The planned sale of $50 million in so-called mini-bonds by the New York State Dormitory Authority has some market participants debating once again whether it makes fiscal sense to have a program specifically designed to help small investors afford municipal securities.

The sale would mark the first issue of small-denomination debt under the New York State Savings Bond Program. The state's Public Authorities Control Board approved the deal on Tuesday for a February sale, along with a $185 million competitive deal slated for next week.

The mini-bond program, announced as part of an executive order by Gov. Mario M. Cuomo, is intended to make available tax-exempt bonds to retail investors, who often cannot afford to purchase state bonds sold at much higher denominations.

At the moment, a number of municipalities in the state and across the nation issue small-denomination bonds. On Dec. 7, for example, New York City is expected to issue $50 million in small-denomination bonds with Prudential Securities as a senior manager. In May, Westchester County sold about $17 million in tax-free beginner bonds using Lebenthal & Co. and Prudential as senior managers.

Finance officials at both municipalities have termed these issues a success, saying they help bondholders looking for a sound investment, and issuers looking to reduce costs.

Thomas A. Devane, the authority's deputy executive director for planning and financial analysis, said the planned deal will probably save between "five and 10 basis points" compared with a negotiated or competitive issue not tailored for the small investor.

Devane said most deals in the municipal market target institutional and other large investors instead of retail buyers, who are less sophisticated and demand less of a discount to purchase municipal securities.

"There is no incremental cost in selling bonds this way compared to a straight deal," Devane said.

But a number of market executives, state lawmakers, and even past issuers point to the high advertising costs and other expenses associated with marketing and selling the small-denomination bonds.

"In my opinion, it doesn't save the issuer any money," said John L. Kraft, a municipal bond attorney for the firm of Lowenstein, Sandler, Kohl, Fisher & Boylan. "Most mini-bond programs are done to offer to people a chance to invest in the state or city, even if it costs more to issue these bonds."

To be sure, comparisons are hard to come by. Devane, for his part, said he does not have a model that compares the cost of issuing mini-bonds with the cost of issuing a similar deal the old-fashioned way.

Government officials and finance executives say extensive advertising is needed to sell these securities in order to educate retail investors about the securities. When told of those expenses, several bond executives questioned whether the transactions are always worth the cost.

Stephen Reitano, finance commissioner for Westchester County, said the county's recent sale of small-denomination bonds was highly successful. He said the deal cost no more than a county competitive bond sale, even with the $60,000 in advertising costs.

But Reitano said issuers have to look at all the alternatives before trying mini-bonds. "You've got to examine the cost of issuance," he said. "I know some issuers, where the cost was $13 to $14 a bond. Ours was less than $7."

Peter J. Sweetser, president of Lebenthal & Co., which helped underwrite the Westchester County sale as well as a sale for Erie County, N.Y., said both "issuers believe that the deal was sold at no greater costs" than if they were sold to institutions.

Sweetser said small-denomination bonds serve a larger, public policy role that their critics overlook. The securities, he said, democratize the municipal bond market, bringing in people who normally cannot afford the face value of tax-exempt securities.

Devane said that advertising the transaction, using television, radio, and newspapers throughout the state, will probably cost about $400,000, a figure trimmed by state officials from an original estimate of $740,000. Lebenthal & Co. is scheduled to serve as senior manager on the transaction. The bond firm's subsidiary, Lebenthal, The Ad Agency, will coordinate the advertising for the deal.

One finance executive, who asked not to be quoted by name, said the $400,000 advertising bill on a $50 million bond issue represents a cost of issuance that is almost twice as large as a regular negotiated bond sale, where the so-called gross spread average is about $8 for every $1,000 in bonds.

Devane disagrees with this analysis. He said that targeting retail investors will probably save between five and 10 basis points on the deal. "If you present-value five to 10 basis points on $50 million of bonds with a 30-year maturity, we will save much more money than the $400,000 advertising costs," Devane said. "No question about it."

Claudia Hutton, a spokeswoman for the state budget division, said the deal may cost "slightly more" than it would under normal circumstances, because of the advertising expenses and other costs. But even with the possibility of higher costs, Hutton said the program is worthwhile.

"The governor wanted to give investors without a lot of money the opportunity to reap the benefits of buying a municipal bond," Hutton said.

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