Q: AND A:
with Peter Verniero, chief counsel to Gov. Christine Todd Whitman of New Jersey
When she took office last January, New Jersey Gov. Christine Todd Whitmean turned to her chief counsel, Peter Verniero, to change a controversial bond-selling mandate imposed by her predecessor, Jim Florio.
Florio, trying to root out politics from the selection of underwriters, dramatically changed the way the state and its issuers sell debt when he imposed a preference for competitive bids over negotiated deals.
In 1992, New Jersey issued 79.2% of its bonds on a negotiated basis, according to Securities Data Co. In 1993, under the Florio plan, that figure dropped to 54.4%. And as of Dec. 9, 1994, New Jersey's negotiated deals this year represent less than half, or 43.4%, of all issuance by the state and its agencies.
State finance officials and bond underwriters, as well as officials at the Public Securities Association, said the Florio plan was too strict, forcing New Jersey to sell bonds on a competitive basis even when it would cost the state more to do so.
In order to give the state more detailed information about bond-selling practices, Whitman appointed Verniero in January to head a task force that would review and recommend possible changes in the Florio mandate.
In July, the panel produced a series of recommendations that specifies when the state can issue bonds using negotiated sales, and when it should use competitive selling techniques.
Broadly, Verniero and the panel recommended that New Jersey issuers should have the flexibility to turn to negotiated sales when they need to float large bond issues, or when the structure of the deal is too complicated to sell by competitive bid. Under these circumstances, analysts say, negotiated sales help issuers save money, so Whitman followed the panel's advice with her October executive order on bond issuance.
Formerly a private practice lawyer, Verniero was executive director of the New Jersey Republican State Committee before he joined Whitman's gubernatorial campaign as legal counsel.
Verniero recently talked to staff reporter Joyce Hanson about the advisory panel's actions and his thoughts about negotiated versus competitive bond issuance.
Q: To start off, why don't you just tell me about your participation in the advisory panel. It seems to me that Gov. Whitman deferred to the panel's recommendations in her executive order.
A: In New Jersey, an executive order of a previous administration remains effective into a new administration unless it is in some way changed or altered. One of the responsibilities I have is to review all of the executive orders of previous administrations to advise the governor as to whether they reflect the policies of her administration.
[Gov. Jim Florio issued] Executive Order 92 in May 1993. We felt that because the issues were considerable and complex that we ought to have a detailed review of them. And the governor believed that we ought to have public input and get as many points of view as possible prior to making a decision. So she issued an executive order, Executive Order 6, early on in her administration, in January, creating this advisory panel with me as its chair. The attorney general and the state treasurer were the other members.
The panel's mandate was to review the prior executive orders, to hold public hearings, and to make recommendations to the governor. We did that. We had several public hearings, and we invited many members of the various constituencies who would be affected by the executive orders.
Q: Does that mean underwriters, bond counsel, and financial advisers?
A: That's correct. We also published notices in the newspaper. We invited the general public to attend. We spent a considerable amount of time and effort bringing parties together to testify before the panel. And we were very pleased at the number of responses and at the testimony. It really indicated a cross section of points of view. The panel then issued its report to the governor in July.
Q: How does an executive order differ from a state law?
A: A state law binds the entire state, depending on what the law says. An executive order can only bind the executive branch -- can only bind the agencies and the departments of the executive branch. This order applies to the state, its agencies, and all authorities that are required to submit their minutes, resolutions, or actions for gubernatorial approval or veto.
Q: Was there pressure from Wall Street for negotiated bonding? And was there concern about political contributions?
A: We heard from all the interested constituencies, and one common comment that we heard was that there were flaws in the current system, that the current system needed to be revised to give more flexibility to the state and its issuers. And one example that the bond lawyers gave was that you should strive always for the best qualified firms and be mindful of the price, but that you should not sacrifice quality at the expense of any other criteria. Because in the long run, you would be harming the state and the state's interests by shortchanging or short-circuiting the process.
One of the comments we heard about the old system [under Florio Executive Order 92! was that it was inflexible, it did not allow the state to apply flexible criteria. One of the other aspects we heard about the old system was that standards were unclear.
Q: Florio's was a broad-brushed order, as far as I could see.
A: Yes, and my purpose here is not to criticize the prior administration, and we did not approach these hearings from that point of view. We were not necessarily looking to change anything. We had an open mind. We had no preordained conclusions going into this process.
Q: I did notice that, compared with the Florio order, the Whitman order was very specific in listing the specific circumstances under which a negotiated bond sale will be permitted. How did you devise this list?
A: Well, we relied in part on the testimony that we heard. We took to heart many of the things that were said to us and tried to incorporate the best ideas into the report, and then into the executive order. I think one of the best points that was made, and one of the smartest aspects of the executive order, is that it strives for uniformity. Issuers will know, vendors will know, the bond houses will know, lawyers will know, and the public will know what the standards are.
Q: My impression is that the Florio order was made under duress, and that he essentially said "no more negotiated bonds."
A: We did not spend a whole lot of time dissecting the intent or motive behind Gov. Florio's executive order. Rather, we said, "Let's look ahead, let's see after we hear from the various constituencies what the best system would be for New Jersey." The negotiated sale is a good example. We felt that if it were in the best interests of the state, and provided specific criteria were established and followed, then agencies ought to on a case-by-case basis be permitted to conduct a negotiated sale.
Q: There's a lot of negative press these days about negotiated financings. What do you see as being the advantages and disadvantages of both competitive and negotiated bonds?
A: We laid it out in the report that in some cases, a competitive sale does not provide the state with either the lowest price or the best service for a number of reasons. We wanted to give the state and its agencies the flexibility to avail themselves of opportunities of a negotiated sale.
Q: I spoke with an investment banker who said that one of the things Gov. Whitman's order did was to give back the decision-making power to the state's authorities. Is that right?
A: You can interpret it as that, in some aspects. We did say that the issuers should make this decision, but only after adopting criteria that were consistent with the executive order. In other words, this was not a blank check to the agencies. Rather, it was saying to the agencies "Yes, you could have this discretion." You should have an open and competitive process, you should have standards that are known to the public, and you should be consistent. Assuming those criteria are satisfied, then yes, the agencies should make the decision.
Q: So philosophically, how is this system going to be more open?
A: Oh, it's going to be more open in a number of different respects. First, the criteria will be known and consistent and uniform. Secondly, there are several places in the executive order where it mandates that the information be publicly available, reports and the criteria used and the number of firms solicited and so forth. Third, there's a requirement in the order that the allocation of the bonds and the fees received by each member of the underwriting syndicate must be publicly available within 30 days of the closing of the bond issue. Fourth, there's a requirement of an annual debt management plan where agencies now have to provide a plan of present and future indebtedness.
Q: At some point the Whitman Administration will come to an end. Can the governor who succeeds her just sweep away this order and replace it with another?
A: Strictly speaking, technically speaking, the answer to that question is yes. But practically speaking, the answer is it would be difficult for a succeeding governor to undo an executive order that was based on as much public comment and input as this one was. This is not an executive order which was written in the dead of night. This was not an executive order that was willy-nilly devised. Rather, it was an executive order based on substantial public input and an enormous amount of thought and evaluation. It's the kind of executive order that would be difficult for a future governor to, without cause or explanation, merely tear up.