Rockland to Rochester Win as N.Y. Expands Oversight: Muni CreditFreeman Klopott
From Rockland, New York’s lowest-rated county, to Rochester, its third-largest city, localities in the Empire State are winning with investors as the state expands oversight of municipal finances.
In November, Rockland County was allowed to issue $96 million in debt to close a budget gap only by opening its books to state examiners. Yields on some Rochester obligations are the lowest since 2012 after it voluntarily joined a financial restructuring program designed by Governor Andrew Cuomo to keep localities from having to sell debt to cover revenue gaps.
New York’s handling of the two struggling municipalities shows the dual approach it’s taking to oversight. With Rockland, it’s following the same path that started with New York City’s fiscal crisis in the mid-1970s: The state intervenes only when a locality needs help borrowing. Rochester is following a new, voluntary model geared to help local officials before the state is forced to take control.
“Up until very recently, the oversight only occurred when it was a dire problem,” said Howard Cure, director of muni research in New York at Evercore Wealth Management LLC, which oversees about $4.9 billion. “The trend is in trying to deal with fiscal issues of local governments earlier. Investors do like to see that.”
The New York suburb of Rockland is rated one step above junk. Rochester, a city of about 210,000 on Lake Ontario, faces a $28 million deficit for its $480 million budget.
Municipalities in New York and other states that have an established history of intervention, such as North Carolina and Massachusetts, earn higher credit ratings than their counterparts in states that don’t, Moody’s Investors Service said in a September report.
California, for example, where cities such as Stockton and San Bernardino filed for bankruptcy in 2012, has no municipal intervention. It was home to 104 multi-step downgrades from Moody’s from 2008 to the second quarter of 2013, compared with eight in New York.
Moody’s grades state oversight programs on four levels, ranging from strong to none, and places the most importance on those with a statutory framework for direct intervention and a history of using it, said Greg Lipitz, the analyst who wrote the September report. The grades can change, he said. Michigan’s was dropped to moderate from strong after the emergency manager appointed to oversee Detroit’s finances couldn’t keep the city from filing the largest municipal bankruptcy in U.S. history.
Even though investors support New York’s oversight, such as Cuomo’s restructuring program and a monitoring system implemented by Comptroller Thomas DiNapoli, the steps carry little weight for credit ratings because participation is voluntary, Lipitz said. New York gets a moderate grade from Moody’s. By contrast, in North Carolina, which gets a strong grade, a state agency must approve all debt issued by localities.
“When we look for strong oversight, it’s usually the state that’s intervening rather than the municipality requesting intervention help,” Lipitz said.
DiNapoli said the goal of his monitoring program is to address municipalities’ fiscal challenges.
“More information, even if it is sometimes tough to hear, will ultimately lead to better fiscal practices,” DiNapoli said in an e-mailed statement.
Under the law Cuomo signed that allowed Rockland to borrow, the county must submit its budget to DiNapoli for review before it’s passed. The comptroller can then force Rockland to make changes. Moody’s cited a similar 2010 law for Newburgh, a city in the Hudson Valley about 66 miles (106 kilometers) north of Manhattan, when it raised the community one step to investment grade this month.
“We’ve been working hard to help municipalities find solid financial ground,” Morris Peters, a spokesman for Cuomo’s budget division, said in an e-mailed statement. “The bond market has an amazing ability to cut through the haze and let you know that the policies are working.”
Rockland issued tax-exempt 10-year bonds in March that priced to yield 3.45 percent, or about one percentage point above benchmark munis, data compiled by Bloomberg show. The yield spread was similar on debt it sold in December. Both offerings carried insurance.
Stephen DeGroat, the county’s finance commissioner, said demand for the bonds was at least four times what was available.
“Buyers have faith that the county is turning things around,” DeGroat said by phone.
The trading volume in Rochester bonds due in August 2020 set a more than 18-month high on March 3, Bloomberg data show. The securities exchanged hands at an average yield of 1.84 percent, the lowest since August 2012, when they were sold.
Last month, Cuomo’s restructuring board approved Rochester’s application. It will review the city’s finances and offer solutions for savings, with a focus on merging and consolidating services with other municipalities. Rochester can then tap as much as $5 million in grants and loans to implement the recommendations.
Mayor Lovely Warren said Rochester has negotiated union contracts that lower the city’s share of health-care payments and is sharing some services with the county. She said Rochester applied to see if the state can find additional savings.
“We hope that the state will see that Rochester is fiscally conservative and done everything it possibly can,” Warren said by phone. “Maybe they will recognize that we need additional state aid.”
The move also signals to investors that Rochester and the seven other municipalities whose applications have been accepted recognize they have challenges and are working to fix them, said Charles Grande, head of muni research in New York at UBS Global Asset Management, which oversees about $14 billion.
“The state is trying to avoid having to expend an extraordinary amount of resources -- people, time and money -- on a problem that can be addressed early and require less,” Grande said by phone. “If you can see the light at the end of the tunnel, you’re happier to buy and hold the credit.”