CHICAGO - Chicago's comptroller yesterday turned thumbs down on a proposed city ordinance that would require the city to competitively sell plain-vanilla bond issues.
Speaking at The Bond Buyer's Midwest Public Finance Conference here, Walter Knorr defended the city's practice of selling bonds through negotiation, saying that the cost differential between offering bonds through competitive and negotiated sale "is minuscale."
"It's a very narrow dance floor we're playing on," he said.
Knorr pointed to 1993 statistics that showed average spreads for negotiated deals at $8.40 per $1,000 par value, while those for competitive deals were $7.60 per $1,000 par value. He said that Chicago's average for the $2.5 billion of debt it issued in 1993 was $8 per $1,000 par value.
"I think we'll stand by the way we do our transactions," he said.
In February, Chicago Alderman Lawrence Bloom introduced a resolution that would require Chicago to send out requests for qualifications for senior managers, co-managers, and bond counsel firms every two years.
The ordinance calls for the city to accept competitive bids for routine bond issues from firms that respond to the request and are selected as qualified to work on city bond issues.
For bond issues requiring special expertise, the ordinance would allow the city comptroller to pick firms, giving reasons for the selections to the chairman of the city council's finance committee.
The ordinance is pending before the finance committee.
Knorr said another reason for negotiating deals is Chicago's commitment to its 30% minority participation goal in bond issues. In 1993, participation was 29%, he said.
"In negotiated transactions, I can hold together the complete financing group," he said.
Bloom's ordinance would also require any firm included in a Chicago bond issue to comply with all limitations or disclosure requirements concerning political contributions imposed by the Municipal Securities Rulemaking board, the Securities and Exchange Commission, or any other governmental agency.
Knorr said that Chicago is aware of the restriction on campaign contributions by the MSRB that took effect Monday and that the restriction would curtail so-called pinstripe patronage in the bond area.
"We are now very cognizant of the fact and we are abiding by the rules," he said.
The MSRB rule bars municipal bond dealers from doing business with state and local government officials for two years after the dealer, its political action committee, or its bond professionals contribute to an office holder or candidate who can influence the awarding of bond business. An exemption under the rule is permitted for contributions of $250 or less to officials for whom the contributor may vote.
Aside from making that portion of Bloom's ordinance moot, the MSRB rule may be hurting some "worthy causes," Knorr said.
He pointed to the city's summer finance academy, where students from public and private schools are given an opportunity to work in banks and finance and law firms. Knorr said that some lawyers are interpreting the rule to preclude the participation by municipal bond firms in the program because it's run by the city.
"The program may hit the skids because of this interpretation," Knorr said.
Knorr also addressed the use of derivative products, which Chicago has incorporated into bond deals over the last 10 years.
"I caution every issuer and finance official to be careful with derivative products," he said. "Ask yourself the question, why you should enter into a particular transaction."
He said he "strongly advocates" competitive bidding for derivative products.
