIL 5 ARTICLE ABOUT SCHOOL
DISTRICT CONSTRUCTION BONDS SHOULD HAVE SAID CAPITAL
APPRECIATION BONDS ISSUED FOR THE LOWELL SCHOOL DISTRICT IN
1991 BEGIN TO MATURE IN THE YEAR 2003. (This chart had a powerful impact on Michigan schools considering CAB debt. The chart showed every school district in Michigan that issued CABs, along with the amount underwritten including principal and interest. There was hell to pay in districts where interest far outweighed principal, which was most of the time. I have not figured out how to post the chart. — JT)
Text: Buy now, pay later. Pay much later, but pay millions more.
That’s the deal for taxpayers in dozens of Michigan school districts that
are using a heavy-interest form of bonds to stretch out paying for new
buildings, football fields, swimming pools — even buses and computers that
are likely to be outdated long before the bill for them is paid.
Since such financing was made legal in 1986 by the Legislature, 82
districts have borrowed $571 million that will require $2 billion to repay —
about 2 1/2 times more interest than conventional bonds would require.
In most cases, districts won voter approval of the bonds with a pledge
that little or no additional property taxes would be needed to pay them off.
But the payoffs will at least require extending debt- service taxes by 10
or 20 years, and could force tax increases if property values are stagnant or
assessments are held in check by state law.
The schools’ rush for such borrowing has alarmed financial experts who see
a huge balloon of debt settling over Michigan education around the year 2000.
They are warning that some districts are so much, so long in debt that
they will be unable to borrow money to meet future needs. But, they say, the
people who engineered the financial decisions won’t be around to face the next
generation of taxpayers, the ones stuck with the bill for buildings and
equipment that could be worn out or obsolete.
School officials, however, defend the bonds as one way to meet current
needs in a climate of voter ire over property taxes, the major source of money
for schools. They also say it is smart to project that a growing tax base
will enable them to meet future debt without a tax increase, and to ask the
next generation of school users to help pay for facilities and equipment.
Asked about the enormous interest, Gary Kemp, assistant superintendent for
finance in the Lowell schools near Grand Rapids, where a $29.8-million bond
issue for a new high school will cost $97 million by the time it’s paid off
in 2020, said: “I try not to think about it.”
The bonds are known as CABs, short for capital appreciation bonds.
They were authorized in 1986 legislation sponsored by then-state Rep.
Jerry Bartnik of Temperance, a former teacher who was looking for a way to
help school districts raise money.
Bartnik, currently a member of the state Natural Resources Commission,
said he was misled by the Legislature’s fiscal analysts and others into
thinking CABs were a smart option for borrowing.
Now, he said in a recent interview, it is plain that CABs are just a way
of “pushing all the debt back . . . and somewhere down the line, you’re going
to pay the bill.”
“It doesn’t lower borrowing costs,” Bartnik said. “It just raises it.”
He said the heavy long-term debt explains why school districts adamantly
opposed last year’s ballot Proposal C, which would have cut and limited
property taxes without a guarantee that the lost revenue would be replaced.
“They knew they got all this debt coming,” he said.
A property tax-cut proposal that will go before Michigan voters in a June
2 special election provides a sales tax increase of 2 cents on the dollar to
make up money schools would lose.
The Michigan Department of Treasury had initial misgivings about CABs
because of the long-term heavy debt.
“It just didn’t seem fair to me that tomorrow’s taxpayers should pay more
than their fair share of the tax burden for today’s projects,” Robert Bowman,
state treasurer at the time, said last week.
But Bowman eventually signed off on the first CAB in 1988 — although he
insisted that the school district involved, Holt in suburban Lansing, begin
setting aside money immediately to meet the looming debt. The order was not
followed and Treasury now gives CABs routine approval with no such
requirement. Other states allow CABs if money to pay them off is being set
aside in the years before they come due.
How CABs work
With a conventional bond issue, a school district begins paying interest
to bondholders right away. That requires extra income and generally means a
tax increase.
With CABs, the district doesn’t have to pay anything for several years.
That means no immediate tax increase. But in the long run, taxpayers pay
dearly for the delay because interest piling on top of the principal, making
more and more interest due.
To understand the appeal and risk of CABs, imagine you are about to buy a
new house and are offered two methods of financing it.
