DRPA's bond sale drew on connected firms - legally

"We did the whole thing through a competitive process, and it shows in the value we got. We achieved lower costs and better interest rates than our peers.  That demonstrates we got value for what we spent." - John Hanson, the DRPAs new chief executive officer.
"We did the whole thing through a competitive process, and it shows in the value we got. We achieved lower costs and better interest rates than our peers. That demonstrates we got value for what we spent." - John Hanson, the DRPAs new chief executive officer. (RON TARVER / Staff Photographer)
Posted: April 24, 2014

When the Delaware River Port Authority borrowed $487 million in December to repair its bridges and refurbish its PATCO train cars, it paid about $1.5 million to politically connected lawyers and bankers.

The bond sale by the bistate DRPA, which is controlled by the governors of Pennsylvania and New Jersey, intermingled political, personal, and business relationships.

The brother-in-law of the DRPA's top lawyer was chosen as the lead financial underwriter for the sale. And the law firms hired for the sale have deep roots in Republican and Democratic politics in both states.

There was nothing illegal in the arrangements.

Although rules created in the 1990s prohibit direct "pay-to-play" political contributions to get bond underwriting contracts from state and local governments, political connections remain deeply embedded in the business. Municipal bond sales have long been a lucrative source of income for well-connected bankers, lawyers, engineers, and consultants.

Those cozy relationships can cost taxpayers money and reward political insiders, say good-government advocates.

The DRPA's relationships, "while legal, can have the effect of undermining an open and public process for public works projects," said Jen Kim, director of the New Jersey Public Interest Group's law and policy center.

"Government's role is to do what's best for the public good, not play favorites or otherwise encourage actions not based on merit," Kim said.

Sandra Mortal, a college professor who has studied the effects of political connections in the municipal bond business, said a hazard of doing business on the basis of connections is that "you will not necessarily go to the best, you will go to the one you have the connections with."

"There are advantages of working with people you know, but there can be financial and ethical implications," said Mortal, an associate professor of finance at the University of Memphis and a coauthor of Corruption, Political Connections, and Municipal Finance. That can mean paying more and getting inferior service, she said.

DRPA defense

The DRPA's new chief executive officer, John Hanson, who was the agency's chief financial officer in December, said that wasn't the case with the recent bond sale.

The DRPA's underwriting costs were about half of the average for bond sales by the transportation sector in 2013, he said, pointing to a national comparison published by the Bond Buyer, an industry publication.

"We did the whole thing through a competitive process, and it shows in the value we got," Hanson said. "We achieved lower costs and better interest rates than our peers. . . . That demonstrates we got value for what we spent."

Despite the political connections of many of the firms, "they did good work. . . . Everything went very smoothly," Hanson said.


The DRPA gave the lead underwriting job to Citigroup Global Markets Inc., where the managing director and cohead of Mid-Atlantic public finance is Chris McNichol, brother-in-law of DRPA general counsel Danielle McNichol.

Her husband and Chris McNichol's brother is John McNichol, a Harrisburg lobbyist who is the new chief executive officer of the Convention Center and the son of the late Delaware County Republican power broker John F. McNichol.

Citigroup was paid $374,185 by the DRPA. That was 40 percent of the $920,000 paid to all seven underwriters.

Danielle McNichol said she had no role in the hiring of Citigroup Global. She formally recused herself from any participation in the selection process, she said, and "the relationship was disclosed by both Chris and myself in advance."

Citigroup Global and Chris McNichol declined to comment.

Citigroup was ranked second to Bank of America Merrill Lynch in the DRPA's internal evaluation of the firms but got the top job, Hanson said, "because we had a lot of positive experience with Citi . . . and we were very happy with what they did."

Hanson said the McNichols' relationship had nothing to do with the selection of Citigroup as lead underwriter.

"We used Chris McNichol in the past, before I ever heard of Danielle, and he did very good work for us," Hanson said. "There was no connection at all."

The financial and legal firms for the bond sale were selected from lists preapproved in 2012 by the DRPA board, whose 16 members are appointed by the governors of Pennsylvania and New Jersey (except for two Pennsylvania members who are on the board because of their elective offices).

The financial underwriting firms, which sell bonds, then submitted proposals to the DRPA in 2013, outlining their plans for the sale, including proposed costs.

A committee of DRPA executives evaluated the proposals on a number of factors, including price, previous experience in Pennsylvania and New Jersey, and previous experience with toll agencies, and recommended which ones should be included in the final team of underwriters. Final selection was made by then-chief executive officer John Matheussen and approved by the DRPA board last August.

The selected financial underwriting firms had to agree to a negotiated fee, which was below the market average, said acting chief financial officer James White.

Matheussen also approved the legal firms involved in the sale from a board-approved list. The firms agreed to charge no more than the DRPA's $250 hourly maximum fee.

One co-bond counsel was Parker McCay, the New Jersey firm whose chief executive officer and managing shareholder is Philip Norcross, brother of South Jersey Democratic leader (and Inquirer co-owner) George E. Norcross III. The firm was paid $120,000.

The other was Stevens & Lee, the Pennsylvania law firm that has been a major contributor to Gov. Corbett, a former chairman of the DRPA board. The firm also was paid $120,000.

Pennsylvania "special counsel" was Raffaele & Puppio, a Delaware County law firm whose founding partner is Michael Puppio Jr., chairman of the Springfield Township Republican Party. The firm was paid $30,000.

New Jersey "special counsel" was Capehart & Scatchard, a law firm that has been a major contributor to Republican candidates and where former Burlington County Republican Chairman Glenn Paulsen is a managing shareholder. The firm was paid $30,000.

The "trustee's counsel" was Florio Perrucci Steinhardt & Fader, whose founding partner is James J. Florio, former Democratic governor and South Jersey congressman. The firm was paid $12,500.

Of the legal firms involved, only Florio Perrucci responded to inquiries about the bond sale.

Florio noted that his firm was selected by TD Bank, not the DRPA. "Relationships are important" in bond sales, he said, though he added that government agencies must monitor their transactions to make sure there's no improper influence because of those relationships.

As governor in 1993, Florio issued an executive order requiring, for the first time, that New Jersey government bond deals be made on the basis of competitive bidding.

That was important, he said recently, "to avoid people buying the position" as underwriters.

The bistate DRPA set its own standards in 2010, amid demands to ban nepotism, tighten ethics rules, and require political contribution disclosures and more frequent audits, among other reforms, by Govs. Christie and Ed Rendell. The DRPA board balked at an effort by some board members to ban political contributions by companies that do business with the agency.

Instead, it approved a weaker measure that requires companies to promise to comply with state campaign-finance laws in New Jersey or Pennsylvania and to list their political contributions.

The DRPA keeps secret the vendors' political-contribution lists.

Kim, of the New Jersey Public Interest Group, said New Jersey needed greater transparency by "all quasi-public agencies and independent authorities, including the DRPA."

"They're using public funds, and we, the public, should be able to hold them accountable," she said.




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