The New York State Legislature ended its session without signing off on requests to allow financially distressed municipalities to use deficit financing, which Moody’s Investors Service calls a credit negative for those communities.

Lawmakers adjourned on Thursday without passing bills that would have enabled Rockland County, the city of Long Beach and other local governments to issue long-term deficit-reduction bonds.

“The deficit-reduction bonds would have extended the time that these issuers have to repay cash-flow-related debt,” said Moody’s analyst Robert Weber.

Local governments in New York can request home-rule legislation from the state that would allow them to issue bonds for operating rather than capital purposes. The bonds typically have a 10-year maturity and a fixed coupon.

Long Beach, a waterfront community on Long Island’s south shore, has been running operating deficits since 2008. It had originally planned to reduce its $10 million deficit over three years with a temporary surcharge that would equate to a property tax hike of about 11.9%.

In a City Council meeting last month, city manager Jack Schnirman proposed seeking approval for $15 million of deficit reduction bonds, which he said would lower that surcharge to 5.28% by spreading out the debt service over 10 years. Now that the Legislature has not approved the bonds, Schnirman said they will be reviewing their options over the next couple of weeks.

“We’re disappointed that politics seems to be interfering with what has always been a routine approval for municipalities across the state,” Schnirman said, adding that they will make sure that they’re acting responsibly and in a timely manner.

Weber said in the report that without the additional tax increase, the city will likely face continued liquidity strains.

Moody’s currently rates Long Beach at Baa3 with a negative outlook, the lowest investment-grade rating. Earlier this month, the agency took the rating off review for further downgrade.

Rockland County hoped to issue up to $80 million of deficit-reduction bonds to plug its deficit.

“Unlike Long Beach, Rockland did not budget for the issuance of deficit reduction bonds and therefore has more leeway, partly because it has until [Dec. 7] to finalize its budget,” the Moody’s report said.

Rockland finance commissioner Stephen DeGroat said without the deficit bonds, the county would pay down its gap at a slower pace, instead of all at once.

“We would just set up a budgetary reserve in our budget every year, probably starting in 2013, of which a portion of revenues would be designated, like the residential energy tax,” DeGroat said. He added that it could take up to 10 years and that the county’s issuance of cash flow notes would likely increase.

As part of its contingency plan to address its $21 million budget gap, the county recently implemented a 4% energy surcharge, which officials have estimated would generate $5.8 million for the last seven months of 2012.

Rockland County is one of New York’s wealthiest counties and is also its lowest rated at Baa3 by Moody’s. Last week, Moody’s took the rating off review for further downgrade, and assigned a negative outlook.

In other good news for the county, it sold $35 million of revenue anticipation notes on Thursday at a lower interest rate than its last notes offering earlier this month.

The debt priced with a 2.8% yield and bids of at least $140 million, DeGroat said. The Rans were issued to finance operational costs.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.