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Missouri State Auditor's Office - 2004-
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Office of the State Auditor of Missouri
Claire McCaskill


Report No. 2005-101

December 2005


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.









Prior recommendations not implemented


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)





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)




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)






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)





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)







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)







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)









Complete Audit Report

Missouri State Auditor's Office