Maine Quashes Wall Street Negotiated Deals Citing No Free Lunch
“I don’t eat at Wendy’s,” Robert Lenna, the Maine Municipal Bond Bank’s executive director, said when asked why he and three other officials had dinners costing almost $4,000 with Wall Street bankers selling the state’s debt.
Lenna’s declaration, made at an April 8 public meeting, has laid bare a fight over whether Maine, where 12.6 percent of residents live below the poverty line, should try to save taxpayers’ money by holding open bond auctions in place of the privately negotiated debt sales it has relied on for decades.
Maine Treasurer Bruce Poliquin, who was endorsed for the post last year by Tea Party-backed Governor Paul LePage, leaves no doubt that the way the state borrows money for public works must change.
“I do not buy the argument that there is a free lunch,” Poliquin, who criticized Lenna at the April bond bank meeting, said in a telephone interview. “All of these expenses that are included in the price of the deal are paid for by the small towns in Maine through sewer fees or the water fees or local taxes whenever we borrow money for them.”
Just as Tea Party-backed officials upset Washington politics, their movement for fiscal restraint has sparked battles in statehouses across the country. In Maine, where Republicans took control of the governor’s office and Legislature in 2010 for the first time in more than 40 years, the new treasurer is also reviving a decades-old debate in the $2.9 trillion municipal market over the way bonds are sold.
80 Percent Private
Until the 1970s, almost all states and municipalities sold bonds competitively, inviting sealed bids from bankers. Today, more than 80 percent of U.S. municipal-debt is issued through negotiated deals with one or more banks, according to data compiled by Bloomberg. These private arrangements have led to deals such as Jefferson County, Alabama’s failed sewer-debt refinancing that cost taxpayers and investors billions of dollars and may prompt the county to declare bankruptcy this week.
In competitive sales, or auctions, banks offer issuers the lowest interest rate they can to win the business. In negotiated deals, a chosen banker agrees on fees and rates before the sale. The underwriter buys the debt and markets it to investors.
Banks promote negotiated sales as letting them offer the lowest cost by tailoring the debt to specific types of investors. Yet academic studies of the municipal market show such sales often raise costs by as much as $4.80 on every $1,000 borrowed, according to Mark D. Robbins and Bill Simonsen of the University of Connecticut in West Hartford.
“The only way the public can be assured of the lowest bid for a well-structured deal is a competitive bid,” said Robert Fuller, a former Standard & Poor’s managing director in public finance who runs Capital Markets Management LLC, a municipal adviser in Hopewell, New Jersey.
“What can look like a good deal to you can be a much better deal for the other side,” he said.
The dispute over Maine’s habit of raising money in private broke into the open after Lenna, 66, led three state officials to New York in October to close an $80.2 million Bond Bank deal to finance local projects, including schools.
The group on Oct. 26 had dinner with bankers from Wells Fargo & Co. (WFC), which was hired to underwrite the securities, at Il Tinello, at a cost of $1,185, according to state records. The midtown Manhattan restaurant’s homemade pasta dishes include a $22 plate named for former television talk-show host Regis Philbin, a regular patron, and another for billionaire investor Carl Icahn.
Meetings followed at Cello Wine Bar, where the tab came to $66, and for a closing dinner at Smith & Wollensky, at $2,589, with a group that included lawyers and bankers from other firms involved, Lenna said. The steakhouse in midtown Manhattan charges as much as $49 for a filet mignon dish. A later gathering at Redemption Bar & Grill cost $113, the records show.
The four meals cost almost $4,000, an expense that was covered by the underwriters. The bond bank spent $5,872 for the three-day trip, including $4,630 for hotels.
“I think it’s excessive,” said Cherie Sargent, finance director in Poland, one of 29 communities that got money through the bond bank deal, borrowing $4.5 million for water and sewer projects. The town’s share accounted for $27,700 of the underwriter’s fee of $6.16 for each $1,000 in debt sold.
Looking for Savings
“Especially in the economy we’re in right now, everybody should be looking at ways to save money and that doesn’t seem to be the case with that trip,” said Sargent, whose town of about 5,000 residents north of Portland is known as a source of Poland Springs bottled water.
Whether they sold bonds competitively or through negotiated deals, municipal officials used to travel to Wall Street to complete transactions until overnight mail services, facsimile machines and eventually the Internet made such trips unnecessary. Closing dinners remain part of some negotiated deals because public officials often go to New York when underwriters price their bonds.
Dealers are prohibited from “paying for excessive or lavish travel, meal, lodging and entertainment expenses in connection with an offering,” such as trips to meet rating companies and bond closing dinners, according to a 2007 ruling from the industry-funded Municipal Securities Rulemaking Board, a regulatory organization based in Washington.
