Finance – Conduct Competitive Bidding when Issuing Bonds

Savings: $500,000

Excluding the bonds related to the City’s two airports, the City issued $3 billion in bonds in 2009 and 2010.[1]  The City issues bonds through negotiated sales, a process whereby the City “hires a pool of banks to find buyers for its bonds, with interest rates set in discussions with those underwriters.”[2]

Under this option, the City would conduct its bond sales through a competitive bidding process, where underwriters would instead submit sealed bids with the lowest cost bid winning.  A competitive bidding process could save the City money by reducing the underwriting fees it currently pays to banks in order to issue bonds.  “In 2003, the average underwriting charge per $1,000 face value of bonds was $5.58 for competitive issues and $5.91 for negotiated sales, according to Thomson Financial”.[3]  This is a difference of $0.33 per $1,000 of bonds issued.  If the City were to obtain this savings through competitive bidding and continue to issue $1.5 billion worth of bonds annually, it would save approximately $500,000 a year.

Proponents might argue that the bonds the City issues are best suited to competitive bids in that they are typically investment grade and are either general obligation bonds or revenue bonds with strong and predictable revenue streams.[4]  Additionally, the lack of transparency inherent in negotiated bond sales creates potential for conflicts of interest to arise. Opponents might argue that other studies focused on comparing only similar types of bond issuances have found no difference in the cost of negotiated deals versus competitive bids.[5]  Additionally, given the uniqueness of Chicago and the size of its operations, its bond issues are more complex; thus, negotiated bond sales result in a better deal for the City.

 

 

Budget Details

Dept: Finance General Bureau: NA
Fund: Various Approp Code: Multiple Appropriations in Specific Purposes – Financial Category
The appropriations are located throughout the 2011 Annual Appropriation Ordinance.

http://www.cityofchicago.org/content/dam/city/depts/obm/supp_info/2011BudgetOrdinance.pdf

 


[1] Sources: City of Chicago. 2009 and 2010 Comprehensive Annual Financial Report. pgs. 36 and 37 in each. Issuance of Debt figures.

City of Chicago. 2010 Comprehensive Annual Financial Report for Water Fund. pg. 14. Proceeds from issuance of bonds figures.

City of Chicago. 2010 Comprehensive Annual Financial Report for Sewer Fund. pg. 13. Proceeds from issuance of bonds figures.

Reports available at: http://www.cityofchicago.org/city/en/depts/fin/supp_info/comprehensive_annualfinancialstatements.html

[2] Preston, Darrell and McCormick, John. “Chicago Pays for Selling Bonds Without Bids.” Business Week May, 13, 2010.

http://www.businessweek.com/magazine/content/10_21/b4179046013314.htm

[3] Preston, Darrell. “States, Cities Shun Finance Competition, Victimizing Taxpayers.”  Bloomberg January 3, 2005.

[4] TLH Hocking & Associates LLC. “Financing Tools and Trends.” Presented to the Government Finance Officers Association of Arizona. August 6, 2010.

www.gfoaz.org/docs/presos/10st/10st_financing.ppt

[5] Fruits, Eric; Booth, James; Pozdena, Randall; Smith, Richard. “Evaluation of the Comparative Cost of Negotiated and Competitive Methods of Municipal Bond Issuance.” Municipal Finance Journal Winter 2008.