UBS Gets Loan While Connecticut Economy Falters: Muni Credit
Last year, UBS AG (UBSN) began exploring moving back to Manhattan from Stamford, Connecticut, where more than a decade ago the Zurich-based bank had consolidated U.S. operations and moved thousands of employees.
Connecticut Governor Dannel Malloy, the former mayor of Stamford, persuaded UBS to stay by giving it a $20 million loan that won’t have to be repaid if the bank keeps at least 2,000 workers in Stamford until 2017. The deal represents the dilemma facing the Democratic governor, who in his first two years in office gave companies a record amount of tax incentives, only to see the economy stall and the state budget fall into deficit.
“Connecticut doesn’t seem to be yet fully on top of what the competitive world looks like,” said Fred Carstensen, director of the Connecticut Center for Economic Analysis at the University of Connecticut in Storrs. “Financial services is like manufacturing. It’s not a sector that’s going to be a job creator.”
Connecticut, shaken by a mass shooting Dec. 14 that left 28 dead, faced a budget deficit even as it is among 25 states where tax revenue has either matched previous peaks or will do so by this fiscal year.
Overspending on health care has contributed to a $365 million gap in its $20 billion spending plan less than halfway through the fiscal year that began July 1.
Malloy, 57, and the Democratic-controlled state Legislature, which last year passed the biggest tax increase in Connecticut history, on Dec. 19 agreed to use mostly spending cuts to close the gap. The largest reductions are aimed at those without health insurance and the Medicaid program for the poor.
The state economy that has one of the nation’s highest jobless rates, at 8.8 percent in November, compared with the 7.7 percent U.S. average. It had 87,000 fewer jobs last month compared with the peak in 2008 after the 18-month recession began. According to the state Labor Department, among the weakest areas has been finance, which includes banks and insurers. The industry lost 3,000 jobs in the last year, even with the governor’s efforts.
“We’re struggling to come out of this one,” said Kevin Lembo, Connecticut’s comptroller, who said in a report this month that the deficit might be even larger, at $415 million. “The volatility of the situation would argue that the worst is not over yet.”
Even with the budget challenge, investors are rewarding the state with lower relative borrowing costs.
The state on Dec. 12 sold tax-exempt bonds repaid with gas taxes. A 10-year portion priced to yield 1.82 percent, or 0.36 percentage point above benchmark munis, data compiled by Bloomberg show. That spread is down from 0.42 percentage point when Connecticut last sold similar debt on Dec. 1, 2011.
While Hartford, the state capital, has long suffered through a decline from its status as the insurance capital of the world, Fairfield County bordering New York to the south has emerged over the last two decades as a center for hedge funds.
Financiers such as Paul Tudor Jones and Steven A. Cohen set up shop in wealthy enclaves such as Greenwich. Residents in the county, many of whom commute to Wall Street, account for more than half the state’s income-tax revenue.
Swiss Bank Corp. helped fuel the county’s emergence in 1994, when it agreed to move its U.S. headquarters to Stamford in exchange for $120 million of tax incentives. It built the world’s largest trading floor -- the size of two football fields -- downtown next to Interstate 95. The bank agreed to merge with UBS in 1997 and other financial services companies followed it to the city, including the Royal Bank of Scotland’s Greenwich Capital unit.
As financial institutions have been cutting back globally, losing more than 300,000 jobs since the beginning of last year, Connecticut hasn’t been spared. Bank of America Corp. (BAC) said in a filing to the state labor department in June it was letting go about 150 workers in the state. The same month, ESL Investments Inc., the hedge fund run by Edward Lampert, said it was relocating to Miami from Greenwich.
“The proximity to New York and the reliance on the financial industry for high-paying jobs is something that needs to be watched,” said Michael Pietronico, who manages $860 million of municipal securities as chief executive officer of Miller Tabak Asset Management in New York. “The hedge-fund community continues to be a vital part of their tax base.”
UBS had more than 3,000 workers in Stamford when the global credit crisis peaked in 2008 and had expanded outside of its headquarters into offices that the bank has either since left or put on the market seeking to sublet, according to Steven Greenbush, a broker at CBRE in Stamford.
The bank in October said it would cut 10,000 people around the world, about 15 percent of its staff, as it seeks to reduce expenses by $3.6 billion. It declines to say how many will lose their jobs or be relocated from Connecticut.
“UBS intends to honor its 2,000-person threshold contained by our agreement with the state of Connecticut, which is far below our present employee and contractor levels statewide,” Megan Stinson, a spokesman for UBS in New York, said by e-mail.
Malloy in his 2010 campaign for governor said he helped create thousands of jobs in his 14 years as Stamford mayor. Since he took office at the beginning of last year, the state has almost doubled business incentives compared with the prior eight years, giving out more than $800 million of tax credits, loans and grants to 365 companies in exchange for promises to create or retain almost 32,000 jobs.
“These are focused investments in growth industries,” said Andrew Doba, a spokesman for Malloy. “We’re confident it will achieve a good net return on investment.”
In the largest deal to date, the state last year gave $291 million to Bar Harbor, Maine-based Jackson Laboratory to expand in Farmington. In August, Malloy announced that Bridgewater Associates, the hedge fund that paid its founder Raymond Dalio $3.9 billion last year, would get more than $100 million of tax incentives and forgivable loans to move to Stamford from Westport, Connecticut, and build a $750 million headquarters.
The effectiveness of the deals may become a political issue if Malloy runs for re-election in two years.
Ben Zimmer, executive director of the Connecticut Policy Institute, called the incentives a “straight-up redistribution of income from middle-class people to politically connected corporations.”
The institute was founded by Tom Foley, the Republican who lost the election for governor in 2010 and has been telling reporters he will run again.
“Connecticut has been a poorly run state for a long time, and that includes Republican governors and Democratic Legislatures,” Zimmer said. “What he’s done is to largely continue that.”
In muni trading last week, yields on 10-year benchmark tax-exempts reached 1.81 percent, the highest since August, data compiled by Bloomberg show. The interest rate touched 1.4 percent Dec. 6, the lowest for a Bloomberg Valuation index that began in January 2009.
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