CHICAGO —
But when it comes to issuing direct-payment qualified school construction bonds, it doesn’t matter whether the bonds are sold competitively or negotiated, said Robert Doty, president of Sacramento-based American Governmental Financial Services Inc. and chief author of the report.
The federal government’s subsidy covering all of an issuer’s interest costs removes the incentive for competitive sales, he said.
“Under normal circumstances, competitive bidding is an important recommendation,” Doty said. “But if the bond issue is QSCBs, it doesn’t matter if they save a few basis points on interest. The federal government has taken the incentive away from districts to be financially responsible.”
The district’s Bond Accountability Commission, which hired Doty’s firm to review the district’s practices, was poised to present its findings at a public meeting last night. School board members and district executives were invited but it was uncertain if they planned to attend.
Overall, the report praised the district’s borrowing practices, saying its bond sales were well-managed, that taxpayers largely received the benefit of the market’s prevailing interest costs, and that transaction costs were reasonable.
But it recommended several changes aimed at further lowering the interest costs for Cleveland taxpayers.
In addition to competitively selling most of its GO debt, the district should broaden the role played by its financial advisers and bond counsel beyond providing transaction advice and more aggressively pursue and educate investors ahead of sales.
Doty recommended that the district pay its financial advisers on an hourly or retainer basis, not on a contingent basis related to a bond sale. An hourly or retainer basis removes “the potential incentive for the financial adviser to provide advice that might unnecessarily lead to the issuance of bonds,” he wrote.
Outside of direct-subsidy federal stimulus bonds, competitive sales would likely mean lower borrowing costs and have the added benefit of opening bidding to more regional firms that have successfully managed the recent market turmoil but that issuers might not be aware of.
Doty also recommends the district avoid bond insurance. While the benefits of insurance have diminished after the downgrades of insurers,
He also noted that bond insurers have also recently become more willing to sue issuers. “I think buying bond insurance is buying trouble,” he said.
In the case of negotiated sales, Doty advised the district to tap underwriters based on the lowest borrowing cost offered instead of location or experience with the district.
The report comes as the school district nears the end of a $1.5 billion capital plan that included $335 million of local borrowing. It has issued $280 million, and is expected to issue the final $55 million in June. The borrowing will most likely consist of QSCBs.
As part of the campaign seeking voter approval of the borrowing in 2001, the school board created the Bond Accountability Commission to oversee the district’s borrowing practices and how the proceeds are spent.
The panel’s nine members are appointed by the mayor, who oversees the school district.
The district is expected to conduct a negotiated sale on its upcoming $55 million QSCB sale, according to Robert Jackson of the public finance law firm Kohrman Jackson & Krantz PLL and a member of the Bond Accountability Commission. Jackson said that the panel only plays an advisory role to the district.
“We always have an issue of whether [a bond sale] should be negotiated or competitive,” Jackson said. “It depends on the time and the conditions of the marketplace. We recommend both ways.”
The district typically used negotiated sales on longer-term issues and competitive sales on its note deals.