One is a typical mortgage with equal payments each month for 30 years. At
first, you pay mostly interest and little toward the principal of the loan.
Over the years, that ratio changes until your last payment is virtually all
principal.
You consider your income and worry that the payments initially will be
too high for you to handle.
So you get a second option: Move in now. Enjoy the house. No payments are
due on your loan for 10 years, and when they come due, you will have 20 years
to pay it off. In the meantime, interest keeps piling up on the principal.
When you must begin paying, your debt is larger, and so are your payments.
You have figured, though, that your income will probably rise enough in the
meantime for you to handle it.
Of course, you’d also have a huge encumbrance on the house. No such home
mortgages are offered.
The big difference between this hypothetical and school CABs is that the
home buyer has a clear understanding of what’s involved.
School district voters may not, and the architects of a CAB deal may not
be around to cope with the consequences, such as:
* Livonia schools borrowed $7.4 million in one CAB deal that will cost $25.3
million in interest, or 342 percent of the loan amount.
* Brighton schools borrowed $23 million for two new schools, a child
development center and remodeling projects; the interest will be $64 million,
or 278 percent of the loan.
* The Romulus schools used $6.2 million in CABs to help equip classrooms with
computers. After 30 years, Romulus taxpayers will have repaid the $6.2 million
plus $35.8 million in interest, or 575 percent of the loan amount.
“By using that approach, we were able to do it without raising our tax
rate,” said Romulus Superintendent Bill Bedell. “If you had a choice, I think
a regular bond issue would be much preferable, but we would have had to jack
up our millage 2 or 3 mills and people on the front end would have had to pay
for it faster than people later on.”
But John Axe, a Detroit bond attorney and financial consultant who
refuses to get involved in CAB deals, asks: “Would you buy a house like this?
“Of course not — it’s not a sound way of doing it. I might never be able
to pay for it.Who would buy it with an overhead debt several times the sale
price?
“These CABs are only five years old,” Axe said. “By the time the trouble
comes, the board members and administrators who did this will be gone and the
poor taxpayers are stuck with the bill.”
Michael Forrester, an analyst with the New York credit- rating agency
Standard & Poor’s, warned against CABs in a December 1990 article in
Creditweek magazine, under the headline, “Michigan schools’ hidden debt
burden.”
“To many taxpayers, the promise of new school facilities for their
children, coupled with a pledge of ‘no new taxes,’ appears irresistible,” he
said. Because interest on the bonds continues to accrue, the true debt
burden is understated “and could leave a district and its taxpayers vulnerable
to unpredictable economic and financial conditions,” he said.
The bonds “may entice a district to issue more debt or undertake more
extensive projects than it might otherwise contemplate,” wrote Forrester. “The
steadily increasing debt burden could limit the district’s future debt
capacity and thereby restrict its ability to address future capital needs.”
In a newsletter last year for Michigan school business officials, Charles
Kishpaugh, an analyst with Moody’s Investor Service, another major
credit-rating service, wrote that because CABs “saddle future taxpayers with
the obligation of paying for facilities used today. . . . When the CABs
become due in 20 years, will residents be willing to begin substantial
repayment for an older, possibly obsolete facility?”
Richard Allen, a bond salesman for Kemper Securities and a former analyst
for the Michigan Department of Treasury, has been involved in 90 percent of
the school CAB deals in Michigan.
In an interview, he said the higher cost of CABs is offset by the
declining value of money due to inflation over the life of the bonds.
Inflation hit double digits some years during the 1970s, but slowed to a
crawl during the 1980s and was only 2.9 percent last year.
Still, Allen was able to use the argument to convince state Treasury
analysts reviewing a Pontiac CAB that $27 million of additional interest would
really cost taxpayers only $102,000 in future dollars.
He said CABs keep tax rates down, and that taxpayers actually save more
money than they will owe when the CABs come due, if they invest the savings in
interest-bearing accounts.
The state Treasury accepts that premise. But Linda Rairigh, a senior
Treasury analyst, acknowledged in a recent deposition for a lawsuit over the
Pontiac CABs that she was aware the savings really don’t exist.
“We know those figures are not realistic,” she said.
A bad beginning
Allen, whose job with the state was to analyze bond issues for the
Michigan Municipal Finance Commission, was by 1986 selling bonds for the firm
of Prescott, Ball & Turben when the CAB law sailed through the Legislature.
