Growing ethical concerns about campaign contributions have prompted states around the country to tighten their debt issuance practices. One of the most common responses has been to require competitive bids, so that the implied connection between contributions and bond business is severed. In 1991, Florida made changes on when negotiated sales can be used, and New Jersey followed suit earlier this year. Most recently, Massachusetts announced plans to ban most negotiated debt by its state and authorities.
As a state that has traditionally issued nearly all of its debt competitively, Minnesota has received numerous inquiries about how to develop appropriate guidelines and procedures. Many calls have concerned our practices for handling refundings -- bonds that conventional wisdom has always dictated must be negotiated because of those proverbial "windows of opportunity."
There are two main flexibility considerations that must be addressed with competitively bid refundings: timing and final sizing. Minnesota introduces timing flexibility by providing for a sale cancellation notice within 24 hours of the scheduled bid opening. Cancelled sales can be rescheduled to take place as soon as the following day.
Although negotiated sale proponents argue that a state must be able to move at a minute's notice, when is the last time that anyone actually guessed right about the exact low point in the market? The practical reality is that most sale decisions are effectively made within a window of a few days -- more like a "garage door of opportunity." The Minnesota competitive bid process has effectively accommodated this realistic timing flexibility.
Sizing considerations are handled by allowing a four-hour renegotiation period following the bid opening. If the state determines that certain maturities must be increased or decreased (based upon actual interest rates) to properly size the escrow account, the underwriter is notified. The state discusses with the underwriter which maturities will be changed and only makes the changes with the consent of the underwriter. This is important since the underwriter may lose "production" if certain maturities are changed.
Although there are very legitimate reasons for negotiating bond issues, the state of Minnesota has found that many more financings can be competitively bid than conventional wisdom might suggest. Our suspicion is that other states will increasingly discover this new wisdom.
John Gunyou is Minnesota's finance commissioner. Peter Sausen is the state's assistant commissioner for debt management.