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Public officials should be wary of low fee quotes in requests for proposals from municipal market professionals, according to the California Debt Advisory Commission.

"Issuers should be careful about putting too much weight on the fees or cost proposal because the lowest bidder is not necessarily the best-qualified service provider," the commission said in a newly published issue brief.

The brief is intended to help debt issuers in California improve their requests for proposals, said Steve Juarez, executive director of the Debt Advisory Commission.

Titled "Preparing Requests for Proposals," the brief is the third in a series of primers that the commission has prepared since 1992. The first brief focused on underwriting spreads, and the second looked at the differences between competitive and negotiated debt issuance.

Requests for proposals area formal method for issuers to solicit information from firms concerning their qualifications, experience, proposed compensation ' arrangements, and suggested approaches to a financing.

Issuers need to issue requests for proposals for a variety of debt-financing services, including financial advisory, underwriter, bond counsel, and trustee/fiscal agent services.

The process provides "a fair and objective means of selecting the best qualified municipal finance professional," the brief says. "In turn, this allows the agency to avoid any appearance of favoritism in the selection of service providers."

The selection process allows an issuer the opportunity to select from a wide pool of respondents, and it forces the candidates to compete with each other, "presumably resulting in a better price and/or higher level of service for the issuer," the brief says.

In analyzing completed requests returned by municipal market participants, the brief says, issuers will be tempted to focus exclusively on fees. But issuers should remember that they are buying services, not a standard product, the brief says.

"Because the level and quality of services can vary significantly, the qualitative information found in other parts of the RFP are invaluable in determining the respondent's ability to help the issuer achieve its goals for the financing," the brief says.

"A low fee quotation, for example, might indicate relative inexperience on the part of the respondent," the brief says. "At times, the quoted fee can even be misleading." In the case of underwriters, a low spread quote might not take into account the issuer's interest rates and carrying costs of the debt.

A key to evaluating fee proposals is to make sure that fees are quoted on the same basis, the brief says. For financial advisers and bond counsel firms, the standard fee might be based on the amount per $1,000 bond. The firms could quote a fixed fee plus costs, an hourly rate plus costs, or a retainer fee. The trustee or paying agent generally requests an up-front fee, an ongoing administrative fee, and expenses such as legal counsel costs.

For underwriters, the established fee structure is the underwriting spread, the brief says. "The issuer, however, should make sure that underwriter respondents provide a breakdown of the four components of the underwriting spread: management fee, underwriting fee, expenses, and takedown," the brief says.

The brief says that in negotiated sales, underwriters might not be able to provide an exact quote for all four components of the spread. The takedown, for example, has to be finalized on the day of the sale because it is closely linked to interest rates.

"However, the management fee, some of the expenses, and even the underwriting fee can be priced in advance of the sale," the brief says. "At a minimum, the issuer can use the RFP to set cost parameters [or these three components of the underwriting spread."

The brief says issuers should not view the need to solicit requests for proposals as a sign that internal staff is lacking skills.

"While many public agencies maintain staff who are well-versed in finance matters, even a relatively simple bond issue can pose technical challenges," the brief says. Those challenges "may be better left to outside experts." They include sizing the issue, assessing debt-service payment options, creating legal covenants, and complying with disclosure responsibilities.

"The role of the government finance officer is not necessarily to master the intricacies and technical details of a bond issue, but rather to understand and to become proficient at selecting the best qualified professionals to do the job," the brief says.

The requests for proposals process is time-consuming, and once the information is available, it "may be imperfect, incomplete, or misleading," the brief says. "Respondents naturally are inclined to highlight their strengths and gloss over their weaknesses."

But public agencies can mitigate deficiencies created by qualitative feedback. They can solicit objective information that minimizes the need for interpretation, and allows for meaningful comparisons. Then, issuers can conduct an in-depth review of prospective candidates and their proposals.

"An effective RFP process does not materialize by itself," the brief says. "Rather, issuers must be willing to invest time and effort to develop both a good RFP and a smooth solicitation process."

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