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When the recession devastated Beaver County, Pennsylvania, earlier this year, Gentile-Meinert & Associates Inc. were pressed not to raise prices on a $10,000- a-month contract for security guards at the county’s nursing home. The county’s elected officials, attempting to hold the line on the budget, didn’t say that they lost as much as $2.8 million by selling bonds without seeking competitive bids.
That amount is the difference between the underwriter’s price for $72.7 million in bonds at a Jan. 8 sale and the higher prices investors paid later that day. The offering capped a 13- year borrowing saga that pushed taxpayers deeper into debt, county records show. Throughout, Beaver County kept doing business with Commonwealth Securities and Investments Inc., of Pittsburgh.
County Controller David Rossi said he asked why during a closed-door meeting two days before the January borrowing decision. The commissioners’ answer, he said: “We trust them.”
More than 85 percent of the $308.9 billion in new tax- exempt bond issues this year were sold without competitive bidding, according to data compiled by Bloomberg. Such negotiated issues, for which borrowing costs are set privately, show how public officials do financing in the dark in the $2.8 trillion municipal bond market.
No-bid sales made up 68 percent of new bonds in 1982 and 17 percent in 1970, according to the U.S. Government Accountability Office.
Same Underwriter
In the absence of competition, some local government borrowers including Oregon school districts, Hawaii counties, and Missouri municipalities have used the same underwriter for years, public records show. Beaver County relied on Commonwealth Securities to manage all but one of its bond issues since at least 1986, according to county records and transaction documents.
Finance professionals say no-bid sales allow them to market debt to particular investors, helping borrowers fulfill their needs when credit markets aren’t accommodating. Such assertions are belied by data showing that when negotiated sales are combined with persistent use of the same underwriter, issuers’ borrowing costs increase by 5.3 basis points for each sale, according to a study published in the Winter 2008 edition of the Municipal Finance Journal. A basis point is one one-hundreth of a percentage point.
That sort of increase on $100 million worth of 10-year bonds would add up to $1 million in higher costs for an issuer that had used the same underwriter twice previously, according to the research by Mark D. Robbins and William Simonsen of the University of Connecticut in Storrs.
Growing Debt
In Beaver County, which has an annual budget of about $217 million, Commonwealth Securities pocketed more than $2 million in fees on half-a-dozen transactions since 1996 -- deals that converted an initial $57 million debt for a new jail and other projects into a $72.7 million obligation this year, county records show.
Commonwealth and its president, Henry Fisher, declined to respond to questions for this article, as did the county’s solicitor. The administrator of its financial affairs refused to answer questions about the transactions. Commissioners Joe Spanik and Tony Amadio, both Democrats, refused to be interviewed. Republican Charles Camp said only that no laws were broken.
“It’s all public record,” Camp said during a brief interview outside his office. “It’s all done legally.”
Commonwealth was paid for raising money, for advising the county as it took on such derivatives as interest-rate swaps -- and then, in January, for underwriting new bonds to pay for canceling the previous transactions, records show.
Swaps in Trouble
Derivatives are contracts whose value is derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in interest rates or the weather. Trade in such pacts makes up an unregulated $592 trillion global market, according to the Bank for International Settlements.
Interest-rate swaps, one of the most common types of derivatives, are agreements to exchange periodic interest payments with a counterparty such as a bank or insurance company. Hundreds of hospitals, schools and other public agencies entered into rate swaps tied to floating-rate bonds during the past decade to try to cut borrowing costs.
The strategy backfired last year as the credit crisis took hold. Interest payments on issuers’ variable-rate debt increased because of flagging demand, while counterparties’ payments dropped after central banks reduced interest rates.
Canceling Contracts
Since then, municipal governments paid billions of dollars to cancel swap contracts, said Peter Shapiro, the managing director of Swap Financial Group, a firm in South Orange, New Jersey that advises governments on the financial transactions. While no one tallies market-wide costs, public records from Indianapolis, Philadelphia, Miami and Oakland, California, show agencies in those cities paid $331 million to end swaps during the past 18 months.
That money could have paid to pave a 2,192 mile (3,526 kilometer) city street, based on Durham, North Carolina’s cost of $151,000 per mile. Such a street would stretch from coast to coast, according to the U.S. Geological Survey.