He said he is hazy about his role in the process. “We may have had some
input.”
But in a June 1991 interview with the Bond Buyer industry newspaper,
Allen described himself and the Prescott, Ball firm as “instrumental in
getting the legislation passed.”
He also said he was “instrumental in taking this over to the education
area.”
By 1988, Allen was a senior vice president with the underwriting firm of
Tucker Anthony, R.L. Day. He also was vice president of the school board in
Holt, and chairman of its finance committee when Holt issued the first CABs
in Michigan.
Although the Tucker, Anthony firm was involved, Allen said he stayed clear
of the Holt deal because of his position on the school board.
But Bowman, state treasurer at the time, and Ronald VanErmen, the
district’s business manager, recalled Allen being very involved. VanErmen, in
fact, recently deferred questions about the bonds to Allen, saying, “the guy
who handled that for us is the guy to talk to.”
“Rich Allen knew the intricacies of that thing. I wasn’t involved, only to
the point where I was observing it. Rich handled the deal, and he’s really
knowledgeable . . .
“As school administrators, we don’t know that much about bonding,” said
VanErmen. “That’s why we rely on somebody like Rich Allen.”
Bowman said he “spent a great deal of time with Rich Allen and the school
district and everybody else. We thought whatever we did at Holt could be
precedent-setting.”
When the Holt board approved the Tucker, Anthony plan, Allen abstained
from voting. Three months later, just before the bonds were issued, Allen made
a formal “declaration of interest,” stating that, due to his employment, he
might indirectly benefit from the deal.
Records show Allen’s firm made about $150,000 in service fees on the Holt
CABs. In an interview with the Free Press, Allen insisted there always was a
“Chinese wall” between him and the transaction.
“Personally,” he added, “I get nothing off these deals. I get a salary.”
At the Department of Treasury, analyst Anton Presecan — a former Allen
colleague — gave the Holt issue careful scrutiny, aware of its
precedent-setting nature.
In memos, Presecan said the CABs, intended to refinance about $5 million
in debt for buildings opened in 1967, would cost Holt taxpayers an extra
$14.3 million and extend debt service payments from 1997 out to 2016.
“The staff has serious reservations concerning the propriety of stretching
out of debt incurred by past or current taxpayers to a future generation of
taxpayers,” Presecan wrote. “Buildings financed with a 1967 bond issue will be
almost 50 years old before these refunding bonds are paid off, assuming the
buildings still have utility.”
Presecan suggested Holt set up an account known as a sinking fund, where
anticipated increases in state aid could be banked with interest, then used to
repay the bonds early, saving millions of dollars.
Treasury approved the Holt bond issue, with the provision that Holt set up
such a fund. Bowman said it would be “a way to ensure that today’s taxpayer’s
pay for today’s benefits.”
But Holt schools never did it.
“I’ve never heard of this,” VanErmen said when shown a copy of the order.
“That’s a shocker,” said Allen.
One of Holt’s bond attorneys, Thomas Nordberg of Thrun, Maatsch and
Nordberg, said the order was so vaguely worded that it was meaningless.
A similar order was issued a few months later when the Upper Peninsula’s
Munising School District issued CABs.
Munising Superintendent Steve Cromell said this month that he knew nothing
about it.
Bowman, now chief financial officer for IT&T in New York, said the state
has “no choice but to go back and enforce” such orders, “maybe not
retroactively, but progressively.” Treasury officials said they were unsure
how that could could be done.
Louis Schimmel, director of the Municipal Advisory Council and a CAB
critic, said other states require sinking funds and Michigan should, too. He
also said no further CABs should be permitted.
“You can’t make it retroactive and make all those bonds go in default —
that would be insane,” Schimmel said. “But I am proposing that we stop it
right now.”
Big business for bonds
In the early and mid-1980s, the bond debt of public schools in Michigan
was steady or declining. In 1985, school districts sold 11 issues worth a
total of $154 million.
Last year, (1992) Michigan schools sold more than $1.3 billion worth of bonds,
including CABs, in 205 deals. The bond activity has increased in part because
of lower interest rates, and in part because CABs make bonds easier to sell to
voters, with the “no new taxes” pledge.
