A Helping Handout

Longmont's Main Street still reflects its farm-town roots, with mom-and-pop diners serving homemade pie and realtors posting notices for "horse property" in storefront windows. But like so much of Colorado, Longmont is changing.

An influx of high-tech firms has sparked an economic boom. Subdivisions are going up on all sides of the old neighborhoods that ring downtown, and a flood of new students has the St. Vrain Valley School District bulging at the seams. Following the lead of other fast-growing communities, Longmont's civic leaders decided they needed to float a bond issue to pay for new schools.

They organized a group of parents and teachers into the Committee for Kids First and began pushing for a $98.7 million bond issue on the November 1997 ballot. The committee contacted local PTAs and businesses, hosted community forums and organized the sort of grassroots campaign required for a successful bond election.

But this small-town campaign soon had a big-time presence. Rick Reiter, the high-profile Denver political consultant who's worked on many local ballot measures, showed up to help. Reiter and his troops gave the committee strategic advice based on other successful bond campaigns around Colorado and helped compile lists of likely voters to target with the message that Longmont's schools needed help. They worked closely with the campaign committee all the way up until election day.

And the campaign never paid Reiter a cent.
He was hardly volunteering his time, though. Reiter was working under contract with George K. Baum & Company, an influential 17th Street bond house that does millions of dollars in business with cities and school districts all over the state. Like other securities firms, Baum arranges the sale of bonds on the market and collects an underwriting fee. On a bond issue as large as the one for St. Vrain schools, Baum stood to make hundreds of thousands of dollars.

Not surprisingly, both Baum and the school district desperately wanted the bond issue to succeed.

In 1996, when the St. Vrain school district started looking for a firm to underwrite the proposed bond issue, the district made it clear to interested bond houses that it expected the winning firm to provide a campaign consultant. The "solicitation for services" put out by the district asked for the bond firm's experience in "structuring an election campaign" and requested a "timeline of pre-election activities, campaign assistance and post-election services." It also demanded a list of political consultants utilized by the firm.

"If we had said we want Joe Shmoe to work with us as our political consultant, they would have hired him," says Kathy Hall, president of the St. Vrain Valley school board.

Baum got the job. St. Vrain got its bonds.
Longmont isn't alone in making such demands. Cities and school districts across Colorado have come to expect that they'll be provided paid political consultants by the bond firms they hire to underwrite potential bond issues. It's now standard practice for public contracts with securities firms to include a provision requiring that the firm hire a political pro to manage the upcoming election campaign for the bond issue. Many of these firms, which include some of the best-known names on 17th Street, now have in-house political consultants who can be shuttled around the state at a moment's notice.

The consultants' services aren't entirely free, of course: Taxpayers wind up paying the underwriting fees that follow a successful bond election. And so a growing number of critics, including some within the securities industry, are claiming that the bond houses' involvement in elections is really an indirect public subsidy of political campaigns.

"The use of political consultants is undermining the political process," says Russell Caldwell, senior vice president of Bigelow & Company, a Denver-based bond firm. "I'm hoping this blows up in all of our faces."

Caldwell dropped his own bomb during last fall's RTD Guide the Ride campaign, when he publicly criticized bond firms getting involved in political campaigns in the hopes of making big commissions. In an attempt to end the practice known as "pay to play," Caldwell tried to get the Colorado Municipal Bond Dealers Association to officially discourage its members from hiring political consultants and pollsters to work on election campaigns.

When the bond dealers' association refused, Caldwell's company quit the group.

"I've been having a dispute with the entire industry over pay-to-play practices," says Caldwell. "I just differ with them over whether we should have any ethics in this industry."

A North Carolina native who's lived in Colorado over twenty years, Caldwell is now one of the financial world's most controversial inhabitants. His denunciations of local bond houses rankle others in the industry, who accuse him of hypocrisy and self-promotion. And in fact, Caldwell not only recognizes the lure of spending thousands of dollars on a political consultant in order to win millions in underwriting fees, he admits that his firm may be forced to resort to the same tactics in order to compete.