Beaver County’s January debt sale included a $7.7 million termination payment to Lehman Brothers Holdings Inc., the New York-based bank that declared bankruptcy in September 2008. The payment would have covered four months of payroll for the county, which has about 900 employees.
Steel Country
Home to 172,000 people, Beaver County lies about 30 miles northwest of Pittsburgh, in the heart of what used to be western Pennsylvania’s steel country. The county, the home of former NFL quarterback Joe Namath, has lost more than 15 percent of its population since the 1980s, when it lost five mills.
It has relied on Commonwealth Securities as its underwriter for $337 million in bonds, since 1986, records show. The firm collected a fee as a placement agent for the one sale it didn’t manage, in 2007.
“Could we have saved Beaver County taxpayers anything by getting competitive bids? I can’t answer that,” said Roger Javens, a Republican county commissioner from 1984 to 1996.
Since 1993, Commonwealth charged the county fees ranging from $8.70 per $1,000 of bonds to $15 for a sale in 2007, according to figures compiled by the county controller’s office. The average underwriting fee in the market dropped by 25 percent to $5.27 between 1998 and 2007, data from Thomson Reuters show.
Higher Fee
Commonwealth received $654,000, or $9 for every $1,000 of bonds, in exchange for lining up buyers and setting the interest rate for the Jan. 8 bond issue. That fee was 29 percent higher than any other Pennsylvania county paid during the previous year, according to documents for similar sales by a dozen other counties.
Hours after the commission meeting ended that day, the bonds’ value increased as much as 5 percent above what the county was paid for selling them, delivering gains to whomever owned the securities.
The largest chunk of the offering, $42 million of bonds maturing in 2031, jumped from 98 cents on the dollar to as high as $1.03, according to data from the Municipal Securities Rulemaking Board in Alexandria, Virginia, which oversees the tax-exempt debt market.
The higher price took the bond’s yield, or effective interest rate, to 5.12 percent, compared with the 5.7 percent the county paid, the data show.
‘Insanely High’
The 5 percent increase in first-day trading is high even in a market where localities often receive less from underwriters than investors are willing to pay, said Rick Green, a professor of financial economics at Carnegie Mellon’s Tepper School of Business in Pittsburgh, who has studied trading patterns in bonds soon after they’re issued.
“To me, it seems insanely high,” he said.
The prices of the 11 other maturities in the bond issue also rose that day, producing a total increase of $2.8 million.
The results differ from a $118 million sale by Pennsylvania’s Chester County arranged by banks led by Merrill Lynch & Co. the same week.
The largest bond in that debt offering, $31 million maturing in 2028, didn’t rise during the first day as the AAA- rated bonds were sold to customers for a yield of 4.82 percent in blocks as small as $5,000 worth, according to MSRB data.
Merrill Lynch’s underwriting fee was $5.53, 39 percent less than Commonwealth’s that week.
Didn’t Push
Beaver County politicians have squandered taxpayers’ money by not pushing for lower fees or better sales, said Jay Paisley, a retired school teacher who ran unsuccessfully for county commissioner as a Democrat in 2007.
“When the mills were booming, that was not a problem,” he said. “It didn’t matter if you didn’t have competition. It didn’t matter if you had incompetent leadership. Now it does. This is the public’s money and we have to get the most bang for the buck.”
With Commonwealth as their underwriter, Beaver County officials didn’t hire a financial consultant for debt sales, according to official statements for the bond issues. That meant they were trusting a party with an opposing interest, according to the Government Finance Officers Association, a national professional group based in Chicago.
Unlike financial advisers, underwriters have no fiduciary relationship with municipal clients, says the GFOA, which issues recommendations on how counties should protect themselves. Underwriters want to buy bonds at a low price -- making them easier to resell to investors -- while cities and counties seek to sell at the highest price.
‘Go-To Guy’
Former Beaver County officials said they don’t see their relationship with Fisher and Commonwealth as adversarial.
“Every time there was a bond issue, it was, ‘Let’s call Henry,’” said Javens, the former commissioner. “He’s the go-to guy. They just had confidence in him.”
Fisher’s wife and the husband of another Commonwealth banker, both of whom have identified themselves in federal or state records as employees of the bank, have donated thousands to the commissioners’ campaigns, according to campaign-finance documents on file at the county’s election office.
Since 1994, underwriters have been barred from making political contributions for the elected officials they do business with -- or from coordinating the contributions of other individuals.
