Gene Saffold, Chicago's CFO, is sticking with the city’s more than two-decade tradition of shunning open bidding for Chicago’s long-term debt, selling $2 billion in bonds through private negotiations with banks.
Arranging competitive auctions instead would save taxpayers millions of dollars, according to internal documents and a review of bond sales by the country’s third-largest municipality.
Eighty-five percent of the $378 billion of long-term municipal bond deals in the U.S. last year were negotiated privately, according to data compiled by Bloomberg. Breaking Chicago from that habit proved challenging for one of Saffold’s predecessors.
Saffold defended the use of negotiated sales in a Dec. 4 interview in Bloomberg’s Chicago bureau. “We’ve gotten effective pricing, especially if you look at us compared to other state and local governments,” he said.
One of the city’s own advisers found otherwise. Six weeks after the interview, Kristina Eng of the New York office of A.C. Advisory Inc. sent a memo to Chicago’s finance department. It showed how $500 million of a Jan. 11 bond sale yielded more than half a percentage point more than a comparable Pennsylvania issue sold competitively. The Pennsylvania issue may have won a better spread in part because its bonds matured six years earlier than Chicago’s and had a rating one level higher from two of three credit evaluators, Eng wrote.
Efforts to introduce competition fail because the city and its aldermen want to reward those who support public officials and politically connected charities, said a former investment banker in Chicago.
“I’m a proponent of negotiated sales,” Saffold said. “Cost isn’t the sole objective.”
The Chicago-based Government Finance Officers Association recommends competitive sales for bonds rated A or better, including those backed by secure revenue sources with structures that don’t require extensive explanation to buyers. Negotiated sales are best suited for those rated below A or with unusual features, according to the association.
Some states require a portion of municipal bonds to be competitively bid. Illinois law sets a minimum of 25 percent for most of its bonds, said Kelly Kraft, a spokeswoman for the governor’s Office of Management and Budget.
Cities and states that negotiate don’t borrow at the lowest cost for taxpayers in the $2.8 trillion U.S. municipal bond market, said Craig Brown, an assistant professor of finance at City University of New York who has surveyed research in his study of borrowing costs.
Research findings put the difference at 17 to 48 basis points, according to a 2008 article in the Municipal Finance Journal by Mark D. Robbins, associate professor, and William Simonsen, professor, at the University of Connecticut.
“Finance officers are persuaded they can match wits with the underwriters they work with and negotiate a better sale than competitive bids can provide,” Robbins said in an interview. The city officials are “just trying to get a transaction done. Cost is less of a consideration.”
A negotiated deal restricts a city’s ability to force underwriters to offer the lowest interest rates or show taxpayers it got the best price, said Ralph Martire, executive director for the Center for Tax and Budget Accountability, a non-partisan group in Chicago.
“There is no way it could be in the public’s interest to do a no-bid deal on a bond,” Martire said. “There is no way you can win.”
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Tuesday, May 4, 2010
Should Chicago be bidding bonding?
Chicago CFO Taking Orders From Daley Increases Taxpayers’ Costs