HISD selection process for bond firms raises scrutiny
Under no-bid method, companies tied to political insiders gained $7M in fees
Investors who bought nearly three-quarters of a billion dollars in Houston school construction bonds in April relied on two law firms to make sure that all relevant information about the school system had been disclosed.
So it was noteworthy when the firms, in their official role as “disclosure counsel,” decided not to divulge a troubling bit of information they’d picked up during due diligence — that the Houston Independent School District had received inquiries and data requests from federal law enforcement over the past 24 months.
One of those firms is led by state Sen. Royce West of Dallas. West — who would not discuss the decision against disclosure — is part of a network of politically connected law and financial services firms that HISD has hired to arrange $1.9 billion in bond sales as part of the largest voter-approved school bond program in modern Texas history.
Since 2012, those firms have been paid about $7 million for their services. Using the state’s public records law, the Chronicle tallied the fee totals based on HISD data tied to the 2012 bond referendum, other school-board approved borrowing and some refinancing of old debt.
Tapping into a deep vein of white-collar political patronage, HISD did not require any of the law firms to compete for work. That informal selection process, though legal, has raised questions about whether the cost of selling the bonds could have been lower and whether a lack of transparency in hiring helped political insiders get or keep contracts.
In addition to West’s firm receiving $173,037 since 2012, the power brokers whose firms or former employers have benefited by earning lucrative fees include former city attorneys Jonathan Day and Robert Collie Jr., ($754,025); state Sen. Rodney Ellis of Houston ($207,926); Harris County Justice of the Peace Zinetta Burney ($306,021); and former school board president Laurie Bricker of underwriting firm Jefferies. (Fee amounts for underwriting firms are not detailed in HISD records.) No in-depth analysis
HISD defends its selection process but acknowledges it’s done no in-depth analysis to determine whether its practice of hiring two firms as bond counsel, two as disclosure counsel and two as financial adviser — one large firm that generally takes the lead and one woman-or minority-owned company — has increased fees.
“We are not in a position to speculate on the cost impact of a program that seeks to ensure diversity among the district’s business partners,” HISD spokesman Jason Spencer said in a written response to questions.
Mike Lunceford, for one, would like to know — and he’s a member of the school board.
Lunceford said he’s been curious for years about the district using two firms to serve the same role on bond sales.
“I just want to know, ‘What do they do for the money?’ ” said Lunceford, who served as a citizen member of the district’s bond oversight committee before being elected to the board in 2009. “What does a co-counsel do? What paragraph did they write? I would just like to make sure we know what services are being provided for the money being paid.”
Richard Huebner, who for three decades was president of the Houston Minority Supplier Development Council, said he knows that the minority-and female-owned firms associated with Ellis, West and Burney are all well run.
But were they selected because they were minority- and female-owned, he asked, or because of their political connections.
“What is the role of politics in this contract? Are they trying to buy someone’s connections, or is it based on prestige?” said Huebner, who retired this year as president of the nonprofit that works with businesses and local governments to promote opportunities for minority- owned firms. “Because I’m an optimist, my belief is that they were brought in because they can perform well.”
School board president Manuel Rodriguez Jr., a trustee for more than a decade, said the board has promoted the hiring of minority and women-owned firms to represent the city’s diversity. He said he was not surprised that firms tied to elected officials had been hired.
“I would hope that people would see that we’re entrusting well-established firms,” Rodriguez said. “These people, most of them, have won the trust of their constituents — in the case of Rodney Ellis and others.”
HISD has used New York-based Rice Financial Products, a minorityowned firm where Sen. Ellis worked, on bond sales as a financial adviser in tandem with FirstSouth-west for years, through the summer of 2015.
But this April, six months after Ellis left Rice Financial, HISD instead used Houston-based YaCari Consultants as its minority-owned financial advisory firm.
One of the firm’s principals is Yava Scott, a veteran municipal finance executive whose husband is chairman and chief executive officer of a firm called The Tagos Group, which specializes in logistics for oil and gas companies. Ellis is a director of Tagos. Ellis and Scott’s husband have separate firms that have had ownership stakes in the company, according to state records.
