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Suffolk County Punished as NYC Suburbs’ Gaps Widen: Muni Credit

June 06, 2012

Suffolk County Punished as NYC Suburbs’ Gaps Widen

Long Beach, on the southern coast, was dropped five levels to the lowest investment grade by Moody’s in December. Photographer: Victor J. Blue/Bloomberg

New York’s Suffolk County, home of the Hamptons beach towns, faces a growing financial penalty to borrow for projects such as roads, bridges and a golf course as it confronts a fiscal emergency.

The 80-mile (129-kilometer) stretch of eastern Long Island, where hedge fund billionaires John Paulson and George Soros have bought houses, is dealing with a three-year $530 million deficit. It plans to sell $60 million in tax-exempt bonds today as the extra yield that investors demand on its debt has almost doubled since December.

County Executive Steve Bellone declared a fiscal emergency in March after Suffolk’s spending plan ended out of balance for the first time in two decades. It joins nearby counties Nassau and Rockland contending with fiscal stress while officials pare services and payrolls in the suburbs, which are among the nation’s 20 wealthiest.

“There were decades of surpluses, and those surpluses were never sent back to the taxpayers -- they were spent,” said Matt Dalton, who manages about $1 billion of munis at Belle Haven Investments Inc. in White Plains, New York. “The minute there’s a deficit, it just shatters everything.”

Suffolk, Nassau and Rockland had their bond ranks cut in the past six months by at least one rater and have either a negative outlook or are on review for downgrade from at least one of the credit companies. In the case of Suffolk, the reduction sapped enthusiasm for the debt from Jim Holihan at Evercore Partners in New York.

‘Not Eager’

“We’re just not eager investors at these levels for the county paper,” said Holihan, whose company manages $3.5 billion. “Further downgrades are likely.”

A December Suffolk bond sale included a 10-year portion yielding about 0.57 percentage point more than top-grade securities, data compiled by Bloomberg show. The yield penalty has averaged about 1.05 percentage points in the past two weeks, Bloomberg Valuation data show.

Even that may not be enough for investors such as Evercore. The company is looking for spreads of at least 1.2 percentage points above AAAs, Holihan said. Suffolk “probably does get worse before it gets better,” he said.

The independent financial consultant for the county of 1.5 million projected adequate demand in the sale. Proceeds will pay for more than 100 projects, including work at a municipal golf course near Fire Island and improvements to buildings and roads.

Stabilizing Finances

“We expect to do well,” said Richard Tortora, president of Great Neck-based Capital Markets Advisors LLC. “The county is being very proactive in taking steps to address its budget problems. A plan is afoot to stabilize the county’s finances.”

That plan includes cutting about 300 workers next month and collecting revenue from adding red-light cameras, said Vanessa Baird-Streeter, a spokeswoman for Bellone, a Democrat. In Rockland, officials have unsuccessfully petitioned the state Legislature to help fill a $40 million budget gap by raising taxes.

Downstate counties such as Suffolk tend to rely more than upstate counterparts on sales taxes, which are the first to falter in recessions and slow to rebound, said Mark LaVigne, deputy director of the New York State Association of Counties in Albany. The levy makes up about 44 percent of Suffolk’s $2.8 billion budget for 2012, Baird-Streeter said.

State Control

Nassau lies between Suffolk and New York City, which balanced its fiscal 2013 spending plan with revenue from $7.3 billion in Wall Street firms’ first-quarter profits.

Nassau has had its finances under the control of a state watchdog for 18 months. It plans to sell $220 million of notes tomorrow, data compiled by Bloomberg show. Fitch Ratings lowered Nassau’s rank in December by one step to A+, fifth-highest.

Some local governments of the county of 1.3 million are also contending with fiscal strains.

Oyster Bay, on Long Island’s north shore, was lowered three levels by S&P last month. Long Beach, on the southern coast, was dropped five levels to the lowest investment grade by Moody’s in December. The city issued one-year securities in April yielding 2.5 percent while AAA debt yielded about 0.22 percent, data compiled by Bloomberg show.

Of the New York counties circling the most-populous U.S. city, Westchester alone has three top credit grades.

The county kept that rating in part because it built up more reserves than its counterparts in the lead-up to the recession, said Dora Lee, a Moody’s analyst.

Lower Costs

Investors have rewarded Westchester with lower relative borrowing costs.

Rockland, with 312,000 people, had its rating lowered last month by Moody’s to one step above junk. It issued a one-year note backed by its general-obligation pledge last week to yield 3.4 percent, according to data compiled by Bloomberg. That’s a higher interest rate than Westchester, across the Hudson River, paid in November for bonds maturing in 17 years, the data show.

As Nassau, Suffolk and Rockland tackle financial strains common to municipalities nationwide, they have an advantage: their relative wealth.

The New York counties are ranked eighth, 16th and 20th, respectively, in median household income among counties in the U.S., according to Census Bureau data. If not for these levels of affluence, said Naomi Richman, a managing director at Moody’s, they would probably be rated lower.

Following are pending sales:

The DORMITORY AUTHORITY OF THE STATE OF NEW YORK plans to sell $1.8 billion of bonds backed by personal-income tax revenue as soon as next week, according to data compiled by Bloomberg. Proceeds will refund debt. (Added June 6)

DETROIT plans to sell $575 million of debt secured by sewer revenue as soon as next week, data compiled by Bloomberg show. Proceeds will help finance upgrades to the city’s wastewater treatment system, refinance debt and end swap agreements, according to offering documents. The swap termination fees total about $288 million, according to Fitch Ratings. Fitch last month cut the system’s senior lien bonds to A-, seventh-highest, from A. (Added June 5)

To contact the reporters on this story: Esmé E. Deprez in New York at; Brian Chappatta in New York at

To contact the editor responsible for this story: Stephen Merelman at

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