A Proposal to Bring the State Treasurer's Office into the 21st Century

By Curt Pringle

"This proposal would take advantage of available technology to improve California's bond bidding system. Not only would the process be simplified, but also make it easier to find the best interest rates from a larger pool of bidding entities. Californians could be assured that the Treasurer's office has the ability to find the best possible rates for their hard earned tax dollars."

California, home of the world's largest high tech industry, still operates its government through a fairly antiquated system. For example, California's multi-billion dollar bond sales are still done as they have been for a hundred years – through paper transactions that are regularly hand delivered. This process is inefficient, costly and unnecessary given technological advances.

The California Treasurer's office has an opportunity to fully utilize and drive the creation of new applications for the innovative tools and systems being generated by one of the state's most important assets – its dynamic technology sector. In a dramatic step in this direction, Pringle proposes to solicit and receive bond sale bids on many bond issues through an electronic bid system. Utilizing an electronic bid system will result in increased competition in the market and the ability to realize economic opportunities in a more immediate fashion.

The key elements of this proposal are:

• Request for application would be available on-line

• Solicitations and applications would be issued electronically

• Completed applications and bids would be submitted electronically

• Timelines and the official bidding periods would be determined through a uniform, systemwide internal clock

• Confidentiality of bids and bidders would be maintained through an electronic shield process.

The state currently issues bonds very much the way it did 100 years ago. First, the state Treasurer solicits bids by issuing a hard copy Notice Inviting Bids (NIB). That NIB is sent through the mail to a modest list of likely bidders. If a bond house wishes to offer a bid they must request and are required to fill out a hardcopy bid form and submit it to the Treasurer by mail or hand delivery. The bidder is also required to deliver a deposit check with their application, the purpose of which is to attest that the firm is both serious about a bid, and a legitimate bidder. Since financial firms rely on last minute information to determine market conditions, most firms wait until the last minute to submit a bid. Since most firms are located on the East Coast, bidders must employ runners in California to travel to Sacramento, contact their main office by telephone at the appointed time and deliver the application and the deposit check at the last minute.

This paper intensive process is both slow and costly. The expense and effort involved in mail solicitations and transactions of hardcopy materials causes a limited solicitation. The limited solicitation reduces the number of bids submitted, and reduces competition.

Technology as a Cost Saving Mechanism:

Technology has reached an advanced point where California's nearly antique process is counterproductive. Systems currently exist and are being improved to allow these transactions to be done electronically. Presently, the Bloomberg and MuniAuction electronic bidding systems are up and running and have developed a proven track record of success (1). Moreover, muni-bond industry stalwart Thompson Financial Services is currently in the final stages of development of their "Parity" electronic bidding system (2).

The proposal would use these services as the foundation of a completely electronic solicitation and bidding program. Under this program, solicitations and NIB documents would be disbursed electronically. The ease and low cost of electronic notice will allow the Treasurer's office to greatly expand the number of notices that they send out. Additionally, a general public notice can be posted on a Treasurer or system maintained muni-bond Internet site. Also from this site, interested underwriting firms could download the full NIB and application materials. No longer will there be the delay of requesting and receiving materials through the mail, although that option would still be available. Firms would actually be able to submit their bids through the electronic system. This has the benefit of allowing final bids to be developed at the last minute based on market information and then transmitted electronically.

Such a system would also allow other changes in the bidding process. For example, instead of the current formality of requiring bidders to include a deposit check, the electronic system could be used to create a pre-bid registration system. Under this system, interested bidders would submit appropriate information to show that they are legitimate and serious bidders prior to the bid deadline. Those bidders who are certified and registered could then be assigned a registration code, allowing them bid access. This type of process would eliminate the need for and expense of a physical check and personal delivery, while still providing the assurances of the old system.

Obviously, the key to a successful system – and a legitimate concern – is over system safety, reliability, and uniformity. Bidders will want to know that their materials will be received, that the bids will be held in confidence until bidding is closed, and that there will not be unauthorized access to the system or information. For this reason the existing systems and Pringle's proposal include many safety features. Registered bidders would "log on" to the bid site prior to the submission of the bid, greatly minimizing the risk of non-acceptance. A uniform site "clock," which is run through a master bid clock provided by the service, will create uniform transaction timelines, insuring that all bidders are operating under the same requirements. In addition, all bids submitted electronically would remain confidential until the closing period through a screening process. This will ensure that proprietary information is not leaked to the advantage of one firm over another. Post-bid confirmations would continue to be done as they are now – to act as a final check.

Conclusion.

An electronic solicitation, application and bidding process will greatly increase competition by making information and participation widely available. Moreover, distributing the solicitations electronically and having the NIB on an Internet site could mean reduced printing costs for the Treasurer, and instant access to materials for bidders. Likewise, an electronic bidding system would allow a much quicker turn-around time for making solicitations and the submission and awarding of bids, allowing bidders greater opportunities in today's quickly fluctuating market.

1. Bloomberg has just set up a system using email bids through its "deal-a-matic" propriety network for the State of Utah and has completed its third electronic offering including a $235 million sale in June 1998. MuniAuction has just finished its 9th transaction in late July.

2. Thompson Financial Services is the owner of the Bond Buyer, MuniFacts/TM3 and Dalcomp. The Parity system that they are developing will interface with the system that is currently used by most underwriting firms when preparing their competitive bids.