SANTA MONICA, Calif. - A restructuring of the fiscal relationship between California and its localities should be favored by the securities industry as a step toward ensuring issuers' financial integrity, a state policy analyst said here yesterday.
California's existing system of state and local government "has become completely dysfunctional," and one outgrowth of that problem is "more and more creative bookkeeping techniques and cost shifting," said Peter Schaafsma, director of the state and local finance section for the California Legislative Analyst's Office.
Such financial maneuvering can complicate efforts by bond investors to gauge the degree of risk at a time when borrowings continue to swell, Schaafsma said.
Schaafsma helped spur extensive interest in restructuring this year with a report calling for a massive overhaul of the state-local fiscal relationship.
Numerous public officials are exploring the topic, which is expected to be a hot-button issue in the state capital next year.
Schaafsma, who appeared on a panel before more than 300 participants at the third annual California Public Finance Conference sponsored by The Bond Buyer, told market participants that it is "in your interest to get this ball rolling" on restructuring.
Intergovernmental revamping could lead to greater accountability and better performance, whereas investors stand to face growing risk if the existing system leads to "further degradation in the years to come," Schaafsma said.
From a fiscal standpoint, "at some point we'll have to recognize the local trough is empty," he said.
The public is increasingly confused about the existing system, where it seems "no one is accountable for anything," Schaafsma said.
In response, he outlined a potential reorganization model that would sort out program responsibilities, rearrange revenue to match them, and esbtablish incentives and sanctions to achieve goals.
The model is helpful because we at least know the proposed direction [and have] an outline for moving forward," said Sharon Yonashiro, another panelist and finance director for Los Angeles County.
Yonashiro cautioned, however, about potential minefields, including the need to enact reforms as a package rather than in a hasty, piecemeal fashion.
Gregory Clark, a vice president of Capital Guaranty insurance Co., said that the state has caused "so much uncertainty" in the last couple of years with its multibillion dollar shifts of local property tax revenues to school purposes, which helped the state balance its budget.
Future solutions to budget shortfalls need to take into account the potentially harmful consequences of such actions, especially for counties, Clark said.
A question about how restructuring would affect the creditworthiness of existing state and local debt also arose after the panel members spoke.
Schaafsma said that the "legislature's tendency has always been" to respect existing obligations.
Though the impact of major restructuring could in aggregate hold local entities harmless from a financial standpoint, there would be "some winners and losers here" on an individual basis, he said.
In a separate session focusing on whether issuers in California are best served by negotiated underwriting, speakers generally agreed that proposals to ban underwriter contributions to public officials might result in fewer negotiated issuances.
But Bernie Schroer, senior portfolio manager for the Franklin Group of Funds, said he was offended by a perception held by some that competitively bid issues are free of politics.
Negotiated issuance is taking the rap of being shady, while competitive [issuance] is being seen as pure laissez-faire economics," Schroer said. "I hope we're not too naive to believe that."
Nationally, about three out of four new municipal issues are negotiated. In California, about 80% of new issues are negotiated and 20% are competitive by dollar volume, according to the California Debt Advisory Commission.
Anthony Taddey, a Bank of America senior vice president and director, said while he agrees that "there will be an increasing amount of competitive sales," 1994 volume overall will be "significantly less" because of a falloff in refinancings.
Taddey acknowledged that underwriters prefer working on negotiated deals because it allows them an opportunity to pre-market the securities to help reduce risk. Underwriters lose money "much more regularly" on competitive issues, he said.
Taddey said that while political contributions and negotiated deals are seen as synonymous, a ban of negotiated issues by some agencies is "throwing out the baby with the bath water."
Taddey and other speakers said negotiated issues provide the best method for a public agency to meet social goals, such as increasing participation by minority- and woman-owned firms.
Aimee S. Brown, a principal of Artemis Capital Group Inc., a woman-owned firm, said "the right for issuers to choose [negotiated or competitive] must be maintained as a public policy."
Robert T. Gamble, finance director for the San Francisco Redevelopment Agency, said he prefers to sell debt through negotiated deals, but he is rethinking his approach.
Gamble said about 5% to 10% of issuances fall into a "gray area" where an agency could go with either a competitive or negotiated financing. Now, he said, the public finance community will see the "swinging of the pendulum" to competitive bidding, especially on deals, in that gray area.
Yesterday's keynote address was delivered by Barry Sanders, a senior partner of Latham & Watkins and a co-chairman of Rebuild LA, which aims to bring economic life back to some of Los Angeles' poorest and most neglected areas. Sanders said these are "vibrant communities with Serious problems, but vibrant communities nonetheless."
