Eyeing the use of minibonds as a way to attract new buyers of city bonds and raise some capital, the New York City Council heard testimony on Friday from municipal bond experts from the private and public sectors.
The council's subcommittee on revenue enhancement, chaired by councilman Stanley E. Michels, held the hearings to study the feasibility of selling such bonds. The hearings were also held to hear testimony on some of the legal and marketing questions surrounding the sale of such bonds.
The city is slated to sell almost $4 billion of general obligation bonds annually over the next decade. And although the city now has the ability to sell zero coupon and variable-rate debt, city officials continue to work on other marketing strategies.
The committee focused on a new minibond proposal created and offered by James A. Lebenthal, chairman of the New York City-based municipal bond firm of Lebenthal & Co.
Mr. Lebenthal's plan, called "Lebenthal Tax-Free Savings Bonds," would offer tax-exempt zero coupon city GOs, with maturities of 10 years to 15 years, to investors who do not have the cash to buy big blocks of bonds and who would normally be considered savers. The bonds would be sold for $250 and would be redeemable by the city upon notice of the bondholder, at a predetermined value.
The minibond program is modeled after the old Series E United States government bonds, or savings bonds.
In testimony, Mr. Lebenthal said, "We're here to talk about a small denomination savings instrument that must not only be affordable and accessible to savers, but must be suitable for the widest possible public market of citizen bondholders, so that we can advertise in the mass media, 'Come one, come all.'"
He envisioned the city selling about $25 million of the bonds per deal, or about $100 million of the minibonds annually to start the program. His firm would sell these securities.
Officials from the city's Office of Management and Budget, Comptroller's office, and Department of Finance and Economic Development are studying Mr. Lebenthal's minibond plan.
Alan L. Anders, director of financing policy and coordination with the budget office and the only city official to testify at the hearing, said Mr. Lebenthal "has raised for us very serious obstacles that have to be overcome--and we are working with him and our attorneys."
Some of the obstacles include secondary-market liquidity for such securities, whether the city needs special authorization from Albany to allow investors to put their bonds back at any time, and legal questions about disclosure, he said.
Mr. Anders noted that some electric utilities have been successful in marketing similar tax-exempt securities. But these entities have advantages the city does not: They have an established relationship with ratepayers and they can build up cash reserves much easier than the city can.
"As you know, this city doesn't have this liquidity," Mr. Anders said. But the Lebenthal proposal is not dead, he said. "It can be a component of an overall program."
Testimony against the minibond program was offered by Joe Mysak, acting editor of The Bond Buyer.
Mr. Mysak said, "I warn you that such talk is a sideshow of sentiment, and, from what I can tell, no way to run a city's finances." He called the bonds a "novelty" and a "stunt."
Becuase the minibonds are not a regular security featured in the market, he said a "nightmare" could be created in the secondary market for minibonds if investors cannot recoup their investment. A swell of bad feelings for the city could result among investors and the dealer community, Mr. Mysak cautioned.
While noting that glitches have to be worked out, Mr. Lebenthal said in a phone interview after his testimony, "I think that we achieved a purpose, which is to plant bees in bonnets."
He added, "It is a way of sending a message" to small investors on how bonds are used and an exhortation to get people involved in public financing.