Andrew Fisher and Ann Fisher, the son and wife of Henry Fisher, along with Richard Rojcewicz, the husband of Commonwealth’s senior vice president, Marcia Rojcewicz, have contributed to Camp, Spanik and Amadio, the records show.
Pittsburgh Donors
All the donors live in Pittsburgh, according to the addresses listed on the donations. Ann Fisher and the Rojcewiczes didn’t return messages left at their homes seeking comment. Andrew Fisher didn’t respond to messages sent to his office.
Amadio received a combined total of at least $1,700 from the trio since he first ran for the commission in 2007, campaign records show. Camp got at least $2,200 since 2004 and Spanik was given $800 since 2007.
A separate political committee that supported Spanik and Dan Donatella, a Democratic former commissioner, received at least $4,100 from the same three donors between 2003 and 2006.
A man who identified himself as Donatella said in a telephone interview that he didn’t recall receiving any money from Fisher’s wife. “I don’t know anything about that,” he said. Subsequent attempts to reach Donatella for comment were unsuccessful.
Family Members’ Rules
Neither Ann Fisher nor Richard Rojcewicz are currently registered as Commonwealth employees. Federal Election Commission records identified Ann Fisher as an investment banker with the firm in 2004 and 2005, and at least two state political-contribution records named her as an investor with CIM Investment Management, Commonwealth’s money-managing arm.
A 2006 Pennsylvania record also identifies Richard Rojcewicz as an “investment advisor” to CIM.
There is no law prohibiting family members of bankers from making political contributions, said Ernesto Lanza, general counsel of the Municipal Securities Rulemaking Board, the industry’s self-regulatory group. Such giving “becomes a problem” if the family member is making the contributions on behalf of an underwriter, he said.
Henry Fisher, a Pittsburgh resident, has been working in the bond business in western Pennsylvania since the 1970s, according to records filed with the Financial Industry Regulatory Authority, or Finra, in Washington, which oversees securities firms.
Four-Month Ban
He and his company agreed in 1981 to return $81,000 in fees and accept a four-month ban on working as a consultant or financial adviser on municipal bond deals to settle allegations from the Washington-based Securities and Exchange Commission that he participated in a securities fraud scheme from 1976 to 1978, according to SEC records and Fisher’s file with Finra.
Fisher received fees on municipal-bond deals arranged by two bankers at other firms, according to the SEC administrative order. In turn, he paid companies owned by the brokers, and “little, if any, meaningful services were provided,” the order said. Fisher neither admitted nor denied wrongdoing.
He later helped finance buildings at the Community College of Beaver County, an emergency response center, a parking garage and a 122,000 square-foot performing-arts center in Midland, a town of 3,000.
Finance Authority
His work in Beaver County goes beyond underwriting county debt sales. Commonwealth signed a $100,000-a-year contract in 1991 to provide marketing for the Pennsylvania Pooled Finance Authority. The agency, run by appointees of the county commission, later changed its name to the Pennsylvania Finance Authority, according to its records.
In 2007, the contract was shifted to Financial Services Inc., a company that listed its business address at the Rojcewiczes’ home address. The company hired Henry Fisher as an independent contractor.
The authority handles bond deals for various municipal borrowers -- all of them underwritten by Fisher’s firm, according to bond filings. Commonwealth has managed $390 million of debt sold by the authority on behalf of school districts, Beaver County and other Pennsylvania localities since 1992, records show.
In addition, Commonwealth’s investment arm, headed by Fisher’s son, Andrew Fisher, manages almost half the county’s $162 million employee-retirement fund, according to figures from the end of last year.
Foray Into Derivatives
The seeds of Beaver County’s foray into derivatives were planted in 1996, when Commonwealth sold $57 million worth of bonds for the county to build a new jail and complete a handful of other public-works projects. The bank’s fee was $565,000, according to the official statement for the offering.
The next year, the county refinanced the debt, capturing lower interest rates. Commonwealth received $531,000, county records show.
While Internal Revenue Service rules kept the county from doing another such deal for a decade, commissioners were able to squeeze cash from its debt just five years later, in 2002, using a derivative known as a swaption. The Federal Reserve in Washington was reducing the benchmark interest rate to 1.25 percent, a 41-year low.
Under the unregulated contract, Beaver County sold the money to be made in a refinancing to Lehman Brothers, like a farmer who sells crops at today’s prices to a third party long before harvest.
