Negotiated vs. competitive school bond sales
In 2007, Jonathan Ellis wrote a series of stories for the Argus Leader, which left little doubt that school districts, cities and counties in South Dakota were throwing away millions of dollars by negotiating bond sales for construction projects instead of soliciting competitive bids.
Here’s part of one of those stories about the Harrisburg School District, which had a $31 million bond sale:
Had the district chosen to put the bonds out to bid rather than choosing an underwriter before the sale, experts say firms across the country would have lined up to buy the bonds. In a competitive sale, the district would have sold the bonds to the firm offering the lowest interest rate, thereby ensuring that taxpayers receive the lowest possible rate to borrow money.
“They would get plenty of bids from all over the country, and they would get good bids,” said Robert Smartt, a Boulder, Colo., venture capitalist who worked for 16 years in municipal finance for Goldman Sachs.
Ken Rust, the interim chief administration officer for the city of Portland, Ore., said highly rated general obligation bonds are a “pure commodity” that basically sell themselves in a competitive auction.
“It really is a no-brainer,” Rust said. “There is no issue with getting a market for the bonds, in my opinion.”
But Reider defended the district’s plan to use a negotiated sale, saying he would have more flexibility to sell the bonds. And he said that in a competitive sale, the district would be at risk if some sort of economic calamity affected rates in the bond market.
Smartt, however, said, “The chances of that happening are .00001 percent.” Even if something did affect the market, the district could cancel the auction.
The Sioux Falls School Board has a big bond sale coming up for some new schools. The board will discuss Wednesday afternoon whether they ought to take competitive bids or not.
Rich Lauer of Sioux Falls, now retired, used to represent investment bankers who did negotiated sales. He told me in December that the Government Finance Officers Association handbook says it has to be an extraordinarily unusual bond issue for a negotiated sale to make sense. And yet, 39 out of 40 bond sales in South Dakota in 2006 were negotiated, Ellis found.
Lauer said Todd Vik, the school district’s business manager, repeated a bond dealer’s sales pitch when he asked him whether the district would be taking competitive bids.
“They don’t know any better,” Lauer said.
We’ll find out Wednesday if Vik has come around.
The City of Sioux Falls already has. Three months after Ellis’ first story, city officials celebrated the sale of $70 million in bonds for the Lewis & Clark water project.
“It turned out to be a good day for us,” Mayor Dave Munson said.
“It’s good for the taxpayers to get the best deal.”
