When the West Contra Costa Unified School District in California needed money to repair and upgrade deteriorating classrooms, it hired [a “negotiated” underwriter] to sell $191 million of municipal bonds.

As far as school officials knew, the March 2016 sale went off flawlessly, enabling the district to refinance older debt and tackle tasks such as removing asbestos and upgrading science labs.

However, within a day of the initial sale, the original buyers sold, or “flipped,” $35 million of the district’s bonds for a profit of $306,000, a Wall Street Journal analysis of trading in the bonds found.

Within 10 trading days, the post-offering trading had generated $1.24 million of market-adjusted profits. [The “negotiated” underwriter] participated in some of that trading, buying back bonds and reselling them.

Newly issued municipal bonds, which are marketed as long-term investments, aren’t supposed to trade like that. The post-offering buying and selling suggests West Contra Costa’s bonds—sold in what is called a negotiated offering—were initially underpriced. That means the district will pay more in interest over the life of the bonds than it would if the bonds had been priced closer to what subsequent investors paid.

“That’s money being left on the table that costs taxpayers and rate payers and governments,” said Patrick Clancy, who recently retired after 30 years as a financial adviser to local governments issuing bonds. “That’s not the way it’s supposed to go.”

Read more: Wall Street Journal.

Although it’s widely considered a “best practice” to use an independent advisor (i.e., not an underwriter-broker/dealer) when issuing municipal bonds, some local governments still use an underwriter as their advisor!

Key reasons to NOT use an underwriter/broker-dealer as your advisor:

• Underwriters sometimes don’t take competitive bids, and dictate the interest rate in a “negotiated” bond sale!
• Underwriters have other clients (bond buyers) who want a high interest rate (the opposite of what you want!)
• Underwriters have an incentive to put higher interest rates on your bonds so they can more easily sell them
• If an underwriter takes competitive bids, federal law prohibits them from bidding, so your pool of bidders may be significantly smaller

For all these reasons (and others), it’s often considered a best practice to use an independent advisor (i.e., not an underwriter-broker/dealer) when issuing municipal bonds.

Here’s how to find out if your Financial Advisor is independent — or a broker-dealer.

1. Click here to go to the MSRB website to check the qualifications of your Municipal Advisor.
2. Type in the name of your advisor
3. When the name pops up, look at it’s “Registrant Type”

If the Registrant Type is “Municipal Advisor“, that means the advisor is independent and putting your community’s interests first!

If the Registrant Type is “Municipal Advisor/Broker Dealer”, that means the advisor may have the above concerns and conflicts!

At Ranson, we are independent advisors, NOT underwriter-advisors. So we will always put your interests first!
For more information, contact Larry Kleeman or Beth Warren.