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When the West Contra Costa Unified School District in California needed money to repair and upgrade deteriorating classrooms, it hired Piper Jaffray Cos. 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. Piper Jaffray 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.”
Municipal Market
The Journal analyzed all trading in newly issued municipal bonds* between March 2013 and November 2017. Those bonds had a face value of:
A Journal analysis of municipal-bond data found such post-offering trading to be routine. About $60 billion, or roughly 5%, of newly issued bonds in negotiated offerings between 2013 and 2017 were sold to customers who turned around and sold them to dealers within a single day of the initial offering, usually for a profit, the Journal found.
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