As bond underwriters, banks buy general obligation and facilities’ bonds from school districts looking to raise capital. They sell them on Wall Street to mutual funds, hedge funds, insurance companies and well-to-do individuals. These tax-free bonds are purchased by the investors with an eye on using them as tax shelters.
Insider Conflicts
Municipal finance experts say school officials often don't realize that underwriters have their own investor-clients looking to make a profit from these tax-free bonds.
It is the governing board’s fiduciary responsibility to see that the district pays the lowest interest rate available. They must remember these underwriters’ inner circle of investors also wants the highest return rate on their investment. That is where the underwriters’ conflict of interest enters.
Advice from Treasurers
In its handbook written for school district administrators, the California Assn. of County Treasurers and Tax Collectors advises district officials to avoid negotiating bond deals with underwriters. Studies have shown that negotiated bond deals cost school districts higher interest, and more in underwriting fees. They suggest that districts sell the bonds themselves in an auction, making the banks compete against one another in an open, written-bid process. This way school districts should have a better chance of gaining the best offer with the market’s lowest prevailing interest rate. Perhaps the offer could be sweetened by including other banking services.
Mr. Laase may be contacted at GMLaase@aol.com
