Amid widespread concern about perceived “pay-to-play” in the industry, the federal agency that oversees the nation’s municipal bond market is significantly ramping up its scrutiny of bond underwriters.

The Municipal Securities Rulemaking Board just passed new rules requiring the bankers who buy and sell municipal bonds to disclose the contributions they make to public bond campaigns.

By collecting that information, the MSRB aims to figure out whether underwriters are buying their way into public bond deals by giving money to campaigns like those required to pass school bonds.

We examined the striking pattern between contributions to campaigns in San Diego County and the companies who win work on the bonds in this investigation.

Jay Goldstone, MSRB board chairman and San Diego’s former chief operating officer, said as soon as the agency has enough data, it will start analyzing it to see whether companies that donate to campaigns are more likely to win work if the campaign is successful.

And the analysis will go a step further: Goldstone said the agency will examine individual bond deals to see whether taxpayers are getting poor deals as a result of the alleged pay-to-play.

If the MSRB finds that municipalities are paying above-market rates on their bond deals, it will consider bringing in even more stringent rules that could bar underwriters from making donations to campaigns altogether, Goldstone said.

“We’ve had, for years, pay-to-play rules that limit the amount of contributions a firm or an individual banker in a firm can make to a candidate running for office,” Goldstone said. “This is an extension of that.”

California legislators have attempted several times to introduce statewide legislation barring underwriters from making campaign donations. Here’s what we wrote in February:

Unlike construction firms, which are usually awarded contracts only after a district has considered bids from several companies, underwriters seldom undergo a competitive bidding process to win a district’s bond business.

Rather, school boards negotiate bond sales directly with underwriters — they agree on a fee and negotiate over the interest that will be paid on the bonds. In large deals, minute differences in interest rates could amount to hundreds of millions of extra dollars the taxpayers will ultimately pay to borrow money.

That has long concerned some California legislators, bond industry regulators and industry insiders, who worry that underwriters can buy access to bond business with large campaign donations.

In 2011, a bill sponsored by [former Assemblyman Chris] Norby sought to ban underwriters from working on bond programs to which they had previously donated. It died in a state Senate committee.

Norby said the bond campaign process has been “hijacked by Wall Street.” Expensive campaigns are now bolstered by Wall Street banks, a far cry from PTA groups going door to door to promote school bonds, he said.

“There’s no honest community debate,” Norby said.

Two similar bills sponsored by then-state Sen. Roy Ashburn in 2010 also died in a Senate committee.

A letter to Ashburn from Stratford Shields, then-managing director of Morgan Stanley, laid out the bank’s reasons for supporting tighter rules on donations.

“There are many cases where there is an appearance that only the contributing firms to a bond ballot election committee have an opportunity to compete to provide financial services for the bonds,” Shields wrote.

Our investigation, which focused exclusively on local school bond campaigns since 2006, found that almost every underwriter who made a large donation to a campaign ended up winning a contract to buy and sell the bonds once the measures passed.

Those underwriters made hundreds of thousands of dollars in fees from the bond deals, and, as we explained in this guide, they may also have made more money by selling the bonds to investors at a profit.

The new MSRB rules were approved on Monday by the Securities and Exchange Commission, which must sign off on all the agency’s actions. They will take effect July 1.

Goldstone said it could take a year or more for the MSRB to have enough data to start its analysis. He said the agency may hire a third party to look through the data.

Will Carless is an investigative reporter at Voice of San Diego currently focused on local education. You can reach him at or 619.550.5670.

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Will Carless

Will Carless was formerly the head of investigations at Voice of San Diego.

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