Regional News

California Eyes Mini Bonds

SAN FRANCISCO — California Treasurer Bill Lockyer is pushing a bill that would allow the state, the largest issuer of municipal debt, to take the unusual step of selling $25 bonds on the New York Stock Exchange.

The proposed legislation would change state law to allow minimum general obligation bond denominations to drop to $25 from $1,000, potentially increasing California’s reach into the retail market.

The bill “would allow us to issue these $25 instruments that are really a security listed on the New York Stock Exchange,” said Tom Dresslar, a spokesman for the treasurer’s office. “The more retail you have, it puts you in a better position to get the best possible price when you go to the institutional side.”

An analysis of the bill by state Assembly staff said the product could potentially “open up a largely untapped investor base.”

Dresslar said the state would also gain added transparency in the secondary market for the retail investors, as well as a “patriotic” element by allowing more residents to purchase debt.

He said the state is still far from a decision on whether to sell the new securities.

Assembly Bill 1408 cleared the Assembly Appropriations Committee Wednesday, and awaits action by the full chamber.

Only about a handful of states have sold the debt, termed preferred securities, including a sale by New Jersey in the late 1990s of similar taxable debt, according to John Hallacy, manager of municipal research at Bank of America Merrill Lynch.

“There have been some complaints about liquidity in the bond market and [these securities are] a way to assure liquidity in some respects,” Hallacy said.

Lockyer has been working on improving the state’s retail bond sales. He launched an ongoing marketing campaign targeting retail investors, including newspaper and radio ads, and a website, www.BuyCaliforniaBonds.com.

California issued more than $99 billion of debt from 1996 to 2009, $34 billion more over the same period than the second largest national seller, New York City, according to Thomson Reuters.

The state has $37 billion of debt that is authorized but not yet issued, according to the treasurer’s office.

Several issuer in the past have pushed to sell bonds to retail investors using “mini bonds” that are usually sold in $1,000 denominations.

Vermont’s administration secretary and former treasurer Jeb Spaulding said his state has sold $1,000 bonds in the past, partly as a way to maintain another market and to reach local investors.

In 2009, Vermont and several states sold entire bond issues to retail investors because of concerns about institutional markets after the financial collapse.

“It is a balance act,” Spaulding said, noting that it can increase costs.

Vermont, which sells a small fraction of debt compared to California, has sold roughly one-third of its bond issuance to retail investors in past years.

“We always do the competitive sale first to make sure we tie our negotiated retail sale that follows the competitive sale to the same pricing,” said Spaulding, a past president of the National Association of State Treasurers.

Lockyer’s legislation comes at a time during which uncertainty about passage of a balanced budget has caused California to hold back on issuing any new paper.

The state has no plans to go to market until the fall, and even that is far from certain.

Dresslar said the government might sell around $6 billion of GO bonds then.

Gov. Jerry Brown will release a revised budget proposal Monday outlining plans to close a $15 billion hole remaining after he was unable to persuade lawmakers to call a special election asking voters to extend temporary tax increases.

The state’s fiscal year ends June 30. California lawmakers rarely adopt a budget on time; in 2010, the budget passed on Oct. 8.


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