Bloomberg News

Nassau Freedom Revealed in Buffalo Losing Oversight: Muni Credit

June 27, 2012

Nassau, New York’s wealthiest county, can take lessons from Buffalo, its poorest city, on how to win back financial independence from a state oversight board.

Eighteen months after Nassau’s fiscal affairs were taken over, County Executive Edward Mangano failed last week to get permission from lawmakers to sidestep the state panel and borrow $40 million to pay tax refunds. Instead, the Long Island suburb of 1.3 million, which has seen its relative borrowing costs climb in the past month, will tap reserves.

Buffalo, in contrast, is set to end nine years of New York oversight July 1, when its control board will shift to an advisory role. The city of 261,000 on the Canadian border achieved the goal by cooperating with the authority to balance its budget for three straight years while shrinking its debt by more than 25 percent.

“A control board takes away some political authority, but permits unpleasant decisions,” said Howard Cure, head of research at New York-based Evercore Wealth Management LLC, which manages $3.5 billion. “To get out from under its yoke, you need to maintain a structural balance. Nassau has a way to go to get there. Buffalo cooperated with its board to achieve one.”

Nassau has joined nearby counties Suffolk, home of the Hamptons beach towns, and Rockland in facing fiscal strains caused in part by flagging sales-tax revenue. The Nassau County Interim Finance Authority took control in January 2011 after ruling the county’s budget had a gap of more than 1 percent of projected spending.

NIFA Directives

NIFA wants Nassau to bolster reserves, end the use of one- shot revenue, reduce labor costs and avoid borrowing to cover property-tax refunds, the authority said when it took control.

Nassau, whose $93,613 median household income is triple Buffalo’s, must get the authority’s approval to borrow and on contracts it negotiates with unions. About 30 percent of Buffalo residents live under the poverty level, and its median household income is the lowest of the state’s cities.

The two municipalities have the same credit rating, at A1 from Moody’s Investors Service, fifth highest. Buffalo’s has risen from Baa3, one step above speculative, when the control board took over in 2003. It’s now the best in the city’s history, according to Mayor Byron Brown. Nassau’s rating was cut one step by Moody’s in November 2010.

Yield Penalty

As Nassau attempted this month to persuade state lawmakers to agree to a bill allowing it to issue bonds without NIFA’s approval, demand for some of its debt weakened. The yield on an 18-year bond issued by Nassau County in April rose to 1.18 percentage points above top-rated debt on June 15, data compiled by Bloomberg show. That’s the widest since it was issued and up from 0.97 percentage point a month earlier.

The attempt to get approval for a bond sale showed county leaders are prone to work against the control board, said Lawrence Levy, executive dean of the National Center for Suburban Studies at Hofstra University in Hempstead, part of Nassau.

“In Nassau, they still don’t completely understand how profoundly they need to change,” Levy said in an interview. “It’s still a political game played by the old script.”

County lawmakers on June 25 voted down a request by Mangano, a 50-year-old Republican, to borrow about $40 million for the property-tax refunds. The plea came after he couldn’t get state lawmakers, including Senate Majority Leader Dean Skelos, a Nassau Republican, to go along with the plan. He’ll use county savings to cover the costs, said Brian Nevin, a Mangano spokesman.

Tax Refund

Nassau isn’t the only local government in New York that pays for so-called tax certiorari payments, a refund to a property owner after a court rules the payer was overcharged, said Robert Weber, an analyst for Moody’s. Jurisdictions including Westchester County pay for them through operating budgets or hold reserves, he said.

“Having to bond out for them may be a sign they’re having operational weakness,” Weber said of Nassau in a telephone interview. “We’re going to continue to analyze the county’s ability to get a structural balance, and at some point that’s going to have to include paying for tax certioraris.”

Nassau guarantees the payments for property owners who win settlements against school districts and towns. In 2013, a Mangano-backed law goes into effect ending the guarantee.

“Working together, NIFA and I will do all in our power to address today’s actions in a responsible manner while protecting taxpayers,” Mangano said in an e-mailed statement after the county Legislature rejected the borrowing.

Working with the authority may help Nassau regain financial independence and reduce borrowing costs, said George Marlin, a NIFA director.

Buffalo regained independence after its debt shrunk by more than 25 percent since 2004 to less than $300 million and as it lowered its residential property tax rate since 2006, according to Fred Floss, a control board member, and a statement from the mayor.

Following is a pending sale:

LAS VEGAS VALLEY WATER DISTRICT plans to sell $400 million in general-obligation bonds as soon as July 9, according to data compiled by Bloomberg. About $40 million will be used for refunding, the data show. Standard & Poor’s rates the debt AA+, second-highest. (Added June 27)

To contact the reporters on this story: Freeman Klopott in Albany, New York, at fklopott@bloomberg.net; Brian Chappatta in New York at bchappatta1@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net


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