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Poway Unified’s trusty financial advisers Dolinka Group have collected more than $2 million from the district over the last five years, much of that under a contract that may violate state conflict-of-interest laws after a new ruling that broadens those laws’ reach.
Dolinka, a school-centric, Irvine-based consulting firm, advised the Poway district on how to structure its $105 million Proposition C capital appreciation bond sale in 2011, a deal that earned Poway nationwide notoriety because it will cost taxpayers $981 million to repay over 40 years and can’t be paid off early.
That bond sale – which netted the firm $288,000, sparked legislative reform and drew stern criticism from the state attorney general and state treasurer – isn’t the only aspect of the firm’s Poway work history that merits scrutiny, according to several legal experts.
The Dolinka Group has also overseen Poway’s Mello-Roos Community Facility Districts since 2008.
Mello-Roos is a state law that lets an agency like a city, county or school district raise money through a special tax with voter approval. It’s often used in newer housing developments and the money goes to pay for public works projects or public services.
As Poway’s Mello-Roos administrator, Dolinka tracks student enrollment and projects it into the future, assigns tax rates, negotiates with developers and recommends when and how to sell more bonds to pay for new infrastructure, among other tasks. The firm then works as a consultant on the multimillion-dollar Mello-Roos bond sales, earning tens of thousands more on the bond sale it helped create.
Therein lies the potential problem.
State conflict-of-interest laws have long banned public officials and employees from being financially interested in contracts they create (Poway already flirts with the line on this standard, as its superintendent gets the same raises he negotiates with teachers). A recent precedent-setting ruling from the 5th District Court of Appeal this summer applied the same conflict standards to contractors and consulting firms performing government functions.
The Davis vs. Fresno Unified School District decision further clarified that those who advise government agencies generally cannot profit from their advice.
Poway school officials say their legal counsel is reviewing the issue and putting together a legal opinion.
The reach of the Davis decision is already being felt locally.
Pro golfer Phil Mickelson recently felt the wrath of the prohibition in a Sept. 29 letter from the state Fair Political Practices Commission. Citing the Davis decision, the FPPC said Mickelson’s design firm could not renovate the city’s Torrey Pines Golf Course because it did extensive work planning and designing the project.
Attorneys for the California Association of School Business Officials expressed concern about the decision to the state Supreme Court, writing the Davis decision has rendered common arrangements suspect, including, “financial advisors who provide assistance with bond campaign or program development and then act as a designated financial advisor on related financings.” The high court declined to review the case.
Dolinka’s work in Poway, in the same way, may constitute self-dealing due to the firm’s dual roles administering the Mello-Roos program and also working and profiting from the bond sales the firm recommends.
Dolinka has a similar contractual relationship with both Valley Center-Pauma Unified and Del Mar Union school districts, records show.
“The Fresno case has been a big deal in the conflicts world,” said Sacramento attorney Gary Winuk, former chief enforcement officer of the Fair Political Practices Commission. “Where a company participates in the decision-making for the terms contract, they will have a 1090 conflict if they realize financial benefits from it,” he said, referring to the section of the law that governs those conflicts.
“For the Poway example, I think they are in the danger zone and will have to take a hard look at the specific facts,” said Winuk, who now works at a private law firm. “After the Fresno case, the legal ground has shifted for using corporate consultants to participate in contracts where they will have a financial benefit.”
Michael Colantuono, a veteran municipal attorney, also said that while these relationships are common, “These practices may be difficult to justify, particularly in light of the Davis decision.”
JoAnne Speers, a professor of public-sector ethics at the University of San Francisco, suggested the district and Dolinka seek advice from the attorney general, FPPC and their legal teams because, “The stakes are really high.”
Contracts that violate state conflict-of-interest laws are invalid and consultants could be ordered to repay every dime to the school district, among other consequences.
“Erring on the side of caution in this area of the law is what most public-agency attorneys advise because the consequences are so severe,” said Speers, who formerly served as general counsel to the League of California Cities and most recently led the nonprofit Institute for Local Government. “When in doubt, sit it out.”
She said district decision-makers “could want, as a matter of policy, for their consultants to participate in the planning and advice and not have an interest in seeing that deal go through.”
Robert Fellmeth, Price Professor of Public Interest Law at the University of San Diego, also said the Davis decision “is an important case and there is no question that it pierces what I thought was a bright-line exclusion. … You are in a vanguard area of law here.”
“If you can arrange a bond sale in a way as a consultant that will alter your profitability in any other capacity then there is an issue,” said Fellmeth. He too recommends getting an attorney general opinion.
The district’s planning director, Sandi Burgoyne, called the consultants “my team members” and “my staff” at the Sept. 16 board meeting in which she advised the board against making consultant changes.
Such a description only furthers the concern, said Fellmeth.
Dolinka Group was among a slew of consultants proposed by staff that night to work on an upcoming Mello-Roos bond sale. The item died, but longtime board member Andy Patapow’s effort to pass it has prompted a recall effort.
A complete financial picture of Dolinka’s work history at Poway is hard to put together from the outside. District officials have not produced amounts paid for actual bond sale work using bond proceeds. Instead, the district provided only invoices processed by the finance and planning departments.
Voice of San Diego tallied those invoices and tracked down some bond work totals in other district documents and in data reported to the state treasurer’s office.
Currently the Dolinka firm is working under a five-year $625,000 agreement for Mello-Roos financial and demographic consulting work approved in February 2014. District invoices show Dolinka has been paid $335,000 since 2010 for routine Mello-Roos administration work.
Since 2010, Dolinka made at least another $1.67 million on 18 different bond sales as a financial adviser or special tax consultant or both, mostly for Mello-Roos sales.
Benjamin Dolinka did not respond to multiple interview requests.
Should Poway seek advice from the attorney general, it may be awhile.
In 2013, then-state Treasurer Bill Lockyer sought somewhat similar guidance from Attorney General Kamala Harris, asking her to weigh in on the legality of bond underwriters, financial advisers and bond counsels that provide pre-election school bond campaign services in exchange for exclusive contracts to work on the bond sales. Two years later, Harris has yet to issue a legal opinion.
This post has been updated to include Dolinka’s contract with the Del Mar Union school district.