Issuers wonder why they pay for advisers; 'added baggage.'

NAPA, Calif. -- Many municipal bond issuers are questioning the need for outside financial advisers, according to several participants at a public finance conference here.

One reason is the recent disclosures about fee splitting by financial advisers and underwriters, some issuers said. But, putting aside scandals in a few states, a number of issuers have doubts about the basic role of the adviser.

Using outside advisers may not always be cost-effective, Tom Friery, treasurer of Sacramento, Calif., said at last week's conference, sponsored by Grigsby Brandford & Co. Friery said that he and other officials at the city treasury do Sacramento's advisory work.

"In the job that I do, I am responsible for the sale of debt. If that's my job and I don't know how to do it, I shouldn't be in my job," Friery said in a separate interview.

Friery said he has heard of a municipality paying its adviser $75,000 a year. "I think of that in terms of one and a half persons that could be added to my staff" who could perform other duties in addition to financial advisory work, the treasurer said.

Bernard Schorer, a portfolio manager for Franklin Advisors Inc. in San Mateo, Calif., agreed. "In many cases, I think the financial adviser is just added baggage on the train," Schorer said at the conference. "You don't need a financial adviser to tell you whether the price is right. The underwriter should know that."

Both Friery and Schorer participated in a panel discussion between issuers and portfolio managers.

Virvus Jones, comptroller of St. Louis, said he uses outside consultants "as a backup."

Although St. Louis does use outside financial advisers, their work is closely monitored, Jones said. The comptroller said his staff can handle some of the tasks often performed by a financial adviser, such as structuring the city's bond deals. In addition, he said, his staff generally gathers its own statistics and monitors underwriters' work.

When Jones does employ outside advisers, he prefers those with investment banking experience.

"I don't want somebody structuring my deal who doesn't have an understanding of the financial markets," he said.

Howard Freeman, assistant general manager for finance for San Antonio Gas and Electric, said the agency also tends to use investment banking firms rather than independent contractors.

He also criticized what some underwriters say is a common practice among financial advisers: discussing the pricing of a bond issue with dealers who did not participate. Advisers frequently do that to find out whether underwriters obtained a good sale price for an issuer.

"I don't think the financial adviser's role is to go to the people who aren't in the deal and jack around the people who are in it," Freeman said.

Panelists and conference attendees also discussed what role financial adviser's should play in the reinvestment of bond proceeds and whether it is appropriate for financial advisers to receive additional fees for such work.

Freeman of San Antonio Gas and Electric said that the agency has employed its financial adviser to supervise the reinvestment of bond proceeds done by the underwriter, but the adviser did not receive additional fees from the reinvestment transaction.

Robert Campbell, chief financial officer of the San Diego County Water Authority, said the authority's board of directors has its financial adviser sit in on interviews of potential underwriters to provide an independent opinion in addition to staff recommendations, Campbell said.

Campbell said the authority's financial adviser offers advice on the Pricing of bond deals, provides Comparative Pricing information, and also negotiates takedowns received by syndicate members.

A takedown is the discount from the list price allowed to a member of an underwriting account on any bonds purchased from the account.

When working for an issuer with credit problems, a financial adviser can often face a difficult job and criticism when a deal goes poorly, said Steven J. Krupa, a portfolio manager with John Nuveen & Co.

Pointing to the recession that has hit various regions of the country, Krupa said, "during the last 10 to 15 years it was a no-win situation for the financial adviser to bring bad news to an issuer.

Outside financial advisers can also be useful for smaller issuers that sell bonds infrequently, have little knowledge of the bond market, or time to structure debt offerings. Krupa said.

One finance executive argued for the advantages of outside advisers.

"We feel there are many benefits to using an independent financial adviser," said Freda Johnson, president of Government Finance Associates Inc., an independent financial advisory firm in New York.

Johnson is a member of the board of directors of the National Association of Independent Public Finance Advisors.

"Because we do not underwrite. we feel we have a better sense of what's going on in the market." said Johnson, who did not attend the California conference.

"We don't have any obligations except to the client and we feel that's important," Johnson said. "We feel we can provide a very objective service.

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