Swap Details
The county received $1.5 million after fees, records show. Commonwealth got $200,000 -- half a so-called placement fee that it split with RRZ Public Markets Inc., a financial firm based in Cranberry Township, Pennsylvania, according to transaction documents.
The contract gave Lehman the right to force the county to refinance the 1997 bonds beginning in 2007, when it would enter into an interest-rate swap with the bank.
In the swap, the county would pay to Lehman the fixed rate it had been paying on the bonds -- which reached as high as 5.3 percent. In exchange, Lehman would pay the county a floating rate, based on several formulas specified in the contract.
Lehman’s payments were intended to offset floating-rate bonds, known as variable-rate demand obligations or VRDOs, that the county would sell under the contract to pay off the old securities.
Commissioners took on additional risks in 2004 by layering a second derivative, known as a basis cap, on top of the first. That August, the county approved entering into the trade with JPMorgan Chase & Co. of New York. In return for a $1.36 million payment, the county agreed to pay out whenever two key credit- market measures moved in certain ways.
Tracking Borrowing Rates
Payment was due every time the Bond Market Association index, which tracks municipal borrowing rates, rose above 72 percent of the London Interbank Offered Rate, the rate banks charge each other for loans. The payment would amount to the difference between the two rates, multiplied by $60 million, according to county records.
Commonwealth split $220,000 in advisory fees with Investment Management Advisory Group Inc., of Pottstown, Pennsylvania, according to documents obtained under the state open-records law. IMAGE, as the adviser is known, was raided in 2006 by the FBI as part of a continuing investigation of price- fixing in the municipal-derivatives market. The firm did not respond to a request for comment.
Acting on Advice
The county did two more swaps in 2006 -- again acting on the advice of Commonwealth and IMAGE -- against the same bonds. The new contracts canceled the previous two and allowed the county to increase its potential winnings or losses by betting on the difference between short- and long-term interest rates. When the difference between the two widened, Beaver County’s payments from Lehman would increase.
Commonwealth received $295,000 and Image $195,000 for advice on the deals, records show. By the end of 2006, the trades were worth $11.7 million to Lehman, based on the market value listed in the county’s financial statement for the year.
Municipalities were ill-prepared for such risky trades, said Bart Hildreth, a professor at Georgia State University in Atlanta and editor of the Municipal Finance Journal. When capital dried up on Wall Street as the financial crisis worsened last year and banks collapsed, such transactions hit school districts, hospitals and local governments with unexpected costs.
Didn’t Know
“The evidence seems to be pretty clear that most of the small-to-medium issuers didn’t really know what they were doing,” he said.
The county’s first set of payment exchanges became effective in November 2007. Lehman declared the largest bankruptcy in history less than a year later.
Interest rates on floating-rate bonds soared as investors dumped the securities. Officials at school districts, cities and charities nationwide that had financed public works with the instruments found they couldn’t refinance without breaking their derivatives contracts -- by paying bankers the market value of the deals.
That sort of bind pushed Jefferson County, Alabama, the state’s most-populous county, close to bankruptcy. Interest rates on Beaver County’s bonds more than doubled to 7.75 percent in September 2008, an annual sum of $4.6 million, according to data compiled by Bloomberg.
After Lehman’s failure, the county paid $7.7 million to close out the deal, which was scheduled to run through 2026, and officials ultimately decided to refinance the debt again -- this time through the $72.7 million private sale on Jan. 8.
‘Hold Their Line’
During the half-hour meeting where they approved the new issue, commissioners celebrated a retiring county employee and proclaimed Jan. 18 “Sanctity of Human Life Sunday” to mark the anniversary of the U.S. Supreme Court’s 1973 decision legalizing abortion.
Spanik spoke of how commissioners were pressuring county contractors to save money, “knowing the economic impact that is happening all over the country and right here in Beaver County.”
“We have gone back to several of our vendors and asked them to hold their line on their cost increase,” he said. “That’s what we’re doing throughout all of our vendors that we can.”
Gentile-Meinert, the security company, agreed in negotiations with commissioners not to pass along rising labor costs and other expenses, said Louis Gentile, its president.
‘On the Hook’
“We absorbed those costs,” he said.
There was no discussion during the meeting of the payment to Lehman Brothers, the higher-than-average fees for Commonwealth or the fact that a $57 million debt from 1996 now amounted to $72.7 million.