Government bonds are a powerful motor driving the national economy,
financing the construction of roads, schools, sewers, town halls, airports and
other public facilities.
Bonds, thus, are a very big business. State and local bond debt has been
estimated at more than $1 trillion — outweighing the $322 billion federal
deficit — by Donald Axelrod, an economics professor at the State University
of New York, Albany, and author of a book on public financing.
But bonds, with an arcane terminology all their own, are little understood
and barely regulated. Underwriters buy them wholesale and sell them at retail
to institutional or individual investors. The risk to investors is low when
bonds are government-backed, and the return can be substantial.
So can the underwriter’s profits. For example, the underwriters on a
$2.4-million CAB deal for the Rockford schools made $496,000, records show.
The Securities and Exchange Commission does not oversee bond markets,
leaving them to nominal self-policing through the National Association of
Securities Dealers.
In Michigan, only the Department of Treasury has any watchdog role on
behalf of taxpayers, but does nothing to monitor bonds beyond reviewing and
approving proposed sales.
Treasury analyst Rairigh said it is not the state’s role to second-guess
local voters who approve the bonds.
“If local taxpayers don’t like it, they can recall the board,” she said.
A Free Press review of Treasury’s CAB files found that some underwriters
persuaded Treasury to approve a bond deal, then issued bonds that were very
different.
For example, in a 1991 Lowell deal, Kemper’s Allen filed a spreadsheet
telling Treasury that $16 million in CABs would be issued, with payments due
beginning in 1997, and interest totaling $57 million. Records show the
actual sale was for $19.2 million, with payments due beginning in 2003.
Adding $3.2 million to the principal and delaying the pay- back by five
years increased interest on the bonds by $25 million.
In her sworn deposition for the Pontiac suit, Treasury’s Rairigh said the
Municipal Finance Division simply accepts underwriters’ spreadsheets without
running its own checks on them.
She said the state lacks the computers and work force to do independent
analyses.
Rairigh said she has asked her superiors for guidelines on approving CABs
with large interest costs, but to date there are no criteria for accepting or
rejecting proposals for bond refunds which cost taxpayers more than the
original issues.
Ralph Clark Chandler, a professor of politics and law at Western Michigan
University, had no idea he would spawn a $2 billion balloon in 1986 when he
suggested Jerry Bartnik take a look at bonds.
Bartnik, legislator at the time, was taking a graduate course from
Chandler and the two discussed what Bartnik might be able to do to help
schools raise money.
“We tend to look at bonds as instrumentalities of governments, and what
can be bad about bonds? There is a lot of naivete about that. . . . Your
average bear in this state would have no idea we’re talking about such a big
business,” Chandler said.
“It appears to me that the idea of CABs could work in an expanding
economy. If you’re in the Southwest, for example. But if you’re in the
Midwest, particularly in Michigan where the economy is at least cyclical and
at most depressed, then that’s not really a very good way to go.”
Bartnik said he’s disappointed to learn his class project has turned sour.
“It’s a tool,” he said, “but it’s not being used prudently.”
And of the school boards, administrators and underwriters who ventured
into CABs, “let’s be honest,” he said. “In 20 or 30 years, there isn’t one
person who’s still going to be there.”
* The financial community has grown alarmed about the debt awaiting the next
generation of Michigan taxpayers. Analysts predict some school districts
saddled with heavy-interest, delayed-payment bonds — known as CABs —
will be hard- pressed to borrow money for future needs.
* In one case, Romulus schools eventually will pay $35.8 million in
interest on a $6.2-million loan.
* Despite state orders, districts are setting aside no money to meet the
debt.
TOTAL SCHOOL DEBT
(In billions of dollars)
In the early and mid-1980s, the bond debt of public schools in Michigan was
steady or declining. Debt has risen dramatically since 1988, when districts
began financing projects with high- interest capital appreciation bonds.
1982: 2.19
1983: 2.09
1984: 2.08
1985: 2.06
1986: 2.03
1987: 2.12
1988: 2.25
1989: 2.61
1990: 2.98
1991: 3.61
1992: 4.15
SOURCE: Municipal Advisory Council of Michigan
A MATTER OF INTEREST (Sorry, I’m not able to reproduce this table — JT)
At left is a list of Michigan school districts that have issued capital
appreciation bonds with the length of the loan, the dollar amount of interest
and interest as a percentage of principal.
