Apparently this has been going on for decades !!! I assume that it's no coincidence that New York, California and Washington (state) are mentioned in the article.


(snip)" In Washington, they want to sell more debt through the use of non-profit corporations, using so-called 63-20 financings (the numbers refer to a 1963 revenue ruling issued by the Internal Revenue Service). The state legislature asked Treasurer Michael Murphy to look into the situation. Murphy asked Orrick Herrington about them.

``Why are NPC (Non-Profit Corporation) Financings Used?'' is addressed on Page 3 of the Orrick memo.

It then proceeds to answer the question in some of the frankest language you will ever see used in connection with public finance.

Three Reasons

``There are basically three reasons for utilizing an NPC in connection with a financing undertaken for the benefit of a Governmental Unit,'' the memo states.

These are: ``(i) to circumvent competitive bidding, prevailing wage and/or other public contracting requirements that would otherwise apply to public projects undertaken directly by a Governmental Unit; (ii) to circumvent voter approval and/or debt limitation requirements that would otherwise apply to bonds issued directly by a Governmental Unit; and /or (iii) to circumvent competitive bond sale, maximum interest rate and/or other limitations that would otherwise apply under bond statutes applicable to a Governmental Unit.''

Well, you can see why selling bonds through these kinds of entities might be so popular. More and more issuers want to sell bonds that aren't subject to debt limits, that are done ``off the books,'' and, most importantly, away from public scrutiny.

There are a lot of reasons, and a lot of circular reasoning, for this. Politicians pander to voters who don't want to pay more taxes for ever-higher levels of goods and services. Voters don't want to approve bond issues for useful things like new prisons. Politicians want to give out the goodies to their friends, in the form of jobs at various authorities and non-profit corporations, and in the form of underwriting and investment business.

Blame it on the politicians. Blame it on the voters. Blame it on Wall Street.

Private Finance

Blame it on the bossa nova. New York has something like $50 billion in bonds outstanding. About $4 billion is general obligation, approved by the voters. Ever wonder why? The Orrick memorandum spells out the reasons. Politicians wanted to circumvent the voters, debt limits, competitive bidding and bond sale. They wanted to get around -- you, me and everyone else.

``NPCs generally have very broad powers under state non- profit corporation acts (similar to those of a `for profit' corporation), and very few limitations on the manner in which those powers are exercised,'' the memo says. ``Unlike Governmental Units, NPCs are not subject to open public meeting, public disclosure, competitive bidding, prevailing wage, public purpose, jurisdictional, or other restrictions on the exercise of their powers.'' "(snip)