MINUTES OF THE ASSEMBLY COMMITTEE ON GOVERNMENT AFFAIRS SUBCOMMITTEE A.B. 52 Sixty-eighth Session March 10, 1995 The Subcommittee on Government Affairs was called to order at 12:05 p.m., on Friday, March 10, 1995, Chairman Neighbors presiding in Room 330 of the Legislative Building, Carson City, Nevada. Exhibit A is the Agenda. Exhibit B is the Attendance Roster. COMMITTEE MEMBERS PRESENT: Mr. P.M. Roy Neighbors, Chairman Mrs. Joan A. Lambert Mr. Max Bennett Ms. Saundra (Sandi) Krenzer COMMITTEE MEMBERS ABSENT: None GUEST LEGISLATORS PRESENT: None STAFF MEMBERS PRESENT: Denice Miller, Senior Research Analyst OTHERS PRESENT: Carole Vilardo/Nevada Taxpayers Association Bob Seale, Nevada State Treasurer Brian Krolicki, Chief Deputy/State Treasurer's Office Steven Bell, Managing Director/Dane Bosworth Howard Barrett, Research Director/Nevada Taxpayer's Association Al Kramer/Carson City Treasurer G. P. Etcheverry/Smith Capital Markets-Nevada State Bank Ed Felsing/Smith Capital Markets-Nevada State Bank John Swendseid, attorney ASSEMBLY BILL 52 - Requires certain bonds issued by municipalities to be sold by competitive bid. Carole Vilardo, representating NV Taxpayers Association, expressed support of A.B. 52. Due to a prior commitment she was unable to stay but expressed desire to hear the amendments. Bob Seale, Nevada State Treasurer, stated there were multiple objections to A.B. 52. Basically it would limit the flexibility of an issuer. He questioned why certain restrictive words needed to be put in statute which were issues relating to policy. He claimed the attempt was being made to fix a problem that did not exist and advised it was far more appropriate for that kind of language to be used at a policy level with the individual issuer. Responding to Mrs. Lambert's inquiry as to whether his office had a formal policy as far as deciding "negotiated" vs. "competitive", Mr. Seale stated they did follow guidelines but as yet did not have a formal policy which would adopt some of the language from both of those entities. Giving an example of a recent negotiated deal with the Colorado River Commission, he noted a significant amount of money was saved. However, he stressed both ways should be available so as to get the best price. Brian Krolicki, Chief Deputy/State Treasurer's Office, informed the committee Clark County does have a debt management policy and had gone through a very formal procedure to attain it. Mr. Neighbors questioned check and balance, whereby Mr. Seale explained before a bond deal could be completed, either the Board of Examiners or the State Board of Finance must approve it. Steven Bell, Managing Director of Dane Bosworth, Inc., explained his investment/ banking firm managed sales of municipal bonds and securities by both methods, negotiated and competitive. He noted there were several factors that an issuer may consider when choosing a negotiated or competitive sale. Many are on the policy side with relation to the appearance of the sale and then there is the efficiency in which an issuer can access the capital markets, which, from his perspective, was the most important. The efficiency of which an issue can be sold in a market is often times gaged solely by the bottom line or net interest cost that an issuer may incur for selling an issue at any particular given time. However, there are also efficiencies that relate to the structure of an issue which may or may not be appropriate for a competitive sale. Reflecting on those two features, Mr. Bell continued: "The interest rate environment changes on an hourly or minute by minute basis. If we were in a situation where we had in our pocket 10,000 shares of blue chip stock, and we knew that in the next 60 to 90 days we were going to sell to our best benefit, I would ask us to say, would it be in our best interest to choose during this 60 to 90 days the most advantageous time to offer that stock in the market for sale...or would we today say `we're going to sell our l0,000 shares of blue chip stock on April 17th at 1:30 in the afternoon.' Regardless of price, regardless of market conditions, which we know change very quickly. I think the answer to that is fairly obvious. In a given time period, however, one could argue that if we pick April 17th at 1:30 p.m. and we are to ask for a bid on our stocks or if we are trying to negotiate some time around that l:30 , would we in fact get the best price? There are various studies that have been done over the years to say that sometimes a competitive offering of this nature at a specific point in time may well give you the best rate for high grade security or we can point to other issues where high grade securities are negotiated and we actually get a lower interest rate cost based on the negotiation of those securities within a specific time frame. So there are pros and cons on either side of the equation. The key factor is the efficiency at which you enter the capital market based upon what the markets are doing at a particular point in time. Today, for example, the markets are driven primarily by the institutional buyers. We consider mutual fund buyers to be institutions from our perspective. Those institutional buyers, whether they are casualty companies, insurance companies, banks, mutual fund and/or the individual investor change in their requirements from day to day, from time to time, and what type of structures or things they are looking for to fill their portfolio needs. Their portfolio needs may not always meet what we think the market is going to be in a two to three week time period. So, to best react to that, an issuer may oftentimes need the flexibility of a negotiated type sale as opposed to pre-structuring an issue presented to the market at some pre-determined