"A lot of people want to believe we're all a bunch of whores anyway," says Caldwell. "One guy in a blue dress and one in a red dress."

Today Colorado's top political consultants are all linked with one bond firm or another. Reiter and lobbyist Frank "Pancho" Hays work with Baum, Maria Garcia Berry is allied with Dain Rauscher Inc., and Steve Welchert works with Hanifen Imhoff Inc. A host of other consultants, pollsters and professional tea-leaf readers are winning contracts from bond houses to work on elections all over the state.

This activity may seem excessively chummy, but it's legal. The U.S. Supreme Court has ruled that most political contributions from companies and individuals are protected by the First Amendment, making it extremely difficult to restrict involvement by special interests in political campaigns.

In 1996, a Weld County man challenged the legality of Dain Rauscher (then known as Dain Bosworth) hiring a political consultant to work on a proposed $11.5 million bond issue for Weld County Schools. Mike Coan argued that the deal amounted to a virtual public subsidy of the campaign, since Dain stood to profit if the election was successful. But the administrative law judge who heard the case determined that there was no evidence that the costs of the political consultant would be passed on to the district after the vote, and since the school board had given no compensation to Dain before the election, it was not found to be in violation of campaign laws.

"In that particular case, you had an individual who thought any service provider the district employed had a conflict of interest," says Steve Bell, managing director of Dain Rauscher. "The courts didn't agree."

The federal Securities and Exchange Commission does bar securities firms from making direct contributions to the campaigns of politicians who will be in a position to choose underwriting companies for public bonds, and it also limits the contributions of the firms' employees to $250 each. But there are no industry regulations forbidding the hiring of political consultants to work on bond campaigns.

Underwriting fees for bond issues vary widely, from one-half of 1 percent for a school district with a solid credit rating to much higher fees for riskier offerings. Colorado's bond firms have been forced to compete more aggressively for business since changes in federal tax laws reduced the volume of tax-exempt municipal bonds, Bell says, and he sees hiring political consultants as just one more service for his customers.

"Clients get to choose whether they want to take it on," he says. "There are campaigns that have assistance and others that have 100 percent grassroots participation. It's easier if you're a school district with 1,000 voters as opposed to one with 400,000 voters."

Jefferson County falls into the latter category. With more than 86,000 students, the Jeffco school district is the largest in the state, and last November it won voter approval for a $265 million bond issue. Dain underwrote that bond issue and paid for Garcia Berry's firm, CRL Associates Inc., to provide political consulting on the campaign. Records on file with the Jefferson County elections office estimate the value of those services at more than $40,000.

The list of criteria the county gave prospective bond underwriters last year included a request to "provide a description of the services you would be prepared to contribute to the district in the passage of the election." However, school-board president Jon DeStefano insists that those services were not a crucial element in awarding the contract to Dain Rauscher.

"We were very clear that the political part of it was not a concern," says DeStefano. "We were looking for the people who would give us the best bang for the buck. We were really concerned about the caliber of the bond company."

Still, that bond company was heavily involved in the campaign. Larry Lotito, an Arvada man who consistently opposes Jeffco school-bond issues, claims that Dain Rauscher has played a key role in district politics. For example, Lotito points out, a Dain employee, Rudy Andras, even served on the district's budget committee. (Andras says he served on the committee before Dain was hired as the district's underwriter and subsequently acted only as an advisor.)

Overall, Lotito says, Dain's role in last fall's election constitutes an indirect public subsidy of the bond campaign. "It's a cost taxpayers shouldn't have to bear," he adds.

Kathy Hall says she's aware of the criticism that it's unethical for bond companies to get involved in political campaigns. "I can understand that argument," she says. "I don't adhere to it myself. We would have had to hire a political consultant anyway. There are people in a bond company that are knowledgeable about how campaigns are run. We felt the bond issue would sell itself if people were educated."

