Government One-Shots Raising Taxpayers’ Debt Costs: Muni Credit
Nassau County, New York, is planning to auction its sewer system. Yonkers, the state’s fourth-biggest city, spent $131 million from its reserves and refinanced its library. The next time those municipalities need that revenue to balance their budgets, it won’t be there.
U.S. local governments have increasingly relied on so- called one-shots to close budget gaps rather than fixing the chronic imbalances that cause them, Standard & Poor’s said in a report last month. The moves are hurting taxpayers and investors. Nassau, whose finances were taken over by a state board in 2011, has seen the penalty it pays over top-rated securities rise by more than 50 percent.
“One-shots are a dirty word in this business and people in the market take a dim view,” said Chris Mauro, head of U.S. municipal strategy at RBC Capital Markets in New York. “People want solid, recurring revenue streams.”
Since 2007, states have relied on $45.3 billion in one-time budget fixes, including federal aid and deferred payments, according to the Washington-based Center on Budget and Policy Priorities. Local governments have taken similar steps as the 18-month recession that ended in 2009 cut tax revenue and boosted deficits.
Over a five-year period, former Chicago Mayor Richard M. Daley leased thousands of parking meters, a toll highway and city-owned garages to raise $3.45 billion. Since leasing the meters in December 2008, Chicago has seen its relative borrowing costs balloon 12 times over.
Daley spent most of the revenue raised by the sale of the city’s assets before leaving office in May, handing incoming Mayor Rahm Emanuel a more than $600 million budget gap and little wriggle room. Like other municipalities, Chicago may be running out of one-shots, said Matt Dalton, who manages about $1 billion of munis at Belle Haven Investments Inc. in White Plains, New York.
“I don’t know what else they have left to sell,” Dalton said in a telephone interview. “You’ve got to pay attention to one-time spending items because they’re going to change things farther down the ledger. Chicago no longer has revenues from parking.”
One month after Chicago leased the meters, the city sold tax-exempt general-obligation bonds with a 20-year segment priced to yield 4.89 percent, according to data compiled by Bloomberg. That was seven basis points, or 0.07 percentage point, more than top-rated debt with similar maturities, according to a Bloomberg Fair Value index.
In its most recent issue in November, Chicago sold 20-year debt at 4.75 percent, or 86 basis points over the index.
‘Not the Way’
Nassau County, a Long Island suburb of New York City, isn’t done looking for one-time fixes. It’s planning to auction operation of its sewer system to private investors for about $1 billion, which would be the biggest one-shot ever for a New York municipality other than New York City, said George Marlin, a director of the state board overseeing the county’s finances.
“This is not the way to balance budgets or fix deficits,” Marlin said in a telephone interview.
A public-private partnership for the sewer system would help bridge long-term budget gaps and give the county time to bring revenue and expenses into balance, according to County Executive Edward Mangano. The transaction would also allow Nassau to retire $500 million in debt.
“Every option must be considered in order to improve Nassau’s sewage-treatment plants,” Mangano said in a statement e-mailed yesterday. “Private operators have proposed to implement bulk purchasing, cut energy costs, shut down obsolete equipment and make other operating improvements.”
Moody’s Investors Services assigned Nassau a negative outlook on its $1.4 billion of outstanding debt and $210.9 million in general-improvement bonds the county plans to sell later this month, the rating company’s April 17 report said. The action shows Nassau faces a possible downgrade of its A1 ranking, the fifth highest.
“The continued use of one-time revenue to support operations” led to the outlook change, Moody’s said.
Nassau’s borrowing costs relative to top-rated debt rose last year after Mangano’s proposal in September. The county issued general-obligation tax-anticipation notes in December, with a $145 million portion maturing in nine months yielding 1.1 percent, Bloomberg data show. That was 89 basis points more than top-rated debt maturing in a year, according to a Bloomberg Fair Value index.
In May 2011, the county sold general-obligation notes with a similar maturity that yielded 0.83 percent, or 58 basis points above the index, Bloomberg data show.
In Yonkers, Mayor Mike Spano released a fiscal 2013 budget plan April 16 that he says puts an end to the one-time budget gimmicks that totaled more than $500 million since 2004. During that period Yonkers spent $131.3 million of its fund balance and raised $20 million by refinancing its library, a report released by the city April 5 said.
Moody’s cut the city’s rating two levels to Baa1, the third-lowest investment grade, from A2 in October.
In New York’s Suffolk County, where hedge fund billionaires John Paulson and George Soros have homes in the Hamptons beach towns, officials have used $424 million in one-shots since 2008, including property sales, delayed pension contributions and bonds backed by payments from tobacco companies as part of a 1998 settlement.
Suffolk Executive Steve Bellone declared a fiscal state of emergency March 6 after a task force he appointed reported that deficits through 2013 were projected at $530 million. One week later, Moody’s cut the county’s ratings two levels to A1.
“Moody’s emphasizes that for years, Suffolk County has been running an operating deficit which has been papered over through one-shot revenues,” Bellone said in a statement after the downgrade. “Those days must come to an end.”
Following are descriptions of coming sales:
CENTRAL PLAINS ENERGY PROJECT will sell about $609 million in tax-exempt revenue bonds as soon as next week, according to an offering document. The proceeds will be used to purchase a 30-year supply of natural gas from J. Aron & Co. A group of utilities and municipalities in Nebraska, Iowa and South Dakota will take delivery of the fuel. Moody’s Investors Service assigned the debt a rating of A1, its fifth-highest grade. Goldman Sachs & Co., which owns J. Aron, and RBC Capital Markets, are the managers on the deal. (Added April 19)
NEW JERSEY ECONOMIC DEVELOPMENT AUTHORITY plans to sell about $413 million of tax-exempt bonds and $22 million in taxable debt via competitive sale as soon as next week, according to an offering document. The proceeds will be used to fund or refinance the cost of school facilities projects. S&P rates the bonds A+, its fifth-highest grade. (Updated April 19)
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