Audit: Missouri schools could save on bond costs

JEFFERSON CITY, Mo. -- Missouri schools and local governments could have saved $43 million over four years if they had injected competition into bond issuances instead of handpicking firms to manage them, according to an audit released Tuesday.

The report by State Auditor Tom Schweich reaffirms recommendations made by auditors more than a decade ago that Missouri should change its laws to require public entities to use a competitive process to select bond underwriters in most issuances.

"If we had more competition, there would be lower costs, which is not an earthshattering proposition, but it is something that seems to be lost on the people who make the laws and policies in Missouri," Schweich said.

The audit said Missouri school districts, cities, counties, fire districts and other local entities had 807 general obligation bond issuances worth about $4.4 billion from 2008 to 2011. The report analyzed 538 of those bonds worth $3.1 billion and found that just 50 were sold through competitive bids.

The majority used negotiated sales, in which an underwriter was selected in advance of the bond sale and often also served as a financial adviser. Schweich said having one firm fulfill both roles creates a conflict of interest, because an adviser should be seeking the lowest interest rates possible for the public entity while an underwriter's incentive is to have higher interest rates in order to market the bonds to investors.

The audit found that bonds sold through a negotiated process had interest rates that were almost one-quarter of a percentage point higher than bonds sold through a competitive process. That amounted to an average of an additional $88,148 in interest paid by the public entities, or about $43 million cumulatively, the audit said.

Four-fifths of those general obligations bonds were issued by public school districts.

Had they taken competitive bids to select their underwriters, the savings "could've meant more teachers, it could've meant more textbooks, more computers available for educating kids," Schweich said.

Some school officials questioned those assertions.

"There's some debate about whether or not it really saves that much money for the school districts," said Roger Kurtz, executive director of the Missouri Association of School Administrators. He added: "There are a lot of school districts that contend that the way that they're doing it right now -- the negotiated sale [instead of] competitive sale -- actually saves money."

Kurtz did not explain how negotiated sales save costs, but the audit notes that some local government officials have cited the additional cost of hiring an independent financial adviser as one reason why select underwriters who do both functions to handle negotiated bond sales.

In January 2001, then-Missouri Auditor Claire McCaskill issued a report concluding public entities could have saved $83 million in interest over four years if general obligation bonds had been bid competitively instead of issued through negotiated sales.

At the time, about 87 percent of Missouri's general obligation bonds were issued through negotiated sales -- well above the national average of 49 percent. Circumstances have changed little since then. Schweich's report found that 88 percent of Missouri's bonds used negotiated sales compared with 53 percent nationally.

The audit recommends Missouri change its law to require competitive sales for general obligation bonds with good credit ratings. It also suggests that state law should require local governments to use financial advisers who are independent from the bond underwriters.

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