Massachusetts officials plan to announce new guidelines by the end of this month that would immediately ban most negotiated debt by the state and its authorities, according to government officials.
In addition to requiring that deals be underwritten competitively, the state also plans to force competitive bidding on selections of financial advisers and bond counsel.
The move, which is expected to come in the form of an executive order by Gov. William F. Weld, mirrors a similar ban now in effect in New Jersey. It would mark a radical change from how the state typically markets its debt.
Weld and state treasurer Joseph D. Malone are developing the guidelines.
During 1992, the state and state authorities in Massachusetts sold $6.99 billion in bonds. Of that total, $6.8 billion, or 97.2%, was marketed through negotiated sale, according to Securities Data Co.
But bond scandals that have rocked the market elsewhere in the nation have also touched Massachusetts, fueling calls for reform.
This summer, for example, one of Massachusetts' largest authorities, the Massachusetts Water Resources Authority, fired its financial adviser of more than 10 years, Mark S. Ferber. It also disbanded its entire underwriting team.
While Ferber was a partner at Lazard Freres & Co., he and his staff were paid $1 million a year by Merrill Lynch & Co. to help market and sell complicated interest-rate swap transactions. Merrill Lynch was a senior member of the authority's underwriting team at the time.
Authority officials said the terms of the contract were not fully disclosed to them.
Ferber, a successful and well-paid banker, was subsequently fired by his most recent employer, the First Albany Corp., where he had been co-chairman.
The revelations surrounding Ferber's activities caused the state treasurer's office to investigate its own disclosure procedures. It was found that the two firms had not disclosed the terms of the contract to the state, either.
Both Merrill Lynch and Lazard Freres were banned from participating in one of the state's recent bond sales.
As the statistics indicate, most state authorities in Massachusetts rely heavily on selling their bonds through negotiated sale.
For example, the Massachusetts Health and Educational Facilities Authority currently has a deal on the negotiated calendar, and the Massachusetts Industrial Finance Agency proposed to sell an issue of between $400 million and $500 million earlier this year to bail out the state's bankrupt unemployment insurance benefits pool.
"Obviously, there will still be times when the state will do a negotiated sale," said Thomas Trimarco, first deputy treasurer for the state. "But this message shall serve as a firm policy statement about when a negotiated sale will be permissible."
Part of the state's past hesitancy to sell bonds competitively grew out of its credit rating problems.
In the late 1980s and early 1990s, a severe recession and legislative gridlock prompted rating downgrades that at one point gave Massachusetts the dubious distinction of having the lowest state rating in the nation. Moody's Investors Service rated the state Baa and Standard & Poor's Corp.'s rated it BBB.
Last September, better economic performance and improved communication between the branches of state government contributed to the state's rating upgrade to single-A by both agencies.
Fitch Investors Service rates the state's GO debt A.
"Before this year, it would have been very expensive, almost impossible, for the state to try and sell bonds competitively," said Dominic Slowey, Weld's chief financial spokesman. "Two years ago, we could not sell a deal that way."
Slowey said there will still be certain cases, such as large refundings or deals with derivatives, that would require a negotiated sale.
"Where we can do it, we will be leaning toward competitive sales," Slowey said. "Also, when we award lucrative advisory and bond counsel positions, we want to make sure there is no appearance of favoritism."
State officials would like to have the guidelines in place by the time they sell their next issue.
"Right now, we are tentatively scheduled to sell between $200 million and $225 million of general obligation bonds during October," said Trimarco. "These bonds will be sold competitively."
The move toward a more competitive process for the sale of bonds has been in the news since this April when scandals rocked New York, New Jersey, Louisiana, and Kentucky, in addition to Massachusetts.
Several of those scandals involved alleged ties between campaign contributions and the awarding of bond business. But both Trimarco and Slowey said they do not expect restrictions on campaign contributions to be part of the Massachusetts proposal.
Several of the nation's largest issuers of bonds have been plagued by persistent questions about how large campaign contributions affect the makeup of a negotiated underwriting selling group.
In New York City, for example, it was learned that Comptroller Elizabeth Holtzman received a $450,000 loan from Fleet Securities for her failed 1992 race for U.S. Senate.
Earlier this year, Holtzman named Fleet to serve as a co-manager on the city's underwriting team, a move that the city's Department of Investigation termed "grossly negligent."
"Obviously, there are problems nationally that need to be addressed," Trimarco said. "But Massachusetts is not New Jersey or Louisiana, and this proposal will be unique."
He said it is important to separate the need for more competition and campaign finance reform.