By Terrence Dopp and Jeremy R. Cooke
Feb. 12 (Bloomberg) — New Jersey Governor Jon Corzine wants to require state and local politicians to gather competitive bids for buying everything from office supplies to pickup trucks — just not necessarily for the financing.
Corzine, a first-term Democrat and the former head of Goldman, Sachs & Co., says bond sales wouldn’t be included in his push to end no-bid public contracts in his state. In the past year and a half, 95 percent of New Jersey’s offerings were sold via negotiations. More than a dozen academic studies show that opening sales to competitive bidding saves taxpayers money.
“I’m in favor of competitive bidding when somebody shows up,” the governor said in a Feb. 6 interview aboard the inaugural trip of an express train to whisk gamblers from Manhattan to Atlantic City. “But if nobody shows up, then you’re in a negotiated situation anyway. The realities of the marketplace today are different.”
Citing consolidation among underwriters over the past year and soft institutional demand that sent yields for tax-exempt bonds higher than rates on comparable Treasuries, Corzine and others say competition in the $2.67 trillion municipal bond market doesn’t always bring lower costs. Last year, state and local politicians chose negotiations over bids for 86 percent of the $391.5 billion in long-term municipal bonds sold. This month, officials in Georgia, one of the top-rated U.S. states, joined them for the first time in a decade.
The trend toward negotiated sales may be accelerating, even as Christopher “Kit” Taylor, a former chief regulator, calls for banning the practice to stem corruption. No-bid deals in New Mexico are at the heart of a federal investigation into how a political contributor to Governor Bill Richardson won state financial work. The probe led Richardson to withdraw from consideration for U.S. commerce secretary in January.
Last year, Corzine, 62, prohibited state agencies from awarding contracts to campaign contributors — a ban he’s asking the legislature to extend to New Jersey’s municipalities.
Competitive bond offerings force banks to line up on an advertised day and submit the lowest interest-cost bid to win underwriting business. In a negotiated sale, states and cities decide in advance which banks will market the bonds. Underwriters have promoted the no-bid method, saying it allows them to get the best prices for issuers by tailoring the debt to specific types of investors.
Bid sales saved issuers 17 to 48 basis points, “on average and all else equal,” according to a study published in the Winter 2008 issue of the Municipal Finance Journal. A basis point is 0.01 percentage point. On $100 million of debt, the savings mean $1.7 million to $4.8 million less interest over the life of a 10-year bond.
Yield Ratio Flipped
The research by Mark Robbins and Bill Simonsen of the University of Connecticut in West Hartford cited “almost all studies on this issue.”
“That’s in normalized times,” Corzine said of the findings. “We’re not in normalized times. With the current circumstances, you’ve reduced the number of purchasers to a narrower and narrower group.”
Municipalities that don’t expect multiple bidders should use negotiation for bond offerings, Robbins, one of the researchers, said in an interview. High-quality issues will still draw bids, which results in lower costs, he said.
“Nothing has changed in the market that would mean the market wouldn’t work the same way it always has,” he said. “It’s just going to be harder to attract bidders.”
In December, as investors sought the safety of Treasury debt, even the highest-rated states and cities paid as much as 2.2 times what the federal government was paying. That was a record, according to data compiled by Municipal Market Advisors and Bloomberg. Since then, the so-called yield ratio of AAA tax- exempt bonds to comparable Treasuries reached 1.38. Before the credit crisis, it averaged 0.96.
Four of the 12 largest municipal-bond underwriters in 2007, including New York-based Merrill Lynch & Co., merged with other banks last year. A fifth, Zurich-based UBS AG, exited the institutional public finance business.
The auction-rate securities market also collapsed last year, and all except three tax-exempt bond insurers were stripped of top ratings. Bigger institutional investors shook the market with waves of selling that sent municipal bonds to a 4 percent loss, their worst performance in nine years, based on Bank of America Merrill Lynch indexes.
Georgia, the most populous of seven states with top grades from the three major credit-rating firms, opted for its negotiated fixed-rate bond sale in response to such conditions.
The resulting annual debt service was $5.9 million below budget and the rates “more favorable” than those received in the state’s last bond sale in June, Governor Sonny Perdue said in a Feb. 4 news release.
State leaders chose negotiation to market the bonds to retail investors and to allow for increasing the offering’s size as demand allowed, said Susan Hart Ridley, director of Georgia’s Financing and Investment Division. Officials initially planned to offer as little as $200 million and ultimately raised the amount to $614 million.