If you borrowed $100,000 to buy a house, using a conventional mortgage at
7 percent interest, the proportion of interest to principal would vary based
on the length of the loan. Here’s how interest as a percentage of principal
would look over different time periods:
Mortgage years Interest as percentage of principal
15 years 62 percent
20 years 86 percent
25 years 112 percent
30 years 139 percent
Caption:
:
Fifth-grader Marlos Butler, 12, works at a computer in a
Romulus school.
Illustration: PHOTO COLOR DANIEL LIPPITT; CHART HANK SZERLAG
Edition: METRO FINAL
Section: NWS
Page: 1A
Keywords: ; MICHIGAN; EDUCATION; FINANCE; REFORM; LEGISLATION; CHANGE; ; PROPOSAL; MAJOR STORY
Disclaimer:
2. Headline: ONE KEY FIGURE HAS TAKEN THE BUSINESS WITH HIM
Sub-Head:
Byline: JOEL THURTELL FREE PRESS STAFF WRITER
Pub-Date: 4/5/1993
Memo: ; BUYING NOW, PAYING LATER
Correction:
Text: Wherever Richard Allen goes, so does the bond business.
When Allen sold bonds for underwriters Tucker, Anthony, R.L. Day in
1988-89, the firm bought most of the capital appreciation bonds issued by
Michigan schools.
When Allen switched to St. Louis-based A.G. Edwards in 1989, his old
firm dropped off the list of top CAB underwriters. Edwards jumped into first
place.
Allen decamped in 1990 for a job with Chicago-based Kemper Securities
Group. Edwards now is in second place behind Kemper.
Allen, 50, is in charge of Kemper’s Lansing office.
Kemper has “gone out and hustled to help a lot of small school districts
and towns borrow the money they need to afford their capital projects,” Kemper
public relations officer David Waymire said.
Allen, who has done that hustling, is a genial man who uses financial
jargon the way others talk about sport statistics.
“I graduated with a little over a two-point grade average,” said Allen.
“If you want to call me a whiz kid, I’ll be happy to take it.”
He has worked for the state, as a financial consultant and ran his own
business.
Allen was a promoter of the bill that made CABs legal in Michigan in
1986.
He was vice president of the Holt school board when it picked his firm
to underwrite a 1988 bond deal, including $4.8 million of CABs. His firm got
the deal without having to submit to a competitive bidding process.
It was the first CAB deal in Michigan, and according to then-state
Treasurer Robert Bowman, it set a precedent for similar deals.
Since Holt, Allen has dominated the state’s school CAB issues. His
firms have been involved in 90 percent of the deals, according to Securities
Data Co., a securities tracking firm.
“I’ll take the praise or the blame, whatever you want to do,” Allen
said.
Caption:
Illustration:
Edition: METRO FINAL
Section: NWS
Page: 9A
Keywords: ; SCHOOL; FINANCE
Disclaimer:
3. Headline: PONTIAC SCHOOLS SUE LAW FIRM OVER ISSUE
Sub-Head:
Byline: JOEL THURTELL FREE PRESS STAFF WRITER
Pub-Date: 4/5/1993
Memo: ; BUYING NOW, BUT PAYING LATER
Correction:
Text: In the very competitive, but very staid, world of bond sales, the Pontiac
School District has done the unthinkable — dragged its own law firm into
court, charging legal malpractice in a $54-million bond deal.
In a lawsuit, the district accuses Detroit’s prestigious Miller, Canfield,
Paddock and Stone of botching the language of a Feb. 5, 1991, ballot proposal
in which voters authorized the bond sale.
Dennis Pollard, the district’s attorney, said in the lawsuit that the
proposal failed to mention that part of the bond sale proceeds were needed for
a new school bus garage; as a result, the money can’t be used for a garage
and the present one is sinking into a swamp.
Miller, Canfield claims that school officials never told George Stevenson,
the lawyer handling the bonds, about plans for the new garage.
Pontiac claims, too, that Stevenson did not disclose that the law firm
was working for the bond underwriter, Kemper Securities, and the Michigan
Municipal Bond Authority, which had a hand in marketing the bonds.
Richard Barch, a financial adviser active in Michigan bond sales, said it
is not unusual for one law firm to handle different ends of a deal,
representing both the government agency selling the bonds and the
underwriting firm, which buys them wholesale and sells them retail.