“At the end of the day, it’s the taxpayers’ money we’re spending,” Rossi, the county controller, said in an interview. “The bond counsel and the underwriter, they make their money and go home. And we’re on the hook.”
That amount is the difference between the underwriter’s price for $72.7 million in bonds at a Jan. 8 sale and the higher prices investors paid later that day. The offering capped a 13- year borrowing saga that pushed taxpayers deeper into debt, county records show. Throughout, Beaver County kept doing business with Commonwealth Securities and Investments Inc., of Pittsburgh.
County Controller David Rossi said he asked why during a closed-door meeting two days before the January borrowing decision. The commissioners’ answer, he said: “We trust them.”
More than 85 percent of the $308.9 billion in new tax- exempt bond issues this year were sold without competitive bidding, according to data compiled by Bloomberg. Such negotiated issues, for which borrowing costs are set privately, show how public officials do financing in the dark in the $2.8 trillion municipal bond market.
No-bid sales made up 68 percent of new bonds in 1982 and 17 percent in 1970, according to the U.S. Government Accountability Office.
Same Underwriter
In the absence of competition, some local government borrowers including Oregon school districts, Hawaii counties, and Missouri municipalities have used the same underwriter for years, public records show. Beaver County relied on Commonwealth Securities to manage all but one of its bond issues since at least 1986, according to county records and transaction documents.
Finance professionals say no-bid sales allow them to market debt to particular investors, helping borrowers fulfill their needs when credit markets aren’t accommodating. Such assertions are belied by data showing that when negotiated sales are combined with persistent use of the same underwriter, issuers’ borrowing costs increase by 5.3 basis points for each sale, according to a study published in the Winter 2008 edition of the Municipal Finance Journal. A basis point is one one-hundreth of a percentage point.
That sort of increase on $100 million worth of 10-year bonds would add up to $1 million in higher costs for an issuer that had used the same underwriter twice previously, according to the research by Mark D. Robbins and William Simonsen of the University of Connecticut in Storrs.
Growing Debt
In Beaver County, which has an annual budget of about $217 million, Commonwealth Securities pocketed more than $2 million in fees on half-a-dozen transactions since 1996 -- deals that converted an initial $57 million debt for a new jail and other projects into a $72.7 million obligation this year, county records show.
Commonwealth and its president, Henry Fisher, declined to respond to questions for this article, as did the county’s solicitor. The administrator of its financial affairs refused to answer questions about the transactions. Commissioners Joe Spanik and Tony Amadio, both Democrats, refused to be interviewed. Republican Charles Camp said only that no laws were broken.
“It’s all public record,” Camp said during a brief interview outside his office. “It’s all done legally.”
Commonwealth was paid for raising money, for advising the county as it took on such derivatives as interest-rate swaps -- and then, in January, for underwriting new bonds to pay for canceling the previous transactions, records show.
Swaps in Trouble
Derivatives are contracts whose value is derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in interest rates or the weather. Trade in such pacts makes up an unregulated $592 trillion global market, according to the Bank for International Settlements.
Interest-rate swaps, one of the most common types of derivatives, are agreements to exchange periodic interest payments with a counterparty such as a bank or insurance company. Hundreds of hospitals, schools and other public agencies entered into rate swaps tied to floating-rate bonds during the past decade to try to cut borrowing costs.
The strategy backfired last year as the credit crisis took hold. Interest payments on issuers’ variable-rate debt increased because of flagging demand, while counterparties’ payments dropped after central banks reduced interest rates.
Canceling Contracts
Since then, municipal governments paid billions of dollars to cancel swap contracts, said Peter Shapiro, the managing director of Swap Financial Group, a firm in South Orange, New Jersey that advises governments on the financial transactions. While no one tallies market-wide costs, public records from Indianapolis, Philadelphia, Miami and Oakland, California, show agencies in those cities paid $331 million to end swaps during the past 18 months.
That money could have paid to pave a 2,192 mile (3,526 kilometer) city street, based on Durham, North Carolina’s cost of $151,000 per mile. Such a street would stretch from coast to coast, according to the U.S. Geological Survey.
Beaver County’s January debt sale included a $7.7 million termination payment to Lehman Brothers Holdings Inc., the New York-based bank that declared bankruptcy in September 2008. The payment would have covered four months of payroll for the county, which has about 900 employees.
