Nassau bond plan comes at demanding time

Nassau County's planned borrowing to pay for property tax settlements would come at a time when interest rates remain low, but investors may continue to demand higher returns from the financially struggling county.

If the plan approved over the weekend by the County Legislature gets the green light from the Nassau Interim Finance Authority board, the county would sell about $95 million of bonds to pay for tax certiorari settlements -- payments made to owners who successfully challenge property tax assessments -- by the end of the year.

Rates on high-credit-quality municipal bonds with short- to medium-term maturities hit record lows in September but began to rise in October, in part because Treasuries rose, but also because more borrowers were in the market, market experts said. The interest rates municipal borrowers pay generally rise and fall with the U.S. Treasury market.

"With all the turmoil in Europe in particular and credit concerns in general and the stock market was tough in a recession, all these things combined to put U.S. Treasuries to very low points," said Alan Schankel, managing director of fixed income research at Janney Capital Markets.

The yield on 10-year Treasury notes was 2.34 percent on Friday. It was even lower last month, hitting 1.72 percent.

Nassau's four-year financial plan includes about $300 million of borrowing to pay tax certiorari settlements over four years, and $150 million of borrowing to pay for employment termination and court settlements. The budget plan, which was worked on in consultation with NIFA, includes $150 million in annual labor savings.

Borrowing, even at low rates, still means paying back the debt with interest. As of March of this year, investors held $1.37 billion of the county's general obligation bonds. The interest payments on those bonds through 2039 were expected to total $781.6 million, according to county documents. Last year, Moody's Investors Service downgraded the county's credit rating to A1 with a negative outlook from Aa3, which increases the cost of borrowing.

Nassau pays more to borrow than the higher-rated Suffolk County does. When borrowing earlier this year, Nassau also paid for bond insurance, a type of credit enhancement that lowers the interest rates it has to pay, on much of the debt.

"Even with the enhancement, I would guess Nassau's going to trade 10 to 15 [basis points] behind Suffolk," said Fred Yosca, managing director and head of municipal trading at BNY Mellon. Ten basis points is 0.1 percent.

"The perception is there that this is a credit that is struggling," Yosca said. "They are going to have to come with attractive yields to entice buyers to take what they perceive to be the credit risk."

The county is hoping bond investors will see the financial plan in a positive light. "The markets should view this budget and multiyear plan favorably as it was developed in consultation with NIFA," said Brian Nevin, spokesman for County Executive Edward Mangano, in an email. "This plan ends borrowing in 2015. This plan brings structural balance to the county."