“I don’t think it’s that much of a conflict, although it may have the
appearance of it,” Barch said. “It’s sort of a friendly marriage. It’s not
like a divorce.”
The dominant law firm for school bond sales in Michigan, Thrun, Maatsch
and Nordberg of Lansing, has worked for school districts and underwriters at
the same time on 41 CAB deals. Miller, Canfield has done 11 dual CAB
representations. All of the Miller, Canfield deals and all but seven of the
Thrun deals involved Richard Allen’s firms as underwriter.
In a deposition for the Pontiac suit, Miller, Canfield attorney Stevenson
said the bond purchase agreement, “of any of the aspects of underwriter’s
counsel work, would be the one where there is a potential for conflict.”
“The underwriter wants to make a deal, and in their pricing they’re going
to want to do it so they can sell the bonds as efficiently as possible,”
Stevenson said. “That may or may not be in the best interests of the issuer.”
Caption:
Illustration:
Edition: METRO FINAL
Section: NWS
Page: 9A
Keywords: ; SCHOOL; PONTIAC; FINANCE
Disclaimer:
4. Headline: SUPERINTENDENT IS SATISFIED, BECAUSE THE KIDS WILL PAY
Sub-Head:
Byline: JOEL THURTELL FREE PRESS STAFF WRITER
Pub-Date: 4/5/1993
Memo: ; BUYING NOW, BUT PAYING LATER
Correction:
Text: Coloma schools Superintendent Clifford Tallman had no qualms about
saddling future taxpayers in his southwestern Michigan district with big debt
for a new gym.
A 1991 ballot proposal that had failed five times passed easily when
school officials assured voters their children would foot the bill and tax
rates would rise by only 1 mill.
“I told senior citizens that this would be paid off by the students who
are using it,” Tallman said.
Coloma’s new gym cost $4.8 million, with $2.04 million coming from CABs
and the rest from conventional bonds.
Interest on the CABs will amount to about $6.97 million over 29 years.
Traditional bonds would have cost about $2 million in interest.
“If we went traditional, it would have cost us 4 mills, plus or minus,”
Tallman said.
“It is more expensive in the long run to do it this way,” acknowledged
Tallman. “But if you paid cash for your car, it would be cheaper than
financing it over five years.”
To keep the rate at the 1-mill level promised to voters, Coloma’s tax
base must increase in value between three and seven percent a year for 30
years.
“Property is going up just because of the prime location in relation to
Chicago,” Tallman said. “Consequently, we do have a sound tax base.”
Former Farmington school board member and retired National Bank of Detroit
bond expert Richard Wallace disagrees.
“Who knows what our economy is going to be like 15 or 20 years from now?”
he said. “You cannot predict . . . inflation any more than you can predict
what the stock market will be in 10 years.”
But Tallman stands by the financing for the gym: “The students who are
using it will be the major payers on this one,” he said. And for now, “they
are getting the benefit of it.”
Caption:
Illustration:
Edition: METRO FINAL
Section: NWS
Page: 9A
Keywords: ; SCHOOL; FINANCE
Disclaimer:
5. Headline: ROMULUS USES HEAVY DEBT TO BUY CHANGING TECHNOLOGY
Sub-Head:
Byline: JOEL THURTELL FREE PRESS STAFF WRITER
Pub-Date: 4/5/1993
Memo: ; BUYING NOW, BUT PAYING LATER
Correction:
Text: The Romulus schools have installed $23 million worth of Macintosh
computers and other electronic gear in an expensive wager that high-tech
teaching will pay off with better learning.
The computers, expected to be obsolete in 5-10 years, were bought with
money from high-interest capital appreciation bonds. Romulus has issued $28
million in CABs as part of a $35- million bond issue authorized by voters in
a Nov. 6, 1990, election. No payments are due on the CABs until 1998.
The interest on them will total $89.5 million — three times their value
— by the time the CABs are paid off in 2017.
But Superintendent Bill Bedell said Romulus would not have the classroom
computers today if not for CABs, which enabled the district to sell bonds by
renewing a 3.5-mill debt levy, not by raising taxes — “a hell of a selling
point with the people.”
A conventional bond issue would have required a three- or four-mill tax
increase, Bedell said.
