Scouting for graft: Look for Michigan in California

By Joel Thurtell

If I were a district attorney or attorney general in California — someone with subpoena power — I’d be asking hard questions about the behavior of public school officials and the people who arrange loans, aka bonds, for the state’s schools.

Did school officials accept freebies from bond underwriters and financial advisers?

Was the advice they got from bond attorneys independent or self-serving?

Might such freebies have influenced officials’ decisions about issuing bonds with, say, an interest rate of 1000 percent?

Specifically, were there trips, completely unnecessary, by school officials to, say, New York, under the pretext of  lobbying credit rating agencies such as Standard & Poor and Moody’s, supposedly to argue the case for the district’s loan-worthiness?

Were there first-class airline tickets for the trips?

Stays in posh hotels?

Meals in swank restaurants?

Broadway plays?

Lots of face time between school officials and bond hustlers?

Did school officials competitively bid bond deals?

Or did they hand the business to their “friends” who “gave” them swell gifts?

Ultimately, who paid for the bond rating trips, if they took place?

The schools’ taxpayers, maybe?

One telltale for corruption is whether the district took on enormous debt through an instrument known as a “Capital Appreciation Bond.”

Nineteen years ago in Michigan, I found underwriters and an “independent” financial adviser wining and dining school officials and treating them to “free” trips to New York. The officials would then select that underwriter to issue their debt — at huge cost to Michigan taxpayers.

In this 19-year-old Detroit Free Press article, Californians may find hints for questions to to ask school officials who approved high-interest Capital Appreciation Bonds.

Reprinted with permission of the Detroit Free Press.

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.”

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Illustration:

Edition: METRO FINAL

Section:  NWS

Page: 4B