Senate Bill 120 – Shopping for Loans
If you go to a bank or credit union to get a loan to buy a house, you don’t necessarily think of yourself as a customer in the same way you do when you go to the supermarket to buy groceries. We don’t generally see money as a consumer product or a commodity like sugar, rice, or coffee.
Yet, when you take out a loan, what you’re actually doing is renting someone else’s money. The interest on the loan is the “rent” the lender, who is the owner or the “landlord,” receives for allowing you to use that money.
It makes sense, then, to comparison shop for loans in the same way you might comparison shop for oranges or hamburger. Credit Union A might offer a slightly lower interest rate or more appealing payment schedule than Bank B or Mortgage Company C. By comparing loan costs instead of simply dealing with one lending institution, you might end up saving money. This process is very familiar to almost anyone who has ever borrowed money to buy a home. Failing to shop for the best interest rate on a home loan is just poor stewardship.
Yet currently in South Dakota, when a city or other governing body issues bonds, it is not required to do that common-sense comparison shopping. Government spending in other areas—from buying vehicles, to fueling those vehicles, to constructing or repairing buildings, to purchasing office supplies—is done competitively. Suppliers are required to submit bids in order to insure that the taxpayer’s money is being spent wisely.
Professional services, such as legal and financial advice, are exempt from the competitive bidding process. Bond issues and borrowing have been treated as financial services and have come under that same exemption. This simply makes no sense.
Senate Bill 120 is intended to remove the exemption. In part, it reads as follows: “No governing body may sell or enter into any contract for the sale of any issue of its bonds in an amount exceeding one million dollars, for whatever purpose issued, without first advertising for bids in the manner prescribed by section 2 of this Act.”
The bill separates financial advice related to the sale of bonds from the actual sale. The advice would remain exempt from the bidding requirements, but the sale itself would have to be conducted competitively.
There are exceptions to the requirement. Some exceptions are intended to protect transactions that might need to be conducted privately. I’ve been told that only about five percent of all bonding situations would fall into this category. Others are designed to allow governing bodies to conduct routine business without restrictions that would prove burdensome or that might add to taxpayers’ costs.
Along with several other members or former members of the South Dakota Investment Council, I fully support SB120. Competitive bidding requirements are intended to save money for the taxpayers of the state. It makes no sense to exempt borrowing money from those requirements. Renting money is a business transaction no different from contracting for a construction project or buying computers. In fact, borrowing can include some of the largest transactions that governing bodies make. Requiring suppliers of money to submit competitive bids is a long-overdue reform. It is one more way to protect taxpayers from possible backroom deals and to insure that tax funds are spent wisely.
The complete text of this bill is available at the South Dakota website. To read it, go to http://legis.state.sd.us/sessions/2008/Bills/SB120P.htm.