Scott, who was appointed in 1991 by then-Gov. Ann Richards to the Texas Board of Human Services, didn’t respond to requests for comment.
Ellis said in an email that HISD would have to explain the switch from Rice Financial to YaCari. ‘Roundtable’ talks
Ken Huewitt, the interim superintendent and former chief financial officer, said he could not recall why HISD changed co-financial advisers. Typically, to pick the co-financial adviser or the co-bond counsel, Huewitt described the process dating back to at least 2012 as similar to a “roundtable” discussion among staff and representatives of the lead firms.
Huewitt said he doubted the dual approach to promote diversity has increased the overall price tag, though the district has not done a formal analysis.
Fast-growing Northside ISD in San Antonio has opted not to use “co”-firms or disclosure counsel, believing it saves money, said David Rastellini, the district’s deputy superintendent of business and finance. Cypress-Fairbanks ISD, meanwhile, recently hired co-bond counsel and uses West’s firm as sole disclosure counsel.
The “best practices” for how governments hire attorneys and other bond firms focus on competition, transparency and decisions made on qualifications, said Justin Marlowe, a professor of public finance at the University of Washington.
That is accomplished by regularly seeking proposals or qualifications from firms, instead of hiring the same firms over several years without allowing others to compete, Marlowe added.
“You should always be thinking about whether there’s a better, more qualified, more economical firm out there,” he said.
Although short of competitive bidding, HISD did use formal methods to select its main financial adviser and team of underwriters.
It issued requests for qualifications for both around the time of the 2012 bond referendum. A district committee recommended which firms to hire based on various factors, such as price, quality and “past relationship” with the district.
Huewitt said he never was pressured to hire certain firms.
“Nobody has come to me and said, ‘Give somebody the business,’ ” he said. Fued with auditor
When public agencies raise money for capital projects by selling bonds, “bond counsel” prepare a legal opinion for investors and confirm that interest payments are tax exempt. The use of separate firms as “disclosure counsel” is not universal but has become more common in recent years following a crackdown on governments that mislead investors.
In March, as part of the disclosure process, HISD’s treasurer sent the district’s chief internal auditor, Richard Patton, a questionnaire asking whether HISD had been the subject of any significant civil or criminal investigations in the last two years.
If so, it might have been appropriate to disclose that information to potential investors as HISD prepared for the sale of $757 million in bonds in April to fund part of its ongoing, $1.9 billion 2012 construction program. The district’s disclosure counsel — Bracewell, a major Houston-based law firm, and West & Associates, Sen. West’s Dallas-based law firm — were assigned to advise the district on the matter.
Patton for months had been feuding with HISD officials and the school board over what he thought were inadequate contracting procedures in the school construction program — practices so deficient that he had reported them to the HISD police chief. Patton also had communicated with the FBI about unspecified problems. Disclosure rules vary
None of this was disclosed in a March 29 report to potential investors. Rather, HISD filed a supplemental statement April 8 saying that Patton was under investigation for alleged misconduct unrelated to HISD audits or the bond offering. He had, by then, been suspended with pay by the school board.
Neither Bracewell nor West would comment on the disclosure advice they provided. Spencer, the HISD spokesman, said school district officials are confident they followed the rules regarding disclosing risks to bond investors.
Patton alleges that he was suspended because he reported potential violations of law to HISD’s police chief and to the FBI. In a grievance filed with the district, Patton says he refused to change his answer on the disclosure question- naire about talking to law enforcement after being “pressed” by an unnamed disclosure attorney on March 9.
The grievance notes that Patton was suspended a day later.
Patton’s attorney, David Feldman, said in a June interview that he found the timing of the back-andforth over disclosure curious. Federal guidelines for disclosure are subject to interpretation, and federal courts have interpreted them differently in cases involving corporations, said Andrew Kintzinger, a Washington, D.C., attorney and adjunct professor of law at Georgetown University. Dual role for HISD
In February 2013, HISD used Sen. West’s firm to serve as co-disclosure counsel on the first batch of bonds sold as part of the 2012 bond referendum. The sales totaled about $450 million — some involved refunding old debt — and West’s firm was paid $57,750 from its first three deals. Its total fees on HISD bond sales are now triple that amount.
