City Council members urge debate on bond sales
Honolulu hasn't sold its bonds by competitive bidding since 1989, possibly at great cost
City officials are under pressure to change a 16-year practice of hiring Wall Street banks to arrange bond sales through private negotiations.
City council members will consider today an auditor's report that recommends Honolulu hire a financial adviser to consider selling bonds through competitive bidding, as the U.S. government does.
The report urges a change in rules that have resulted in the same banks being hired to manage offerings.
"It's like buying a car," Ann Kobayashi, the budget committee chairwoman, said from her office. "You don't buy one from the first dealer you visit. You usually shop around."
Hawaii and its local governments, more than in any other state, rely on Wall Street banks to set the terms and interest cost of their debt. While most sales in the $2 trillion municipal bond market are so-called negotiated offerings, academic studies show local governments can save money by selling bonds at auction. Banks in an auction must offer the lowest cost to taxpayers in return for the right to resell the debt to investors.
Four of Honolulu's nine city council members said the findings of the audit should be debated publicly.
Kobayashi placed the audit and its results on the agenda today for a budget committee hearing.
Honolulu hasn't sold its bonds by competitive bidding since 1989, according to Bloomberg data. When officials in Hawaii County sold bonds by auction last month -- becoming the only municipal borrower in the state to do so in almost a decade -- it paid lower fees and interest costs than previous sales.
The $50 million of bonds were sold at an average yield that was 0.03 percentage point less than AAA-rated municipal securities. Over 20 years, that amounts to $212,800 less in interest costs than a top-rated borrower would pay.
By comparison, the $55 million of bonds it sold in August 2004 through a sale arranged by A.G. Edwards & Sons were priced, on average, at yields that were 0.06 percentage point more than top-rated debt, for additional interest costs of $196,000.
UBS AG or Citigroup Inc. led sales of Honolulu's debt for the past three years, a practice that was criticized in the February report by city auditor Leslie I. Tanaka. In the city's most recent sale of $396 million of bonds last year, underwriters received fees of about $3.47 for every $1,000 worth, according to bond documents.
"It clearly raises some important issues about how we are selecting our underwriters," said Charles Djou, a member of the city council. "I think we should investigate whether we should change the methodology by which we float our bonds."
In a 36-page response to the audit, the director of Honolulu's Budget and Fiscal Services Department said it isn't clear that auctioning bonds saves money.
"The debate over whether the competitive bond sale is superior to the negotiated method has been going on for decades," the director, Mary Patricia Waterhouse, wrote. "Over time, the trend has been toward the negotiated bond sale method. As you can see, since 1990, negotiated sales have surpassed competitive sales by a large margin. Can all of these issuers be doing it wrong?"
One city councilwoman who sits on the budget committee, Barbara Marshall, said the auditor didn't present enough evidence that the city could save money.
"It was not conclusive to me," Marshall said. "I really have a lot of faith in the city treasury."
Negotiated sales can be useful for selling low-rated debt or bonds by an entity with which buyers are unfamiliar, because banks can address investors' questions and help sell bonds that otherwise might attract little interest.
Most governments engage in both types of sales, rather than relying on one exclusively, as Honolulu does.
Kobayash said she hasn't drawn any conclusions on the best sales method.
City Councilman Todd Apo also said he hasn't made a decision on whether the city is getting the best rates. He said the conclusions of the auditor's report should be debated in public.
"We need to, at a minimum, have that discussion and as a group make that determination," Apo said.