New York, the biggest U.S. municipal borrower last year, is headed for the steepest issuance slowdown since at least 2003 even as demand for the state’s bonds drives the extra yield on its debt to a two-decade low.
Wall Street’s home state and its localities have sold 37 percent less securities this year than in the same period of 2012, data compiled by Bloomberg show. The drop is the steepest among the five most populous states and deeper than the 10 percent reduction across the $3.7 trillion municipal market.
The shift is occurring as more New York towns face fiscal stress, according to state Comptroller Thomas DiNapoli. Twenty-four had a history of deficits and held too little cash to pay bills, he said in a report last month. It was DiNapoli’s first comprehensive review of more than 1,000 municipalities after audits showed that almost 300 had previous budget gaps and more than 100 lacked sufficient available funds.
“If you’re struggling to balance your budget, you will defer as long as you can any new debt issuance,” said Howard Cure, head of research at New York-based Evercore Wealth Management LLC, which oversees about $4.7 billion.
The legislature in Albany approved bills this year allowing the first local borrowing to close deficits since 2010. Democratic Governor Andrew Cuomo is creating a panel that will advise cities and towns on how to restructure as they wrestle with budget shortfalls. New York is trying to alleviate fiscal stress to avoid having to take over a struggling municipality’s finances. The state imposed such a control board on Nassau County on Long Island in 2011.
“The challenge facing local governments has reached a critical point,” DiNapoli, a 59-year-old Democrat, said last month in a statement.
This year, New York issuers have offered about $15.7 billion in long-term, fixed-rate debt, compared with $24.7 billion in the same period of 2012, Bloomberg data show. The state’s next biggest year-over-year drop in the past decade was 20 percent in 2006.
Of the five most-populous states, Illinois has the second-steepest decrease, at 13 percent.
The lack of New York general obligations on the market has helped shrink the yield spread on the state’s borrowings, said Fred Yosca, head of fixed-income trading at BNY Mellon Capital Markets LLC in New York.
The additional yield investors demand to buy 10-year bonds from New York borrowers instead of benchmark debt has virtually disappeared, unprecedented in Bloomberg data that began in 1993. New York is rated AA by Standard & Poor’s, third-highest.
“People will pay up for the state name, perceived as a good credit these days, and they don’t get the opportunity to buy it that much,” Yosca said.
Cuomo, 55, has issued an average of $448 million in general obligations in his first two full fiscal years as governor, according to data from DiNapoli’s office. The average of the two years before Cuomo took office in January 2011 was about $814 million.
New York’s ratio of debt to personal income is projected to fall to 4.4 percent in fiscal 2019 from 5.4 percent this year, according to its capital spending plan.
The drop “is the result of statutory and administrative reforms that have fundamentally improved our debt practices,” Morris Peters, a spokesman for Cuomo’s budget division, said via e-mail. The state no longer borrows to cover administrative personnel costs and short-term equipment purchases, he said.
Even as issuance of state general-obligation debt has slowed, the amount of bonds offered by the state’s 45 authorities has risen 18.6 percent since 2008, according to a report released this month by the Authorities Budget Office, which has oversight. About 38.9 percent of the debt issued by authorities in 2012 funded unrelated state activities, up from 34.9 percent in 2008, the report said.
California is on pace to reclaim the mantle of top issuer after New York ended its two-decade reign last year. The most-populous state and its local governments have sold $28.2 billion this year, 27 percent more than a year ago, after voters approved a tax increase on the wealthiest earners.
New York may still catch up, Cure said. In the second half of the year, it will probably need to add to the $500 million already borrowed to construct a more than $3 billion replacement for the Tappan Zee Bridge across the Hudson River, he said.
A pickup in the state’s borrowing pace may not signal fiscal strengthening at the local level.
A $96 million deficit in Rockland County, about 35 miles (56 kilometers) north of New York City, may now be closed after lawmakers approved a bill allowing it to borrow to do so. That would be the most allowed for deficit financing for any county since 2006.
Cuomo is reviewing the bill, said Rich Azzopardi, a spokesman.
In the biggest sale on the calendar from an issuer in the state, New York City plans to sell $635 million of general obligations as soon as next week.
The metropolis will issue into a municipal market that has stabilized since a rout last month, when benchmark 10-year yields rose the most since at least January 2009.
At 2.77 percent, the maturity’s yield is the lowest since July 3. It compares with 2.49 percent on similar-maturity Treasuries. The municipal yield has exceeded that on its federal counterpart on all but one day since June 21.
The municipal market has lost 0.3 percent this month as of July 16, more than the 0.1 percent decline for Treasuries, Bank of America Merrill Lynch data show.
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