Sept. 11 (Bloomberg) -- New York and its municipalities have achieved lower 10-year borrowing costs than their New Jersey counterparts since Governor Andrew Cuomo took office, reversing a trend that stretched back to 1994.
Since Cuomo, a 54-year-old Democrat, took his post at the start of 2011, 10-year debt sold by New York and its localities has yielded less on average than bonds issued in Republican Governor Chris Christie’s New Jersey, data compiled by Bloomberg show. From 1994 through 2010, New York had the higher interest-rate penalty.
While the three major credit-rating companies last year downgraded New Jersey one level, citing reasons including its unfunded pension liability, New York is poised for its highest credit grade in four decades. Standard & Poor’s last month revised its outlook on the Empire State to positive from stable after two consecutive on-time budgets.
“I have a bit more concern about New Jersey only because of their pension funding,” said Gary Pollack, who manages $12 billion as head of fixed-income trading at Deutsche Bank AG’s private-wealth unit in New York. “New York pension funds are very highly funded.”
Both governors have made changes to retirement benefits, capped property taxes and cut spending. Yet New Jersey had about 68 percent of assets to pay future retirement costs as of June 30, 2011, according to state data. New York’s system was 90 percent funded at the end of fiscal 2011, according to the office of state Comptroller Thomas DiNapoli.
Localities in both states are borrowing at levels close to record lows. Still, since Jan. 1, 2011, yields on 10-year debt sold in New York are 0.014 percentage point below New Jersey bonds of similar maturity on average, Bloomberg data show.
That’s a reversal from the 16 years through 2010, when 10-year New York securities yielded 0.13 percentage point more on average than New Jersey’s, according to Bloomberg index data starting in 1994. In five-year debt, New Jersey issuers have paid more extra yield than New York borrowers on average since the start of 2010.
Longer-term bonds tell a different story in recent months. Interest rates on 30-year debt sold in the Garden State have been below New York bonds with a similar maturity since May 1, Bloomberg data show. It’s the first time that’s happened since August 2009. For 20-year maturities, New Jersey’s costs have been below New York’s for most of the past year.
“Any suggestion that New York’s overall borrowing costs are trending lower than New Jersey’s is simply inaccurate,” Andy Pratt, a spokesman for New Jersey Treasurer Andrew Sidamon-Eristoff, said in an e-mail. “In fact, based on Bloomberg data, the trend is exactly the opposite for 20-year and 30-year debt, especially since the passage of New Jersey’s latest budget.”
Christie, 50, who took office a year before Cuomo, on June 30 signed a $31.7 billion budget for fiscal 2013 after vetoing $361 million in Democratic spending initiatives. His plan included $8.87 billion of aid for public schools, a $1.03 billion pension payment and $347 million in business-tax cuts.
S&P cut New Jersey’s rating in February 2011 by one grade to AA-, its fourth-highest level, citing the state’s “poorly funded pension system.”
New York is rated AA, one step higher. Two more years of balanced budgets may earn it a one-step increase to AA+, S&P said last month. That would be the highest mark since the state was cut to AA from AAA in 1972.
“The governor has emphasized keeping spending growth under control and eliminating fiscal gimmicks,” Morris Peters, a spokesman for New York’s budget division, said in an e-mail.
Under Cuomo, lawmakers approved the first consecutive on-time budgets since 2006. New Jersey’s constitution doesn’t allow it to spend money without a budget in place by the July 1 start of the fiscal year. Failure to meet that deadline can result in the closing of some government operations. The last time that happened was in 2006 under Democratic Governor Jon Corzine.
For some investors, the higher New Jersey yields have an appeal as the debt crisis in Europe has pushed interest rates in the $3.7 trillion muni market to their lowest level in 45 years.
New Jersey ‘Upside’
“You don’t quite get those opportunities to buy the extra yield in New York these days,” said Michael Pietronico, who oversees $790 million of munis as chief executive officer of Miller Tabak Asset Management in New York. “There is some upside in New Jersey paper relative to New York.”
New Jersey debt is also delivering a better total return.
The state’s bonds have earned 6.8 percent this year, compared with 5.4 percent for New York, according to S&P data. New Jersey returns are set to outpace New York’s for the second straight year, the longest stretch since 2006.
Both states have jobless rates that exceed the national average of 8.1 percent in August. New York’s rate was 9.1 percent in July, compared with 9.8 percent for New Jersey.
From the start of July 2009 through March 2012, New York ranked 17th among the 50 states and the District of Columbia in economic health, according to data compiled by Bloomberg. New Jersey was 41st, according to the Bloomberg Economic Evaluation of States. The gauge is based on the performance of local-company shares, tax collections, mortgage delinquencies, job growth and personal income.
The index is intended to indicate the direction of each economy, rather than absolute health, so a state that’s quickly rebounding will have a higher rank than one with a steady but slower pace of growth.
For new workers, Cuomo boosted the state’s retirement age to 63 from 62 and created 401(k)-style retirement accounts for some non-unionized employees. Christie since taking office has raised the minimum age for workers to leave with full benefits and required them to pay more for retirement and health benefits in a package designed to save $120 billion over 30 years.
Christie in July 2010 imposed a 2 percent cap on real-estate tax increases, cutting in half the maximum allowable increase and limiting exemptions. Cuomo also limited the boosts to 2 percent, and both states included a provision allowing voters in a community to exceed the threshold.
In the muni market yesterday, yields on top-rated tax-exempts due in 10 years were little changed at about 1.75 percent, Bloomberg Valuation data show. The record low was 1.63 percent in July.
Following are pending sales:
OMAHA PUBLIC POWER DISTRICT in Nebraska plans to sell $550 million of tax-exempt bonds as soon as next week to refinance debt, data compiled by Bloomberg show. (Added Sept. 11)
SUFFOLK COUNTY, New York, home to Long Island’s Hamptons beach communities, plans to issue $105 million in tax-anticipation notes as soon as tomorrow, data compiled by Bloomberg show. (Updated Sept. 11)
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