Financial underwriters who want to do business with the County of Los Angeles must agree not to give political donations to school bond campaigns under new rules adopted this month by government finance officials.
Because Los Angeles County is by far the largest municipal bond issuer in California, the move is likely to have statewide implications.
Mark J. Saladino, the Los Angeles County treasurer-tax collector, said Tuesday that his office set the policy to prevent campaign donations from influencing the hiring of securities brokers by school districts and to increase competition among dealers, who often charge millions of dollars in fees.
Saladino has been concerned that some firms try to recover their donations in their underwriting fees -- contrary to a state law that prohibits schools from using tax revenues to finance bond campaigns. Bonds are typically repaid from tax revenues over a period of years.
Under the policy, underwriters must not donate to school bond measures if they want to qualify for the treasurer's list of investment banks and securities dealers eligible to sell county bonds.
The county's list of financial firms -- currently 40 dealers that include some of the nation's largest banks and brokerages -- is reviewed and revised every five years. Saladino said the next evaluation is in 2016.
"If they are giving to school bond campaigns, we won't do business with them," Saladino said.
According to the treasurer's office, most, if not all, of the current participants already have agreed to the restriction.
Saladino said he has informed other county treasurers about the new policy and plans to notify state Treasurer Bill Lockyer to encourage him to adopt the same restrictions.
The policy stems from a nationwide effort by major investment banks to prevent underwriters from donating money and campaign services to bond ballot measures.
In July, 12 firms pledged not to make political contributions to bond measures and notified the federal Municipal Securities Rulemaking Board of their action. The brokers include Morgan Stanley & Co. Wells Fargo Securities, JP Morgan Securities, Goldman Sachs, Barclay's Capital and Merrill, Lynch, Pierce, Fenner & Smith.
The securities rulemaking board, which regulates the government bond market, has been considering whether to prohibit all underwriters from contributing to political campaigns for bond measures.
Such a restriction would expand on a current board rule that bans underwriters for two years from doing business with a government entity if they give campaign donations to elected officials of that entity.
Lockyer, county treasurers across California and many investment banks have become concerned that campaign donations can create an uneven playing field for bond business at the expense of taxpayers.
In statewide surveys by The Times and other publications, virtually every securities broker hired by a school district contributed to the district's bond campaign and was retained without competitive bidding.
According to numerous studies, competition among underwriters often produces lower interest rates and fees, which can save governments and taxpayers million of dollars in debt payments for large bond issues.
In addition, a recent study focused on California school bond issues performed by New York University and the University of Colorado found that post-election fees paid to underwriters that made donations were on average $27,576 higher than those paid to brokers that did not contribute.
Researchers said the finding raises serious questions about the circumvention of state and local regulations restricting the use of public resources in election campaigns.