When Erie County, N.Y., needed to raise funds for capital projects last year, it first had to go to the Erie County Fiscal Stability Authority for permission.
The authority said no, setting off a struggle for control of the county's ability to issue debt that both sides have said is nearing a resolution that could bring $36.9 million of bonds to the market soon.
Under a compromise agreement hammered out over the past three months, the FSA plans to issue 30-year bonds on its credit while the county will privately place "mirror bonds" for the same par with the authority. If the county gets upgrades from two rating agencies to single A, then the authority's bonds, which are backed by county sales tax, will be converted to county debt. The issue will be the FSA's first.
The agency, which is commonly referred to as a control board, was created in 2005 by former New York Gov. George Pataki and the Legislature at a time when the county faced a $118 million budget deficit.
By statute, the control board has to approve the county's annual budget and four-year plan or it goes from an advisory role into "hard control," which gives it the right to approve or deny bond issues. In 2006, it did just that, and though it approved the county's sale of $50.4 million, last year the control board decided that with its better credit rating, it could save the county money by issuing debt itself.
Moody's Investors Service assigns the county a Baa3 and the authority a Aa2. Fitch Ratings assigns the county a BBB-minus with positive outlook and does not rate the authority. Standard & Poor's assigns the county a BBB with stable outlook and does not rate the authority.
County Comptroller Marc Poloncarz agreed that the control board's stronger credit would save some money, but neither side could agree on how much, or the value of those savings. Poloncarz said the authority's borrowing would save between $250,000 to $400,000 for the life of the bonds while the authority said it would save $556,000. The FSA's annual budget this year is $750,000, said the authority's executive director, Kenneth Vetter.
Poloncarz said he thought the agency was seeking to be the issuer of debt on behalf of the county just to extend its own life.
"We did not want to see the control board perpetuate its life and burden the taxpayers of Erie County with an annual bill of $800,000 just to save a combined $400,000," Poloncarz said. "It made no sense whatsoever."
Not so, said Vetter, who added that the authority has a wider role than just bonding.
"The stability authority is here to provide oversight to Erie County to provide assurance that the county is on very good long-term financial footing, and bonding is only one of those items," he said.
It's wrong to look at "the authority's entire budget and say, 'Well, they save less than their entire budget, so it's a net negative,' " he said.
While in a control period, the FSA has the power to approve or reject contracts the county wants to enter into, and has enacted a hiring freeze. The authority will exit the control period when it approves a budget and four-year plan for the county, Vetter said.
In November 2007, it rejected the county's request to sell its own bonds. The county Legislature then voted against allowing the authority to issue bonds on its behalf.
"We were kind of in a major Mexican standoff, so to speak," Poloncarz said.
The compromise, which was worked out with the aid of the state Division of Budget and approved by the county Legislature on New Year's Eve and later by the authority, appears to allow both sides to get what they want - namely, the authority continues its oversight role and issues bonds, but it won't extend its life for the term of the bonds by allowing the county to assume the debt.
"We indicated we would be willing to turn over the administration of the bonds at any time, but the county wanted a higher level of that assurance," Vetter said. That assurance was the mirror bonds and the agreement that the county would take out the bonds when the county got a single-A rating from at least two rating agencies.
The compromise ran into a snag in January when officials were advised that having the bonds become callable based on when, and if, the county got an upgrade, would be not be attractive to investors. Now the plan is to have a minimum number of years before the bonds will first become callable.
Vetter said he thought they had an agreement with the county about the length of the call date but wouldn't disclose it since the board hadn't been informed yet. Also under discussion was whether the bonds would be fixed or variable rate, Vetter said.
The wrangling has delayed some projects such as road work because the county could not advance cash for capital spending last year with the bond sale so uncertain, Poloncarz said. He added that since the compromise was worked out, he has been able to make some cash advances.
The county recently has been bolstered in part by Canadian shoppers taking advantage of the weak dollar. Poloncarz said he expects the county to achieve its rating in three years.
"We're going to have another year of surpluses," he said. "We had record sales tax receipts and revenues in 2007."
First Southwest Co. is financial adviser to the county and Capital Markets Advisors LLC is financial adviser to the authority.
Citi will lead manage the sale and Roosevelt & Cross Inc. will co-manage.
Hawkins Delafield & Wood LLP is bond counsel for the county. Phillips Lytle LLP is bond counsel for the authority.
The county sold $523 million of new-money bonds since 1997, according to Thomson Financial.
Vetter said that the authority has been extra cautious, since this will be its first-ever bond sale.
"We want to get it right," Vetter said. "If you go to market and you don't have it right, you don't sell out the issuance, you have a problem."
