CHICAGO — New procurement rules aimed at curbing pay to play in contracts awarded by Illinois, its agencies, and its public universities could dampen the flow of creative financing ideas from the public finance community, some market participants believe.
The rules in SB 51, which can be seen at www.ilga.gov/legislation/publicacts/96/096-0795.htm, were approved by the General Assembly and signed into law last year as part of a larger package of ethics reforms that included a ban on political contributions from large state contractors.
The measures received strong bipartisan support following the indictment of former Gov. Rod Blagojevich on federal corruption charges alleging he sought to parlay his power over state contracts to squeeze contractors for campaign contributions.
While still digesting the implications of the procurement rules, public finance participants are worried over two provisions. One imposes new reporting requirements on communications between state officials and contractors, and the other prohibits awarding work to businesses or individuals that “assisted” the state in determining a need for a specific contract.
The prohibition took effect July 1 for contracts entered into after that date, and the reporting requirements will take effect on Jan. 1. Reactions from market participants vary, but some are concerned that both measures will hurt the exchange of information between finance managers and bankers and advisers.
“I’ve talked to bankers and they are not happy with it,” said state debt manager John Sinsheimer. “I am concerned that they will be reluctant to bring me ideas. Some are worried that if they bring in an idea, I won’t be able to use them. It doesn’t make any sense.
He added, however, that “the General Assembly passed the bill, and we will honor it.”
The state ushered in the use of negotiated sales on general obligation issues with the passage of a $12 billion capital program in 1999, arguing that the ability to select underwriters would generate more creative financing ideas from the public finance community.
The new rules come as the state has turned to a series of negotiated and competitive financings to help it manage through a liquidity and budget crisis. They include cash-flow issuance and borrowing to cover pension payments. The state also will soon put together a financial team to manage a tobacco deal.
The legislation spans the scope of state-related issuers, including the university system, the Illinois Finance Authority, the Illinois Housing Development Authority, and the Illinois State Toll Highway Authority.
“Bankers will not want to offer up any proprietary ideas if they know it’s going to then become public,” said one Chicago banker who asked not to be identified. “And the reward for bringing an idea to the table is the hope that you will get the senior manager assignment. If that’s going to change, bankers are going to think twice about bringing ideas in.”
“It could freeze the ability of an issuer to gather information and accept new and creative ideas,” another banker said.
The prohibition language specifically states that no person or business shall bid for or enter into a contract if they assisted the state in determining whether there is a need for a contract except as part of a response to a publicly issued request for information; assisted the state by reviewing, drafting, or preparing a request for proposals or request for information; or provided similar assistance.
The language leaves open to interpretation the scope of the rules, and so issuers and bankers are still waiting for further clarification. Some remain uncertain over whether the prohibition would be applied to an already-established pool of qualified underwriters.
The state and many of its related issuing entities typically establish qualified pools through a competitive selection process every two to three years but may conduct a separate selection process for a specific transaction.
“Can those underwriters already in a pool show an issuer a unique idea and get the business?” one public finance banker asked.
“There’s a lot that’s open to interpretation,” one finance official with an Illinois agency said. “If we are looking at issuing variable-rate bonds and a banker or financial adviser comes in to talk with us and offers up a new wrinkle and a structure that’s a little different, are they a prohibited bidder? That’s the gray area. If the need is established but some proprietary idea is offered, does that trigger the prohibition?”
The reporting rules cover any written or oral communication received by a state employee that imparts or requests material information or makes material arguments regarding potential action concerning a procurement matter.
A detailed summary must be provided to the Procurement Policy Board monthly by state officials, and the board must make the information public on its website within seven days. If registered as a lobbyist, as bankers who work with Illinois and its agencies are, then those individuals must also submit reports.
One of the legislation’s sponsors suggested some of the concerns are exaggerated.
“The law does not require firms to give up their secret recipe,” said assistant Senate majority leader Jeff Schoenberg, D-Evanston, who co-sponsored the legislation with House Speaker Michael Madigan, D-Chicago. “They have to disclose the interaction and may have to exercise greater caution in the details they provide. They may believe that the mere reporting of these discussions triggers bells and whistles that notify competitors, but I don’t believe that is the case.”
“Our policy goal is to protect taxpayers and to ensure that the competitive bidding process remains true,” Schoenberg said. “While we welcome innovation, firms should not assume that they automatically are going to get the business because they’ve introduced a new product. What’s ultimately driving these changes is a far greater appetite for transparency in the public domain.”
The new ethics reforms and procurement rules followed a series of legislative hearings and work by a panel appointed by Gov. Pat Quinn after lawmakers threw Blagojevich out of office through impeachment proceedings after his December 2008 arrest.
The former governor is currently on trial on corruption charges.
Federal prosecutors allege that the state picked Bear, Stearns & Co. as the lead manager on its $10 billion GO pension bond issue in 2003 because Blagojevich and several advisers expected to reap $500,000 from a consultants’ fee paid by the firm.
SB 51 also imposes state fines and penalties on firms in violation of the Municipal Securities Rulemaking Board’s strict limits on campaign contributions and its ban on the use of consultants.
Some market participants said they hope for follow-up legislation clarifying the application of the rules, but Schoenberg said he has not been contacted about further revisions. Lawmakers are focused on the upcoming November election and will return to work in the fall to face a looming $12 billion deficit going into the next fiscal year.
For the time being, issuer officials said they will rely on the guidance of internal and state ethics, procurement, and purchasing officials.