Steel Country
Home to 172,000 people, Beaver County lies about 30 miles northwest of Pittsburgh, in the heart of what used to be western Pennsylvania’s steel country. The county, the home of former NFL quarterback Joe Namath, has lost more than 15 percent of its population since the 1980s, when it lost five mills.
It has relied on Commonwealth Securities as its underwriter for $337 million in bonds, since 1986, records show. The firm collected a fee as a placement agent for the one sale it didn’t manage, in 2007.
“Could we have saved Beaver County taxpayers anything by getting competitive bids? I can’t answer that,” said Roger Javens, a Republican county commissioner from 1984 to 1996.
Since 1993, Commonwealth charged the county fees ranging from $8.70 per $1,000 of bonds to $15 for a sale in 2007, according to figures compiled by the county controller’s office. The average underwriting fee in the market dropped by 25 percent to $5.27 between 1998 and 2007, data from Thomson Reuters show.
Higher Fee
Commonwealth received $654,000, or $9 for every $1,000 of bonds, in exchange for lining up buyers and setting the interest rate for the Jan. 8 bond issue. That fee was 29 percent higher than any other Pennsylvania county paid during the previous year, according to documents for similar sales by a dozen other counties.
Hours after the commission meeting ended that day, the bonds’ value increased as much as 5 percent above what the county was paid for selling them, delivering gains to whomever owned the securities.
The largest chunk of the offering, $42 million of bonds maturing in 2031, jumped from 98 cents on the dollar to as high as $1.03, according to data from the Municipal Securities Rulemaking Board in Alexandria, Virginia, which oversees the tax-exempt debt market.
The higher price took the bond’s yield, or effective interest rate, to 5.12 percent, compared with the 5.7 percent the county paid, the data show.
‘Insanely High’
The 5 percent increase in first-day trading is high even in a market where localities often receive less from underwriters than investors are willing to pay, said Rick Green, a professor of financial economics at Carnegie Mellon’s Tepper School of Business in Pittsburgh, who has studied trading patterns in bonds soon after they’re issued.
“To me, it seems insanely high,” he said.
The prices of the 11 other maturities in the bond issue also rose that day, producing a total increase of $2.8 million.
The results differ from a $118 million sale by Pennsylvania’s Chester County arranged by banks led by Merrill Lynch & Co. the same week.
The largest bond in that debt offering, $31 million maturing in 2028, didn’t rise during the first day as the AAA- rated bonds were sold to customers for a yield of 4.82 percent in blocks as small as $5,000 worth, according to MSRB data.
Merrill Lynch’s underwriting fee was $5.53, 39 percent less than Commonwealth’s that week.
Didn’t Push
Beaver County politicians have squandered taxpayers’ money by not pushing for lower fees or better sales, said Jay Paisley, a retired school teacher who ran unsuccessfully for county commissioner as a Democrat in 2007.
“When the mills were booming, that was not a problem,” he said. “It didn’t matter if you didn’t have competition. It didn’t matter if you had incompetent leadership. Now it does. This is the public’s money and we have to get the most bang for the buck.”
With Commonwealth as their underwriter, Beaver County officials didn’t hire a financial consultant for debt sales, according to official statements for the bond issues. That meant they were trusting a party with an opposing interest, according to the Government Finance Officers Association, a national professional group based in Chicago.
Unlike financial advisers, underwriters have no fiduciary relationship with municipal clients, says the GFOA, which issues recommendations on how counties should protect themselves. Underwriters want to buy bonds at a low price -- making them easier to resell to investors -- while cities and counties seek to sell at the highest price.
‘Go-To Guy’
Former Beaver County officials said they don’t see their relationship with Fisher and Commonwealth as adversarial.
“Every time there was a bond issue, it was, ‘Let’s call Henry,’” said Javens, the former commissioner. “He’s the go-to guy. They just had confidence in him.”
Fisher’s wife and the husband of another Commonwealth banker, both of whom have identified themselves in federal or state records as employees of the bank, have donated thousands to the commissioners’ campaigns, according to campaign-finance documents on file at the county’s election office.
Since 1994, underwriters have been barred from making political contributions for the elected officials they do business with -- or from coordinating the contributions of other individuals.
Andrew Fisher and Ann Fisher, the son and wife of Henry Fisher, along with Richard Rojcewicz, the husband of Commonwealth’s senior vice president, Marcia Rojcewicz, have contributed to Camp, Spanik and Amadio, the records show.
