Regional News

N.Y.'s Nassau County Takes a Hit

Nassau County, N.Y., received its first rating downgrade in a decade last week as it prepared to market and remarket at least $463 million of general obligation debt.

Moody's Investors Service on Thursday downgraded the Long Island suburban county's GO debt to A1 from Aa3. Moody's retained a negative outlook on the credit, citing weak liquidity and increased dependence on non-recurring revenue.

It also downgraded the county's short-term rating to MIG 2 from MIG 1. The downgrades affected $1.2 billion of outstanding debt.

On Monday Nassau plans to convert to fixed rate at least $67.3 million of variable-rate bonds issued in 2007 that have maturities out to 2024.

On Nov. 16, the county plans to competitively sell $270 million of tax anticipation notes. In the first week of December it aims to competitively sell $50 million of tax-exempt bonds with one- to 10-year maturities and $76 million of taxable Build America Bonds with 11- to 20-year maturities.

Though the final structure and par amount of the offering is subject to change, the tax-exempt bonds are expected to finance tax certiorari settlements — successful challenges to property tax assessments — and the BABs are expected to finance the county's ongoing capital program.

Bank of America Merrill Lynch is remarketing agent on the variable-rate conversion.

Public Financial Management Inc. is financial adviser on the deals and Orrick Herrington & Sutcliffe is bond counsel.

The variable-rate bonds are being converted because of the expiration of a letter of credit and low interest rates, according to PFM managing director Nancy Winkler.

"We like the overall lower interest rate environment right now from a historical perspective and feel that it's a good time to lock in long-term fixed-rate bonds for the county," Winkler said. "The county is mindful of its aggregate variable-rate exposure which it has largely from the outstanding NIFA portfolio of variable-rate bonds which are swapped."

The variable-rate bonds that are being converted do not have swaps associated with them. NIFA is the Nassau County Interim Finance Authority, an oversight board that monitors the county's finances and used to issue new-money debt on its behalf.

Fitch Ratings and Standard & Poor's affirmed their ratings of AA-minus and F1-plus and A-plus and SP-1-plus, respectively. Both have stable outlooks.

Nassau competitively sold $126.6 million of tax-exempt bonds on Aug. 11. The bonds priced with serial maturities from 2012 to 2026.

On the short end, two-year bonds yielded 0.56 on a 4% coupon, 14 basis points higher than Municipal Market Data benchmark double-A GOs. The 16-year bonds yielded 3.67% on a 4% coupon, 28 basis points higher than MMD's double-A GOs.

Nassau County has 1.35 million residents and is located on Long Island, just east of New York City. Its median household income is $93,579, compared to the national median of $52,175 in 2008, according to the U.S. Census.

The Moody's downgrade came days after the County Legislature passed the first budget by County Executive Ed Mangano and follows an outlook change to negative from stable in June.

Mangano, a Republican, took office in January after defeating incumbent Democrat Tom Suozzi.

The $2.6 billion budget cut more than 400 positions and $100 million of spending. It also counts on concessions from organized labor that are subject to negotiation.

The county also plans to end a practice of paying tax certiorari settlements on behalf of taxing districts in 2013 and to reform the assessment system.

Though Nassau has a large and wealthy tax base with a manageable debt burden, its financial operations are expected to remain challenged due to its reliance on volatile sales taxes, increased pension costs and the expiration of federal stimulus funds, according to a Moody's rating report.

"The long-term rating downgrade reflects the deterioration of the county's financial position driven by significant weakening of the liquidity position and increased dependence on non-recurring revenues in the 2011 budget," the report said. "These new developments compound a trend of ongoing structural deficits and the lack of a feasible long-term plan."

Moody's said the county's 2011 cash-flow projections were "aggressive" and contained "significant assumptions that may be difficult to meet." Delays in New York State aid reimbursement have also contributed to a deteriorating cash-flow position, the report said.

It added that the negative outlook reflected a "belief that structural gaps are likely to increase given recent changes to the county's multi-year financial plan, which decreased recurring revenue sources."

Asked about the downgrade, Mangano's office released a statement from press secretary Mike Martino that did not address issues raised in the Moody's report.

"The county executive ran for office to address the budget mess in Nassau County that Moody's describes," Martino said. "The county executive is proud of the bold, aggressive structural reforms instituted in the 2011 budget and is confident that these actions will benefit Nassau taxpayers and bondholders."

Mangano's office did not respond to a question about the potential impact of a downgrade on Nassau County's borrowing costs.

PFM's Winkler said the market was already aware of the June outlook change.

"The negative outlook had been out there so we'll have to wait and see what the market thinks," she said.

In September, NIFA said in a report that the proposed budget wasn't balanced. The authority identified $234.4 million of risks in Mangano's proposed budget.

New York created the agency in 2000 to issue bonds and oversee county finances at a time of fiscal crisis, partly due to borrowing to pay tax certiorari liabilities.

In 2003, Nassau began a shift toward satisfying the liability through pay-as-you-go funding. By 2006 it had set aside $50 million to cover the claims, but borrowing to settle the claims has increased since then.

Mangano's proposed budget included $100 million of tax certiorari borrowing but that was reduced to $50 million.

NIFA chairman Ronald Stack said he was still concerned about borrowing for tax certiorari liabilities but referred questions about the downgrade to the county administration.

"I do not comment on the county's rating," he said. "I only comment on NIFA's rating."

Stack wouldn't comment on the newly passed budget, saying only: "I'm not in a position yet [to comment], we're analyzing."

He added that it was too early to say whether NIFA would make an official comment on the budget because the county executive has 10 days to veto amendments, and the Legislature would then have seven days to try to override vetoes.

"I'm still waiting for final action on the budget," Stack said.



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