Report 94016 Summary - March 1995

A Review of the State's Bond Sales for 1993 and 1994

Chapter 1434, Statutes of 1990 (statute), added Section 5703 to the California Government Code, which specifies that the state treasurer is the sole authority for selecting the underwriters to negotiate state bond sales, except for California Housing Finance Agency (CHFA) bond sales. Section 5703 of the Government Code also requires the state treasurer to use a competitive process to select underwriters for negotiated bond offerings and requires the state treasurer, the financing authorities, and the CHFA to maintain records of the costs of issuance of negotiated bond sales. In addition, this section requires the state treasurer to maintain certain records related to bond issues that are sold by competitive bid. The statute also calls for us to perform two audits. The first audit was issued in January 1994, and this audit completes the mandated reports.

We reviewed the cost records of negotiated bond sales that the State Treasurer's Office (STO), CHFA, and state financing authorities maintained, and we reviewed the records of competitive sales that the STO maintained. In addition, we determined whether the Government Code, Section 5703, was being fully implemented and compared costs with similar initial bond offerings in other states.

During our review, we noted the following conditions:

From January 1993 through December 1994, the STO selected the lead underwriter and comanaging underwriters (comanagers) from underwriter pools established pursuant to the Government Code, Section 5703, for 78 of the 81 negotiated bond issues we reviewed. For the remaining three sales, which were financings for revenue anticipation notes, the STO selected the comanagers based on various factors, including past performance.

During 1993 and 1994, all six of the entities we reviewed collected the cost information that the Government Code, Section 5703, requires to be maintained for negotiated bond sales.

During 1993 and 1994, only the STO sold bonds by competitive bid. We reviewed 15 of 26 bond issues sold by competitive bid during 1993 and 1994 and found that in all 15 bond sales, the STO maintained records of all bids and bid verifications as required by the Government Code, Section 5703(f). In addition, the STO awarded the bonds in each sale we reviewed to the underwriter who submitted the bid with the lowest true interest cost or net interest cost.

We compared the true interest costs of nine bond issues sold by other governmental entities with the true interest costs of nine California bond issues. We found no indication from the information obtained in this limited review that California is paying more than necessary for interest costs on state bonds.

  • During 1993 and 1994, the state treasurer generally selected comanagers for negotiated bond sales from competitively established underwriter pools. However, the STO does not interpret the Government Code, Section 5703, to require competitive selection of comanagers for negotiated sales. Consequently, the policy of using competitively selected comanagers could change, and the State could award millions of dollars of underwriter's discount annually without the benefit of competition. For the two years we reviewed, the total underwriter's discount earned by all comanagers the state treasurer selected was $14.3 million. Thus, we believe that more needs to be done to ensure that a competitive process is used to select all underwriters.