Cuomo Seen Surmounting Sandy as Yield Penalty Rises: Muni Credit
Superstorm Sandy may have doubled the deficit New York Governor Andrew Cuomo needs to plug in his budget. His fiscal track record has investors betting he will handle the challenge in talks that begin in two months.
Bonds of the third-biggest U.S. state are showing signs of stress since the storm struck the region Oct. 29, leaving 2 million New Yorkers without power and crippling transportation. The yield penalty on some maturities has climbed at least 18 percent since Oct. 26, data compiled by Bloomberg show. New York debt has trailed a rally in the $3.7 trillion municipal market.
Yet investors such as Howard Cure of Evercore Wealth Management LLC say the past two years suggest Cuomo, a 54-year- old Democrat, will steer the state through a recovery that may cost more than $30 billion. Since taking office in 2011, he has closed more than $12 billion in budget gaps in part by cutting school funding and raising taxes on the wealthiest New Yorkers. The accomplishments led Standard & Poor’s to say it may boost the state’s credit rating to the highest in 40 years.
“The state and New York City have shown they’re able to handle some pretty dire circumstances, and right now I give them the benefit of the doubt,” said Cure, director of muni research at Evercore in New York, which oversees $3.8 billion.
Sandy killed more than 40 state residents, flooded the New York City subway system and leveled beach communities in Long Island, Brooklyn, Staten Island and Queens. The storm disrupted fuel distribution, leading to hours-long lines at gasoline stations and rationing. Cuomo’s midyear budget update, due Oct. 31, is late because Sandy’s costs are still being tallied.
On Nov. 8, the governor said the deficit for fiscal 2014 will probably widen to $2 billion from $1 billion as Sandy’s destruction caused $33 billion in economic losses and damage.
Speaking in a radio interview Nov. 20, Cuomo declined to specify a deficit estimate, while saying, “It can’t be good.”
Tax collections before Sandy were already lagging behind projections made in July by $170.8 million, Comptroller Thomas DiNapoli said in a statement Nov. 21.
S&P boosted the outlook on New York’s general obligations to positive from stable in August, five months after Cuomo pushed through a pension revamp projected to save the state $13 billion over 30 years. Two more years of balanced budgets may merit a one-step rating increase to AA+, second-highest, S&P said. That would earn New York its best ranking since it was cut to AA from AAA in 1972.
David Hitchcock, S&P’s primary analyst covering New York state, said natural events like hurricanes and earthquakes are typically one-time costs that don’t lead to long-term budget imbalances.
“In comparison to the large budget holes they had to solve from the recession, I would expect this to be relatively small,” Hitchcock said in a Nov. 20 telephone interview. “They’ve been relatively good at budget cuts in order to maintain the structural balance.”
Cuomo has said he will ask for $30 billion in supplemental aid from Congress in addition to seeking 100 percent reimbursement from the Federal Emergency Management Agency, rather than the 75 percent it typically provides. With its fiscal year beginning April 1, New York has less time for budget planning after Sandy than its battered neighbors, New Jersey and Connecticut.
Over time, the cost of the damage, which includes debris cleanup, transportation infrastructure repairs and tax-revenue losses, will be offset by economic gains from reconstruction, Moody’s Investors Service wrote in a Nov. 13 report.
“We expect sales taxes in particular to see a significant boost as spending on repairs and rebuilding ramps up,” Moody’s said.
Still, Cuomo may not have the same leverage he had during his first two budgets, especially after pushing through a year- end tax increase in 2011. Also, Democrats may be poised to retake control of the Senate for the first time since 2008, which may lead to an intraparty battle for leadership. In 2010, a similar squabble delayed the budget by four months.
“Cuomo was able to raise income taxes last year, and I don’t think he can do it again,” Cure said. “You could also have arguments about who is controlling the state Senate, and that could have a big effect on how the state goes about fixing the deficit.”
The aftermath of Sandy may have prevented New York state bonds from joining the biggest municipal-debt rally since July, which has sent interest rates in the tax-exempt market to the lowest since 1967. Yields on muni bonds due in 10 years fell to 1.44 percent Nov. 21, the lowest since at least January 2009, when Bloomberg data begins.
The extra yield investors demand to hold New York state and local securities compared with AAA general-obligations has increased this month to the most since September, Bloomberg data show. The spread widened to 0.46 percentage point on Nov. 19, the biggest gap since Sept. 10.
Matt Dalton, who manages about $1.2 billion in munis at Belle Haven Investments Inc. in White Plains, New York, said municipal-bond buyers understand economic growth will follow Sandy’s destruction.
“Enough investors have had experience with disasters to realize it’s not a doom-and-gloom event,” Dalton said. “There’s insurance, there’s federal aid, and there’s the rebuilding effort. You get a rubber-band effect as you get revenue up.”
Following is a pending sale:
TEXAS plans to sell $1.1 billion in general-obligation bonds as soon as Dec. 3 to finance road projects, according to data compiled by Bloomberg. The debt will be issued through the Texas Transportation Commission, according to Moody’s Investors Service, which rates the securities Aaa, its top grade. (Added Nov. 23)
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