time....when in fact the buyers out there ...the ability to sell an issue efficiently is based upon the fact that there are efficient buyers on the other side. So that negotiating flexibility often allows you to structurally create a better efficient entry into the capital market that you otherwise could not do in a competitive sale. So from a broker/dealer standpoint, one could argue pros and cons on both sides. However, if you look at the ability to pick and choose...and having that flexibility as an issuer...that seems to be the best situation that an issuer can be involved in ......and oftentimes the market may be best suited for a competitive sale as an issue may be best suited for a competitive sale ...or the market may suggest a better efficiency on a negotiated sale basis just as the type of issue may suggest a negotiated type of issue. So, I think flexibility is really the key in this type of environment. Certainly the capital markets in their current state (although I don't think my crystal ball is better than anyone elses) I don't think I see a long term real stable market environment that we will have over the years ahead. Most often a financial advisor, or someone designated which sometimes may be a broker/dealer within their own internal structure...a financial advisor will structure an issue and prepare and present it to the marketplace with that advanced notice I mentioned earlier, stating to the capital markets that at a given point in time we are going to request on behalf of the issue of the debt a solicitation of an interest rate bid or a true interest cost. Some institution or group of institutions is going to bid for a particular issue at a point in time. That financial advisor will be responsible for the following requisite requirements to present that to the market. 1) They will structure the issue that the capital markets and institutional players and dealers will participate in. 2) They will pick the time that the bids will be received. 3) They will pick the method upon which those bids will be analyzed and then they will assist the issuer to be sure that all the requisite legal requirements are made sufficient to allow for the issue to be sold at that competitive sale and that the sale of those bonds will be based upon the fact that the bonds are tax exempted that's appropriate, are valid obligations of the issuer, and that they are legally issued. So the role of the financial advisor is one of presenting to the market an issue for sale. Financial advisors sometimes are allowed to bid on the issue, sometimes they are not. There's a disclosure that needs to be made if they are in fact allowed to bid on bond issues when they serve as a financial advisor. And that usually is a policy of the issuer...some allow it, some don't. So it goes both ways. The negotiated sale is completed sometimes with the assistance of a financial advisor and sometimes not. More of the larger issues that are done across the United States will be done with the assistance of a financial advisor even when there is a negotiated sale. Seems to be a kind of trend that's taking place over the last few years across the country. What this means is that the financial advisor will assist the issuer in preparing the issue for sale, and at or during an appropriate time. This sometimes could take a few days or even several months. They will in fact negotiate with a broker/dealer or group of broker/dealers for the sale of those securities at a specific point in time ...although that point of time has not been pre- determined such as in a competitive sale. We don't say, on a date certain, at a time certain, we are going to fix those interest rates. Period. End of discussion. Rather we say, that during a fixed time period when the funds are needed by the issuer, we will negotiate a couple of things: 1) We will negotiate the structure of that issue which allows it to be efficiently presented to the marketplace based upon where the marketplace is at that particular time; 2) We will present the issue with our structural changes and modifications as needs to the marketplace at a time when we think interest rates may be favorable or to the advantage of the issuer at that particular point in time. Now obviously, from a broker/dealer's standpoint and from a financial advisor's standpoint, if we were to negotiate a bond sale at the bottom valley of the interest rate graph, if we had a linear graph of interest rate trends over the course of time, we would be the greatest thing since sliced bread. However, if the interest rate environment started to move, we then through negotiated sale, had the opportunity to either continue with the sale, make modifications if need be, or we can say, no, we can withdraw this from the market at this point in time due to marked changes...which happens frequently." Ms. Krenzer asked what the term was for the person who negotiates. The answer was underwriter, investment banker, broker/dealer, buyer and a whole host of other things. Continuing, Mr. Bell stated "Sometimes a financial advisor is allowed to bid on a bond. With adequate disclosure, your financial advisor may in fact be a major factor in the capital markets. We are, in this particular case, as a financial advisor to the bond bank, also a very active participant in Nevada securities." Mr. Seale interjected, explaining that in Nevada, financial advisors have not in the past bid on securities and Mr. Bell's company will not be bidding on bonds that they are the financial advisor on as a matter of policy. Mrs. Lambert asked Mr. Bell to comment on a report stating in 1970, 83% of the municipal bonds sold were sold competitively in the nation and in 1993, 80% of the municipal bonds sold in the nation