NYS budget office puts brakes on dormitory mini bonds.

The New York State Dormitory Authority will not issue $50 million in mini bonds in an upcoming transaction as state budget officials continue to evaluate the deal's structure.

The transaction would have marked the first sale of small denomination state debt since Gov. Mario M. Cuomo signed a November 1992 executive order creating a "New York State Savings Bond Program." The program is intended to make available tax-exempt bonds to retail investors who often cannot afford to purchase state bonds sold at much higher denominations.

Under the program, several state bonding authorities, including the Dormitory Authority, would sell "low denomination, tax-exempt bonds" on behalf of the state. The appropriation bonds would be sold at a deep discount in the form of zero-coupon bonds or capital appreciation bonds.

For the past month, officials at the Dormitory Authority have planned to issue the securities as part of a $235 million bond issue scheduled for later this month or next. They felt confident that officials in the state budget division would approve the agency's proposed structure, as well as plans to advertise the issue. The agency chose Lebenthal & Co. as senior manager for the mini bond deal.

But in recent weeks, state budget officials, who must approve the issue before sale, have extended their evaluation of the deal as proposed by the authority.

As a result, Thomas A. Devane, the authority's deputy executive director for planning and financial analysis, said Thursday that the division's continued examination has forced the agency to deviate from its original plan and not issue the mini bonds in an upcoming deal.

Devane said the agency, which is committed to raise money for the state university system sometime before the end of the year, will now seek state approval to issue up to $235 million of bonds sold through a competitive bid.

"Our responsibility is to get money for the state university system," Devane said in an interview on Thursday. "I can't hold off much longer."

Claudia Hutton, a spokeswoman for the state budget division, said the office, in delaying its approval, is attempting to make certain the issue "truly benefits the small saver."

Hutton said the division has several concerns about the authority's original proposal regarding the structure of the deal, but she would not elaborate. "It's not the quality of work the authority has done that is the issue," Hutton said. "This is whether what has been prepared is enough to meet the goals in the executive order."

State officials, speaking on a not-for-attribution basis, said the budget division is concerned that the bond deal as structured does not include a put feature, which would allow investors to sell the securities back to the issuer.

The budget division and members of the governor's staff are also concerned about the authority's plan to spend about $740,000 to advertise the deal - an expense the authority says is needed because the bonding program is unfamiliar to many state residents. Under the proposal, the authority had planned to advertise the deal extensively on television and radio and in newspapers.

In addition, officials representing Cuomo are reluctant to recommend that the governor personally appear in television advertisements, as proposed by the authority, state sources say.

Cuomo may run for reelection in 1994. The governor's staff fears some of the same criticism that opponents hurled at Comptroller Elizabeth Holtzman and Mayor David N. Dinkins when they appeared in New York City mini-bond ads during their recent elections, state sources said. The ads were criticized for promoting the candidates, rather than the bonds. Hutton refused to comment on the matter.

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