Why is there no competition for bonds?

By WYATT EMMERICH,

Billions of dollars in local and state bonds are being issued without competitive bidding. Many of the leading state experts in Mississippi bidding laws are wondering why. It used to not be this way.

There’s no telling how much taxpayer money is being left on the table. It’s probably in the millions of dollars.

Instead of sealed bids, the bonds are “negotiated.” Officials argue negotiated deals provide more flexibility and allow better market timing.

There may be some merit to the flexibility argument but nobody can time the bond market, much less the government.

The problem is that flexibility can often turn into to cronyism. Political connections can become a big factor in determining which law firms and consultants get the deal.

Leland Speed has been bugging me for years to write this column. He believes the failure of our state to require competitive bidding on bond deals is a statewide scandal.

Speed founded two highly successful publicly traded companies based in Jackson, Eastover Group and Parkway Properties. He is also a former head of the Mississippi Development Authority (MDA).

Leland Speed should know. Fifty years ago he was in the local government bond business. He remembers the competitive bidding process. Everybody would huddle around when the bids were opened. The deals would be bid down to the third and fourth decimal point. The competition was intense. Taxpayers benefitted.

Somewhere along the line this changed. Speed thinks the changes were spearheaded by a former legislative leader who then resigned to work for a law firm doing negotiated government bond deals.

A new state law requires cities and counties to use reverse auctions for purchases of all “commodities.” Money is the ultimate commodity. How then can bond deals be considered exempt from this new law?

An expert in the attorney general’s office is unsure. He told me bonds are not commonly considered commodities but admitted there was no hard and fast legal definition for the word. It’s one of those gray areas.

I called up state Sen. John Polk and state Rep. Jerry Turner. They are the chairmen of the Accountability, Efficiency and Transparency committees of their respective chambers. Together they helped pass the new reverse auction law for commodities.

I asked them why bond deals are exempt from the new reverse auction law. Both responded the same. “That’s a really good question.” They are planning to request a review of the situation through the legislature’s Performance Evaluation and Expenditure Review (PEER) Committee.

State representative David Baria, head of the House Democrats, introduced legislation this year to require competitive bidding on bond deals. The bill died in committee.

Baria was unable to explain how our state went from competitive bidding to negotiated deals. But he did say something like this: “Law firms and consultants are making millions and the taxpayers are getting screwed.”

I talked to Rita Wray, the head of the new state Procurement Review Board. She didn’t know much about the situation and referred me to the state bond commission which oversees bonds from state agencies. I asked her why bonds are not considered a commodity under the new reverse auctions law, which her board oversees. “Talk to the bond committee,” was her answer to that and all my other questions.

I also emailed and called various friends and contacts in the state and local government bond business. Nobody wanted to talk. This is obviously a sensitive topic.

The Bond Advisory Division is part of the Mississippi Department of Finance and Administration. This bond division has a staff. The governor, attorney general and state treasurer direct the staff.

I attempted to talk to the staff and got directed to Chuck McIntosh, the director of communications. In the old days, a journalist could easily talk to the staff without being routed through a PR person. There was a spirit of openness and transparency with the media. Those days are gone.

The communication was done mainly through email. I emailed a set of questions and got an official response. McIntosh referred me to the title 19 and 20 of the state law which governs city and county bonds. There is no mention of competitive bidding.

“The issuance of city and county bonds does not fall under the jurisdiction of the State Bond Commission,” the email stated.

McIntosh referred me to the AG’s office. The PR person there gave me a number to call, but only if the conversation was “on background,” whatever that means.

The AG expert was pretty forthcoming and we had a good conversation. He said the bond commission used to employ competitive bidding but that changed about 10 years ago at the prompting of Haley Barbour and Tate Reeves.

As for cities and counties, the “professional services” exemption is a loophole being used to avoid state bidding laws. Instead of having various bond underwriters bid on the business, the city or county will hire a bond attorney to handle the entire process.

The bond attorney can then negotiate with the underwriter. Under this system, the underwriting markup and expenses are overseen by the bond attorney, who may have incentives that are not necessarily in line with the taxpayers.

The bond commission email stated:

“The legislation that authorizes the issuance of state bonds gives the State Bond Commission the authority to use a competitive or a negotiated sale.  Both methods have inherent traits that should be considered when deciding upon the method of sale for the bonds.

“With a competitive issuance, underwriters bid against each either to buy the issuer’s bonds. The underwriter, which offers to buy the bonds at the lowest True Interest Cost (TIC) is selected.  

“With a negotiated issuance, an issuer solicits quotes for underwriting proposals through a request for proposals or a solicitation for offers. This effectively produces competition among underwriters for a negotiated issue. Once the underwriter(s) is selected, the issuer and underwriter negotiate the fee (i.e. gross spread) to be paid.”

I then asked for a breakdown of bonds issued competitively versus negotiated. Since 2016, eight bonds totalling $1.5 billion were negotiated. Two bonds totalling $100 million were competitively bid.

Steve Holley is a name that kept coming up as a bond kingpin. His company is Government Consultants and is located in Jackson. I talked with his assistant but he never called.

In 2005, Holley signed a consent decree with the Mississippi Secretary of State’s office and paid a $10,000 fine.

His offense? Failing to report thousands of dollars in political contributions.