He said he knows the computers will be obsolete, but “40 percent of our
ninth-graders are flunking math. It appears to us the only way to keep pace is
to use artificial intelligence, and we figure those computers will be key.”
As part of its CAB repayment plan, the district figures property values
will grow enough for the 3.5-mill levy to remain adequate for debt service.
Farmington school board trustee and retired bond dealer Richard Wallace
criticizes the practice of loading heavy debt on future taxpayers for items
that will be obsolete before they’re paid off.
“I believe that when you’re building a capital project — bricks and
mortar, schools and libraries — it should be paid for approximately over the
useful life of the project,” said Wallace. “You don’t want to finance school
buses over 30 years, because they’re worn out in half a dozen years.”
Caption:
:
Second-grader Renee Walker, 8, counts the old-fashioned way at
Wick Elementary School in Romulus recently.
Illustration: PHOTO DANIEL LIPPITT
Edition: METRO FINAL
Section: NWS
Page: 9A
Keywords: ; SCHOOL; FINANCE; ROMULUS
Disclaimer:
6. Headline: FEWER DISTRICTS OPEN UP THEIR BOND SALES TO BIDDING
Sub-Head:
Byline: JOEL THURTELL FREE PRESS STAFF WRITER
Pub-Date: 4/5/1993
Memo: ; BUYING NOW, BUT PAYING LATER ; SEE CHART IN MICROFILM
Correction:
Text: Since capital appreciation bonds were authorized in Michigan in 1986, a
majority of school bond sales, including all the CABs, have been negotiated
with one underwriter rather than put out to competitive bids.
Underwriters, who buy bonds wholesale and sell them retail, say deals
mixing delay-pay CABs with conventional bonds and spread over 20-30 years are
too complex to sell at auction. They say negotiating also gives them more
flexibility to pounce on favorable market conditions, benefiting sellers and
investors.
But critics say negotiated deals end up costing more, with most of that
money profiting underwriters.
“Many of us in the investment business don’t think that the size of these
issues is so horrendous they have to be negotiated,” Louis Schimmel, director
of the Municipal Advisory Council of Michigan, told the Bond Buyer, the
industry newspaper.
Local governments “might just be surprised at what the interest rates are
compared to a negotiated basis,” Schimmel said.
The River Rouge School District was surprised recently when it saved $1
million in interest on a $47-million conventional bond issue by rejecting a
pitch from Kemper Securities, leading CAB underwriter in Michigan, to be sole
underwriter on a negotiated deal.
The salesman was none other than Philip Runkel, the former state school
superintendent who is now employed by Kemper.
“It seemed like the more we got into it, the more the proceeds would be
eaten up by these various fees in a negotiated deal,” said River Rouge
business official Brian Jones. “We didn’t see how we could justify the extra
fees.”
The district opted for bids that were unsealed two weeks ago. The New
York firm of Goldman, Sachs was the lowest, bidding $1 million less in
interest than Kemper, which submitted a bid that was fourth-lowest.
Detroit bond attorney John Axe said underwriters have brainwashed
Michigan school officials into believing they can’t take competitive bids to
sell CABs or bonds to refund old debt, which is done in other states.
In 1991, $225.6 million of CABs were sold competitively in other states;
in 1992, $484.4 million, according to Securities Data Co., a securities
tracking firm.
One bond attorney, George Stevenson of the Detroit firm of Miller,
Canfield, Paddock & Stone, said in a recent deposition that underwriters
prefer negotiated sales because “they have much assurance that they have a
deal.”
“They have an advantage in pricing that they don’t have in a competitive
transaction,” he added.
In an April 1991 column, Bond Buyer editor Joe Mysak called the rising
tide of negotiated bond deals “a perversion.”
“More than three-quarters of the market should not be going negotiated,”
he wrote. “The municipal market needs less politics. It needs more smart
issuers. And it needs closer scrutiny of deals that are negotiated.”
Caption:
Illustration: CHART
Edition: METRO FINAL
Section: NWS
Page: 9A
Keywords: ; SCHOOL; FINANCE
Disclaimer:
7. Headline: ALLEN PARK BOARD SUSPENDS SCHOOLS CHIEF DURING PROBE
Sub-Head:
Byline: JOEL THURTELL FREE PRESS STAFF WRITER
Pub-Date: 4/12/1993
Memo:
Correction:
Text: Allen Park’s school board has suspended Superintendent Michael Ferguson
with pay while it investigates claims that he sexually harassed coworkers
and spent nearly $8,000 on a 1991 trip to New York that may have been
unnecessary.
