Bloomberg News

Nassau Gaps Ignored as Penalty Reaches 4-Month Low: Muni Credit

June 19, 2013

Debt of Nassau County, home of New York’s richest households, is rallying even as the suburb struggles to close budget gaps after more than two years of state financial oversight.

The Long Island municipality of 1.3 million is selling $210 million of notes today after Fitch Ratings lowered its general-obligation grade last week and said more cuts are possible. While the county projects a combined $276 million of shortfalls in the coming three years, that may swell if it loses legal battles, including one that would reverse a wage freeze, Fitch said.

Nassau’s tax-free debt is benefiting as investors seek shelter from New York’s state and local levies, the nation’s highest. The extra yield on some county bonds due in 30 years fell this week to the smallest since their sale in February. Those securities have Fitch’s sixth-highest rating. The notes offered today, which mature as soon as March, have the company’s second-highest grade.

“Those will sell without a problem,” said Clark Wagner, who oversees $1.6 billion of municipal debt as director of fixed income at First Investors Management Co. in New York. “There is so much money-market demand for New York notes.”

Holding Up

Nassau securities are holding up better than the rest of the $3.7 trillion municipal market. Benchmark local-debt yields are close to a 15-month high as investors anticipate that the Federal Reserve will scale back its bond buying. Investors pulled the most money ever from bond funds worldwide in the week ended June 12, according to Cambridge, Massachusetts-based EPFR Global, which tracks the flow of money into funds.

Tax-exempt Nassau general obligations maturing in April 2043 traded June 18 at an average yield of 4.36 percent, or about 0.7 percentage point above benchmark debt, data compiled by Bloomberg show. The yield gap was 0.79 percentage point when they were priced in February.

The county is selling $155 million of notes due in March and $55 million maturing in April.

“Demand is very strong” from individual investors, Katie Grilli-Robles, a spokeswoman for Republican County Executive Edward Mangano, said in an e-mail.

Shared Strains

Nassau joins neighboring Suffolk County, home of the Hamptons beach towns, and Rockland County north of New York City in facing fiscal challenges. 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.

Fitch dropped the jurisdiction’s general obligations last week by one step to A. The company cited the local economy as a strength. Median household income was about $96,000 from 2007 to 2011, the most among New York counties, Census data show.

The county said this month that it ended fiscal 2012 with a surplus of about $42 million, assuming reimbursement for some costs related to Hurricane Sandy, which hit the region Oct. 29. The county closed a $310 million budget gap in the period, and has reduced headcount by about 19 percent since 2009, Fitch said.

“We have stayed away from the county in anticipation of more financial stress and downgrades, and I’m glad we did,” said Howard Cure, director of muni research at New York-based Evercore Wealth Management LLC, which oversees $4.7 billion.

Rulings Pending

Two court rulings against the county are adding to financial pressure.

The first case involves a wage freeze implemented by the finance authority in 2011 that was challenged by labor unions. A U.S. District judge in Brooklyn ruled in February that the move wasn’t permitted by the New York Public Authorities Law, a decision the county appealed. Oral arguments were heard this month in Manhattan.

A projected deficit of $61.9 million for fiscal 2014 would “substantially increase” if the county loses its appeal and has to repay an estimated liability of about $230 million, Fitch said.

The second case involves legislation passed by the county in 2010 that shifts the responsibility to towns, school districts and special districts for refunds to taxpayers who have successfully challenged property-tax assessments.

February Decision

In February, a state appeals court in Brooklyn declared that the law violates the state constitution and the Municipal Home Rule Law. The county has appealed that ruling to the state’s highest court in Albany, which is expected to hear arguments in the case next year, said Gary Spencer, a spokesman for the Court of Appeals.

Elsewhere in municipal trading, yields on 10-year Treasuries eclipsed like-maturity muni interest rates for the first time since June 10. At 2.32 percent, yields on benchmark 10-year munis compare with 2.35 percent for similar-maturity Treasuries.

The ratio of the interest rates, a gauge of relative value, is about 99 percent, down from above 110 percent last week. The lower the figure, the more expensive munis are compared with federal securities.

The federal court cases are Carver v. Nassau County Interim Finance Authority, 11-cv-1614; Donohue v. Nassau County Interim Finance Authority, 11-cv-1900; and Jaroncyzk v. Nassau County Interim Finance Authority, 11-cv-2743, U.S. District Court, Eastern District of New York (Brooklyn.)

The state court cases are Baldwin Union Free School District v. Nassau County, 3280/2011; Hafner v. Nassau County, 4193/2011; and Town of North Hempstead v. Nassau County, 4381/2011, New York State Supreme Court, Nassau County.

To contact the reporters on this story: Emily Freeman in New York at Efreeman14@bloomberg.net; Esme E. Deprez in New York at edeprez@bloomberg.net; Chris Dolmetsch in New York State Supreme Court in Manhattan at

cdolmetsch@bloomberg.net

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


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