Cuomo Fixes Prolong New York Debt’s Biggest Rally: Muni Credit
January 17, 2012, 11:59 AM ESTBy Martin Z. Braun
Jan. 6 (Bloomberg) -- Governor Andrew Cuomo’s deals with New York lawmakers and unions to raise taxes and freeze pay may help extend the biggest rally in a year for the state’s income- tax bonds.
The difference in yield between a top-rated New York bond backed by personal-income taxes and due in 2017, and an index of similar-maturity tax-exempt debt, has fallen 34 basis points since Oct. 27, according to data compiled by Bloomberg. That’s the most since a 51-basis-point narrowing at the beginning of last year. A basis point is 0.01 percentage point.
New York’s state and local governments borrowed about $34 billion of fixed-rate debt last year, the most within any state, according to Bloomberg data. Sales still fell 13 percent from 2010 as issuers restrained spending after the longest recession since the 1930s.
New York bonds “will probably be supported due to the improving picture in Albany,” said Matt Dalton, who manages $925 million of munis as chief executive officer of Belle Haven Investments Inc. in White Plains, New York. “Demand outstripping supply is a bigger force than the market paying attention to Cuomo.”
The premium demanded by investors to hold the income-tax bonds reached its 2011 high of 55 basis points on Oct. 27, after U.S. municipal-bond sales surged and as the state faced a $350 million midyear budget deficit and a $3.5 billion gap next fiscal year. Last month, the Albany-based Legislature approved Cuomo’s plan to raise taxes on those earning $2 million or more and cut them for the middle class. Extra revenue from the new brackets lowered the estimated 2013 deficit to $2 billion.
Union Agreements
Cuomo, a 54-year-old Democrat, also instituted a property- tax cap and got New York’s two biggest government-worker unions to agree to pay freezes and furloughs last year.
A poll by Quinnipiac University in Hamden, Connecticut, conducted after the tax changes put Cuomo’s approval rating at 68 percent, two percentage points higher than the record set in July 2002 by Republican Governor George Pataki.
“He’s shaping up as a good leader,” said Rob Amodeo, head of municipal investments at Western Asset Management in New York. “As an investor, it gives you confidence that there’s good leadership and they’re going to do the right thing.”
New York’s finances are stronger than some other large states, Amodeo said. The $146.9 billion pension has the best ratio of assets to expected liabilities, at 101.5 percent, according to a study by Bloomberg Rankings. Illinois is the worst-funded, with assets to pay 45.4 percent of obligations.
Better Than Treasuries
New York’s personal-income tax bonds are rated AAA by Standard & Poor’s, its top grade and higher than U.S. Treasuries. The bonds make up about 40 percent of the state’s outstanding securities. Only $3.5 billion are general obligations.
Legislation enacted in 2001 authorized five state agencies, including the Thruway Authority and the Dormitory Authority, to issue revenue bonds backed by state income taxes.
The legislation provides that 25 percent of personal-income tax receipts, or $6 billion, whichever is greater, be deposited into a fund to cover debt payments.
There’s room for spreads on New York’s personal-income tax bonds to narrow further because their tax-adjusted yields are double those of Treasuries, Amodeo said.
A dealer bought $500,000 of 10-year income-tax debt issued by the Dormitory Authority at 118.5 cents on the dollar Jan. 4 to yield 2.4 percent, or about 0.4 percentage point more than a Treasury. The taxable-equivalent yield for the dormitory bond for an investor in the top tax bracket is 3.69 percent.
Lingering Challenges
New York still faces financial challenges, such as reliance on Wall Street for tax revenue. The securities industry lost almost $3 billion in the third quarter of 2011, cutting year-to- date profits to $9.6 billion, Comptroller Thomas DiNapoli reported Dec. 15. He forecast in October that the industry may lose almost 10,000 jobs by the end of 2012.
Lower Wall Street bonuses won’t cause the income-tax-bond spread to widen, said Michael Brooks, a senior portfolio manager at AllianceBernstein Holding LP in New York.
“You need something to really scare people in a big way for it to have some sort of an impact,” Brooks said.
Following are descriptions of coming sales:
METRO WASTEWATER RECLAMATION DISTRICT, COLORADO, which serves 1.7 million people in and around Denver, plans to sell $380 million of sewer-improvement bonds through competitive bid on Jan. 11, according to offering documents. The bonds are rated Aa1, Moody’s Investors Service’s second-highest investment grade. (Added Jan. 6)
ALLEGHENY COUNTY, PENNSYLVANIA, the second-most-populous county in the state and home to Pittsburgh, will borrow as soon as next week $175 million of tax- and revenue-anticipation notes. The debt matures July 2012 and will help the county meet spending needs until it receives tax collections later this year, according to sale documents. The notes will price competitively. The deal is rated SP-1+, Standard & Poor’s highest short-term investment grade. (Added Jan. 6)
NASHUA, NEW HAMPSHIRE, 45 miles (52 kilometers) northwest of Boston, plans to sell as soon as next week $150 million of taxable general-obligation bonds, according to data compiled by Bloomberg. The debt matures from 2013 through 2027. JPMorgan Chase & Co. is the underwriter. Moody’s downgraded Nashua’s $173 million of general-obligation debt outstanding yesterday by one level to Aa2, its third-highest rating. (Added Jan. 6)
--With assistance from Esme E. Deprez, Henry Goldman and Michelle Kaske in New York and Freeman Klopott in Albany. Editors: Jerry Hart, Mark Tannenbaum
To contact the reporter on this story: Martin Z. Braun in New York at mbraun6@bloomberg.net
To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net