The passage of the so-called Taxpayer's Bill of Rights in 1992 raised the stakes for school boards, Hall explains. While many school districts used to hold bond elections in May, the 1992 law requires that they be in November, when a much larger number of voters turns out. That makes school boards eager to get all the political help they can.

"When people voted in May, the voter turnout was so low it was easier to rally supporters," says Hall. "That isn't the case anymore. Now school districts are more cautious about being sure their ducks are all in a row."

The selection of a bond house for the $300-million-to-$500-million bond issue the Denver Public Schools plans to place on the November ballot has already become a source of controversy. Earlier this spring the district accepted an offer of free financial advice in selecting an underwriter from George K. Baum, where school-board member Lee White happens to be a senior vice president. After widespread criticism, and fearing conflict-of-interest charges would hurt the campaign effort, the board rejected Baum's offer to help sort through applications from ten potential underwriters.

Fees for political consultants vary, but they typically start at $10,000 and run up to $50,000. Much of the consultants' work takes place before bond elections are even announced. Political consultants work closely with school boards or city councils to determine exactly how much of an increased tax burden the local electorate would be willing to support. They conduct surveys and low-key polling to see if, for example, voters think building three new high schools is too much but might be willing to support building two.

Once an election is announced, the school district is forbidden by state law from being directly involved in the campaign. Typically, a campaign committee is formed, with the heavy involvement of school-board members and district employees. It's this group that works with consultants like Reiter.

"The expertise a Rick Reiter offers was helpful," says Hall. "In particular, he had been hired locally by people running for office in Longmont in previous years, and he was already familiar with issues in our community."

Reiter declines to comment on his work in various campaigns. "My clients don't pay me to speak on their behalf," he says.

Public documents filed by George K. Baum & Company indicate that Reiter is paid a monthly retainer of $4,750, plus a percentage of the firm's management fees and $1,000 for each new client referred to the company. Those records show that Baum paid Reiter $33,697 in the first quarter of this year.

One of Reiter's primary competitors is Maria Garcia Berry, a high-powered lobbyist and consultant who is married to Colorado Speaker of the House Chuck Berry. Garcia Berry was one of the first local political consultants to forge a close working relationship with a major bond house; she's been affiliated with Dain Rauscher for the past fourteen years.

Garcia Berry scoffs at the suggestion that a bond house paying a political consultant is an indirect public subsidy of elections. "The bottom line is that our fees have never been contingent on anything passing," she says. "We have an ongoing retainer with Dain. We get paid if the bond passes or not. We're part of their overhead."

More often than not, though, Garcia Berry secures a victory for the bond house. She has helped Dain win multiple school-bond elections around the state and has also gotten the firm major work with the City of Denver, including underwriting bonds for Denver International Airport.

Garcia Berry is especially proud of winning school-bond elections for Dain in Colorado Springs, the most conservative anti-tax community in the state. She says her firm, CRL Associates, was able to help fashion bond issues that could pass muster with Colorado Springs voters. "These are not favorable constituencies for tax increases," she adds.

When one local district wanted to create a bond issue to pay for new school equipment, Garcia Berry warned that voters would be skeptical of the proposal. She says her firm instead came up with the idea of proposing a mill levy that would expire after several years--in effect, a temporary tax increase--and the bond issue passed. That's the kind of strategizing a political consultant can offer, Garcia Berry notes.

"We figure out the school district's needs and then give them advice as to what would be the best way to approach the voters," she says.

Even when political consultants are involved, however, Garcia Berry thinks no bond issue can pass without a strong grassroots effort. "I would argue that RTD's light-rail proposal didn't pass because it didn't have a grassroots campaign," she says.

Last fall's election for RTD's $6 billion Guide the Ride proposal was Russ Caldwell's introduction to the political circus--and he soon found himself in the center ring of a knife-throwing act known as the RTD board.

