New York’s debt is rallying the most since March as the Empire State’s first consecutive on-time budgets since 2006 leave it poised for its highest credit rating in four decades.
Five months after Governor Andrew Cuomo pushed through this year’s spending plan and a pension revamp projected to save $20 billion over 30 years, Standard & Poor’s yesterday boosted the outlook on the third-most populous state’s general obligations to positive from stable. Two more years of balanced budgets may merit a one-step rating increase to AA+, S&P said. Even as the state’s jobless rate exceeds the national average, it may earn the highest rating since it was cut to AA from AAA in 1972.
Investors demand about 0.37 percentage point of extra yield to hold 10-year debt of New York and its municipalities rather than AAA tax-exempts, the smallest difference since March, according to Bloomberg Fair Value data. The gap has shrunk about 25 percent since the start of the year.
The outlook change “will build a base around advancements we’ve seen in New York paper,” said Matt Dalton, who manages about $1.2 billion in munis at Belle Haven Investments Inc. in White Plains, New York. “New York has resiliency because it has the ability to make changes by raising taxes and cutting services.”
Cuomo has done that since taking office in January 2011. Before his first budget was passed, a $14.9 billion imbalance was forecast for the current fiscal year, S&P said yesterday. The 54-year-old Democrat closed the gap in part by restraining growth in Medicaid expenses, cutting school funding costs and raising taxes on joint filers earning more than $2 million annually.
“We base the outlook revision on what we view as the state’s movement toward structurally balanced budgets in the past two years,” David Hitchcock, an S&P analyst, said in a statement.
Neighboring New Jersey, where Republican Governor Chris Christie is also in his first term, has a AA- grade from S&P, one level lower, with a stable outlook. Ten-year debt from New Jersey issuers yielded 0.45 percentage point above benchmark munis yesterday, data compiled by Bloomberg show. New Jersey’s 9.8 percent jobless rate exceeds New York’s 9.1 percent level. The national rate is 8.3 percent.
Neil Klein at Carret Asset Management said the company has been adding New York debt in the past year.
“Our appetite for New York bonds is greater now than it has been in previous years,” said Klein, who manages $1.2 billion of fixed income at Carret in New York. “We view New York as a very, very diverse economic powerhouse.”
New York is still trailing the broader $3.7 trillion municipal market this year. The state’s bonds have earned 5.2 percent, compared with 5.9 percent for the market as a whole, according to S&P data. New Jersey has earned 6.7 percent.
Returns from New York are lagging behind as the state and its local governments are on a pace to sell more debt than any other state, beating their California counterparts for a second straight year.
New York issuers have offered about $30.2 billion in long-term, fixed rate debt, to $27.7 billion for California, data compiled by Bloomberg show. In 2011, New York sales totaled $33.8 billion, compared with $31.7 billion for the world’s No. 9 economy.
Cuomo also faces the challenge of declining contributions from financial workers to the state’s revenue.
Wall Street’s cash bonus pool fell 14 percent last year to $19.7 billion, the lowest since 2008, according to New York state Comptroller Thomas DiNapoli. A global slump in trading and deal-making is prompting some banks to pare jobs in their securities divisions.
Business and personal income-tax collections from the financial industry accounted for as much as 20 percent of New York tax revenue before the start of the financial crisis in 2008, according DiNapoli. The contribution fell to 14 percent last year.
New York ranked 20th in economic health among the 50 U.S. states and the District of Columbia in the year through March, according to the Bloomberg Economic Evaluation of States. New Jersey was 41st.
The BEES Index is based on the performance of local-company shares, tax collections, home prices, mortgage delinquencies, job growth and personal income, giving equal weight to each.
A pension overhaul Cuomo pushed through a divided Legislature also was key to the revision, S&P said. It was among victories including a law legalizing same-sex marriage and a property tax cap that helped push Cuomo’s approval ratings to record highs.
The change approved by lawmakers in March raised the retirement age to 63 from 62 for new workers, and for the first time offered a 401(k)-type retirement plan to some non-union workers.
“This proves the state is on the right track,” Cuomo said on a conference call with reporters yesterday. “We hope to keep it going. We have to continue to see what happens with the economy, but we’re on the right track.”
Following are pending sales:
FLORIDA MUNICIPAL POWER AGENCY plans to sell a combined $140 million of debt as soon as tomorrow, according to data compiled by Bloomberg. The issuance will refund debt and finance capital projects, according to sale documents. (Added Aug. 28)
TEXAS plans to sell $155.4 million of general-obligation debt for water projects, according to bond documents. The state is set to issue the bonds as soon as next month, Bloomberg data show. (Added Aug. 27)