Makeup of advisory panel may change if California dumps debt commission.

LOS ANGELES - Nearly 30 California public finance professionals who give advice to a state-run debt advisory commission will face conflict of interest problems if a proposed bill becomes law, market participants said this week.

A bill by Assemblyman Byron D. Sher, D-Redwood City, to eliminate the California Debt Advisory Commission could bring about significant changes in the commission's 29-member technical advisory committee, participants and the commission's executive director said.

Under Sher's proposal, functions now handled by the debt advisory commission would be turned over to the state treasurer's office.

Created in 1981 by legislation sponsored by then-Treasurer Jesse Unruh, the commission serves as a clearinghouse for public debt information and provides issuers with technical assistance. Under state law, the nine-member commission is bi-partisan. Its chairwoman is state Treasurer Kathleen Brown and its members include representatives of the governor's and state controller's offices, four legislators, and two local government finance officials.

The nine commissioners have a 10-member staff of state employees who are funded through an annual $1.25 million budget derived from fees assessed on every public debt sale.

In addition, the commission since 1983 has been assisted by an all-volunteer' technical advisory/committee. Committee members serve two-year terms without compensation. They are appointed by the treasurer and meet quarterly. Though the committee is little known outside California, some of the market's most active investment bankers, bond counsel, and financial advisory firms are members.

Sher's proposed bill, which is scheduled for hearing May 18 before the Assembly Ways and Means Committee, would create a new unit in the state treasurer's office called the debt management and allocation division. It would combine the staff of the debt advisory commission and the staff of the California Debt Limit Allocation Committee, which allocates private-activity bonds among state and local agencies. The reorganization is intended to provide economies of scale and cut employees.

However, members of the commission's technical advisory committee are concerned that the newly reorganized treasurer's office would call into question their right to pursue business opportunities with the treasurer's office.

Members fear that if they provide advice directly to the treasurer - as opposed to the current system of giving advice to the nine commissioners - it might be seen as giving them unfair access to business opportunities with the treasurer's office.

Steve Juarez, the commission's executive director and top staff member, said "the membership of the commission's technical advisory committee may need to be altered in order to remove any potential conflict of interest on the part of its members." If they provide advice to the treasurer, the question becomes, "should they be getting bond business?" Juarez said.

One solution would be for technical advisory committee members to "give up" their service on the committee "before doing business with the treasurer's office," Juarez said. Another solution would be to leave membership "open to just those people who don't do business with the treasurer's office," he said. Such a scenario "would be unfortunate," he said.

"The question is, does visibility on [the technical advisory commitee] give you an inside track in getting hired by the state?" said Lewis G. Feldman, a partner in the municipal law firm of Cox, Castle & Nicholson. He was appointed to the committee in January. "The answer is that visibility anywhere, if you are competent, helps you. Visibility can hurt you as well if you prove yourself to be incompetent."

"Clearly, there is always a possibility that an appearance of a conflict can be given off by people who participate [on the technical advisory panel]," said Timothy J. Schaefer, a senior vice president for Evensen Dodge Inc., an independent financial adviser.

In January, Schaefer was reappointed by Brown to a second two-year term as chairman of the technical advisory committee. He has been a member of the committee for seven years.

"I'm not convinced that, in a legal sense, the fact that we report to the commission, as opposed to the treasurer, really makes a lot of difference," Schaefer said. He said the committee primarily interacts with the staff of the California Debt Advisory Commission, not with the nine commissioners.

"Everybody is already sensitized to the potential for conflict," Schaefer said. He said members are "very circumspect" when dealing with issues that could raise business conflicts. They have been "recusing themselves when it is called for, and disclosing when they want to do business with the treasurer's office."

"Our role is advisory in nature. We are there to be an additional resource to the commission," Schaefer said. "But, certainly, there are no apologists for the fact that two-thirds of us are private-sector practitioners."

Another committee member is Scott Sollers, a partner and manager of public finance for Stone & Youngberg, who said it is possible that state attorneys might recommend that the technical advisory committee be disbanded, although he would hate for that to happen. "It is a marvelous forum for a collection of individuals representing a cross section of disciplines."

But, "In terms of the work product that gets done, just having it under the direction of the treasurer won't change the services of the commission," Juarez said.

Brown supports Sher's legislation, which, if passed, would take effect in January, the same month Brown completes her four-year term. Brown is campaigning for the Democratic nomination for governor.

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