Feeding at the ValTrans Trough

Investment bankers who specialize in handling government bond debt stand to make huge fees if the $8.5 billion ValTrans project is approved by voters later this month. So it's no surprise that a gaggle of investment houses are pouring money into the campaign.

But one company, bond giant Rauscher Pierce Refsnes, has a leg up on the others, thanks to Chris Hamel, a former top aide to Bruce Babbitt.

Hamel, the principal coordinator of the ValTrans public relations effort, also is a vice president for Rauscher, which is the biggest underwriter of tax-exempt bonds in Arizona. The firm already serves as financial adviser to the Arizona Department of Transportation on all bond issues approved by the State Transportation Board.

Hamel denies that his decision to fight for ValTrans has anything to do with the fact that his company could stand to profit from a yes vote. He insists there's no conflict of interest.

"I am the kind of person who enjoys community service and political campaigns," says Hamel, who spent thirteen months in Iowa last year stumping for Babbitt's presidential campaign. "ValTrans is a good proposal and an interesting one and an important one. People like me who enjoy participating in politics like to participate in important issues."

It's not certain that ValTrans would use bonds to help pay for itself. But large municipal projects almost always do--and the Regional Public Transportation Authority (RPTA) has made provisions for bond expenditures in its projected capital costs. Acknowledges Hamel: "The investment banking community generally is anticipating that some kind of issuance of debt is likely." And he adds that Rauscher Pierce Refsnes, which has contributed $5,000 to the ValTrans effort, "would be among the kinds of firms that would be considered."

So is his firm actively lobbying for the contract? "Frankly, it's not something the firm has actively discussed or made a decision on," says Hamel. "It's something this office hasn't talked about."

Among the bond firms, nobody's openly broaching the subject. But their money is saying plenty. In addition to Rauscher Pierce Refsnes, ValTrans has been supported by, among others, $15,000 from Goldman, Sachs & Co., $5,000 from Shearson Lehman Hutton and $5,000 from Young, Smith & Peacock. The companies hope to land one of two jobs that would be created by a future bond issue: bond underwriter or financial adviser. The latter would advise RPTA how to prepare bond issues, which would be paid back with tax revenues.

It's common practice for companies to serve as cheerleaders for public projects on which they'd like to bid. Engineering and construction firms also are pumping money into ValTrans, with an eye toward competing for contracts. And there's nothing illegal about Hamel's dual role with Rauscher and ValTrans. A bond issue would be put out to competitive bid and would be up for grabs, he says, and there's no guarantee Rauscher Pierce Refsnes would get the job.

However, a source with experience in the bond market questions whether Rauscher Pierce Refsnes would truly be treated as just another bidder. Hamel's local political contacts and his work on the ValTrans campaign would surely give him a head start, says the source, who declined to be identified. "They hire the right people," he says of Hamel's firm. "That's how they get their business."

And Hamel's firm already serves as financial adviser to the Arizona Department of Transportation on all of its freeway bond issues. Rauscher has collected $357,000 in fees on five issues totaling about $815 million since 1986, says Suzanne Sale, ADOT's assistant director for administrative services. In other words, the firm has received about $4 for every $1,000 of bonds issued. Underwriters, who sell the bonds, get a higher percentage. But they often have to split the proceeds with other bond houses. By contrast, only one financial adviser is hired per bond issue.

"The argument that we understand the Arizona market is one which a firm like ours makes to any and all Arizona issuers," says Hamel. But firms like Goldman, Sachs also do business in the state, he adds. "This is an active and very competitive market. My sense is that the local argument will have less influence on the decision than you might suspect."

RPTA officials say it's too early to say how much money they might need to raise through bonding. But here's a hypothetical: If RPTA issues $8 billion worth of bonds to build ValTrans and the financial adviser receives the same percentage Rauscher got for its ADOT work, the adviser's fee alone will be a little over $3 million.

In short, somebody's going to make a killing if and when ValTrans decides to enter the debt markets--and voters won't know who that is until long after the March 28 election.