The trend away from competitive bidding for municipal bonds is an outrage. It has already spawned a political scandal in New Jersey that has enveloped Governor James J. Florio's top aide. The U.S. Attorney for New York's Southern District is investigating alleged sweetheart deals between the New Jersey Turnpike Authority and Merrill Lynch & Co., which landed the juicy post of lead underwriter for $1.6 billion in turnpike bonds. The problem isn't confined to New Jersey. In 1992, a stunning 81% of all the money raised by munis was sold in this secretive way, up from 59% in 1980. And anyone who suspects that there are plenty of other scandals hidden under state capitol rotundas around the country is probably right. Municipal bond deals have become one of the prime forms of political patronage at the state and local level.
There are sometimes reasons to negotiate bond sales. Bonds with complicated revenue streams, interest-rate swaps, and other exotica demand the negotiated format. Wall Street, which makes higher fees from negotiated deals, argues that they elicit more sales effort from underwriters. Underwriters say that pre-screening customers to see if they're interested in the bonds makes for a smoother sale.
Fine. But these circumstances are relatively rare and do not explain the explosion in negotiated bidding for municipal bonds. New York State, for example, has required competitive bids since 1905, excepting only the most complex issues. In all that time, there have been just two exceptions.
After the New Jersey scandal broke, Florio switched to competitive bidding. These states should serve as a model for others. When negotiated deals are unavoidable, there should be full disclosure of how the winner was picked and a review by a state ethics board. That way, the suspicion surrounding backroom bargaining will be history.