Local issuers in New York will be able to sell deficit notes to make up for revenue shortfalls under legislation signed into state law earlier this month.

The law, which was submitted by Comptroller Thomas DiNapoli, made a few changes to the rules governing local finance that could affect how municipalities and school districts issue debt.

They include raising the limit on private sales of bonds to $5 million from $1 million and allowing outstanding notes issued in 2005 to be rolled over for seven years instead of five.

The purpose of the law was “to modernize some of the local government borrowing provisions in state law,” said DiNapoli spokesman Robert Whalen.

The deficit notes, called “deficiency notes,” allow municipalities, school districts, and district corporations to borrow up to 5% of their annual budget to close deficits that arise from revenue shortfalls. The notes cannot be rolled over beyond the fiscal year following the one in which they were issued.

Municipalities already had the authority to borrow for budget deficits caused by natural disasters but not to cover revenue shortfalls.

“Sometimes you will come into a deficit by means of revenue deficiency,” Whalen said. “It’s not always a spending problem that can lead to the need to do some short-term borrowing.”

Raising the limit on private sales to $5 million from $1 million was meant to update the law, which had been set in 1991. Public sales, in this context, are competitive have more stringent noticing requirements than private sales, which can be private placements, negotiated sales or competitive sales.

“Just for practical purposes, the local governments needed a little bit of a higher limit, given the size of the borrowing that they’re doing,” Whalen said.

John Shehadi, chairman of Fiscal Advisors & Marketing Inc., a financial adviser whose clients include many municipalities and school districts in the state, said the higher private-sales threshold would save on public notice costs.

“In some cases you may [also] have the client who, for whatever the reason, mostly fiscal stress, would want to quietly place the bonds rather than go through a full-blown bid situation,” Shehadi said, noting that private sales could still be done competitively. “In almost all cases, we would encourage our clients to issue a request for bids and conduct it just like we do that for notes all the time.”

Most local debt in New York in terms of dollar amount is sold through negotiation but most local deals are sold competitively.

Out of $23.79 billion of bonds sold last year by local issuers, $20.53 billion was negotiated rather than competitive, ­according to Thomson Reuters. Those numbers are skewed by $12.56 billion of negotiated bonds sold on New York City’s three main credits. The city is one of a ­handful of municipalities in the state that has ­statutory authority to sell its bonds through negotiation. 

The majority of local deals were sold competitively, with negotiated sales accounting for 159 of 509 deals. Municipalities can request authorization from the comptroller’s office to sell bonds through negotiation. The higher limit on private debt sales sunsets in 2012.

New York State Association of Counties said in a memo in support of the legislation that it would “provide much-needed fiscal management flexibility and ease the sale of local government bonds” during a challenging fiscal climate.

One market source said the impact of the law might not be dramatic, at least in the near term.

“In times of market difficulties such as we saw back in 2008 and going into 2009, I think you would have seen some of these reforms acted [upon] to a greater extent,” the source said.

“With the strong market environment that we’re in today and the extremely low interest rates and accessibility to the market, I’m not sure you’re going to see a huge movement on the part of local government to take advantage of these right away.”

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