Poliquin, 57, began pressing for competitive sales as a way to cut costs after being elected treasurer by the Republican-controlled Legislature. A real estate developer who returned to Maine in 1996 after leaving Avatar Associates, the New York-based money manager co-founded by Martin Zweig, Poliquin oversees the state’s general-purpose bond sales and sits on the boards of four independent state authorities that have been run by Lenna since 1988.
In April, the bond bank held a special meeting on how it sells debt. Poliquin wanted the board to hire a financial adviser to help determine when to offer securities through competitive bid. At the meeting he detailed the costs from the negotiated sale in October, asking Lenna why he didn’t close the deal on a conference call from his office in Augusta, Maine’s capital, and get food at a nearby Wendy’s Co. (WEN) restaurant.
“It is very easy to suggest that somehow or other, because somebody goes out to dinner, or does a closing in New York, that there are savings to be made,” Lenna said July 11 by telephone. “It has no impact on the cost of our bonds. It doesn’t affect the interest rate. It doesn’t affect the cost of issuance. Closing dinners are paid for by the bankers, not the issuer.”
Lenna said he typically goes to New York to close bond deals when the financing is for a number of local borrowers such as in October. It is easier, he said, to assemble all of the legal documents required from the communities for the securities at the offices of the bond bank’s law firm in New York, Hawkins Delafield & Wood LLP. The closing dinners also offer an opportunity for “team building,” he said.
The bank’s board voted 3-2 against hiring a financial adviser. The opponents included the two members who went to New York for the October closing, Chairman Stephen R. Crockett and Cathryn M. Robinson. In a meeting last month, the board unanimously approved a step to hire an adviser, Lenna said.
Maine for decades sold almost all of its bonds through negotiated deals, according to Poliquin. Former treasurer Samuel Shapiro, a Democrat who held office from 1981 to 1996, worked almost exclusively with Paine Webber Group Inc. and the firm’s New York-based banker Andrew Gurley. UBS AG (UBSN) of Zurich bought Paine Webber in 2000 and remained in control of much of Maine’s bond sales until it closed the underwriting unit in 2008.
“Back then everything was different in terms of pricing,” said Shapiro, who after leaving the treasurer’s post became a consultant to a UBS asset management unit that invests public money. “As long as he had the turnpike and the bond bank and the housing authority and the state he was willing to cut his price and make very little profit on each because the total profit would have been the same if he had just one account,” he said regarding Gurley.
Gurley, who is now retired from UBS, declined to comment on the debt sales when reached by telephone.
While most states have laws requiring competitive bidding for government projects such as new construction, the rules for debt offerings are varied. Some such as New Jersey imposed requirements for the transactions following political scandals.
New Jersey Sales
Former Democratic Governor Jim Florio in 1993 ordered all state bonds to be sold through auctions after an aide became the subject of a federal investigation because he co-owned an underwriter working on a financing with the New Jersey State Turnpike Authority. Florio’s Republican successor, Christie Todd Whitman, altered the order, granting waivers to permit negotiated sales.
Lenna’s argument for negotiated deals failed to persuade Poliquin. Later in April, the treasurer asked the Maine Health and Higher Educational Facilities Authority’s board to hire an outside adviser. The proposal passed 9-0. That means the next nonprofit hospital or college bond sale by the authority, which is run by Lenna, may be done by auction.
Poliquin, who sought the Republican nomination for governor last year, losing to LePage, didn’t stop there. In May he got lawmakers to introduce a bill to require competitive bond sales by state agencies. The measure failed in committee.
Closing by Mail
In June, the treasurer sat in his Augusta offices watching the results of electronic bids from Wall Street for about $108 million of the state’s general-obligation bonds while talking with Public Financial Management Inc., his Philadelphia-based financial adviser, on a conference call. The sale was closed through the mail. There was no dinner to mark the event nor even takeout from Wendy’s.
Craig Hrinkevich, a Wells Fargo banker in New York who led the team marketing the bond bank’s securities, sent an e-mail to Poliquin on May 19 before the general-obligation debt auction, offering to buy all the securities at a cost of $4.29 per $1,000 of face value, “subject to negotiation and expenses,” according to a copy of the note.
Hrinkevich wouldn’t discuss Maine’s bond offerings. He said market statistics don’t make clear that competitive sales provide the lowest cost to issuers.
“If you look at the percentages, most are negotiated sales,” Hrinkevich said about U.S. municipal bond deals in a telephone interview. “That’s not the bank’s preference. That’s the client’s preference.”
Hrinkevich said his company is a leader in handling both types of offerings.
Maine will pay an annual average interest rate of 1.9 percent on the bonds it sold competitively, less than the 2.1 percent it would have paid in a negotiated offering, according to the treasurer’s office. By rejecting the offer from Wells Fargo, it saved $1.65 million in interest over 10 years, Poliquin said.
“This is Maine,” he said. “That is a lot of money.”
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