Pittsburgh Donors
All the donors live in Pittsburgh, according to the addresses listed on the donations. Ann Fisher and the Rojcewiczes didn’t return messages left at their homes seeking comment. Andrew Fisher didn’t respond to messages sent to his office.
Amadio received a combined total of at least $1,700 from the trio since he first ran for the commission in 2007, campaign records show. Camp got at least $2,200 since 2004 and Spanik was given $800 since 2007.
A separate political committee that supported Spanik and Dan Donatella, a Democratic former commissioner, received at least $4,100 from the same three donors between 2003 and 2006.
A man who identified himself as Donatella said in a telephone interview that he didn’t recall receiving any money from Fisher’s wife. “I don’t know anything about that,” he said. Subsequent attempts to reach Donatella for comment were unsuccessful.
Family Members’ Rules
Neither Ann Fisher nor Richard Rojcewicz are currently registered as Commonwealth employees. Federal Election Commission records identified Ann Fisher as an investment banker with the firm in 2004 and 2005, and at least two state political-contribution records named her as an investor with CIM Investment Management, Commonwealth’s money-managing arm.
A 2006 Pennsylvania record also identifies Richard Rojcewicz as an “investment advisor” to CIM.
There is no law prohibiting family members of bankers from making political contributions, said Ernesto Lanza, general counsel of the Municipal Securities Rulemaking Board, the industry’s self-regulatory group. Such giving “becomes a problem” if the family member is making the contributions on behalf of an underwriter, he said.
Henry Fisher, a Pittsburgh resident, has been working in the bond business in western Pennsylvania since the 1970s, according to records filed with the Financial Industry Regulatory Authority, or Finra, in Washington, which oversees securities firms.
Four-Month Ban
He and his company agreed in 1981 to return $81,000 in fees and accept a four-month ban on working as a consultant or financial adviser on municipal bond deals to settle allegations from the Washington-based Securities and Exchange Commission that he participated in a securities fraud scheme from 1976 to 1978, according to SEC records and Fisher’s file with Finra.
Fisher received fees on municipal-bond deals arranged by two bankers at other firms, according to the SEC administrative order. In turn, he paid companies owned by the brokers, and “little, if any, meaningful services were provided,” the order said. Fisher neither admitted nor denied wrongdoing.
He later helped finance buildings at the Community College of Beaver County, an emergency response center, a parking garage and a 122,000 square-foot performing-arts center in Midland, a town of 3,000.
Finance Authority
His work in Beaver County goes beyond underwriting county debt sales. Commonwealth signed a $100,000-a-year contract in 1991 to provide marketing for the Pennsylvania Pooled Finance Authority. The agency, run by appointees of the county commission, later changed its name to the Pennsylvania Finance Authority, according to its records.
In 2007, the contract was shifted to Financial Services Inc., a company that listed its business address at the Rojcewiczes’ home address. The company hired Henry Fisher as an independent contractor.
The authority handles bond deals for various municipal borrowers -- all of them underwritten by Fisher’s firm, according to bond filings. Commonwealth has managed $390 million of debt sold by the authority on behalf of school districts, Beaver County and other Pennsylvania localities since 1992, records show.
In addition, Commonwealth’s investment arm, headed by Fisher’s son, Andrew Fisher, manages almost half the county’s $162 million employee-retirement fund, according to figures from the end of last year.
Foray Into Derivatives
The seeds of Beaver County’s foray into derivatives were planted in 1996, when Commonwealth sold $57 million worth of bonds for the county to build a new jail and complete a handful of other public-works projects. The bank’s fee was $565,000, according to the official statement for the offering.
The next year, the county refinanced the debt, capturing lower interest rates. Commonwealth received $531,000, county records show.
While Internal Revenue Service rules kept the county from doing another such deal for a decade, commissioners were able to squeeze cash from its debt just five years later, in 2002, using a derivative known as a swaption. The Federal Reserve in Washington was reducing the benchmark interest rate to 1.25 percent, a 41-year low.
Under the unregulated contract, Beaver County sold the money to be made in a refinancing to Lehman Brothers, like a farmer who sells crops at today’s prices to a third party long before harvest.
Swap Details
The county received $1.5 million after fees, records show. Commonwealth got $200,000 -- half a so-called placement fee that it split with RRZ Public Markets Inc., a financial firm based in Cranberry Township, Pennsylvania, according to transaction documents.
