New York's BAN rollover law could impact long-term issuance
While municipalities will clearly have more budgetary flexibility thanks to a recently enacted New York law that allows municipalities to extend rollover periods on bond anticipation notes by two years, its impact on long-term issuance will be determined largely by the length of the COVID-19 pandemic.
"When the economy can recover will dictate what happens with borrowing," according to municipal bond analyst Joseph Krist. "As long as you have the uncertainties associated with the pandemic, and its impacts, then it is going to be very difficult to make firm projections on time frames."
The measure, which Gov. Andrew Cuomo signed into law on Aug. 24, stretches the time localities have to pay back BANs issued between 2015 and 2021 that are rolled over into a new calendar year to seven years from five. The law took effect immediately.
Moody’s Investors Service analyst Rob Weber said the measure is a credit positive for New York’s local governments, and especially school districts, since they are active issuers of BANs. All-time low interest rates may offset some of the legislation’s benefits, he noted, since many localities may opt to take advantage of market conditions by selling long-term debt.
"The legislation allowing the extension of BAN rollovers to seven years from five will push off long-term interest costs that would have likely hit in 2020 or 2021," Weber said.
Krist, publisher of the Muni Credit News, said New York is the first state to his knowledge to implement an extended BAN rollover period, a move he said was necessary since the state has been withholding 20% of state aid typically distributed municipalities. Other states will likely follow suit, he added.
“The one thing states can do if they aren’t going to provide necessary aid is loosen up restrictions on borrowing that they currently have on their lower levels of government,” Krist said. “If they are going to leave these local governments to fend for themselves they have to give them some additional tools to fight this.”
Fitch Ratings analyst Shannon McCue noted, the extended rollover period will enable local governments facing fiscal headwinds posed by the virus to delay issuing long-term debt for at least two years to free up budgetary savings from avoiding debt service costs. Municipalities that are healthier financially will also benefit from the two-year rollover option by lowering interest costs associated with long-term debt, she added.
“It takes a little bit of spending pressure off for the next couple of years by giving them more time to pay off the BANs without issuing long-term bonds,” McCue said. “It gives them budgetary relief in the short-term.”
The legislation, which was sponsored by State Sen. Liz Krueger, D-Manhattan, and Assemblyman Fred Thiele, I-Sag Harbor, also extends to five years the period in which localities must replenish restricted funds they transfer to their operating budgets. Previously, such transfers needed to be reversed within the same fiscal year. Weber said this option will be particularly helpful for municipalities with fiscal years ending in December, since the COVID-19 pandemic has had a far larger financial impact on them than school districts or villages that have mid-year budget cycles.
The legislation will also play a key role in easing local governments' access to capital reserve funds to finance infrastructure projects since municipalities will no longer require referendum approval from voters to move the monies, he said.
New York State Comptroller Thomas DiNapoli said he pushed for the legislature to pass a bill amending its local finance laws this summer because of major revenue hits taken by municipalities this year.
“Local governments across New York are facing dire financial consequences from the coronavirus global pandemic as sales tax revenues shrink and state aid is in jeopardy,” he said. “This legislation, proposed by my office, will help ease the burdens they will face until our economy fully recovers.”