Competition, negotiation and the public trust.

• Author: Esser, Jeffrey L.
• Position: Editorial

The refunding frenzy fed by the low interest rates of 1992 and 1993 has subsided and, as a consequence, the number of municipal bond issues is declining. For government finance officials, this means that competition for bond underwriting will increase, leading to new rounds of pressures on issuers from firms vying to sell their bonds. These pressures can become intense when bonds are issued through a negotiated sale rather than a competitive sale. Thus, the debate will surely heat up over which method should be used, and under what circumstances, to select bankers to underwrite and distribute municipal bonds.

This debate mirrors a similar, though less impassioned, controversy over the larger issue of government procurement methods in general. While there are those who will argue that the sale of bonds is not a purchase and thus should not be covered by the specifics of procurement regulations, no one can dispute that during the sale of bonds a plethora of services--which the issuer must pay for--will be acquired. These run the gamut from financial advisor to underwriter, bond counsel, printers, trustee bank, paying agent and registrar.

These services may be needed in a hurry when market conditions seem favorable, and the need for speed can lead to exemption from normal procurement procedures. In order to achieve the best value for the public dollar, established procurement requirements seek to ensure arms-length transactions and as much competition as possible. They also are important protections for ensuring that the public trust is maintained by avoiding an actual or even apparent conflict of interest.

Most states have in their laws a general preference for competitive, i.e., low bid, procurement unless the contracting authority can demonstrate by persuasive argument that other methods will prove more advantageous to the government. The fundamental premise is that maximum price competition minimizes government costs. The same standard should be applicable to the sale of municipal bonds: the competitive method should be preferred unless the officials making the selection in each situation can satisfactorily demonstrate that negotiation is more likely to provide favorable results. When negotiation is selected, finance officials should follow established RFP procedures.

During the sale of bonds, the financial stakes and public scrutiny are high. An increase of a few basis points in interest over 30 years on a large issue can amount to more...