Jan. 9 (Bloomberg) -- New York Governor Andrew Cuomo, who faces re-election in November, wants to use a projected $2.2 billion surplus to cut taxes. That’s fine with bond investors, who say that three consecutive on-time budgets leave the state on a path of fiscal improvement.
The 56-year-old Democrat wants to lower levies on businesses and homeowners as the extra yield that bondholders demand to buy New York general obligations has shrunk to the smallest since at least March. The state is poised for its highest credit rating since 1972.
While sapping projected surplus revenue may require budget compromises down the road, Cuomo and lawmakers have established a track record of such fixes, said Howard Cure, director of municipal research in New York at Evercore Wealth Management LLC, which oversees about $4.7 billion.
“The governor has been very effective about getting what he wants through the legislature,” Cure said. “Because of that, investors look very favorably upon the state.”
New York isn’t alone in predicting excess cash. In California, the most-populous state, surpluses are projected to swell to $9.6 billion in five years. As a growing U.S. economy boosts revenue, 23 states have cut taxes or taken steps that reduced revenue this budget year, according to a December report by the National Association of State Budget Officers. Ohio, Arizona, Texas and Alaska, all with Republican governors, adopted the largest decreases.
The tax cuts Cuomo proposes would be phased in by fiscal year 2017. While such a plan depletes projected excess revenue, reducing corporate tax rates and freezing property levies for two years would attract business and residents, said Ebby Gerry, who helps manage $15 billion of munis, including New York debt, at UBS Global Asset Management in New York.
“If you do this, you will have a better business climate,” Gerry said. “You take the short-term hit for the long-term gain. And it does decrease your credit volatility as you go through cycles.”
The three major credit-rating companies grade New York two steps below benchmark munis, all with a positive outlook.
David Hitchcock, a Standard & Poor’s analyst, said in an interview that the company will analyze the proposal after Cuomo introduces his spending plan this month. New York’s fiscal year begins April 1.
Cuomo has delivered the state’s first three consecutive on-time budgets since 1984, which has New York poised for its highest S&P mark since 1972.
New York general obligations maturing in March 2025 traded Jan. 2 with an average yield of 3.06 percent, or 0.27 percentage point above benchmark munis, data compiled by Bloomberg show. That difference reached as low as 0.21 percentage point on Dec. 10, the least since the bonds were sold in March.
Debt of New York and its localities lost about 2.2 percent last year, Barclays Plc data show. Yet the entire $3.7 trillion municipal market fared worse, declining 2.6 percent in 2013.
Cuomo’s plan may make it harder to balance the state budget should the economy falter, said Fred Floss, executive director of the Fiscal Policy Institute, a nonprofit research group in Latham, New York, that is backed by organized labor.
“In two or three years, if the economy doesn’t continue to improve, you’ll be stuck with these tax cuts when you might not be able to afford them,” Floss said by phone.
About half of Cuomo’s proposal is meant to freeze property taxes for two years. He also wants to spend $400 million on a credit targeted at New York City renters. Other measures include dropping the corporate tax rate to 6.5 percent from 7.1 percent -- the lowest since 1968 -- matching the state’s estate-tax exemption to the federal level, and cutting the tax rate to manufacturers upstate to zero.
“From a bondholder perspective, people would certainly enjoy seeing stimulation in the economy in upstate New York,” Cure said.
“Our statewide job growth strategy starts with a top-down reducing-tax theory,” Cuomo said in his State-of-the-State address yesterday. “Let’s send a strong signal to businesses saying this is a different day.”
The tax plan, which Cuomo proposed Jan. 6 and raised again yesterday, already has support from Dean Skelos, the Long Island Republican who co-leads the senate.
“The governor and us are actually very close in terms of the tax cuts that are being proposed to help rebuild New York’s economy,” Skelos told reporters in Albany on Jan. 7.
Sheldon Silver, the Manhattan Democrat who leads the Assembly, has said any tax cut must be balanced with maintaining state services.
When Cuomo took office in 2011, the state faced a $10 billion budget gap, according to Cuomo’s budget division. In his second year, that fell to $3.5 billion and last year it was $1.4 billion. He closed the imbalances in part by using the threat of dismissals to get the state’s biggest unions to agree to wage freezes and limiting state spending growth to 2 percent annually.
Meantime in the municipal market, states and cities have scheduled about $6.6 billion of debt sales in the next 30 days, almost 30 percent below the one-year average.
The borrowing slowdown fed a rally across all maturities yesterday. Yields on benchmark 10-year munis fell to 2.85 percent, the lowest in more than a month, while the interest rate on similar-maturity Treasuries was 2.99 percent.
The ratio of the interest rates, a measure of relative value, fell to 95 percent, the lowest since May, and compared with a five-year average of 99 percent. The lower the figure, the more expensive munis are compared with federal securities.
“A lack of issuance in early January usually allows us to outperform taxable markets,” said David Manges, muni trading manager at BNY Mellon Capital Markets LLC in Pittsburgh.
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