Regional News

N.Y. Budget Is the PITs

New York's budget for fiscal 2010 will alter the state's public finance landscape in several significant ways: by increasing the cost of bond issuance for public authorities and corporations, changing how personal income tax bonds are sold, and introducing short-term borrowing on the PIT credit.

New York almost passed its $131.8 billion budget on time to cap an extraordinary fiscal year that included new Gov. David Paterson finishing up disgraced former Gov. Eliot Spitzer's fiscal 2009 budget, the takeover of the state Senate by Democrats for the first time since the 1960s, and the near free fall of the state's most important industry, Wall Street.

After months of calling on lawmakers to make tough choices - to cut spending without raising taxes and return the state to long-term balance - Paterson compromised with a budget that made a lot of people unhappy. It relied on higher income taxes for wealthier residents and federal stimulus funds to close a deficit that had ballooned to more than $16 billion.

New York plans to borrow roughly the same amount that it will pay in debt service - $5.7 billion. Lawmakers appropriated $5.86 billion for debt service and a $250 million appropriation for a debt reduction reserve fund. The state has $49.88 billion of debt outstanding.

The state's primary debt issuance vehicle is its PIT bonds, which it sells through five public authorities: the Dormitory Authority of the State of New York, the Empire State Development Corp., the New York State Environmental Facilities Corp., the New York State Housing Finance Agency, and the New York State Thruway Authority.

Since the credit was introduced in 2002, each issuer has been restricted to selling the appropriation-backed bonds for certain purposes related to each authority's mission, such as housing-related PIT debt for the HFA or transportation-related debt for the Thruway Authority.

That's all changed now. The budget authorized DASNY and the ESDC to issue PIT bonds for any of the spending categories. It's not clear whether this move will lead to a phase out of PIT issuances by the EFC, HFA, and the Thruway, which tend to sell smaller PIT deals than DASNY and the ESDC.

"Our intent ... is to provide flexibility for us in issuing PIT bonds as market conditions allow," Division of Budget spokesman Matthew Anderson said. "This could allow for consolidation of issuances which could lead to economy of scale."

DASNY spokesman Marc Violette said in an e-mail that his authority would be looking to the Division of Budget in the coming months for guidance on how to proceed with PIT issuance.

Although PIT bonds are all issued on the same credit and carry the same credit rating, they haven't always priced the same. Observers have noted that the Dorm Authority's PIT bonds tend to price better, though comparisons between different issuers are difficult since market conditions vary.

"We believe that the size of the Dormitory Authority's bond portfolio and the fact that we have not had a bond default in our 65-year history may have a positive impact on how our bonds price when we go to market," Violette said.

PIT bonds sold by the ESDC and HFA tend not to trade as well as bonds issued by other PIT issuers, said Fred Yosca, managing director and head of trading at BNY Capital Markets.

"They're all the same credit but ... [ESDC] bonds never seem to trade as well as a Dorm or Thruway would if they had the same rating," he said. "There's a perception, at least in my mind and I think in other people's as well, that Dorms, Thruways and Environmentals are just cleaner."

New York could begin issuing short-term bond anticipation notes on its PIT credit in fiscal 2010 for the first time, though it's unclear how much short-term borrowing the state plans to do or when.

"We're providing ourselves flexibility as market conditions develop, but we don't have any plans to issue PIT Bans at this time," Anderson said. The amount of PIT-backed Bans the state can issue is not capped, he said.

New York is not alone in looking to short-term financing, according to Fitch Ratings analyst Laura Porter.

"We're seeing in general more people doing Bans, so it doesn't necessarily surprise me that they would get the flexibility to do that," Porter said. The state's potential short-term issuance doesn't have a credit impact, she said.

New York City is also planning to sell notes for the first time since 2003. The city's January financial plan anticipates $2.4 billion of annual note sales beginning in fiscal 2010 and continuing through fiscal 2013. In the past, the city has sold Bans in the fall and paid them off in the spring.

While higher income taxes on the state's highest earners have gotten a lot of attention, the higher costs for bond issuance haven't. Public authorities and public benefit corporations that have at least three board members appointed by the governor, as well as industrial development agencies, have to pay a fee to the state when they sell bonds based on a five-step graduated scale according to the principal amount issued.

The budget increases those fees by an average of 8 basis points. On the low end, the state fee for issuing bonds with a principal amount of $1 million or less has risen to 0.168% of the principal from 0.14%. On the high end, the fee on deals of more than $20 million rises by 14 basis points to 0.84% from 0.7%. The fee is expected to raise $120 million in fiscal 2010, with $20 million of that attributed to the increase, according to a Senate budget report.

"The state was facing a significant deficit and this was one avenue to provide additional resources," Anderson said.

The state's cash-strapped Metropolitan Transportation Authority, for example, will have to pay an additional $2.7 million in bond issuance charges on top of the $13.7 million it was already going to be charged on the $1.96 billion of bonds it plans to issue in the remainder of the calendar year.

Had the new fees been in place when the New York City IDA sold $259 million of bonds on behalf of the New York Yankees and $82.3 million of bonds on behalf of the New York Mets earlier this year to complete their stadium projects, the fee would have added costs of $362,600 to the new Yankee Stadium and $115,192 to the Mets' new Citi Field

The fee also applies to PIT bond issuance and would have increased state revenue by an additional $3.9 million on its PIT deals last year had the new fee structure been in place.

Officials expect revenue from the master settle agreement with major tobacco companies - which is used to backs its $3.87 billion of outstanding tobacco bonds - will come in more quickly than needed to pay debt service. The state has mandatory debt service of slightly less than $291 million on its tobacco bonds in fiscal 2010, but it expects MSA funds to bring in $517 million. The "turbo" structure the bonds were sold under requires excess revenue to be used to retire outstanding tobacco debt, for which lawmakers appropriated $226 million.

In addition to $5.86 billion appropriated for debt service, the state allocated $3.99 billion for contingencies. Most of that relates to New York's $7.61 billion of outstanding variable-rate debt.

"This is a common practice for the state to include these appropriations in the debt service bill," Division of Budget spokesman Jeffrey Gordon said in an e-mail. "The state does not anticipate using these contingency appropriations .... They are included to create needed flexibility, primarily to address worse-case scenarios."

Given unpredictable credit market conditions, those worse-case scenarios include variable-rate demand bonds spiking to a maximum rate of 18%, or if the state suddenly needs to terminate all of its outstanding interest rate swaps. In such cases, the state has authorized payment of $2.27 billion for variable-rate debt service, $800 million to terminate its swaps and $100 million for "related expenses."



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