were sold through negotiated sales. Mr. Bell's response: "If you were to look at the trend of interest rates in 1970, it doesn't change much, because in those days interest rates didn't change much. Those were in the days of home mortgages that were four and five percent...and municipal bond rates were at three...and there wasn't a lot of change. If you look at the trend from approximately 1979 to 1980 to today, you would see that the linear graph looks like a picture of an EKG...it's all over the place...we will see it is not uncommon to historically notice interest rate changes of 50 to 70 basis points..half a percent to maybe 3/4 of a percent in a 24 hour period. ..based on something (the Gulf War for example, oil embargos, dollar value changes)...there are several factors that impact the market; but nonetheless, we have seen just unbelievable changes in very short periods of time in the last 15 years. Now, what that says to issuers is, `we're going to present to the marketplace a sale of bonds in an environment that is volatile to say the least'. So what we'd like to be able to do is to pick and choose the opportunities to present that issue to the marketplace. Thus, most issues have been negotiated. That's one factor. Second factor is, since 1978 when Congress recodified many of the finance laws that we function within today, and there has been several changes and modifications since that time, we have seen a situation where many things have evolved in the financial market that didn't exist in 1970. In 1970, for example, there was no such term as a "lower floater." There were such things as "multi family housing revenue bonds" or "single family mortgage revenue bonds"....there was not the extensive use of private activity bonds; there were not derivative products, although a bad word today, all of those things that have been special and unique products that have been presented at the capital marketplace and have dictated a very unique structure and a very unique knowledge base to put these things together. In the early and mid 80s, I worked with E.F. Hutton, who may have been one of the premier innovators of all types of things...advance refundings, escrow swaps, lower floaters, upper floaters, variable rate securities...and these things were types of securities that required negotiation or an explanation with the capital markets to even access the capital markets....to explain to institutional buyers what these things were and how they function. So, interest rate volatility and multiple products introduced in the marketplace over the last 15 years have really impacted why we see more negotiated issues than we have seen prior to that point." Mrs. Lambert asked what kind of time frame is required on a competitive sale. Brian Krolicki responded, "In a municipal bond bank our procedures to get through from the minute we know a deal is happening to when in theory it would be sold is 60 to 90 days, but usually, once we get approval, we have to get pre-approval for a bond sale and then get formal approval again ...so it's a two step process. But it's usually 30 days and we just say we will sell 30 days from that date, so it's very rigid...30 days from today we have no idea whether there is a Mexico crisis or a Baring Brothers bank that's bankrupt...I mean those are things that are so far out, but we have already decided 30 days ago that we were going to sell on that day. I would like to digress for a moment. We always hear the comment that government should be much more like the private sector. We talk about now just public underwriting (municipal governments, states, etc.) ...but if you look at the private sector and what they do when they sell their bonds, it's almost all negotiated...they don't do competitive sales ....If I'm IBM or Xerox, I know exactly which investment house broker dealer I am dealing with, what my fees are, and I bring it to market. These are the most sophisticated participants in the capital market and they exclusively use negotiated sales. So, I think that's an interesting point because sometimes we lose that when we are dwelling on municipal issues." Responding to a question from the committee, Mr. Seale stated "There is a process you go through in getting the firms you are going to deal with in a negotiated deal. For instance, with Colorado River Commission, a very large number of underwriters were contacted, an RFP was sent out to a large number....those RFPs were then returned to a committee; the committee reviewed those written proposals and then they eliminated a number of them and then there were some five firms that came before this committee and I sat on that committee and heard their full arguments as to what they were going to do, how they would do it, what their price was going to be.....and then, didn't pick one underwriter...we picked several to form a syndicate amongst themselves and then went to the marketplace as Mr. Bell has described. It is an open, a competitive activity ....and "negotiated" is perhaps not the best word that we could hang on there but I think we're sort of stuck with that. It is very open. And you still have, under either one of those approaches, the governing body ...either the Board of Examiners or the Board of Finance or the County Commissioners or the City Council or whatever, is still in a position to observe what is happening with the issuance of these bonds. There is no lack of public knowledge that's going on in these situations." Steve Bell described the process upon which a negotiated sale is completed: "It is based upon the negotiation between the issuer, their financial advisor, and usually a syndicate of underwriters which include broker/dealers. At a specific point in time, through the negotiation