New York City this month will employ a new short-term borrowing strategy to save money by selling $1 billion of tax anticipation notes that would mature in six months instead of 12 months.
The notes, expected to be sold competitively on July 31, are slated to mature on Feb. 3, 1992.
The city last sold Tans, which are secured with property tax revenues, in July 1990, when it borrowed $1.1 billion of notes reoffered to yield 5.90%. The Tans came due on July 28, 1991.
Michael W. Geffrard, deputy executive director of the city's office of economic development, acknowledged that the city will forgo potential arbitrage earnings on the investment of the note proceeds because the Tans will have a shorter maturity. "But we will make up for it in rate," he said, adding that the city's financial advisers and some members of its underwriting syndicate have said the city could see a "25 to 30 basis point pick up" because the notes are only six months in maturity.
Mr. Geffrard said the shorter maturity may whet institutional investor demand, especially on the part of money market funds affected by the Securities and Exchange Commission's recent decision to reduce the maximum allowable average maturity of those fund's portfolio from 120 days to 90 days.
The city also plans to re-enter the bond market on Aug. 5 with a $750 million negotiated general obligation bond offering, its first GO issue of fiscal 1992, which began July 1.
In preparation for the note and bond sales, city officials met yesterday with officials from Moody's Investors Service and Standard & Poor's Corp. At the moment, there are no city Tans or revenue anticipation notes outstanding. But when there were city notes outstanding, Moody's rated the Tans Mig-1 and the Rans Mig-2. Standard & Poor's rated the Rans SP-2 and the Tans SP-1 plus.
Tans are considered the city's better short-term credit because city property tax revenues are escrowed for the Tan debt service account as soon as they come in during December and January. City officials pointed out in a statement released yesterday that Rans, not Tans, are secured with state aid payments.
The city's Ran ratings have been cut by both Moody's and Standard & Poor's in the last two years because state budget impasses delayed aid payments and raised concerns about the timeliness of their repayment. Despite these budget problems, repayment was made on time.
But while reaching for something new, the city this year plans to repeat a controversial short-term borrowing plan instituted last year: selling its Tans and Rans in two separate sales, a departure from its traditional short-term borrowing plan of selling both securities at the same time and in a smaller quantity.
As part of its annual short-term borrowing plan last year, the city sold about $2.4 billion of Tans and Rans, excluding the roughly $1.3 billion of Rans borrowed in the spring to cover operating expenses normally covered by state aid payments.
This year, city officials plan to sell roughly the same amount of Tans and Rans, with a Ran sale slated for the fall, perhaps in November.
Last year, city officials -- in the hopes of earning about $30 million in arbitrage on the investment of note proceeds -- introduced the plan to split the borrowings. But the earnings projections were about $27 million too optimistic, according to the state comptroller, because city officials made mistakes in their earnings calculations. City officials acknowledged the mistakes, but said the city still made money on the investments.
Fiscal monitors of the city's borrowing practices have expressed concern about the split borrowings. In a report on the city's finances released in June, the New York State Financial Control Board says it remained critical of the city's plan to veer from its traditional short-term borrowing practices.