When his firm was approached for a contribution to the Guide the Ride campaign, Caldwell was told that companies that donated might get a piece of the bond action--or so Caldwell said when he complained publicly. Opponents of Guide the Ride, most notably current RTD board chairman Jon Caldara, used Caldwell's story to help portray the ballot proposal as nothing more than a huge public subsidy for greedy would-be contractors.

The RTD board subsequently voted to bar any company that donated more than $100 to the campaign from winning contracts that resulted from the huge Guide the Ride project. But U.S. District Judge John Kane later ruled that the board's prohibition amounted to an unconstitutional infringement on a company's right to free speech. Caldwell never even got to testify at the final hearing--which was held after the election.

This spring, though, Caldwell was back in the news. Pro-light-rail members of the RTD board accused him and Caldara of engaging in their own pay-to-play hijinks, arranging for Caldwell's Bigelow & Company to win a contract as RTD's investment-banking firm, despite submitting an estimate of underwriting fees that was three times as high as the estimate submitted by another bidder.

Since Caldwell also included political consultant--and Guide the Ride opponent--Ed Graham as part of his underwriting team, his competitors accused him of pandering to Caldara's political bias in order to win the contract.

"Russ is so damn hypocritical, I can't believe it," says one veteran 17th Street broker who works for a rival firm and asks not to be named. "He's always been heavily involved in politics. Russ is crying foul over something he's been doing for years. He's doing the same things as everybody else and calling the kettle black. In terms of his innocence, it doesn't exist."

Caldwell says it's unfair to describe Bigelow as the high bidder, because the figures the various competitors submitted were estimates and were always subject to further negotiation. As for hiring Ed Graham, Caldwell claims he really had no choice, since his competitors already had their political help lined up.

"We have never offered political consultants unless we have to," says Caldwell. "If they tell me I have to show up with a political consultant to get a contract, I'll show up with a political consultant."

Caldwell came to Colorado in 1977 to head up former governor Dick Lamm's department of commerce. After working for several years on economic development for the state, he decided to jump into the banking world. In 1981 he signed on with Kirchner Moore & Company and started his career in the bond world.

"In those days it was fun," recalls Caldwell. "We'd show up, and Hanifen and Boettcher would be there. It was an enjoyable business. Now we're distinguishing capabilities of firms based upon who their political consultants are."

Caldwell and several colleagues founded Bigelow in 1993. With just forty employees, the company is smaller than the other major players in Colorado's bond market; Caldwell says the trend toward hiring political consultants is harder on small firms like his.

With a Bible Belt drawl and a fondness for wearing golf shirts and khaki pants in the office, Caldwell doesn't look like the stereotypical investment banker. He doesn't sound like one, either; his conversation is peppered with down-home colloquialisms like "that dog don't hunt."

Caldwell grew up on the edge of the Blue Ridge mountains in the small town of Murphy, North Carolina. "It was dirt-poor," he recalls. "The richest man there was the bootlegger. It was a bunch of poor Scotch-Irish tarheels."

The local Baptists had succeeded in getting the sale of hard liquor banned in much of the area, and Caldwell says everyone had to make arrangements to get a drink. "Every family had their own bootlegger," he says. "The largest funerals were always for the family bootlegger."

After moving to Atlanta and graduating from Georgia State University, Caldwell held a succession of jobs with local and state governments, where he was introduced to government bonds. When the opportunity to work for Dick Lamm came up, Caldwell says his love of the outdoors drew him to Colorado.

"I'm still an avid outdoorsman," he says. "That's one reason I love the Western Slope so much."

Much of his firm's business is in rural Colorado, and Caldwell has spent years on the road in his adopted state, talking to school boards and city councils from Burlington to Montrose. He's at ease in small-town Colorado, and he worries that many of his larger competitors are bringing big-city political tactics to remote corners of the state.

He cites a $31 million water-system election in Fort Morgan last year, for which George K. Baum paid for a campaign consultant, as an example of Front Range practices spreading into rural Colorado. Although Bigelow itself hired a consultant to work on a recent school election in Steamboat Springs, Caldwell says he won't sacrifice his firm's ability to win business just to uphold a principle.