Then, in April 2013, West found himself in position to help HISD before the legislature in Austin. A member of the Senate Finance and Education committees for more than a decade, West had filed a bill that would create a state-run school district for low-performing campuses. HISD stood to have several campuses removed from its authority, and Terry Grier, HISD superintendent at the time, was concerned.
According to a copy of an April 2013 email obtained by the Chronicle, Grier asked a lobbyist for the school district, Darryl Carter, if he had talked to West.
“Yes,” Carter responded. “He said that he wanted HISD to speak against the bill, and he would change the bill based on the testimony.”
West later put forth a new version of the bill that incorporated a few changes suggested by HISD, although the legislation ultimately died on the House floor in the final days of the 2013 session. West said he didn’t recall asking any school district to speak out against his bill or speaking with Carter.
Matthew Wilson, an associate professor of political science at Southern Methodist University, said he could see why HISD would see it as “advantageous to have a link” with West in the Legislature, given that he is an “outspoken advocate for increased school funding.”
But West’s dual role for HISD as co-disclosure counsel in Houston and legislative advocate in Austin offers a stark example of his public duties as a lawmaker intersecting with his private ones as an attorney. Reached for comment, West said an email: “I know the caliber of our work is what allows us to be part of finance teams, not political connections.”
Grier, who left HISD at the end of February, said recently in a brief interview that he found the request from West odd.
“I thought it strange at the time that we would be asked to testify against a bill that someone had introduced,” Grier said. “Usually people want you to testify for their bills.”
Grier declined to answer questions about the hiring of West’s law firm or the other high-profile firms hired by HISD. Campaign contributions
Andrews Kurth, the large Houston-based law firm, has been HISD’s lead bond counsel since the 1980s, according to the district. The firm’s political action committee contributed $7,500 to the campaign to win passage in 2012 of HISD’s $1.9 billion bond referendum for school construction. Day, the former city attorney and one-time Andrews Kurth partner who is now retired from the firm but maintains an office there, contributed $1,000 to the campaign.
Day has maintained a high profile role in HISD politics.
For several years, he has been the chairman and treasurer of the Houston Business-Education Coalition political action committee, to which he and the Andrews Kurth PAC have contributed. In turn, the coalition has contributed $132,000 to school board candidates since 2009.
Day said the coalition PAC contributions have had no relation to Andrews Kurth’s bond counsel work for HISD. He also said he no longer has a financial interest in the firm and receives no compensation. He referred bond questions to Collie.
Another former city attorney, Collie is a senior partner at Andrews Kurth and a key contact on HISD bond sales.
Andrews Kurth has for years shared its role as HISD’s bond counsel with the law firm co-founded by Burney, the Harris County Justice of the Peace and veteran Democratic activist.
Andrews Kurth has received more than $754,000 in fees from HISD bond sales since 2012. Burney & Foreman has received more than $306,000 during that time.
Peggy Foreman, Burney’s partner and a veteran municipal finance attorney, said she couldn’t recall the last time her firm had to compete for HISD’s co-bond counsel work. She said she didn’t know whether Burney’s political roots had any influence in HISD using the firm decades ago.
Then there is Bricker, a former president of the Houston school board. She has worked on HISD bond sales as a vice president for one of the district’s underwriting firms, Jefferies, since resigning from the board in May 2004. Two months later, she was appointed by then-Gov. Rick Perry to serve on the board of the Texas Higher Education Coordinating Board.
The school district’s team of underwriters has included Jefferies or its predecessor as part of several bond offerings between March 2008 and this April.
The fees earned by each underwriting firm are not reported to the district, but the total on the deals involving Jefferies since 2012 topped $2.9 million, records show.
Bricker said she retired from Jefferies in March after nearly nine years. She said she saw no conflict in her work for the company because she no longer was on the school board.
“What is the role of politics in this contract? Are they trying to buy someone’s connections, or is it based on prestige? Because I’m an optimist, my belief is that they were brought in because they can perform well.” Richard Huebner, former president of the Houston Minority Supplier Development Council