Selling Bonds the Chicago Way

View of sky scrappers from the Chicago River

There’s an interesting article about the advantages of selling bonds on the open market, rather than negotiating their sale in Bloomberg.com today.

It looks at Chicago’s practice of never seeking open bids, of always negotiating.

A couple of relevant paragraphs follow:

[A City of Chicago memo obtained under a Freedom of Information request] showed how $500 million of a Jan. 11 bond sale yielded more than half a percentage point more than a comparable Pennsylvania issue sold competitively. On a taxable portion of the issue, Chicago paid 152 basis points more than a benchmark Treasury rate while Pennsylvania paid 80 basis points over Treasuries, according to the memo. A basis point is a hundredth of a percentage point. …

The Chicago-based Government Finance Officers Association recommends competitive sales for bonds rated A or better, including those backed by secure revenue sources with structures that don’t require extensive explanation to buyers. Negotiated sales are best suited for those rated below A or with unusual features, according to the association….

Chicago avoids bidding out its bond deals because investment bankers in the city donate to charities and political campaigns, said a former city official with knowledge of the process. Many local politicians fear damaging that relationship by asking banks to compete for Chicago’s bond business, the former official said…

Cities and states that negotiate don’t borrow at the lowest cost for taxpayers in the $2.8 trillion U.S. municipal bond market, said Craig Brown, an assistant professor of finance at City University of New York who has surveyed research in his study of borrowing costs.

There’s also a comparison of financing at O’Hare with that of the Florida Department of Transportation that’s interesting.


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