Author: Michael

Published March 28, 2024 in the OASBO e-newsletter 

By: Michael G. Sudsina

Good luck with that! Due to the number of variables associated with any given municipal bond issue, achieving “the best” rate is problematic. However, there are many things a school CFO can do to ensure a successful bond issue that results in a competitive interest rate. Yet, due to the skill set of most school treasurers and the demands on their time in the office (payroll, budgets, forecasts, routine accounting, monthly reporting, not to mention annual audits), all too often, when a bond issue arrives, it’s just “one more thing” I need to get off my desk. 

Clearly, next to funding the annual operating budget for an Ohio school district, the biggest single expenditure taxpayers are asked to bear is repaying a bond issue for building projects. Currently, due to higher interest rates, the largest single expense is not principal repayment, but the interest component. So, how can a treasurer have a positive impact on the resulting interest rates? 

How do you prepare yourself to ensure a successful bond issue and approximate the best available interest rate given the already high demand of your time? Proper preparation starts at the inception of the process with the assemblance your finance team. You need bond counsel to meet all the legal requirements. The municipal advisor (MA) represents the district’s side of the negotiating table to effectively accomplish structuring, rating, and pricing, all in the best interest of the taxpayer. The underwriter is necessary to gain access to investors, however, they are obligated to represent the interests of the investor, which presents an inherent conflict with the best interests of the district. 

GFOA recommends that a thoughtful process be conducted to select the underwriting firm(s), as not all underwriters are created equal. Many critical differences exist among firms that most frequently represent Ohio schools. These differences include the size and composition of their sales staff (stockbrokers), the volume of the firm’s municipal bond business, and their capitalization. The individual responsible for setting interest rates, the bond trader, sits on the trading desk, most commonly at the out of state headquarters, and not with the banker on the ground that interacts with the treasurer. Additionally, certain firm strategies evolve year-to-year, with focus on municipal bonds ebbing and flowing with such changes. How does the treasurer’s office prepare to best understand pricing performance (setting interest rates) from one firm to another? The MA is the only member of the financing team equipped with market knowledge to formulate an independent assessment of potential underwriters. 

Once the finance team has been assembled, and the bond issue prepared for marketing, pricing day finally arrives. One of three investor order outcomes will occur: 

1. Commensurate orders are received to purchase all the bonds with appropriate maturities, 

2. Fewer orders received than required, i.e., undersold, 

3. More orders received than necessary, i.e., oversold.

A perfect match of orders received vs. bonds available is unlikely. Commonly, at the end of the 90-minute pricing period, the issue is undersold or oversold. If undersold, depending on magnitude, the trader will suggest increasing rates to attract additional orders to fully sell the bonds; if oversold, the trader should recommend rate reductions, as the bonds were apparently priced too low, i.e., rates set too high. When presented with repricing proposals, the only way a treasurer can make an informed decision as to the acceptability of the repricing is with expert, independent advice. The MA, if properly experienced, has the objectivity to provide such advice and will command respect from the trader to complete a reasonable repricing negotiation. Without an MA on their side, a treasurer is left at the mercy of the banker and trader to accept the repricing proposal. Only through an effective repricing negotiation is the “best” interest rate achieved.