It would have been the largest competitive municipal deal since the market freeze that followed Lehman Brothers Holdings Inc.’s bankruptcy, Bloomberg data show.
“If we didn’t get any bids, I would think that would send a negative signal about the quality of our debt,” Ridley said.
The Port Authority of New York and New Jersey got no bids on Dec. 3 for a $300 million sale of taxable three-year notes.
‘No Risk Whatsoever’
“It’s not necessarily comparable to us, but it’s an indicator of where the market was, the tenuous nature of the market” at the time, Ridley said.
There’s no proof that a canceled round of bids “would put a taint on your issue,” said Joy Howard, principal at St. Louis- based WM Financial, adviser to local governments on bond sales.
Florida this week returned to its usual practice of auctioning fixed-rate debt, after negotiating a bond deal at the beginning of January when benchmark yields were higher.
The state attracted seven bidders for $200 million of bonds to finance capital spending for schools. Barclays Plc’s winning interest cost of 4.7 percent beat out bids that were all within 0.05 percentage point, said Ben Watkins, director of the state’s Division of Bond Finance.
“That’s indicative of a market that’s functioning pretty efficiently,” Watkins said. “High-grade frequent issuers with name recognition and very straightforward credit are in demand.”
Negotiated deals make sense for offerings “that are less solid,” said John Mousseau, a municipal portfolio manager at Vineland, New Jersey-based Cumberland Advisors Inc., in an e- mail. “However, it is very evident that dealers are taking no risk whatsoever these days.”
The New York Yankees hired Goldman Sachs Group Inc., successor to Corzine’s former firm, to manage the team’s second round of city-approved tax-exempt ballpark financing last month. Yankee Stadium LLC agreed to pay 7 percent on $259 million of 40- year bonds. The next day, the same securities jumped in price and fell in yield by about half a percentage point, according to Municipal Securities Rulemaking Board trade data.
“They left an incredible amount of money on the table for the Yankees,” because the drop in yield indicates investors may have been willing to settle for less interest, Mousseau said. Alice McGillion, a Yankees spokeswoman, didn’t reply to a request for comment on the financing.
Taylor, who calls for banning negotiated debt sales, was executive director of the tax-exempt bond industry’s self- regulatory organization, the MSRB, for almost three decades until 2007.
He proposes a national market that would force dealers to bid for maturities of new tax-exempt issues they want to sell. The format would help address concern that fewer dealers and less capital have hurt the market, Taylor said.
Since 1994, MSRB rules have limited campaign contributions by underwriters trying to win business in so-called pay-to-play practices. That requirement doesn’t apply to financial advisers who contract with public agencies.
Corzine took steps to limit corruption in the state government’s executive branch with four executive orders he signed in September 2008. Among other things, they prohibited agencies from awarding contracts to campaign donors and expanded employees’ financial disclosure requirements.
Now he’s asking state lawmakers to extend the ban on contractor contributions to the county and local levels, replace a patchwork of local finance regulations with one state law and prohibit those holding contracts with school districts from giving to municipal candidates or political action committees.
The New Mexico investigation that kept Richardson out of President Barack Obama’s cabinet echoes a pay-to-play scandal from more than a decade ago in New Jersey. In 1995, former Governor Jim Florio’s chief of staff, Joseph C. Salema, pleaded guilty to sharing in more than $200,000 in payments from a New Jersey bank that sought a bond offering in Camden County.
As the case broke in 1993, Florio signed two executive orders specifying that competitive bidding should be used for bond sales, with certain exceptions approved by the state treasurer. While the orders were in effect, from May 1993 to October 1994, negotiated financing dropped to less than 50 percent of bond sales from 79 percent.
Complexity in Abundance
In 1994, then-Governor Christine Todd Whitman issued a new order, establishing conditions in which negotiations would be allowed. They included sales of poor or complex credits, issues involving an untested financing structure and deals made in volatile markets.
Since September 2007, the state has sold $8.25 billion of bonds via negotiation and $456 million through bids, according to data provided by New Jersey’s Treasury Department.
“We’re in some of the most volatile market conditions in the history of Wall Street,” Tom Vincz, a treasury spokesman, said in an e-mail. “Given the many calisthenics to exit the auction-rate securities market last year, complexity was in abundance.”
To contact the reporters on this story: Terrence Dopp in Trenton, New Jersey at email@example.com; Jeremy R. Cooke in New York at firstname.lastname@example.org.
Last Updated: February 12, 2009 11:10 EST