CHICAGO -- Despite Illinois Gov. Jim Edgar's promise to open up the state's bond business to more firms, his administration has tapped many of the same firms that worked under the previous administration to manage more than $900 million of state bond issues over the next two years.
Administration officials said the firms were picked on the basis of their answers during the screening process, as well their expertise, and that campaign contributions had no influence on the selection process.
Earlier this year, the state sent out a request for qualifications to underwriting and law firms to serve as senior manager and bond counsel on state bond issues in fiscal 1992, which begins July 1, and fiscal 1993. According to Arnold Kanter, Gov. Jim Edgar's chief counsel, 48 underwriting and 20 legal firms responded to the request.
Mr. Kanter said the Edgar administration chose to send out requests for qualifications "because we wanted to do a review of all the firms, adding, "We wanted to open the process a little bit more than it was opened in the past."
At the top of the winner's list are First Chicago Capital Markets and Dean Witter Reynolds, which will rotate as senior manager for $200 million to $250 million of college saver bonds backed by the state's general obligation pledge in fiscal 1992. According to Bill Ledbetter, bureau chief of the budget bureau's economic development division, another $200 million of college saver bonds may be issued in fiscal 1993.
Bear, Stearns & Co. will be senior manager on the approximately $156 million of Build Illinois sales tax revenues bonds the state plans to issue next fiscal year. Mr. Ledbetter said another $156 million of the bonds would be sold on a competitive basis. Morgan Stanley & Co. will be the top underwriting firm on the $20 million to $70 million of civic center bonds the state will issue in fiscal 1992. Mr. Ledbetter said the amount of fiscal 1993 bonding for Build Illinois and civic centers has yet to be determined.
The law firms the governor selected are Chapman & Cutler, which will serve as bond counsel on $319 million of GOs, including the college saver bonds, to be issued in fiscal 1992; Sidley & Austin, which will handle $313 million of Build Illinois bonds; and Hopkins & Sutter, which will give legal advice on the civic center bond issues.
Expertise from bond issues done during the administration of former Gov. James Thompson seemed to be a major criterion in choosing some of the firms. For example, First Chicago invented the college saver concept and has served as senior manager on three of the last four issues.
John Gilchrist, the chairman of First Chicago Capital Markets, said the firm's position as the top senior manager for bonds issued in the state over the last three years also contributed to its selection.
Mr. Kanter said Chapman & Cutler was chosen because it has "historically" served as bond counsel on state GO issues. In fact, the firm has handles state GO issues since a new state constitution went into effect in 1971, allowing Illinois to issue GO debt without prior approval in a referendum.
He applied the same reasoning to the choice of Sidley & Austin on the Build Illinois bonds; the law firm has been bond counsel on those issues since they were first sold in 1985.
As for Hopkins & Sutter, Erhard Chorle, an executive assistant to Gov. Edgar, said the firm's expertise in the area of tax law led to its selection for the civic center bonds, in which, he said, "a lot of complex tax issues are involved," Mr. Ledbetter said the complexities involving the bonds, which are backed by a state horse-racing tax and secured by a general revenue fund pledge, involve meeting federal requirements that no funds from private vendors or managers at the facilities are being used by the state government to pay for the bonds.
There seemed to be little correlation between the firms chosen and the amount of money they contributed to last year's campaign of Gov. Edgar, the former secretary of state.
"[Gov. Edgar's] got a reputation for being squeaky clean, and the whole process was squeaky clean," said one investment banmker involved in the firm selection process.
Mr. Kanter said "no one looked at any contribution list before we began or completed the selection process.
"I could not tell you how much any firm gave [to Gov. Edgar's campaign]," Mr. Chorle added.
The three lead underwriters were not among the municipal bond industry's five largest contributors to Gov. Edgar's campaign. State campaign disclosure records showed the three firms' contributions were: Bear Stearns, $13,500; First Chicago, $13,250; and Dean Witter, $4,500.
The three underwriters that contributed the most to the campaign all submitted requests for qualifications but were not chosen by the Edgar administration. According to state records, the firms that contributed the most to the Edgar war chest were: First Boston Corp., $31,000; Goldman, Sachs PAC III, $30,000; and Smith Barney, $24,875.
Industry sources said the most noticeable absence from the list of finalists was Donaldson, Lufkin & Jenrette, which had been a strong backer of the Edgar campaign, contributing $22,500, according to state records. Officials from the firm's Chicago office could not be reached for comment.
On the other hand, the winners were happy.
"I think [the state] was very rigorous and very fair," said Alex Rorke, a managing director at Dean Witter, which was the senior manager on two Build Illinois zero coupon bond issues in 1988 and 1990. "The firm is happily looking forward to it."
State records show that the three chosen law firms did not contribute to the Edgar campaign at all, while seven other firms that unsuccessfully sought the state business contributed a combined $72,400.
The firms were asked to respond to 17 questions that covered basics, such as what capital and personnel commitments they could make to an Illinois bond issue, how they would use variable-rate securities or derivative products in a state bond deal, what their ties were to South Africa or firms that do business with the country, and hypothetical questions on how they would handle specific state bond issues.
Mr. Kanter said the list of 48 underwriters, which included a number of firms that due to their size were equipped only to be co-managers, was whittled down to 10 finalists. Those firms were interviewed in person by the selection panel -- composed of Mr. Kanter, Mr. Chorle, and state Budget Director Joan Walters -- and were asked specific questions on how the firms would deal with Standard & Poor's Corp.'s February placement of about $7 billion of state debt on CreditWatch with negative implications, Mr. Kanter said.
"Clearly were were interested in having an understanding of the impact of CreditWatch and how we could best market Illinois obligations to reduce the effect, if any, of CreditWatch, and how the market looks upon Illinois issues," he explained.
Mr. Kanter pointed out that the list of chosen firms was not written in stone for the next 18 to 24 months.
"If [a firm] walks in with an extraordinary new idea, they are not going to be barred from the process," he said.
He added that the governor also wants minority - and women-owned firms to participate in the bond issues as co-bond counsel and co-manager. He said the minority law firms may be selected by the end of this week, and he added that details were being worked out with the senior managers on the participation by minority firms as co-manager.
As for the selection process by dozens of state authorities with bonding power, Mr. Kanter said the governor through his use of the request for qualifications route was trying to "lead by example," but could not dictate how the authorities should choose their bond teams.
Ron Bean, executive director at the Illinois Development Finance Authority, which could issue an estimated $50 million to $75 million of industrial revenue bonds in fiscal 1992, said he plans to send out a request for qualifications for bond counsel next month.
Robert Hickman, the executive director of the Illinois State Toll Highway Authority, said the use of a request for qualifications was a "good idea" the authority probably would adopt. While about $3 billion of tollway projects have been proposed, Mr. Hickman said that the Illinois General Assembly would set the authority's bonding power for the next year during its current session.
