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Deal in Focus

DASNY Sets $634M of PIT Bonds

The Dormitory Authority of the State of New York plans to market $634.4 million of personal income tax bonds this week as the state reels from Gov. David Paterson’s decision Friday not to run for election in November.

It was unclear last week whether Paterson’s announcement would throw another wrench into an already strained budget battle or smooth things out. Despite a torrent of negative economic news, New York’s ratings have held up, with the three major rating agencies affirming the state’s general obligation rating ahead of a $448.5 million general obligation deal last week.

DASNY plans to market the PIT bonds to institutional buyers on Wednesday following a retail order period tomorrow. The deal is structured as three series — a $374 million tax-exempt Series 2010A, a $46.7 million federally taxable Series 2010B, and a $213.8 million Series 2010C that will be taxable Build America Bonds. Par amounts are preliminary and subject to change.

RBC Capital Markets is book-running senior manager and Loop Capital Markets LLC is co-senior manager. Hawkins Delafield & Wood LLP is bond counsel. The bonds will be marketed as serials and terms with maturities out to 20 years. The state plans to use the bond ­proceeds to finance capital grants for health-care related projects, environmental and energy infrastructure projects, and to refund mental health bonds.

Paterson’s decision not to seek election in November came days after the New York Times reported that the governor and state police may have intervened in a domestic violence case involving a Paterson aide, David Johnson.

At a press conference Friday, Paterson said he plans to spend the remainder of his term focusing on the state’s problems.

“It has become increasingly clear to me in the last few days that I cannot run for office and manage the state’s business at the same time,” he said.

Paterson said that an investigation into the allegations against him by Attorney General Andrew Cuomo would vindicate him.

“I have never abused my office, not now, not ever, and I believe that when the facts are reviewed, the truth will prevail,” he said.

Cuomo was widely expected to challenge Paterson in a Democratic primary, though he has not announced his candidacy for governor. Paterson became governor in March 2008 after former Gov. Eliot Spitzer resigned amid a prostitution scandal.

Though his decision not to run makes him a lame duck as the state tries to close a $7.4 billion budget deficit, observers and market participants were mixed as to the impact it will have on the budget process. Paterson proposed a $134 billion all-funds budget in January that included unpopular cuts to health care, local aid, and education.

While public opinion on the governor has been dismal for months, market sources have often given him high marks for his efforts in trying to focus the Legislature on the state’s fiscal problems.

“One thing he’s been effective on is beating the drum on the budget,” a market source said. “You have to assume [Lieut. Gov. Richard] Ravitch steps up and takes a lot of responsibility.”

Robert Ward, deputy director of the Rockefeller Institute of Government, said that the public’s displeasure could actually prompt legislative action.

“When voters are unhappy with Albany, that makes the Legislature want to get things done,” Ward said “Sometimes the environment itself can create a desire in the Legislature to move forward.”

The Rockefeller Institute has been working with Ravitch on a four-year financial plan that has yet to be released.

State Comptroller Thomas DiNapoli called on Paterson to allow Ravitch to negotiate the budget with the Legislature.

“The circumstances are difficult and the budget clock is ticking,” DiNapoli said in a statement. “New Yorkers can’t afford a government distracted during these rough economic times.

New York City Comptroller John Liu on Friday went further, calling for Paterson to resign and for Ravitch to take over.

“We have a $4.1 billion budget deficit to grapple with in New York City and cannot make real progress until the state budget is resolved on time one month from now,” Liu said in a statement. “In order for this to happen, we need Gov. Paterson to step down now ... As governor, Richard Ravitch would be the person most able to steer clear of politics, bring people together, and bring about a balanced, on-time state budget.”

Stephen Acquario, executive director of the New York State Association of Counties, noted Paterson’s decision not to run might help him focus more on the budget issues.

“Clearly we have very difficult and painful choices that lie ahead of us,” he said. “The pressure of intense scrutiny on the reelection is now off the governor’s shoulders.”

As to the impact of Paterson’s problems and the current budget situation on this week’s PIT sale, Fred Yosca, managing director of trading and underwriting at BNY-Mellon Capital Markets, said, “It shouldn’t make any difference.”

The debt is “an encumbrance on future income tax collections,” he said. “It won’t be coming out of next year’s budget.”

The state issues most of its bonds on its PIT credit, which is secured by 25% of state personal income tax receipts. Debt service is subject to state appropriation but if funds are insufficient, the state comptroller is required to transfer money from the general fund to cover payments.

DASNY is one of five public authorities that sell PIT bonds on behalf of the state. The state has sold $21.14 billion of PIT bonds since 2002, the first year bonds were sold on the credit.

The recession has hurt the state’s income tax collections, which declined to a projected $34.4 billion in fiscal 2010 from $36.8 billion in fiscal 2009. The state projects PIT receipts will increase to $37.4 billion in fiscal 2011, which begins on April 1.

The rebound in the financial services industry is helping too, with DiNapoli projecting last week bonuses in calendar 2009 will reach $20.3 billion, a 17% increase over 2008 as Wall Street profits are forecast to hit a record $55 billion.

Fitch Ratings rates the state’s PIT bonds AA-minus with a stable outlook, on par with its GO rating. That rating is already below average for a state and incorporates the cyclical nature of the state’s economy, said Fitch analyst Laura Porter.

“That reflects a variability of the revenue stream, it reflects a dependence on the financial services, and it reflects a history of budgeting behavior that tends to rely on nonrecurring resources in downturns,” Porter said. “The reason why New York State has probably kept the ratings from everybody is that it’s not reached the point where you feel the assumptions that go into it are not holding.”

On the positive side, the state benefits from being a wealthy state with a broad economy, a debt burden that is above average but moderate, and good pension funding relative to other states, Porter said.

Standard & Poor’s rates the deal AAA with a stable outlook, citing a strong 4.9 times future maximum annual debt service on the bonds. Standard & Poor’s rates the state’s GOs AA with a stable outlook. Moody’s Investors Service rates the state’s GOs Aa3 with a stable outlook and does not rate new PIT issues.

Last week, New York competitively sold $217 million of taxable Build America Bonds to Morgan Stanley with a true interest cost of 5.27%, or 3.43% after the 35% federal subsidy. The state also competitively sold $180.5 million of tax-exempt GOs to Citi with a TIC of 3.24%, and $51.0 million of taxable GOs to TD Securities with a TIC of 3.44%.

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