Why did Pa. make hospital list 4 law firms in bond sale?

Lawyers for Pennsylvania Gov. Tom Wolf, who campaigned for competitive bidding and lower fees in state legal contracts, told one of the state's biggest employers last month to hire three Philadelphia law firms -- not just the one it wanted -- as a condition for routine state and federal tax breaks.

Back in March, the University of Pennsylvania Health System wanted to borrow up to $400 million to expand its West Philadelphia trauma center, Chester County Hospital and Radnor outpatient offices and demolish the old Penn Tower Hotel, among other projects. Penn Health brought its plan to the Pennsylvania Higher Educational Facilities Authority, one of several state-backed agencies that help issue income-tax-exempt bonds.

Penn Health asked to hire well-connected Ballard Spahr LLP as its bond lawyer. The authority's board, with representatives from state agencies, legislators and the elected auditor general and treasurer, approved Penn's plan unanimously March 10.

But when the Penn Health bond prospectus was made available to would-be investors by Merrill Lynch, JPMorgan and Penn Health's other Wall Street underwriters on April 16, Ballard was listed as just one of four firms Penn Health listed as "Bond Co-Counsel." The others: Obermayer Rebmann Maxwell & Hippel, Ahmad Zaffarese LLC, and Turner Law PC.

The Obermayer and Ahmad firms were added by Wolf's Office of General Counsel, which reviewed lawyer hiring using a new process, the board was told in an April 21 memo from Wolf's Office of General Counsel.

The administration's move caught authority board members by surprise. "We don't know how this happened. Why are there three more law firms? We need answers," Auditor General Eugene DePasquale told me.

"We were very, very suprised to learn that the Office of General Counsel selected other bond counsel," Sen. Lloyd Smucker, R-Lancaster, told me. "I'm not sure that was Penn's choice. We're not sure they (Wolf's Office of General Counsel) have the authority to do that."

"I'm concerned when an authority board is challenged," state Sen. Andrew Dinniman, D-West Chester, told me.

Counsel found Ballard was the high bidder -- at $200,000 -- but also the only one ranked "Excellent" for Understanding, Experience and Qualifications.

Obermayer was rated only "Good". But Obermayer also promised to give 40 percent of its work to the Ahmad firm, whose small size and minority ownership entitled it to special consideration under the new Wolf-era criteria. Ballard, which intially had "0% Small/Diverse Business Participation," invited the Turner firm to share, and it is listed on the prospectus, though state officials told me they have no record Turner will be paid as part of the deal.

Obermayer chairman Thomas Leonard, who has been a contractor on numerous state legal, insurance and real estate projects over the year, and veteran Ballard bond lawyer William Rhodes (corrected) didn't return calls seeking comment.

Wolf's top lawyer -- who heads the office that told Penn what law firms to hire -- is Denise Smyler, a veteran municipal attorney. Smyler was a named partner in the Ahmad firm: it was Ahmad Zaffarese Smyler before she left to work for Wolf.

Coincidence? "Denise Smyler had no knowledge that Ahmad Zaffarese was listed by Obermayer. Denise only knew the identity of the prime firms, not the subcontractors," spokesman Wolf Jeffrey Sheridan told me.

The memo naming Ballard, Obermayer and Ahmad for the Penn Health job was signed by a Smyler deputy, who Sheridan says handled the case to help avoid conflict. The governor's office says the lawyers ended up costing Penn $200,000, same as Ballard offered.

Penn Health's capital-raising goals, at least, "were achieved," Penn Health spokewoman Susan Phillips told me. But Penn Health declined to comment on how Penn felt about having to split its legal work and fees among the state-mandated firms, instead of the one it wanted.

PFM, the authority's financial adviser, told the board May 12 that local public school intermediate units have backed off plans to finance bonds with the authority because of what happened with Penn Health, the authority's executive director, Robert Baccon, told me.

At least one of the authority's rivals, the Philadelphia Industrial Development Corp., is taking advantage of the new complexity of dealing with the state.

"In light of recent procedural changes at the state level," college finance officers were invited to a May 12 conference at Philadelphia's Hotel Monaco to hear PIDC chief John Grady show how a PIDC affiliate can prepare tax-free bonds "with no restrictions on the selection process" for lawyers and bankers, said a flyer promoting the event.

"I don't think this is us trying to take business form the state," Grady said innocently. PIDC collects fees of up to $100,000 for every bond issue it helps prepare. Issuers are used to hiring their own lawyers, Grady noted, and "we let an issuer pick their own counsel." By contrast, "the state has a greater role in the selection proces."

Grady thinks hiring lawyers is best left to borrowers. "We've tried to overcome the peception this is very political," he added. (Longer version of column that ran here in today's Inquirer)