News

Mayor Tom Murphy's hand-picked bond refinancing team stands to make about $2.3 million in fees and represents a sampling of political contributors and the well-connected.

Murphy chose the team members for the $198 million refinancing deal without bidding out the contracts. The city expects to net about $6.5 million, after paying the fees, by refinancing the debt. The mayor and City Council members want to use the money to pave streets and make other repairs.

It's legal and not uncommon to award such professional services contracts without seeking bids. But the practice has drawn the attention of watchdog groups concerned that lucrative deals could be steered to insiders. Good government groups say that such deals can drive up costs and lock out less-connected competitors.

Even Murphy, who has never done one of these deals before, said it's not the best way.

"I've always believed strongly about competitively bidding these things," Murphy said. "This one for us was an exceptional one because of what we went through. We were in junk bond status and (made) a remarkably quick turnaround."

The mayor's bond team includes two Pittsburgh law firms -- Klett Rooney Lieber & Schorling and Kirkpatrick & Lockhart Nicholson Graham -- that contributed heavily to his 2001 re-election campaign.

= Klett Rooney, which gave Murphy at least $15,000, is serving as bond counsel and figures to make $75,000 on the deal.

= Kirkpatrick & Lockhart, which gave $8,500, will serve as the underwriter's counsel and will split a $60,000 fee with another law firm.

Lehman Brothers Inc., the New York-based underwriter, seemed to have no ties to the administration until about six months ago. Murphy said he had never met anyone from Lehman Brothers until this week.

That's not for a lack of effort on the firm's part.

Lehman Brothers tried to drum up public finance business in the state by paying a $5,000-a-month retainer to a Pennsylvania lobbyist -- who also happens to be a shareholder in Klett Rooney.

The bond firm paid Government Solutions Group, a Camp Hill lobbying firm, more than $10,000 during the fourth quarter of last year to help it "in procuring public finance business" in Pennsylvania, according to a public disclosure form it's required to file with the Municipal Securities Rulemaking Board, a self-regulatory organization for bond issuers.

Government Solutions President Robert L. Shuster is a shareholder in Klett Rooney. He said his contract with Lehman Brothers has since ended.

Shuster first said he had nothing to do with helping Lehman Brothers win the city contract. Several hours later, he called the Pittsburgh Tribune-Review to say he had introduced the firm's senior vice president for public finance, James Query, to Murphy's former finance director, Ellen McLean.

McLean has since resigned and could not be reached for comment. Her husband, Michael McLean, is a partner in Kirkpatrick & Lockhart.

"It was one of those opportunities you go and try to network and say hello and make new friends," Shuster said.

That was about six to eight months ago. Today, the city and Lehman Brothers are very good friends. It will share nearly $1 million in fees with NatCity Investments, an affiliate of National City Corp.

NatCity's managing director, Linda D. Eremita, serves as the city's financial adviser on the bond deal. Reached by phone Friday as she was boarding a plane, Eremita said she could not comment.

Murphy had high praise for Eremita, calling her the "pilot" on the refinancing deal.

"My view is that Linda had confidence in them (Lehman Brothers), felt they had the expertise and the size, I guess, to be able to handle this bond issue," Murphy said.

Last week, Richard Fees, the city's acting finance director, told City Council members, "We chose Lehman Brothers because Lehman Brothers has had experience dealing with distressed cities."

The Municipal Securities Rulemaking Board has raised concerns about the role of consultants -- such as Shuster's Government Solutions Group -- in municipal bond deals.

It has proposed a new rule, which if approved by the Securities and Exchange Commission would ban the use of consultants. The concern, said Christopher Taylor, the group's executive director, is that these contractors do not fall under the same regulations that apply to bond firms.

In its notice on the proposed rule, the board takes issue with the increased use of consultants, the amounts consultants are paid and the level of political giving by consultants. The money paid to these people could be motivating them to "use more aggressive or questionable tactics," the notice says.

The problem with steering contracts to political contributors and their friends is that it can drive up the cost of government and create a self-perpetuating cycle, said Barry Kauffman, executive director of Common Cause Pennsylvania, a nonprofit that promotes good government.

"Clearly, it demonstrates the power of campaign contributions," Kauffman said. It seems similar to the "pay-to-play" drama playing out in Philadelphia and other Pennsylvania cities, he said.

"The friends of a politician get juicy, fat contracts, and they give some back (in campaign donations)," Kauffman said. "That makes the politician more invulnerable so they can go back and reward their friends again."

The point of bidding contracts is to drive down the costs, he said.

"Clearly, the public might not be getting the biggest bang for its buck," he said.

City Council plans to take a final vote Tuesday on whether to approve the mayor's bond refinancing plan.

• Most Read
• Most E-mailed
• Latest News