process (we might call it a discussion process) that includes both the issuer, their financial advisor, and this group of underwriters that are going to put their capital at risk and buy the securities, they are going to submit, just like in a competitive sale, a written bid to purchase the securities. The primary difference is that in a competitive bid environment you are going to pick a date certain and collect bids from all kinds of folks, whoever wants to bid. On a negotiated basis, you are going to have a pre-selected group of underwriters or broker/dealers who are going to negotiate with the issuer on that particular issue and will, at a given point, submit a bid and that group of selected syndicate members or underwriters have control of the issue and they have control of it in the marketplace to sell to investors, they have control of it structurally...that they may more efficiently enter the market and fit the needs of buyers at any respected time. However, the ultimate control is the issuer along with their financial advisor. So, the issuer and his financial advisor will evaluate through this discussion a negotiation process which takes some time...it doesn't happen in two minutes...what the structure of the final issue will be based upon which that syndicate will submit a bid to buy the bond and that will be discussed with the issuer and financial advisors to whether or not they choose to accept that particular bid or if any changes or modifications need to be made." Elaborating, Brian Krolicki added: "On the competitive sale we have a date certain but there's also a time specific. You don't sell one bond until you're completely satisfied with the price of the bond, the interest rate on the bond and the fees that have been charged. On a competitive sale, you don't know what they are because their price, the fees, all of those are built in to one number that you don't know until you open the envelope....and it may be a good value, it may not be....but if it's not, that's what you sold your bonds at. You've lost that flexibility and the ability to truly drive the transaction." Mr. Neighbors wondered if, on a competitive bid, all bids can be refused...so as not to be locked in to a low bid. Mr. Bell responded that was correct and noted it is given as a notice prior to the sale that any and all bids may be rejected. "However, the difficulty there is that we are now back in the 60 to 90 day time frame before we can do it again." Mr. Bennett queried whether strictly going to competitive bidding would have an adverse effect on bond rating. Mr. Bell responded the method of sale chosen would not impact the rating. Howard Barrett, Research Director of the Nevada Taxpayer's Association, offered additional remarks in support of A.B. 52: "This bill pertains only to local bonds because the state does not have a debt management plan and we feel until they do have such a plan, we didn't want to make recommendations concerning anything at the state level at this point. The reason the state does not have a debt management plan is because you cannot even get any one point in this state a complete listing of all the bonds that are outstanding. There is no clearing house for even information on state bonds. State bonds are issued by a number of jurisdictions. Most of the bonds approved by the legislature and redeemed by the fifteen cent property tax are bonds issued by the Board of Examiners. The Colorado River Commission issues bonds, the University issues bonds. So there is not even a clearing house for them, let alone one authority issuing state bonds. The original recommendation was that all local bonds be competitive. There have been a number of additions, and you will hear more amendments today to that original recommendation ...we have accepted some of those and we are prepared to accept some that John Swendseid will be proposing today. Without competitive bonds, there is no way you can prove that you got the lowest rates and that you got the most money or the least expense, the least payment of interest for the taxpayer at that one time. Competitive bonds are the only way you can prove that at that one time on a certain day, that was the lowest rate available. If the bond was negotiated, you never know if there is somebody else out there, some other underwriter who was not quite as hungry and didn't want quite as much profit, that would have undercut the underwriter that you did go with. Now, I would agree that there could be some situations where underwriters might be able to come up with a better deal, but they can't prove that. A competitive bond is the only way you can prove it. I wish this had been in effect for the past 20 years. You're aware of the information concerning the various problems in the various states where because of kickbacks, rebates, whatever, business has been influenced and gone a certain direction and that would be at the expense of the interest payer (the taxpayer, the consumer)...whoever it is that is paying off those bonds has to pay off the greater interest. The true interest rate is still lower for competitive sales than it is for negotiated sales. And the true interest rate is the amount that the taxpayer or the consumer, or whoever it is, is going to be paying. If you have a $40 million bond issue for example, and you save a tenth of a percent interest over a period of 20 years, that is still big money for the taxpayers paying off those bonds. The Oregon study indicates that the competitive is still better than the negotiated and if you have more competition, more bidders in the competitive, you're going to get a better rate yet. So we would strongly urge you to continue the idea of the competitive sales as outlined in the bill." Responding