Attorneys Dennis Pollard and Dennis Miller, whom the board hired to look
into the allegations after it suspended Ferguson last month, expect to report
to the board this month. Ferguson could not be reached for comment.
Pollard, who is investigating the harassment complaints, would not reveal
details, but said they were made by two of Ferguson’s coworkers.
Miller is investigating the New York trip. He said Allen Park schools
paid $2,010 for three first-class airline tickets for Ferguson, then-board
member Jim LaBrecque and Richard Barch, the board’s financial adviser. The
three stayed two nights at the Waldorf-Astoria hotel, which billed them
$3,957. Miller said the school officials spent $547 on meals, $195 on taxicabs
and $36 on tips.
Barch said he took Ferguson and LaBrecque on the trip to lobby
credit-rating agencies in hopes of getting the district a better rating for
its new $7-million bond issue.
The bonds were guaranteed by the state and automatically received the
state’s credit rating issued by Standard & Poor’s and Moody’s, said Louis
Schimmel Jr., director of the Municipal Advisory Council of Michigan.
Rating trips are not unusual for many school officials in districts where
voters have approved bond proposals. Barch, whose Ann Arbor-based Stauder,
Barch & Associates is the leading municipal financial consulting firm for
Michigan schools, said he takes about 20 percent of his clients on similar
trips to New York. He said no other trip ever has been questioned.
But a bond attorney said if bonds are being guaranteed by the state or are
being insured, there is no need to visit a rating agency. “That was a total
waste of time and whatever money they spent,” said bond attorney John Axe.
Bond ratings influence the interest rates charged on the bond issue and
suggest how risky the bonds are.
Asked to explain the expenses, Barch said, “I always stay in the Waldorf.”
Miller said $1,000 of the bill is unaccounted for.
“There was a thousand for theater and stuff like that,” Barch said. “I
know we went out to a couple of nightclubs — normal things that people from
out of town would do. You don’t want to sit around in a hotel room.”
To school officials, “it’s a big thing,” said Barch. “To me, it’s
something I need to do to explain the credit rating.”
Barch said he picked up the tab and later billed the school district.
The board had authorized $16,000 for financial adviser’s fees, but Barch
added the $7,745 cost of the trip to his fee and billed the district $23,745,
Miller said.
“The trip was alleged to be related to a meeting with Standard & Poor’s and
Moody’s, but there is no documentation of that,” Miller said.
Miller said he’s investigating whether the trip was necessary. “I was
under the understanding that if your bonds were qualified by the state, you
would get the state’s double A-minus credit rating anyway, so why bother?”
Barch said Allen Park officials needed to visit Standard & Poor’s and
Moody’s because “Wayne County is always a harder sell than say, Kent County,
and you want to put your best foot forward.”
The trip did not result in a change in the bond rating.
Allen Park school board member Edwin Frosheiser said: “I’m not saying they
shouldn’t go to New York and shouldn’t stay in a hotel. It seems to us that
it’s excessive, that’s all.”
Caption:
Illustration:
Edition: METRO FINAL
Section: NWS
Page: 4B
Keywords: ; SEX; HARASSMENT; SUPERINTENDENT; ALLEN PARK; CHARGE
Disclaimer:
8. MAIN CAB STORY — COMMENTS ON UNCUT VERSION
The CAB story was very long, and I was aware soon after it ran on April 5, 1993 that some essential parts had been cut. I’ve found the original, uncut version. It is VERY long, and far more detailed than the version that appeared in the Free Press. I would post it on JOTR, but for one thing. It exists in hard copy form only, in a faded dot matrix printout. If I had time, I’d re-type it. But I don’t have time. I’m going to explore digitizing it.
The uncut version of CAB contains more detail about collusion — the you-scratch-my-back, I’ll-scratch-yours world of bond sales involving underwriters, bond attorneys, so-called independent financial advisers and the sometimes overly compliant school officials who were their customers and supposedly sworn to safeguard the public trust.
As I say, I’m exploring ways to post the uncut version of CAB.
