MINNEAPOLIS -- Worried about political favoritism, the executive board of the Government Finance Officers Association said that issuers should not blindly go down the negotiated route.
"When conditions exist that generally favor competitive sales, GFOA recommends that the competitive method of sale be chosen," the board said in a three-page policy statement that the panel approved on a quick voice vote as the association's annual meeting began here Sunday.
The association's full membership is scheduled to vote tomorrow. The draft policy was originally approved on a 13-to-6 vote on Saturday by the association's committee on governmental debt and fiscal policy following over an hour of debate.
The recommendation comes amid increased pressure on municipal issuers by Securities and Exchange Commission Chairman Arthur Levitt Jr. to begin reversing a 20-year increase in the use of negotiated offerings -- from 23% of the volume of long-term bonds issued in 1973 to 80% in 1993.
Steve Juarez, vice chairman of the debt panel, warned committee members Saturday that association members must "get out front" on this issue, which is "not going to go away" considering the "current environment." His comment was a reference to an array of reports over the last year and a half about federal and state investigations into influence peddling in the municipal market.
Juarez said Levitt told him during a recent meeting that the issue of competitive versus negotiated sales will be "the next topic he will engage in."
But other committee members said the resolution was overkill.
"This is guidance that is not really wanted and is beyond the duty of this committee," said John F. Wenderski, finance director of Prince William County, Va. He urged the panel to circulate the resolution for more discussion before putting it before the membership for a vote.
"It's exactly the type of policy that the committee and the association have been developed to do," Juarez responded. "The arrow is in our quiver here. Having something that clearly addresses the issue gives us a leg up."
Without the resolution, Juarez said, the SEC might see a "void" that the commission would "jump into."
The draft statement urges state and local officials to take pains in deciding how to sell their bonds.
"The method of sale [should be] evaluated for each bond issue," the draft says. If a negotiated sale is used, issuers should keep thorough records and make sure that the process is "equitable and defensible," the policy says.
The document lists several conditions that generally favor a competitive sale, including whether the issuer is a stable and regular borrower.
Other conditions favoring a competitive sale include whether there is an active secondary market for the bonds, whether the issue has a "nonenhanced credit rating of A or above" or can obtain a credit enhancement before the competitive sale, and whether the debt structure is backed by the issuer's full faith and credit or a "strong, known or historically performing revenue stream," the policy says.
The issue should also be neither too large to be easily absorbed by the market nor too small to attract investors without a major sales effort, the document says. The deal should have no "complex or innovative" features and the soundness of the bonds should not have to be explained, the draft policy said.
If interest rates are stable, market demand is strong, and the market is able to absorb a reasonable amount of buying or selling at reasonable price changes, then a competitive sale may be appropriate, the statement said.
The draft policy also said that questions of syndicate membership and bond allocation can be "reasonably addressed" through notices of sale, including participation by disadvantaged business enterprises and regional firms.
The document said that negotiated sales may be appropriate under certain circumstances, but finance officials should be "actively involved in each step." They should make sure that either an employee of the issuer, or an outside professional who is familiar with the municipal market, is available to help structure and price the issue and monitor sales, the statement said.
The document said that finance officers should avoid such conflicts of interest as having the same firm serve as both financial adviser and underwriter on a negotiated issue.
And finance officers should demand that they be fully apprised of any joint accounts or any fee-splitting arrangements among bond professionals, the draft policy said.
Finally, issuer officials should "review the 'agreement among underwriters' and insure that it is filed with the issuer and that it governs all transactions during the underwriting period," the policy said.
