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YELLOW SHEET Office of the State Auditor of Missouri |
Report No. 2005-101
December 2005
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Taxpayers could avoid unnecessary interest costs if school districts and political subdivisions issued general obligation bonds on a competitive basis and used independent financial advisors This audit is a follow-up of our 2001 report titled Audit of General Obligations Bond Sales Practices (Report no. 2001-04). We determined whether recommendations made to the State Board of Education and other state entities had been implemented. In addition, we determined the (1) extent to which the negotiated method of sale has been used compared to the competitive method, (2) financial impact of the use of negotiated sales, and (3) reasons why competitive sales have not been used more often by Missouri public entities. |
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Prior recommendations not implemented
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In January 2001, the State Auditor's Office made several recommendations to reduce unnecessary interest costs associated with negotiated bond sales. However, none of our recommendations have been implemented. (See page 4) |
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Issuers continue to favor negotiated sales of bonds |
Political subdivisions have continued to favor the use of negotiated sales from 1993 through mid-2005. During that timeframe, 87 percent of Missouri issues represented negotiated sales compared to a national average of 46 percent. (See page 4) |
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School districts and other public entities could reduce interest costs |
School districts and other public
entities issued approximately $4.1 billion in general obligation bonds
from September 2000 through May 2005. School districts issued
approximately $3.5 billion, or 84 percent, of that amount. Analysis of
$1.2 billion in bonds issued in a 12-month period disclosed cost savings
could have been achieved if bond issues had been sold competitively.
For example, estimated savings on
competitive sales ranged from $21,000 to $125,000 on bonds analyzed.
(See pages 4 and 9)
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Competitive sales of general obligation bonds not required by state law |
Missouri law does not require public
school districts and municipalities to conduct competitive general
obligation bond sales. However, six of eight surrounding states have
laws which restrict the method of sale for general obligation bonds sold
at the local level. A legislative revision to state law is needed to
address the trend of issuing negotiated general obligation bonds in the
state. (See page 10)
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Some issuers not always well informed |
Some issuers used questionable reasons
in choosing negotiated sales. In addition, officials contacted believed
they achieved low interest rates on negotiated sales because
underwriters offered rates below the national bond index. However, due
to Missouri's high credit rating, the majority of general obligation
bonds issued in the state achieve rates below the national index. The
analysis provided by technical advisors concluded competitively sold
general obligation issues achieved lower rates than issues sold through
negotiation. We also found public school officials have not always been
aware of existing guidance, or the availability independent financial
advisors. (See page 11)
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Issuers have not obtained independent financial advice |
Interviews with ten public school and
two other public entity officials disclosed they had not obtained
independent financial advice for bonds issued during our 12-month test
period. Officials told us they use underwriters because of the service
received and existing business relationships with underwriters. However,
having an underwriter serve as a financial advisor, as well as
underwrite a bond issue, may create a conflict of interest for
underwriters according to the
Government Financial Officers Association. Seven of ten school
administrators contacted knew the potential conflict of interest
existed, but "trusted" underwriters had provided them with a "good
deal." (See page 13)
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Issuers lacked adequate information without independent financial advisors |
Without independent financial advisors,
issuers have not always been well informed about bond issue options. We
found several instances in which underwriters had not provided adequate
information to issuing officials regarding the cost-effectiveness of
bond features such as bond insurance, or of splitting a single bond
issue into multiple issues.
However, this type of information is normally provided by
independent financial advisors. In
addition, we found the majority of officials contacted simply accepted
underwriter proposals presented to them with no negotiation because they
had not been adequately prepared to evaluate the proposal and did not
use an independent financial advisor. (See page 15)
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