The contract gave Lehman the right to force the county to refinance the 1997 bonds beginning in 2007, when it would enter into an interest-rate swap with the bank.
In the swap, the county would pay to Lehman the fixed rate it had been paying on the bonds -- which reached as high as 5.3 percent. In exchange, Lehman would pay the county a floating rate, based on several formulas specified in the contract.
Lehman’s payments were intended to offset floating-rate bonds, known as variable-rate demand obligations or VRDOs, that the county would sell under the contract to pay off the old securities.
Commissioners took on additional risks in 2004 by layering a second derivative, known as a basis cap, on top of the first. That August, the county approved entering into the trade with JPMorgan Chase & Co. of New York. In return for a $1.36 million payment, the county agreed to pay out whenever two key credit- market measures moved in certain ways.
Tracking Borrowing Rates
Payment was due every time the Bond Market Association index, which tracks municipal borrowing rates, rose above 72 percent of the London Interbank Offered Rate, the rate banks charge each other for loans. The payment would amount to the difference between the two rates, multiplied by $60 million, according to county records.
Commonwealth split $220,000 in advisory fees with Investment Management Advisory Group Inc., of Pottstown, Pennsylvania, according to documents obtained under the state open-records law. IMAGE, as the adviser is known, was raided in 2006 by the FBI as part of a continuing investigation of price- fixing in the municipal-derivatives market. The firm did not respond to a request for comment.
Acting on Advice
The county did two more swaps in 2006 -- again acting on the advice of Commonwealth and IMAGE -- against the same bonds. The new contracts canceled the previous two and allowed the county to increase its potential winnings or losses by betting on the difference between short- and long-term interest rates. When the difference between the two widened, Beaver County’s payments from Lehman would increase.
Commonwealth received $295,000 and Image $195,000 for advice on the deals, records show. By the end of 2006, the trades were worth $11.7 million to Lehman, based on the market value listed in the county’s financial statement for the year.
Municipalities were ill-prepared for such risky trades, said Bart Hildreth, a professor at Georgia State University in Atlanta and editor of the Municipal Finance Journal. When capital dried up on Wall Street as the financial crisis worsened last year and banks collapsed, such transactions hit school districts, hospitals and local governments with unexpected costs.
Didn’t Know
“The evidence seems to be pretty clear that most of the small-to-medium issuers didn’t really know what they were doing,” he said.
The county’s first set of payment exchanges became effective in November 2007. Lehman declared the largest bankruptcy in history less than a year later.
Interest rates on floating-rate bonds soared as investors dumped the securities. Officials at school districts, cities and charities nationwide that had financed public works with the instruments found they couldn’t refinance without breaking their derivatives contracts -- by paying bankers the market value of the deals.
That sort of bind pushed Jefferson County, Alabama, the state’s most-populous county, close to bankruptcy. Interest rates on Beaver County’s bonds more than doubled to 7.75 percent in September 2008, an annual sum of $4.6 million, according to data compiled by Bloomberg.
After Lehman’s failure, the county paid $7.7 million to close out the deal, which was scheduled to run through 2026, and officials ultimately decided to refinance the debt again -- this time through the $72.7 million private sale on Jan. 8.
‘Hold Their Line’
During the half-hour meeting where they approved the new issue, commissioners celebrated a retiring county employee and proclaimed Jan. 18 “Sanctity of Human Life Sunday” to mark the anniversary of the U.S. Supreme Court’s 1973 decision legalizing abortion.
Spanik spoke of how commissioners were pressuring county contractors to save money, “knowing the economic impact that is happening all over the country and right here in Beaver County.”
“We have gone back to several of our vendors and asked them to hold their line on their cost increase,” he said. “That’s what we’re doing throughout all of our vendors that we can.”
Gentile-Meinert, the security company, agreed in negotiations with commissioners not to pass along rising labor costs and other expenses, said Louis Gentile, its president.
‘On the Hook’
“We absorbed those costs,” he said.
There was no discussion during the meeting of the payment to Lehman Brothers, the higher-than-average fees for Commonwealth or the fact that a $57 million debt from 1996 now amounted to $72.7 million.
“At the end of the day, it’s the taxpayers’ money we’re spending,” Rossi, the county controller, said in an interview. “The bond counsel and the underwriter, they make their money and go home. And we’re on the hook.”