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The Truth About the Bond Issue
Posted 1-24-2003
News about the mechanics of, and
the fees associated with, Westmoreland County's recent bond issue did not
accurately or fully report the story. This month, I would like to share with
you the details of the process of selecting investment bankers and the
particulars of the fees for the project.
A bit of history will allow
you to better understand why the process was conducted as it was and why it
is significant. For many years, county government exclusively used the
services of one investment banking firm that served as an unofficial
financial advisor, as well as the investment banker for past bond issues.
The county had a firm basically determine when it was time to do a bond
issue, do the work, and ultimately earn the fees. It was apparent there were
problems with that process.
When the current Board of
Commissioners decided to fund some major capital projects, we determined
that, for the first time in anyone's memory, we would hire an independent
financial advisor to walk us through the complex process. The financial
advisor could not participate in the investment banking part of the project.
The advisor earned a fee for helping us define the scope of work, solicit
proposals, select finalists, and identify the strengths and weaknesses of
each competing firm.
Frankly, the work of Arthurs,
Lestrange & Company, the county's financial advisor, was critical to the
Board's making an informed decision and striking a favorable deal. I am not
sure how any public officials, not formally trained in investment banking,
could structure a process and make an informed decision without the help of
a financial advisor.
After receiving 10 proposals,
we honed the list down to four firms to interview. Chosen as the lead
manager for the project was Salomon Smith Barney, a large Wall Street firm.
Chosen as co-manager to instill competition into the process of selling the
bonds was Hefren-Tillotson, a regional investment-banking firm. With the
financial advisor overseeing the process, we went to market for two days and
sold the overwhelming majority of the bonds. They were bought first by
retail buyers, then institutional investors at prices as good as, or in some
cases better, than bonds being sold by the Commonwealth of Pennsylvania at
the same time. Salomon Smith Barney underwrote the remaining unsold bonds
and that effort locked in good rates for the county. Because of the county's
relatively solid financial picture, and sound accounting practices, we had
an AAA rating for our bonds.
One of the key aspects of the
project that was inaccurately reported was the implication that the fees
associated with the project were somehow unreasonable. Because the total for
the major projects is about $33 million and the total of the bond issue is
roughly $37.6 million, it was reported that there was nearly $4.6 million in
fees. A bit of investigation shows we refinanced a $1.6 million bond issue
from 1994 (the only old issue we could still refinance) that allowed us to
recoup $75,000 in savings. We capitalized the interest due for 2003, which
was worth $2.1 million. So $3.7 million of what was reported as fees
actually consisted of refinancing and capitalized interest.
The bond discount accounted
for $187,605, insurance was $152,829, cost of issuance was $110,000, accrued
interest was $127,794, and rounding was $4,065. So the actual expenses
associated with this bond issue were not at all out of the ordinary.
Each participant in the
process -- the financial advisor, the investment bankers, and the bond and
underwriter counsels -- each played valuable roles. Their professionalism
and eagerness to do good work for Westmoreland County worked to the county's
benefit. It is unfortunate that any aspect of the bond issue could be
construed as anything but a quality effort that helped the county secure
capital financing in the most cost-effective manner possible. |
