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Missouri State Auditor's Office - 2000-


Office of the State Auditor of Missouri
Claire McCaskill


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. 

Complete Audit Report
Missouri State Auditor's Office