WASHINGTON -- Los Angeles County's proposal to make unauthorized vendor lease deals a crime under the California securities law has won widespread support in the state legislature and is speeding towards passage this year.
The bill, which passed the state Assembly on a 75-to-0 vote last month and could clear the Senate as early as this week, has been largely non-controversial. But some critics say it will do little to prevent abusive vendor offerings and will not correct a flaw that created a problem for L.A. County two-and-a-half years ago.
The bill is the first attempt nationwide to crack down on the practice of some lease dealers of issuing certificates of participation backed by municipal vendor lease contracts without the knowledge or consent of the municipality.
It would make selling fractionalized interests in a California municipal lease obligation without prior written consent a securities fraud, punishable by a fine or imprisonment.
Under amendments added in the Assembly, the bill clarifies that the consent requirement would not apply to lease sales between financial institutions or to sales and resales of unit investment trust shares.
If the bill passes this week, it would become effective immediately, said Karen Lyons, an aide to Sen. Lucy Killea, who is co-sponsoring the bill with Assemblyman Louis Caldera.
"We assume it will pass unanimously. We have no reason to think it will meet any opposition" in the Senate, said Jim Gelb, a Caldera aide. The bill has been endorsed by Gov. Pete Wilson, Treasurer Kathleen Brown, and other top finance officials on the California Debt Advisory Commission.
If time constraints prevent the Senate from passing the measure before a scheduled recess at the end of the week, final action on the bill would be delayed until September, the aides said.
Sen. Killea's special subcommittee on bonds is scheduled to review the bill in a hearing today, and probably will add a technical amendment clarifying that the municipality's consent would be required if its lease, originally sold to a financial institution, were later remarketed to the public, Lyons said.
The bill responds to some disturbing encounters Los Angeles County has had in recent years with unauthorized deals that did not meet the county's standards for disclosure and compliance with other legal requirements. At least eight other municipalities in the state have also come across such unauthorized deals, as have a growing number of issuers in other states.
While the bill has encountered no opposition from the state's powerful vendor leasing industry, it is not without its critics. One bond dealer, who asked to remain anonymous, charged that the leasing industry does not oppose the bill because it would do little to prevent abusive vendor offerings.
"The lease dealers will just add one more document -- a resale consent form -- to the package" of documents they usually require municipal procurement officers to sign at the closing of the lease transaction, he said. This fits the "cookie-cutter" approach already used by lease dealers to comply with various legal requirements, he said.
Unsophisticated officers of small municipalities, as is currently the case, "will have no understanding of the implications of the consent form -- including that whatever is said in the marketing of the lease can be held against them," because the lease dealers typically do not explain, he charged.
Donald Hawkins, president of Public Leasing Corp. in Irvine, Calif., a vendor lease dealer, disagreed. He said the bill will indeed affect the way lease dealers conduct themselves.
"It represents a pretty fundamental change in the way a lot of people in the industry have done business in the past," he said.
For lease dealers who already are complying with the disclosure requirements of the Municipal Securities Rulemaking Board, the bill presents no problem because it "dovetails" with those requirements, Hawkins said.
"I don't know how others approach it, but we always point out what [the municipal officers are] signing. We want them to understand it. And if an official statement needs to be produced, then we want the municipal entity to sign off on it. We want there to be disclosure of everything," he said.
Hawkins also said that the lack of opposition to the bill reflects the leasing industry's resignation to it, and perhaps a belief that the bill could not be stopped because of the small uproar caused by Los Angeles County last year over its encounters with unauthorized deals.
"If others in the industry who know the governmental process better than I thought that it could be defeated. I'm sure they would have mounted an effort. That it is sailing through implies some sort of acquiescence," he said.
Some in the industry who were riled by the proposal last year, when Los Angeles county officials first announced it at a leasing conference in Tuscon, Ariz., have come to accept it because they now understand the county's outrage over losing control of securities that were marketed in its name, Hawkins said.
Another criticism of the bill nevertheless persists -- that it would fall short of correcting the very incident that first prompted the county's outrage. The incident occurred in January 1991, when the county ran into a vendor lease deal that was being sold by the Chicago Corp. unbeknownst to the county at the same time as the county was trying to market its own equipment lease offering.
Because the bill would apply only to lease sales within California, it would not have applied to the Chicago Corp. offering, which was sold outside the state, said Karen Hedlund, an attorney with Skadden. Arps. Slate, Meagher & Flom in Los Angeles.
State officials acknowledge that the bill takes only a first stab at trying to control abusive vendor deals. But they maintain it is up to each individual municipal agency to take the further steps needed to protect itself and its name in the market.
Guidelines that the California Debt Advisory Commission is drafting for distribution to municipal issuers next month will contain an extensive discussion of vendor leasing practices, and will strongly recommend that municipal governments take the precautions necessary to prevent abuses, said Steve Juarez, executive director of the debt advisory commission.
"What we've come to believe is that there has to be a clear definition in the lease documents as to what the conditions are for secondary securitization of the leases," Juarez said.
Most of the problems state and local governments are encountering with vendor deals could be corrected with better lease documentation, he said.
The Government Finance Officers Association, in a policy statement issued this spring, also recommended that issuers address potentially., abusive vendor lease practices through language in their lease contracts.
The California guidelines will stress that to prevent embarrassing and harmful mistakes, municipal governments must also carefully read and understand lease documents that are prepared by lease dealers before signing on the dotted line, said Steve Shea of the debt advisory commission.
"People often accept the legal language in a lease without really reading and understanding it," he said.
"We hear anecdotal cases of people receiving lease proposals that provide illegal documentation or would violate local debt limit restrictions, or would grant vendors a security interest in the municipality's tax base. These proposals are either unenforceable or, if they are enforceable, would jeopardize the tax-exempt status of the issue," Shea said.