N.Y. Legislature OKs Bill to Allow Pooled RZEDB and BAB Issuance

New York lawmakers Tuesday evening passed legislation during an extraordinary session that allows the New York Municipal Bond Bank Agency to sell recovery zone economic development bonds and Build America Bonds in a pooled issuance to generate lower borrowing costs for local governments and municipalities.

While the Legislature approved the borrowing measure, it did not act on Gov. David Paterson’s plan to help close the state’s fiscal 2010 budget deficit of $3 billion. Fiscal 2010 began April 1.

The governor said he would again call the Assembly and the Senate back into extraordinary session on Monday and Tuesday to tackle the state’s current budget issues.

The bonding legislation, S.66002, creates a borrowing structure in which various local governments will issue general obligation bonds that the MBBA will purchase with bond proceeds that it receives from selling RZEDBs and BABs via negotiation at the same time.

The pooled transaction involves counties and municipalities passing on their RZEDB bonding capacity and BAB authority to the MBBA, according to George Graham, spokesman for the MBBA.

“For federal tax reasons we’re going to get an assignment of their allocation and BAB authority,” Graham said. “So we will technically be the issuer. We will get the subsidy, which we will set up to immediately transfer to the local government through the trustee.”

RZEDBs and BABs are taxable securities created under the American Recovery and Reinvestment Act.

With RZEDBs, the federal government gives borrowers a 45% subsidy on interest costs. Issuers of BABs receive a 35% subsidy on interest costs.

“Most of the borrowers will be [allocating] to us a combination of RZEDBs, BABs, and tax-exempt bonds,” Graham said. “They’ll be trying to use as much of the RZEDB allocation as possible because that’s the most cost effective, but in many cases it’s not quite sufficient to fund projects.”

Officials anticipate a roughly $200 million bond sale before the end of the year, with three or four additional transactions in 2010, Graham said.

Jefferies & Co. has been working with the MBBA in structuring the deal. Orrick, Herrington & Sutcliffe LLP  is bond counsel.

In a pooled transaction, local governments can save on borrowing costs and a larger deal may help attract lower rates in the taxable market.

“It’s a very important bill for counties, municipalities, townships, and cities in that it allows the MBBA to act as an agent on their behalf and allows the MBBA to pool the bonds to save the municipalities economies of scale and considerable money in regard to interest rates,” said Assemblyman Sam Hoyt, D-Buffalo, sponsor of the bill.

“In addition, the MBBA is a very experienced and savvy entity when it comes to selling bonds and it gives some of these smaller municipalities that don’t necessarily have that experience the technical assistance that they otherwise wouldn’t have,” he said.

Since New York’s various counties and municipalities have a range of different ratings, Graham said the transaction would include separate tranches to separate higher-rated entities from lower-rated municipalities.

“In order to make the borrowing cost-effective for a local government that’s triple-A rated, we would need to be able to sell bonds in that category,” he said. “So, we’re looking at establishing tranches based on rating.”

The MBBA already has the ability to intercept state aid from local governments that default on debt. The bill also provides the state comptroller to direct a municipality’s sales tax receipts and-or real estate transfer tax revenue to the MBBA in the event of a default.

The bill also includes mandate relief for local governments with the aim of reducing property taxes.

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