Record N.Y. Tax Hit Feeds Bond Demand After Upgrade: Muni CreditFreeman Klopott and Brian Chappatta
New Yorkers seeking to cushion the blow from a record income-tax bill are poised to stoke demand as the state issues the first bonds since winning its best credit grade in almost four decades.
The state is selling $1.2 billion in mostly tax-free debt backed by personal-income levies today after garnering upgrades this month from Moody’s Investors Service and Fitch Ratings. The securities, to be issued through the Dormitory Authority, are tied to 25 percent of state income-tax revenue, which is set aside in an account that can’t be tapped for other uses.
Collections reached a record $43 billion in New York last fiscal year. That provides an extra incentive to investors, who may already be showing their intentions. Some of the state’s tax-exempt bonds backed by the revenue trade at yields below AAA munis, data compiled by Bloomberg show.
“New York is such a high-tax and big state that there’s demand,” said Howard Cure, head of municipal research in New York at Evercore Wealth Management LLC, which oversees about $5.2 billion. “The state is also on such a good trajectory.”
The sale may buck this year’s trend of investors hunting for lower-grade munis to pad returns as yields hover close to one-year lows. Top-rated state and city debt has earned about 4 percent this year, trailing the broader market’s 6 percent gain, the biggest underperformance since 2009, according to Bank of America Merrill Lynch data.
The relative scarcity of tax-free obligations is spurring demand. New York and its municipalities have issued about 9 percent less debt this year than in the same period of 2013, part of an 18 percent nationwide drop, Bloomberg data show.
Governor Andrew Cuomo, a 56-year-old Democrat running for re-election in November, has pushed through four consecutive timely budgets, the first time that’s happened in New York since 1977. He’s closed more than $13 billion in deficits to help win the state’s first surplus since 2008.
Fitch and Moody’s cited those achievements in bumping up New York’s rating to AA+ and Aa1, respectively, both second highest. Fitch’s rating is its highest ever for the Empire State.
“This is probably the most powerful affirmation of the progress the state has been making,” Cuomo said on a June 20 conference call with reporters, the day of the Fitch boost.
Standard & Poor’s rates the state’s general-obligation debt AA, third highest, and gives a top ranking to New York’s $28.8 billion in personal income-tax bonds.
Tax-exempt personal income-tax bonds maturing in June 2018 changed hands 15 times June 19, the week New York was upgraded by Moody’s. Each trade was at a yield lower than AAA munis.
“On the one hand, it’s clearly a positive -- it’s better to be buying a bond that’s trending up than trending down,” said John Flahive, director of fixed income in Boston at BNY Mellon Wealth Management, which oversees $22 billion in munis. “On the other hand, personal-income-tax bonds are pretty plentiful,” so the new debt may price at a premium to current levels, he said.
S&P affirmed its AAA rating and a stable outlook on the bonds June 20. Analyst David Hitchcock wrote that the company doesn’t expect the grade to change in the next two years.
“While this tax source has had a cyclical element over time, we believe coverage has remained strong and changes to the rate and base have also helped insulate pledged revenues,” Hitchcock wrote.
In December 2011, Cuomo pushed through the legislature a measure that raised taxes on couples who earn $2 million or more while cutting levies for the middle class.
Income-tax collections are expected to climb to $43.7 billion this year, according to state budget documents. New York is one of 17 states to have regained all the private jobs lost during the recession, the state Labor Department said this month.
The expanding economy, a 2 percent limit to annual spending growth instituted by Cuomo when he took office in 2011 and timely budgets have boosted interest in New York debt, Robert Megna, Cuomo’s budget director, said in an interview.
“Investors know that, and knew it before the rating agencies upgraded,” Megna said. “We’re confident” about the bond sale, he said.