Legislature OKs measure to expand use of ‘no-bid’ muni bond sales

California lawmakers passed a bill sought by investment banks that would expand no-bid bond sales, which supporters say are needed after the Wall Street credit crisis made competitive auctions more difficult. The bill allows California’s 58 counties and 480 cities to sell general obligation debt through negotiated offerings, in which the municipality decides in advance which banks will market it. In competitive offerings, banks submit their lowest interest-cost bid on an advertised day. Current law allows negotiated sales by cities and counties for lease-backed and revenue bonds and by school districts. The increasing use of no-bid deals in public finance has ignited debate over whether it saddles taxpayers with higher costs, since banks may set higher interest rates on bonds when they know they have the deal in advance. Banks have an incentive to raise the interest rates on such securities, because it makes them easier to sell, limiting the risk that underwriters will be left holding unsold bonds.