to Mrs. Lambert's inquiry concerning the rationale for listing exceptions, Mr. Barrett explained: "The exceptions were suggested by Marvin Leavitt and the Clark County financial officer....and I believe some of them were suggested by John Swendseid. They were suggested by a group of people who reviewed the original proposal and made suggestions, and they were included in there." Al Kramer/Carson City Treasurer, speaking in opposition to A.B. 52, offered the following comments: "I feel that taking away the ability during a negotiated sale limits the flexibility of what's out there. It's not all apples, not all oranges, sometimes you get something that is just ...it's not a commodity, and when you go to bid on it from a broker's desk, if you don't know what it is ...you're going to raise your bid to where the interest rate is higher. It would pay sometimes to go out and negotiate ...to inform people who are going to bid on this and, you might call it limit, but in a sense you're opening it quite wide to those underwriters who will want to bid on it ...but to inform them as to what it is that's going to be bid on, and therefore, the more likely that they know what's going to happen, more likely the rates are going to go down, and in Nevada that's probably more important...Nevada's sometimes seen as a state where gambling goes on and they can't pay their bills, market's going to crash, there's more and more casinos in other states and rates will be driven up and you need to influence these people on a one to one and educate them as to what is going to happen. So I feel like some of the bonds we have are not commodities and you can't just arbitrarily say take the lowest bid. Regarding unusual methods of financing...It's not as clear there as I'd like to see it. Also, sometimes time is of the essence. There's a window of opportunity you have to act in. And maybe when it comes time to accept or reject the sealed bids that are submitted to you, you don't have the time to go another 30, 60, 90 days to do another bid offering. If you know up front that you will be time constrained, you still will get a pretty good, solid offering from knowledgeable bidders and you can pick your day. So I just submit the main thing is you're limiting the flexibility ...and that would be my say." Mr. Bennett asked how is the paper trail followed on a negotiated bid to assure that it is indeed a low and viable interest rate. Mr. Kramer's response: "I spent a lot of years in the computer business and as the saying was then..'no one ever got fired for buying IBM.' It's very hard to criticize someone who has done a competitive bid...but if going out and doing a negotiated bid takes more effort and working with people and educating them to try and get a better deal for you, you're right, you're losing a little bit of that obvious paper trail tracking it, and the hope is that you are getting a better deal in the end result. Probably no one would get fired for going competitive, but there are times when I think a negotiated is a better product." Mr. G. P. Etecheverry of Smith Capital Markets/Nevada St. Bank introduced Mr. Ed Felsing of the same firm. Mr. Etecheverry stated as a result of the interim study there had to be areas in bonding procedure in Nevada that had to be corrected. His thought was that A.B. 52 with some minor amendments (Exhibit C) could "take care of the bill and pretty well put every one on the same playing field when we start talking about issuance of bonds." The important element of the bonding procedure not addressed in A.B. 52, according to Mr. Etcheverry, was "the person called the financial advisor. We would like to clean that aspect up in the bill and I think from there we can pretty well do what is anticipated to be done by the ACR 38 study and the committee thereof." Mr. Felsing explained in 1985 roughly 80 percent of the bonds were negotiated; in 1994, 68% were negotiated, 30% were competitive...so the ratio today is higher in competitive sales than in 1985. He subsequently discussed details of the bill, flaws in the bill, and the recommendations as seen in (Exhibit C). Mr. Etcheverry added that it might be well to look at the various bond issues that were issued in the state of Nevada the last two years. He noted "you would find that financial advisors come from all over the spectrum but there is still no control...and this bill does not accomplish that and we feel that is very important in A.B. 52. I still think what the thrust of the bill was is to say negotiated sales are inherently bad, competitive sales basically good. I think that isn't the answer. The selection process and the openness of the process whether it be underwriters, financial advisors, bond attorneys, if you get the process open and get it out in the open air, then if the process is right no matter which sale you use, it will be all right." John Swendseid, attorney from a law firm serving as bond counsel, explained the amendment sheet (Exhibit D) was a response to testimony given in Las Vegas in an attempt to address concerns expressed there. He proceeded with a detailed explanation of each amendment. Mr. Barrett indicated the Nevada Taxpayers Association was in agreement with Mr. Swendseid's amendments. Mr. Felsing expressed disdain since Mr. Swendseid's amendments did not include the selection process of either bond attorneys or financial advisors. He added, "If you are going to get all the players and straighten this thing up, that's a critical issue to this bill." Committee discussion ensued. The subcommittee hearing adjourned at 2:00 p.m. RESPECTFULLY SUBMITTED: Christine Shaw, Committee Secretary APPROVED BY: Assemblyman Neighbors, Chairman Assembly Committee on Government Affairs March 10, 1995 Page