The Dormitory Authority of the State of New York plans to begin institutional pricing on $1.36 billion of new-money personal income tax bonds on Monday. DASNY took retail orders on Thursday and Friday on the tax-exempt portion of the deal, which also includes traditional taxable bonds and taxable Build America Bonds.
The state is offering the bonds in four series — two tax-exempt totaling $615.8 million with serial and term maturities up to 30 years, $597.9 million of BABs with serial and term maturities up to 30 years, and $149.5 million of federally taxable bonds with serial maturities up to 10 years.
M.R. Beal & Co. will lead manage the deal. DASNY announced in June that it would be the state’s largest municipal issue in history with a minority firm serving as sole book-runner.
Sidley Austin LLP and Hawkins Delafield & Wood LLP are co-bond counsel on the deal. Public Financial Management Inc. is financial adviser.
The state plans to use the bond proceeds to finance various capital projects, including higher education and health care facilities, and economic development grants.
Decisions on which projects would be funded by which bonds were based on project eligibility and useful life, DASNY managing director of public finance Portia Lee said in an e-mail.
Last month the state brought PIT bonds to market for the first time since May with two deals. New York had delayed tentatively scheduled PIT issues due to its late $136 billion budget, which lawmakers completed on Aug. 4 — 126 days after the beginning of its fiscal year.
The New York State Thruway Authority priced $463.1 million of tax-exempt PIT bonds on Sept. 17. The bonds yielded 3.66% on a 5% coupon for a 20-year maturity. The yield was 32 basis points greater than Municipal Market Data’s 20-year triple-A general obligation benchmark. DASNY sold $133.5 million of taxable qualified school construction bonds on the PIT credit on the same day.
The bonds priced with a single 17-year maturity yielding 3.871% on a 5.051% coupon, 118 basis points greater than 30-year Treasuries, according to the pricing wire.
The bonds were being offered to retail investors last week with yields of 3.92% on 25-year tax-exempts with a 5% coupon.
PIT bonds, which are backed by a pledge of 25% of state personal income tax revenue, subject to appropriation, are the state’s main vehicle for issuing debt. PIT bonds are sold through five public authorities at the state’s direction.
New York has sold $24.04 billion of PIT bonds since the credit was introduced in 2002, according to Thomson Reuters.
The DASNY bonds are pricing during a busy week. New York City is also in the market with $1.3 billion of debt. Municipal bond sales scheduled for next week total $13.14 billion, according Ipreo and The Bond Buyer data.
“The market’s sort of experiencing its first surge in supply in a couple of months,” said Evan Rourke, portfolio manager at Eaton Vance. “There is some either concern and-or hope, depending on what side you’re on, that there might have to be a little concession priced into some things to get them sold.”
The two deals are likely to attract investor interest, according to Rourke.
“These are well-known credits and there certainly is demand out there for New York paper,” he said.
The downturn in the economy hurt New York’s revenues and it has struggled to close large budget gaps, including a $9.2 billion deficit in the current fiscal year.
The state has taken extraordinary measures to manage cash-flow problems, including short-term borrowing from state funds and delaying aid payments to municipalities and school districts. Despite the challenges, New York’s credit ratings have held where some other states have been downgraded.
“You change the rating when the assumptions that have gone into the rating no longer hold true,” said Fitch Ratings analyst Laura Porter.
Fitch rates New York’s PIT credit AA with stable outlook. On the plus side, the rating reflects the state’s extensive financial planning and reporting, well-funded pensions and wealthy economy. On the negative side, the Legislature tends to rely on one-time solutions, there are large out-year deficits, and budgets are frequently late, she said.
Going forward, the state faces the expiration next year of a temporary increase in the personal income tax enacted on high earners last year and the loss of federal stimulus funds.
“It’s a very challenged environment but not out of step with the assumptions that have gone into that double-A rating,” Porter said.
By comparison, Illinois has “huge” structural and budget gaps that have not been adequately addressed and pension funding problems, she said.
California has “liquidity pressures that are unlike others” and limited flexibility due to its initiative process that allows voters to pass legislation that can tie the hands of lawmakers.
“The dysfunction of that budgeting situation is just beyond a New York situation,” Porter said. “There are lot of fundamental strengths in just being a state like New York, if you look at the breadth of that economy and the wealth of that economy.”
Standard & Poor’s rates the state’s PIT credit AAA with a stable outlook. Moody’s Investors Service does not rate it.
The state has entered a reduced period of borrowing capacity and this year cut $1.6 billion of capital spending out of its four-year financial plan.
Last year, the New York Division of Budget reported that based on revenue and debt forecasts, room under the state’s outstanding debt cap would decline to $52 million in fiscal 2013 from $6.8 billion in fiscal 2010.
The Division of Budget now reports it will have $2.3 billion of debt capacity in fiscal 2013, primarily due to capital spending cuts.
The state debt cap was established in 2000 by statute.
When fully phased in in fiscal 2014, the cap will limit outstanding state-supported debt issued since 2000 to 4% of personal income receipts and limit debt service to 5% of total government fund receipts.
In fiscal 2011, affected debt is projected to be 3.53% of forecasted personal income of $959.8 billion. Debt-service costs are projected to be 2.35% of all-funds receipts of $134.3 billion.
“The [capital reduction program] was created to help the state remain in compliance with the debt caps,” Division of Budget spokesman Erik Kriss said in an e-mail.
The state has approximately $55.12 billion of state-related debt outstanding, which includes $19 billion of PIT bonds.