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Below is my most recent TREASURER'S BLOG. Please share it with your family, friends, and associates. My speaking schedule and FINANCIAL NEW$ UPDATES are posted on the Treasury website, where there is also a place to invite me to speak to your group. Thank you.
Excitement at State Treasury
For the first time in 20 years, state government sold Maine “general obligation” bonds on a purely transparent and competitive basis.
Yesterday, at 10:45 am EST, a desktop pc window closed at State Treasury to complete the sale of $108,135,000 of Maine municipal bonds. When the excitement ended, 14 investment banks from around the country had bid against each other to buy the securities. In five days Treasury will receive the proceeds from the sale to build highways and railways, and to fund research and development projects – all approved by Maine voters over the past few years.
When an individual buys a home, he or she typically borrows the money from a local bank, purchases the residence with the funds, and then pays back the bank over a number of years. It’s cheaper, however, for state government to borrow large sums by selling municipal bonds to investors. Through the State Treasury, taxpayers pay interest every six months to the bondholders during the life (maturity) of the bonds, after which the original borrowed amounts (principal) are repaid.
There are generally two methods to sell municipal bonds: “negotiated” and “competitive.” A negotiated sale is a one-on-one transaction worked out between the borrower and the Wall Street investment banker. The interest rate on the bonds and the commission charged to sell them are determined between the two parties. There’s lots of money involved – lots. The total “cost of issuance,” or cost to sell, the bonds often buries expenses in the complex transactions, like $3,400 celebratory dinners in New York.
A competitive bond sale is very different. It’s a transparent, no frills strategy designed to minimize costs. Last week Treasury electronically distributed information describing the forthcoming bond sale to underwriting firms around the country which buy such investments for their retail (small) and institutional (big) clients. Yesterday at sale time, we opened the internet platform to “sealed” bidding, i.e. no underwriter could see another’s bid. We then gathered around the computer screen to watch the bids come in. We closed the process at exactly 10:45 am. Treasury accepted the highest price (and the lowest interest rate) bid for our municipal bond commodity.
The result: in five days the citizens of Maine will receive the most money the market would bear yesterday for our bonds, at the lowest interest rate to be paid by the taxpayers to the bondholders, to be used to build our roads and bridges. Extremely efficient.
This competitive process works best when selling plain vanilla municipal bonds, such as general obligation securities. State government tax revenues, backed by Maine’s “full faith and credit” under our Constitution, pay the bond interest and principal. Predictable, secure, and easy to understand. There’s no need to incur the additional expenses of an investment banker packaging and pre-marketing the transaction as in a negotiated sale.
Last week a national investment banking firm offered, unsolicited, to sell our bonds on a negotiated basis. (Remember, the investment banking fees to sell bonds are huge.) Compared with this negotiated proposal, the cheaper competitive sale yesterday saved Maine taxpayers approximately $165,000 per year of interest payments, or $1,650,000 over the 10-year bond maturity.
Wall Street investment bankers are very convincing. The seven quasi-independent Authorities, such as the Maine Turnpike Authority and Maine Municipal Bond Bank, to my knowledge have always sold their $ billions of bonds on a negotiated basis. I have increasingly encouraged some Authority boards to consider selling their bonds on a competitive platform. Now, Treasury has more hard data to make the case, where applicable, that competitive selling is less expensive and more transparent for those who ultimately pay the bills – the Maine taxpayers.
Yesterday, at your State Treasury, chock one up for the hard-working, frugal people of Maine.
Bruce L. Poliquin
Maine State Treasurer