Cuomo Channeling Dad Wins N.Y. Best Rally Since ’09: Muni CreditBrian Chappatta and Freeman Klopott
New York debt is rallying the most since 2009 as Governor Andrew Cuomo and lawmakers head for their third-straight on-time budget, a first for the Empire State in almost three decades.
Investors in the $3.7 trillion municipal market require just 0.17 percentage point of extra yield to hold bonds from New York and its localities instead of AAAs, close to the smallest penalty in almost four years, data compiled by Bloomberg show. Helping spur demand, residents of Wall Street’s home state bear the nation’s steepest local-tax burden, while lawmakers agreed with Cuomo to extend a higher rate on top earners.
Cuomo, a 55-year-old Democrat, and legislative leaders reached a deal yesterday on a $136.5 billion budget, closing a $1.35 billion gap. The fiscal year starts April 1. The accord gives the state three consecutive timely financial plans, a first since 1984, when Cuomo’s father, Mario, was governor. The streak has the third-most-populous state on the verge of its highest Standard & Poor’s rating since 1972.
“He’s instilled a sense of confidence that government can balance the budget on time, and it’s positive for municipal investors,” said Jim Holihan, who helps oversee $4.5 billion, including some of the state’s general obligations, at Evercore Partners in New York.
Cuomo has said the prospect of a timely plan showed Albany had moved past the dysfunction that previously defined it. In 2010, the year before he took office, the budget process didn’t finish until August, the tardiest since lawmakers took a record 133 days into the 2004 fiscal period to approve a plan.
Over the past three years, Cuomo, who is in his first term, closed more than $13 billion in budget gaps, in part by getting the state’s largest unions to agree to wage freezes. This year’s negotiations were complicated by a power-sharing arrangement in the Senate, where a group of five Democrats shares leadership with Republicans.
“If we get three in a row, technically, I will beat my old man’s record of two in a row, but who’s being competitive?” Cuomo said during a March 8 speech in New York at the law firm Covington & Burling LLP.
S&P has echoed Cuomo’s view that New York’s fiscal position is improving. The New York-based company in August revised to positive from stable the outlook on the state’s general obligations.
The move means New York, which is rated third-highest at AA, could earn its best grade since it was cut to AA from AAA in 1972. S&P affirmed the outlook this month, citing on-time and balanced budgets.
“There’s an overall positive perception by the market about the credit quality of the state,” said James Dearborn, head of munis in Boston at Columbia Management Investment Advisers, which oversees $34 billion in local debt. “The timeliness of the budgets indicates that they have a much more functional legislative process.”
New York issuers have taken advantage of the state’s fiscal improvement, selling more debt in 2012 than those in California for an unprecedented second straight year, Citigroup Inc. data starting in 1991 show. They borrowed $44.5 billion in 2012, the most since at least 2003, Bloomberg data show.
The state and its municipalities are on pace to issue even more this year, Bloomberg data show. The Golden State and its localities had been the top sellers every year except 1998.
New York munis have benefited as residents look to avoid the nation’s highest state and local levies, as tracked by the Tax Foundation, a Washington-based research group.
New York joins states with Democratic governors, including California, Connecticut and Maryland, that have raised taxes in the past two years, even as Republican-led states such as Kansas and Louisiana aim to reduce or eliminate income levies.
In Albany, negotiators agreed to extend a higher tax rate on joint filers earning $2 million or more a year, which raises $1.9 billion annually and was set to expire in 2014. Cuomo, who is up for re-election in 2014, pushed the higher tax through in December 2011, coupling it with reductions for married couples earning less than $300,000 a year.
“Investors were so used to the state muddling through the budget process and there wasn’t a lot of confidence in their ability to come together and get budgets passed,” said Blake Miller, who helps oversee about $11 billion in munis at Neuberger Berman Group LLC in New York.
“Now there’s this feeling that positive forces are working together,” he said. “It all bodes well for the credit.”
Local governments plan to borrow $10 billion this week, the year’s busiest period, including offers from New York issuers led by the New York City Transitional Finance Authority.
With the wave of supply, muni yields have exceeded those on federal debt for six straight trading days, the longest span since December, Bloomberg data show.
At 2.04 percent, yields on benchmark 10-year munis are close to an 11-month high and compare with 1.96 percent on federal securities, Bloomberg data show.
The ratio of the two interest rates is about 104 percent, compared with an average of about 92 percent since 2001. The higher the percentage, the cheaper local bonds are relative to Treasuries.