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When the recession devastated Beaver County earlier this year, Gentile-Meinert & Associates Inc. were pressed not to raise prices on a $10,000-a- month contract for security guards at the county's nursing home.

The county's elected officials, attempting to hold the line on the budget, didn't say that they lost as much as $2.8 million by selling bonds without seeking competitive bids.

That amount is the difference between the underwriter's price for $72.7 million in bonds at a Jan. 8 sale and the higher prices investors paid later that day. The offering capped a 13-year borrowing saga that pushed taxpayers deeper into debt, county records show. Throughout, Beaver County kept doing business with Commonwealth Securities and Investments Inc. of Pittsburgh.

County Controller David Rossi said he asked why during a closed-door meeting two days before the January borrowing decision. The commissioners' answer, he said: "We trust them."

More than 85 percent of the $308.9 billion in new tax-exempt bond issues this year nationwide were sold without competitive bidding, according to data compiled by Bloomberg. Such negotiated issues, for which borrowing costs are set privately, show how public officials do financing in the dark in the $2.8 trillion municipal bond market.

In the absence of competition, some local government borrowers, including Oregon school districts, Hawaii counties, and Missouri municipalities have used the same underwriter for years, public records show. Beaver County relied on Commonwealth Securities to manage all but one of its bond issues since at least 1986, according to county records and transaction documents.

Finance professionals say no-bid sales allow them to market debt to particular investors, helping them fulfill needs when credit markets aren't accommodating.

Such assertions are belied by data showing that when negotiated sales are combined with persistent use of the same underwriter, issuers' borrowing costs increase by 5.3 basis points for each sale, according to a study published in the Winter 2008 edition of the Municipal Finance Journal. A basis point is one one-hundredth of a percentage point.

In Beaver County, which has an annual budget of about $217 million, Commonwealth Securities pocketed more than $2 million in fees on half a dozen transactions since 1996 — deals that converted an initial $57 million debt for a new jail and other projects into a $72.7 million obligation this year, county records show.

Commonwealth and its president, Henry Fisher, declined to respond to questions, as did the county's solicitor. The administrator of its financial affairs refused to answer questions about the transactions. Commissioners Joe Spanik and Tony Amadio, both Democrats, refused to be interviewed. Republican Charles Camp said only that no laws were broken.

"It's all public record," Camp said during a brief interview outside his office. "It's all done legally."

Commonwealth was paid for raising money, for advising the county as it took on such derivatives as interest-rate swaps — and then, in January, for underwriting new bonds to pay for canceling the previous transactions, records show.

Interest-rate swaps, one of the most common types of derivatives, are agreements to exchange periodic interest payments with a counterparty, such as a bank or insurance company. Hundreds of hospitals, schools and other public agencies entered into rate swaps tied to floating-rate bonds during the past decade to try to cut borrowing costs.

The strategy backfired last year as the credit crisis took hold. Interest payments on issuers' variable-rate debt increased because of falling demand, while counterparties' payments dropped after central banks reduced interest rates.

Since then, municipal governments paid billions of dollars to cancel swap contracts, said Peter Shapiro, the managing director of Swap Financial Group, a firm in South Orange, N.J., that advises governments on the financial transactions. While no one tallies marketwide costs, public records from Indianapolis, Philadelphia, Miami and Oakland, Calif., show agencies in those cities paid $331 million to end swaps during the past 18 months.

That money could have paid to pave a 2,192 mile city street, based on Durham, N.C.'s, cost of $151,000 per mile. Such a street would stretch from coast to coast, according to the U.S. Geological Survey.

Home to 172,000 people, Beaver County lies about 30 miles northwest of Pittsburgh, in the heart of what used to be Western Pennsylvania's steel country.

It has relied on Commonwealth Securities as its underwriter for $337 million in bonds, since 1986, records show.

Commonwealth received $654,000, or $9 for every $1,000 of bonds, in exchange for lining up buyers and setting the interest rate for the Jan. 8 bond issue. That fee was 29 percent higher than any other Pennsylvania county paid during the previous year, according to documents for similar sales by a dozen other counties.

With Commonwealth as their underwriter, Beaver County officials didn't hire a financial consultant for debt sales, according to official statements for the bond issues. That meant they were trusting a party with an opposing interest, according to the Government Finance Officers Association, a national professional group based in Chicago.

Unlike financial advisers, underwriters have no fiduciary relationship with municipal clients, says the GFOA, which issues recommendations on how counties should protect themselves. Underwriters want to buy bonds at a low price — making them easier to resell to investors — while cities and counties seek to sell at the highest price.

Former Beaver County officials said they don't see their relationship with Fisher and Commonwealth as adversarial.

"Every time there was a bond issue, it was, 'Let's call Henry,'" said former Beaver County Commissioner Roger Javens. "He's the go-to guy. They just had confidence in him."

The seeds of Beaver County's foray into derivatives were planted in 1996, when Commonwealth sold $57 million worth of bonds for the county to build a new jail and complete a handful of other public-works projects. The bank's fee was $565,000, according to the official statement for the offering.

The next year, the county refinanced the debt, capturing lower interest rates. Commonwealth received $531,000, county records show.

While Internal Revenue Service rules kept the county from doing another such deal for a decade, commissioners were able to squeeze cash from its debt just five years later, in 2002, using a derivative known as a swaption. The Federal Reserve in Washington was reducing the benchmark interest rate to 1.25 percent, a 41-year low.

Under the unregulated contract, Beaver County sold the money to be made in a refinancing to Lehman Brothers Holdings Inc., like a farmer who sells crops at today's prices to a third party long before harvest.

Municipalities were ill-prepared for such risky trades, said Bart Hildreth, a professor at Georgia State University in Atlanta and editor of the Municipal Finance Journal. When capital dried up on Wall Street as the financial crisis worsened last year and banks collapsed, such transactions hit school districts, hospitals and local governments with unexpected costs.

"The evidence seems to be pretty clear that most of the small-to-medium issuers didn't really know what they were doing," he said.

The county's first set of payment exchanges became effective in November 2007. Lehman declared the largest bankruptcy in history less than a year later.

Interest rates on floating-rate bonds soared as investors dumped the securities. Officials at school districts, cities and charities nationwide that had financed public works with the instruments found they couldn't refinance without breaking their derivatives contracts — by paying bankers the market value of the deals.

Interest rates on Beaver County's bonds more than doubled to 7.75 percent in September 2008, an annual sum of $4.6 million, according to data compiled by Bloomberg.

After Lehman's failure, the county paid $7.7 million to close out the deal, which was scheduled to run through 2026, and officials ultimately decided to refinance the debt again — this time through the $72.7 million private sale on Jan. 8.

During the half-hour meeting where they approved the new issue, Spanik spoke of how commissioners were pressuring county contractors to save money, "knowing the economic impact that is happening all over the country and right here in Beaver County."

"We have gone back to several of our vendors and asked them to hold their line on their cost increase," he said. "That's what we're doing throughout all of our vendors that we can."

Gentile-Meinert, the security company, agreed in negotiations with commissioners not to pass along rising labor costs and other expenses, said Louis Gentile, its president.

"We absorbed those costs," he said.

There was no discussion during the meeting of the payment to Lehman Brothers, the higher-than-average fees for Commonwealth or the fact that a $57 million debt from 1996 now amounted to $72.7 million.

"At the end of the day, it's the taxpayers' money we're spending," Rossi, the county controller, said in an interview. "The bond counsel and the underwriter, they make their money and go home. And we're on the hook."

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