"We're not a bunch of squeaky-clean guys," he says. "Our position is, we don't like this whole trend in our industry."

Still, he knows his firm must soon choose between getting more heavily involved in political gamesmanship and trying to change bond-industry practices. "I've either got to be more serious about playing the political game or clean it up," he says.

He plans to go for the cleanup. "This may give us one more star in our crown when we pass the pearly gates," he says.

The involvement of securities firms in politics first became an issue in Colorado in 1981, when Hanifen Imhoff was accused of failing to report all of its contributions to a Mesa County sales-tax campaign. The firm spent more than $57,000 on the successful campaign and played a large role in directing the election effort. The company was charged with two Class 3 misdemeanors for allegedly violating the Campaign Reform Act, but a Denver County judge later dismissed the charges, saying the law was unconstitutionally vague.

Since then, the practice of bond companies trying to buy off politicians has become increasingly controversial. Four years ago, a series of scandals on the East Coast finally prompted the Securities and Exchange Commission to ban securities firms from making direct contributions to politicians who would be choosing underwriters for public bonds. The rule, known as G-37, is enforced by an industry self-regulatory group called the Municipal Securities Rulemaking Board.

The MSRB also requires bond houses to disclose who their consultants are and how much those consultants are paid.

"We wouldn't have adopted these rules if we weren't concerned," says Chris Taylor, executive director of the MSRB.

His group also wants to require the consultants hired by securities firms to disclose their political contributions. Even though bond houses are now restricted from bankrolling their favorite politicians, there is nothing to prevent their consultants from making such contributions. "We're going to get the dealer to give us the consultant's political history as well," says Taylor.

But the disclosure requirements and SEC-mandated ban on contributions haven't stopped bond houses from finding creative ways to influence political decision-making. The most egregious recent example was in New York state, where Dean Witter & Company and Bear Stearns Companies became the lead underwriters for a $3 billion utility bond issue after hiring lobbyists, law firms and municipal bond executives with longstanding connections to Senator Alfonse D'Amato and New York governor George Pataki.

While not directly bankrolling the politicians' campaigns, the bond firms gave money to state Republican Party "housekeeping" accounts and helped fund a campaign for a New York environmental initiative that featured advertisements portraying D'Amato as a friend of the environment.

Since the introduction of rules banning direct political contributions, Colorado securities commissioner Phil Feigin has noted local bond houses shifting the emphasis of their political activities. "Influence-peddling was driven in different directions," he says. "All of a sudden, law firms and political consultants became part of the package."

But while the East Coast is awash in outrageous examples of political payoffs, Feigin says he doesn't think Colorado has seen enough corruption in the local bond industry to justify new state regulations.

"In a smaller state where there are fewer bond issues, I'm not sure it's an issue," he says. "I hate to fix a problem we don't have."

Other states have tried to rein in their securities firms, though. Missouri, for example, passed a law in 1992 that prohibits bond houses from being involved in any way in bond elections from which they stand to make a profit.

In the absence of any local regulations, Colorado's bond firms may soon follow the lead of their East Coast colleagues. "It seems like this goes in cycles," says Paul Hendrie, spokesman for the Center for Responsive Politics in Washington, D.C. "Somebody figures out a way to get around the rules, and it spreads around the country. Then they have to change the rules to deal with that."

The irony is that hiring a political consultant may not increase the chances for a successful bond election. "Their track record is less than 50 percent," Caldwell claims. "Their success rate isn't any higher than for people who don't use them."

Still, he doesn't expect to see an end to bond-house-funded political campaigns in Colorado. In fact, the practice could be just beginning. "I don't know where it all ends," Caldwell says, adding that the bravado of the New York bond dealers in dodging SEC regulations is almost awe-inspiring.

"I thought our crowd was sophisticated," he says, then laughs. "Those boys have taken it to a higher level of science.


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