Glendale could join the growing list of government agencies that conduct direct negotiations with bond issuers if voters approve Measure C on the April ballot.
Supporters of the change say allowing for negotiated bonds — rather than only permitting the current process in which the city engages multiple investors in competitive bidding for the best deal — can save Glendale money and make the funding mechanism more efficient.
But open government advocates and the U.S. Securities and Exchange Commission warn that ditching competitive bidding can lead to quid pro quo politics.
Imagine an EBay-like auction, but rather than selling collectibles or sporting goods, Glendale is selling bonds. It's a process mandated by the city's charter, b
ut Glendale officials now want to be able to select one underwriter with whom they can negotiate directly on price and terms.
While supporters say the negotiated process can offer more flexibility, in a report issued last year the SEC warned that the model creates “opportunities for municipalities to allocate underwriting business on the basis of political contributions, rather than on the price and quality of underwriting services.”
The implication is that big banks and other investors could make political contributions to a bond measure or public officials and then turn around and become the bond underwriter. Underwriters buy a bond and then sell shares to multiple investors.
For open government advocates, it's about maintaining a transparent process, said Fadel Lawandy, director of the C. Larry Hoag Center for Real Estate and Finance at Chapman University.
“With the auction process, or the competitive process, it affords an openness for the taxpayer because the process is not negotiated behind closed doors,” he said.
But Glendale Finance Director Bob Elliot said that's not the motivation behind Measure C.
“I don't want to do anything behind closed doors,” Elliot said, adding that the city would likely host a competition before selecting an underwriter for a negotiated sale.
Negotiated bonds would be an option for the city in case Glendale wanted to do a complicated or unique transaction, Elliot said.
For example, if the city was looking to issue bonds to improve Grayson Power Plant, it would be able to work directly with an underwriter that has experience marketing power plant bonds to investors.
Usually, agencies negotiate bonds if they are conducting a larger than normal offering, have unusual terms, poor credit or there is volatility in the market. Otherwise, competitive bidding historically leads to the best deal through lower interest rates.
“In terms of selling municipal bonds, the best is the competitive bid,” Cal State L.A. University Economics Professor Akbar Torbat said.
Many public agencies issue negotiated bonds despite criticism from open government advocates. The Burbank-Glendale-Pasadena Airport Authority, Los Angeles County, Los Angeles County Metropolitan Transportation Authority and the city of Los Angeles have all issued negotiated bonds in the past.
“The majority of bond sales are done negotiated. Is that good or bad? It depends on the bond issue. If we had a real generic one, I'd say ‘Sure, let's go with competitive,'” Elliot said.