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Cuomo Budget Missing Labor Accord Earns Debt Rally: Muni Credit

New York Governor Andrew Cuomo is betting he can hold the line on spending for five years to pay for tax cuts. Investors back the plan, even as it leaves out the cost of renewing contracts with the state’s biggest unions.

Cuomo’s Jan. 21 proposal gives voters a piece of a projected $2.2 billion surplus in the form of lower property and corporate levies. The framework marks as “to be determined” the cost of contracts that expire in two years for about 122,000 state workers.

In the $3.7 trillion municipal-debt market, investors are signaling confidence in the 56-year-old Democrat, who faces re-election in November. Cuomo has the state poised for its best Standard & Poor’s grade since 1972 if he can deliver a fourth consecutive timely budget. The extra yield buyers demand on some New York debt has shrunk this month to less than half its average of the prior five months, data compiled by Bloomberg show.

Cuomo’s forecast of a surplus “speaks to the discipline he’s been able to exercise over the legislature,” said Charles Grande, executive director and head of muni research in New York at UBS Global Asset Management, which oversees $14 billion. “Unions may feel entitled to that surplus, and exacting any type of concessions from unions might be more difficult from a surplus position.”

Surplus Company

New York isn’t alone in predicting excess cash. In California, Democratic Governor Jerry Brown’s spending plan projects a surplus of $6 billion next fiscal year. As a growing U.S. economy boosts collections, 23 states have cut taxes or taken steps that reduce 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.

Cuomo imposed a 2 percent limit on state spending when he took office three years ago, turning more than $13 billion in deficits over that period into a projected $300 million surplus for the fiscal year through March 31, budget documents show. The tally exceeds $2 billion by fiscal 2017 if he keeps to the same 2 percent cap.

The governor’s plan to phase in tax cuts includes a rebate to homeowners in districts that adhere to the state’s 2 percent ceiling on property-tax increases, and a drop in the corporate rate to the lowest since 1968.

Debt Reward

Bondholders are rewarding the state. The yield spread on general obligations maturing in April 2027 has averaged about 0.21 percentage point this month, compared with 0.57 percentage point from August through December, Bloomberg data show.

In comparison, the average gap this month on similar-maturity obligations of Pennsylvania has been 0.48 percentage point, down from about 0.61 percentage point from August through December. The state has the same AA rating from S&P, the third-highest level, with a negative outlook. New York has a positive outlook.

A three-week rally across the local-debt market has pushed benchmark 10-year yields to 2.63 percent, the lowest since June, Bloomberg data show.

The existing labor deals expire after fiscal 2016. The budgetary landscape has shifted since 2011, when Cuomo had the leverage of a $10 billion deficit and the threat of firings. That backdrop helped him win contracts that froze wages for the first three years of the five-year deals. Those accords with the state’s two biggest unions saved at least $5 billion over those struck in 2007.

Fiscal Shift

“It’s going to be very difficult for the governor to get the same zero wage increases if we’re talking about spending surpluses,” said Elizabeth Lynam, director of state studies at the Citizens Budget Commission, a watchdog group in New York. “Decisions from the past made in tougher times are going to be difficult to repeat.”

Morris Peters, a spokesman for Cuomo’s budget division, said the price tag for new union contracts is manageable.

“Any increase in labor costs will be absorbed within the governor’s 2 percent spending-increase limit,” he said by e-mail.

In 2011, Cuomo joined state leaders nationwide seeking labor concessions as revenue was still recovering from the 18-month recession that ended in 2009. In 2012, he also pushed through a pension plan that raised the retirement age to 63 from 62 for new workers, which he expect will save the state and its localities $80 billion over 30 years.

‘Corporate Welfare’

Stephen Madarasz, a spokesman for the Civil Service Employees Association, the largest state-worker union, said by e-mail that it’s too early to talk about the negotiations.

“There are many more immediate issues that need to be addressed right now,” Madarasz said. There’s also “a need for good middle-class jobs rather than doling out more corporate welfare and tax breaks to those who don’t need them.”

New York’s fiscal prospects also remain vulnerable to the outlook for Wall Street. As of August, there were still almost 14 percent fewer jobs in the industry than before the financial crisis that began in 2008, according to an October report by state Comptroller Thomas DiNapoli. In fiscal 2013, taxes on the securities companies and their workers delivered $10.3 billion to state coffers, the report said.

Wall Street

“The fortunes of the state are largely dependent on the banking industry and Wall Street, and I wouldn’t say the outlook for the securities industry is rosy,” said Fred Yosca, head of fixed-income trading at BNY Mellon Capital Markets LLC in New York. “It sounds to me like Cuomo is counting on a surplus that doesn’t exist yet.”

Cuomo’s success in delivering three straight on-time budgets for the first time since 1984 is earning the patience of bondholders. In 2010, the year before he took office, the budget process didn’t end until August, the tardiest since 2004.

“Over the last few years, in watching the governor operate, he pretty much gets what he wants in the budget,” said Howard Cure, director of muni research in New York at Evercore Wealth Management LLC, which oversees about $4.7 billion. “I’m bullish” on New York debt, Cure said.

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