Behind the Story: Orange County Register reporter stays patient and follows the money trail

Melody Petersen of The Orange County Register has two pieces of advice to offer reporters: stay patient and follow the money trail. Petersen investigated school bonds in Orange County after realizing schools were opting for expensive agreements that would push costs onto taxpayers decades after the initial bond was distributed. She found that school districts were accepting deals that would cost taxpayers more than 10 times the original amount in a special bond known as a capital appreciation bond.

Other reports from the Orange County Register state that the bond deals will cost Orange County districts $2 billion over the next 40 years.

Petersen started by requesting a list of all capital appreciation bonds issued to schools since 2007 from the Califorina Treasurer’s office.  She ranked the list according to the ratio of total required repayments to principal to determine which bonds would be the most expensive for taxpayers. ”George K. Baum & Co, a Midwestern investment bank, showed up repeatedly on the list,” she says.

It seemed to Petersen that school boards had hired the bank for its staff of political consultants, “who were skilled in passing bond ballot measures,” she says.  In California, it’s illegal for schools to hire political consultants but many had hired George K. Baum & Co. anyway.  “The firm was even pitching these deals to some schools that weren’t thinking about constructing new classrooms. The bank offered to help these schools come up with a list of what to build,” Petersen says.

Petersen sent FOIA requests to schools Baum & Co. had worked for to get more documentation on the deals, asking for copies of any correspondence and any documents which showed estimated costs to taxpayers. “I found that school boards were approving the bonds based on documents that had only blanks where the numbers were supposed to be. The superintendents had the estimates of bonds’ cost in their offices, but these numbers were not discussed in public meetings. I had to make special requests to get the actual numbers. Obviously, this doesn’t give you much confidence that school board members knew the real cost of the deals before approving them,” she said.  

She also used EMMA, a database run by the Municipal Securities Rulemaking Board, which offers free access to information on municipal securities. From the site, she learned that George K. Baum & Co. had been selling capital appreciation bonds to schools which would eventually cost taxpayers ten times the value of the initial bond. “I could see speculators jumping in and quickly snapping up a bond from Baum or another dealer, and then selling it within days or even hours for a quick profit. If Baum had given the school the lowest interest rate the market had to offer, speculators would not have been able to profit like that,” she said. Typical bonds should cost 2 to 3 times the initial bond amount.

The California state treasurer has since asked the state’s attorney general to investigate whether schools were breaking the law by hiring banks that also provided political consulting.  The state legislature is also pushing for a bill that would limit the amount of debt schools can have in capital appreciation bonds. “At many California schools, too much of what taxpayers pay for bonds has been going to pay interest and financial fees. That ultimately hurts the kids,” Petersen says.  

Melody Petersen can be contacted via email mpetersen@ocregister.com