Mini-bonds: public engagement and public investment.

• Author: Fu, Elizabeth

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A recent GFOA membership survey identified infrastructure spending as the third biggest challenge facing local governments. The research supports this; the oft-cited 2013 American Society of Civil Engineers' Report Card for Americas Infrastructure, which analyzed a number of factors to provide a comprehensive assessment of infrastructure conditions and needs in the United States, gave the country a D+ overall. (1)

Funding strategies for infrastructure improvements and asset maintenance generally include pay-as-you-go, debt issuance, and public-private partnerships, with varying degrees of public involvement in the budgeting and planning phases. The need for transparency has led some jurisdictions to connect directly with the public when funding infrastructure projects, and recent projects--debt issuance by two cities and a new platform to purchase municipal debt--suggest that the strategy can be successful.

DENVER'S STORY: A PREVIOUS ISSUER IMPROVES ITS PROCESS

Mini-bonds are not new in public finance. For example, the City and County of Denver, Colorado, issued its first mini-bonds in 1990, and other governments, like the City of New York, (2) have issued mini-bonds--generally issued to raise funds for public capital projects, but the key distinction is that they are available in smaller dominations to make them available and affordable to retail investors. (3) Mini-bonds are unrated, and many governments pledge their full faith and credit to make the instruments more secure and attractive to retail investors.

Why are mini-bonds of interest again? Imagine selling out a $12 million bond issue in less than 20 minutes, which is exactly what happened with Denver in 2014. (4) A number of circumstances factored into Denver's success, including four successful mini-bond issuances in prior years; a low interest-rate climate, which attracted investors looking for higher-yielding products; and the use of technology to make it easier to purchase the bonds.

A former revenue director is thought to have first suggested the idea of mini-bonds, with the support of the then-mayor.

With internal stakeholders on board, Denver presented the idea to its bond counsel and financial advisor. Seeing it as a novel product, they were keen to test mini-bonds and use the city's experience to help other governments that might be interested. The 1990 issuance generated nearly $6 million to finance the expansion of a public library, upgrades to city golf courses, and streetscape projects. (5)

Denver also raised approximately $4 million in 1992 for citywide library improvements, $3 million in 1999 for neighborhood programs--such as upgrades to parks and senior centers as well as building a new police station--and $9 million in 2007 for the downtown Denver Justice Center.

In 2013, members of city council and the city's department of finance begin to discuss the possibility of issuing more minibonds. Denver's director of capital funding had started with the city in 2014 and was not involved in the prior mini-bonds; she and her colleagues saw it as a learning opportunity. The finance team began to run scenarios for a possible issuance, identifying a project that had a tangible connection to the community. Ultimately, Denver decided it would issue $12 million for capital maintenance expenditures that represented the last tranche of the Better Denver Bond Program, which was authorized by voters in 2007. (6) Projects under this program focus on infrastructure investments that have a direct community impact, including libraries, parks, and facilities related to health and human services, public safety, and culture. (7)

From an issuer's perspective, where the mini-bond issuance process really distinguishes itself from traditional issuance of a general obligation bond is the internal administrative work required. To make a simple comparison, Denver's process for issuing a traditional general obligation bond entails council approval and document review with the jurisdiction's legal department, financial advisor, external bond counsel, and other working group members, as well as outreach and engagement with rating agencies. Denver's triple-A general obligation...