LOS ANGELES -- Advertisements to promote an upcoming sale of zero coupon bonds by State Treasurer Kathleen Brown's office have provoked partisan election-season debate.
At issue is why the ads, published yesterday in major California newspapers, mention neither Brown nor the state treasurer's office.
John Allan Peschong, executive director of California's Republican Party, claimed yesterday that a letter he sent Brown last Friday pressured her staff into eliminating her name and photograph from the ads.
Brown, the Democratic candidate for governor, Originally planned to use the advertising campaign for self-promotion purposes to gain a political advantage over her rival, incumbent Republican Gov. Pete Wilson, Peschong charged.
The assertion was denied by Hal Geiogue, an assistant state treasurer, who maintains that the ads were never designed to include any written or pictorial reference to Brown, and the Republican pressure had no bearing on the matter.
"There will be no photograph of Kathleen Brown" in the advertising, Geiogue said late Monday. "There will be no name, 'Kathleen Brown,' in the ad. The ad is purely a state of California bond sale advertisement."
Peschong said Brown backed away from being prominently featured in the advertising after receiving his letter, which suggested that she could run afoul of state campaign laws related to using taxpayer money.
Brown was "obviously" planning to appear in the ads until "we got to her" last week, Peschong said. "She saw the light. I think we've been successful."
Running the ads without any reference to Brown or the treasurer's office is a departure from how three earlier zero coupon bond sales were advertised. In September and November 1991, and in March 1993, consumer-oriented ads for zero coupon bond issues featured some variation of the headline "State Treasurer Kathleen Brown announces ... "at the top of the ad.
This time, however, Brown "left the politics out of it," Peschong said. "We're very happy with their decision."
Zero coupon bonds, also known as capital appreciation bonds, are part of a tentatively sized $280 million State Public Works Board lease revenue bond issue to fund facilities at Soledad Prison in Monterey County, Calif. The tax-exempt bonds will be offered by a syndicate headed by senior managing underwriter Bank of America. Pricing is scheduled Oct. 26.
Geiogue said the quarter-page ads that were published in major California newspapers yesterday were part of "the first round" of advertising for the zero coupon bonds. The ads cost $30,000, he said.
Both sides in the debate agree that a major promotional effort is underway to reach consumers.
Last Thursday, Brown held a news conference at California State University, San Jose, to kick off the promotional effort.
Her office distributed a press release announcing the launching this week of "a full-scale marketing effort designed to inform the public that the bonds will soon be available."
"Newspaper ads with an 800 number will be featured in the state's major papers," Brown was quoted as saying in the release. "Brochures detailing the specifics of the sale, as well as the firms offering the bonds, will be made available ... by calling the toll-free number."
A day after Brown's news conference, Peschong wrote Brown. In the letter, Peschong said he heard that the treasurer was preparing advertising "that may prominently feature information and possibly a photograph" of Brown.
The letter recalled an incident in October 1990 when Brown was challenging incumbent Republican state Treasurer Thomas W. Hayes for the job. Brown's campaign manager, Beverly Thomas, wrote Hayes, accusing him of inappropriate self-promotion in connection with the issuance of zero coupon bonds just before that year's general election.
Thomas, now assistant state treasurer, warned Hayes then that he might run afoul of campaign laws if he used the advertising program as a way to gain political mileage in the waning days of the campaign.
Hayes proceeded to sell $76 million of the zero coupon bonds before the Nov. 6 election, at which time Brown defeated him by a 49% to 45% margin.
"In the interest of consistency, it would seem imperative that you would not take actions this year that your campaign decried four years ago," Peschong wrote Brown. "One would think that you would make every conceivable effort to refrain from blatantly promoting yourself in marketing materials for these bonds." Geiogue said he had "not seen" Peschong's letter, "but it sounds like it is off base."
Under the California savings bond program, individual investors can purchase tax-free zero coupon bonds in denominations of $1,000 at an initial price substantially lower than their maturity value. Typically, bonds require a minimum investment of $5,000.
"The bonds will be available in maturities of 8, 9, 10, 12, 14, and 15 years," the Brown release said. "Based on today's interest rate environment, an investor may purchase an 8-year bond at an estimated interest rate of 5.4% with $654 or a 15-year bond at an estimated 6.10% rate with $407."
The headline in yesterday's print advertisement promotes "A Tax-Free Way to Save for Your Child's College Education," but Geiogue said the bonds can actually be purchased by anyone, in any amount.
However, he said, legislation sponsored by Brown and passed in 1991 provides incentives for persons who buy the bonds for educational purposes. For example, a bondholder can exclude up to $25,000 from income calculations used to determine a student's eligibility for state student financial aid. Orders for the bonds may be placed between Oct. 17 and Oct. 25. Final pricing occurs Oct. 26.
Geiogue declined to disclose the dollar amount of the sale. The state could sell "$10 million, $20 million, or $50 million" of the zero coupon bonds, he said. "If you meet the demand, that's a good sale."
Brown's office sold $37 million of capital appreciation bonds in September 1991 and $17 million in November 1991. She sold no zero coupon bonds in 1992. In March 1993, the treasurer's office debuted what it called the CalBond Tax Free Fund, a unit investment trust that consisted of general obligation zero coupon bonds. That program has since been suspended.
This is not the first furor over zero coupon bonds to cause consternation in the Brown Administration. Last year, Brown testified on behalf of newsletter publisher Zane B. Mann who was sued for libel over a 1991 article in his Palm Springs-based California Municipal Bond Advisor that criticized the CollegeSure certificates of deposit product sold by College Savings Bank of Princeton, N.J.
A Los Angeles County Superior Court jury ruled on Nov. 10, 1993, that an article published in the newsletter did not libel the bank.