Bloomberg News

Investors Singing I Love New York With Triple IOUs: Muni Credit

January 14, 2013

Debt of New York issuers is close to the most expensive since 2011 even as the state and its municipalities are set to triple the amount of IOUs they’re using to cover pension bills.

New York and its localities plan to defer a combined $964 million of payments to the state pension under a program Comptroller Thomas DiNapoli created in 2010 that lets public employers spread some retirement obligations over as long as 10 years with interest, budget data show. The amount is up from $791 million last year and $293 million the year before.

While the IOUs signal that rising pension obligations are straining local finances in Wall Street’s home state, issuers are still paying close to the smallest penalty in 18 months. Buyers demanded as little as 0.26 percentage point of extra yield last month on 10-year bonds of New York debt rather than AAA tax-exempts, data compiled by Bloomberg show.

“Investors are concerned about issues like borrowing to pay pensions,” said Howard Cure, director of municipal research in New York for Evercore Wealth Management LLC.

With interest rates near the lowest since the 1960s, “the market is such that it’s not showing up significantly,” said Cure, whose firm oversees about $3.8 billion.

Tax Bet

Benchmark muni yields set a 47-year-low last month as investors bet lawmakers would raise federal income taxes to help trim the U.S. deficit. Last year, New York issuers sold about $44.5 billion of long-term, fixed-rate debt, most among states, Bloomberg data show.

Bill Gross, manager of the world’s biggest bond fund at Pacific Investment Management Co., doubled New York holdings to about $3 billion in the quarter ending Sept. 30, according to filings released last month. Joe Deane, head of munis at Pimco in New York, said Wall Street’s home state offered good credits and prices, and was a high percentage of what was available “when we really liked the market.”

New York municipalities are being squeezed by revenue that has yet to rebound from the recession that ended in 2009, a 2 percent property-tax cap and costs from Hurricane Sandy.

The number of New York local public employers joining the so-called pension amortization program by the Feb. 1 deadline, when fiscal 2013 payments are due, may change, DiNapoli said Jan. 8 in an interview in Albany. More may join, and some may opt out, he said.

Facing Stress

Last year, 133 joined by the final deadline. The portion they can borrow climbs each year when payment rates are rising.

“We keep hearing that more communities are facing fiscal stress,” said DiNapoli, sole trustee of New York’s $150.6 billion retirement fund, the nation’s third-largest. “This is an option for those in severe cash-flow need.”

Municipalities across the U.S. are experiencing the strain of pension costs. Localities sold $980 million of taxable bonds in 2012 to finance public-worker retirement obligations, the most since 2008, data compiled by Bloomberg show.

In New York, DiNapoli sets what localities pay. From fiscal year 2010 to 2014, the average rate they owe on every dollar that police and fire employees earn rose to 28.9 percent from 15.1 percent, and to 20.9 percent from 7.4 percent for other public workers, according to statements on DiNapoli’s website.

New York’s pension is one of the nation’s best-funded. It had about 94 percent of the money needed to pay its obligations in 2011, fourth-highest, data compiled by Bloomberg show.

Loss Impact

Still, by 2014 the bill for counties outside New York City is projected to total $1.1 billion, up from $47 million in 2000 as the fund makes up for losses suffered during the 18-month recession, according to the New York State Association of Counties. Governments amortizing payments must contribute to reserves used to offset any future contributions spikes.

Of the 87 saying they planned to join by a preliminary Dec. 15 deadline, 32 are new entrants, data from DiNapoli show. Among them is Westchester County, a northern suburb of New York City that is rated AAA by Standard & Poor’s, the top grade.

The county is deferring $25.3 million of its $76.1 million bill this year, and plans to amortize $35 million of its $91 million payment next year, according to DiNapoli’s data and county documents. County Executive Rob Astorino, who has pledged not to raise taxes, said he plans to cut about 100 jobs.

‘Few Options’

“We were left with few options,” Astorino, a Republican, said in an interview. “We have exploding pensions, Medicaid and throw in workers’ labor cost and the budget goes up exponentially every year.”

A pension overhaul Governor Andrew Cuomo pushed through the legislature last year that raised the retirement age on new employees to 63 from 62 will save $75 million for Westchester governments and schools within the first five years, Cuomo’s office said at the time the measure was approved.

The state itself plans to take a $779 million loan under the program this year.

“The state joined the pension amortization program in 2010 to provide immediate relief during a fiscal crisis while keeping the pension system fully funded under the law,” Morris Peters, a spokesman for Cuomo’s budget division, said in an e-mail

Nassau County on Long Island, which is under state financial control and was pummeled when Sandy struck Oct. 29, is taking part for a second consecutive year. Since taking office, Republican County Executive Edward Mangano has reduced staff by 20 percent, or about 1,800 positions.

“Pension contributions have doubled since 2010,” Tim Sullivan, deputy county executive for finance, said in an e- mail. “To continue to provide essential services to county residents and hold the line on property taxes, the county opted to amortize increased pension costs.”

In trading yesterday in the $3.7 trillion muni market, benchmark 10-year debt was little changed to yield 1.74 percent, the lowest since Dec. 31, data compiled by Bloomberg show.

Following is a pending sale:

ARIZONA TRANSPORTATION BOARD plans to sell $707 million of taxable and tax-exempt revenue bonds as soon as tomorrow, data compiled by Bloomberg show. Proceeds will help finance a five- year highway capital program and refund debt, according to Moody’s Investors Service. (Added Jan. 15)

To contact the reporter on this story: Freeman Klopott in Albany, New York, at fklopott@bloomberg.net

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


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