YELLOW SHEET Office of the State Auditor of Missouri |
January 29, 2001
Report No. 2001-04
Missouri�s general
obligation bond market has been virtually closed to competition and the
privately sold bonds have cost taxpayers an estimated $83.2 million in excess
interest costs since 1997.
An audit of general obligation
bond sale practices disclosed that Missouri taxpayers could be better
served.� Our audit focused on general
obligation bonds rated AA and AAA, which are considered the most secure of all
municipal debt. Governments use general obligation bonds to finance services
and projects for the citizenry.� They
pay back the bonds with taxpayer�s property taxes and other general revenue.� Unlike revenue bonds (where payment comes
from user fees), general obligation bond debt is guaranteed by the government
entity that issues the bonds. Therefore, government entities that issue these
bonds should strive for the lowest cost, which are generally provided through
competitive sales.
Most bonds were not sold
competitively
An average of 87 percent of
Missouri�s general obligation bonds sold since 1993 were issued without the
benefit of competitive bidding.� Had
these bonds been sold competitively based on the interest rates competitive
issues received, the Missouri taxpayers would have saved $83.2 million in
excess interest costs.
Political subdivision
officials placed reliance on private firms to negotiate sales, which increased
costs to taxpayers
Local officials such as school
superintendents and city administrators have too often relied upon the advice
of familiar bond negotiators instead of seeking open bids assuring the most
competitive rate of return for taxpayers.�
Although Missouri�s general obligation bonds have historically attracted
a nationwide market because of the state�s high credit and management rating,
officials opted to forego competitive sales and allow private sale bond buyers
to negotiate the sales. The exclusion of potential buyers reduces the
competition for bonds and results in higher interest rates, and overall costs
to the issuing political subdivision.�
Bond issues of sufficient size and credit standing attract substantial
interest in the underwriting market nationwide, which makes them attractive to
competition.� Nevertheless, Missouri
private bond sales are more than double national averages even though it is one
of the strongest bond markets in the nation.
Missouri�s private bond
sales are going to only a few private bond buyers�
Of the 41 underwriters who bought
bonds since 1997, 23 bought only in private sales, 9 bought only in competitive
sales, and 9 bought in both private and competitive sales.� However, 3 of the 41 underwriters bought
about two-thirds of the total purchases. The average interest rates fluctuated
widely for the 515 bond issues sold since 1997 and included in our study, even
when the features of the bonds such as credit ratings, sale dates, and average
life were similar.
Appearance of conflict of
interest
In most private sales, the bond
underwriters who purchased the bond issues also served as the financial advisor
to the local officials such as school superintendents and city
administrators.� This presents, at a
minimum, an appearance of a conflict of interest.� The best interest of the local community and the bond underwriter
are in direct opposition making it difficult for both interests to be served by
the same person.
We make several
recommendations to help protect the financial interests of both Missouri�s
taxpayers and political subdivisions such as school districts and cities.� Overall, local officials should more
actively strive for a competitive process when issuing general obligation
bonds.� This includes competitively
selecting an underwriter, financial advisor, and bond counsel.� Reintroducing open and fair competition for
general obligation bonds will more than likely result in significant savings
through lower interest costs.