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By Michael McDonald - Aug 9, 2011 12:01 AM ET
By Michael McDonald - Aug 9, 2011 12:01 AM ET
“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.
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 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.
[..]
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.
[..]
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.
[..]
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.
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.
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 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.
[..]
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.
[..]
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.
[..]
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.
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