Nassau, Suffolk could borrow hundreds of millions of dollars using Fed program
Nassau County Executive Laura Curran and Suffolk County Executive Steve Bellone speak about their county's at and LIA breakfast event at the Cresthollow Country Club on Friday, Jan. 10, 2020 in Woodbury, N.Y. Long Island's county governments are collecting information on how businesses are being impacted by the coronavirus pandemic in hopes of helping them recover with federal and state funds, officials said.. Credit: Howard Schnapp
A new expansion of a Federal Reserve lending program could enable Nassau and Suffolk counties each to borrow hundreds of millions of dollars to cope with drastic declines in tax and fee revenues due to the COVID-19 pandemic, county officials said.
Nassau and Suffolk became eligible last week for the Federal Reserve Board's $500 billion Municipal Liquidity Facility. The program, the first in which the Fed has purchased municipal debt, is designed to help municipalities nationwide cover cash flow shortages caused by economic shutdowns.
Previous estimates of sales tax revenues, Nassau's and Suffolk's single largest source of income, are out the window because of the pandemic.
Nassau is projecting a $136.3 million decline in sales tax revenues in 2020, and Suffolk officials expect at least a $100 million drop.
Red light camera fines and fees, along with revenues from video lottery terminals at closed casinos also have plummeted.
Suffolk is eligible to borrow up to $541.4 million, and Nassau can borrow up to $618.1 million, according to the Federal Reserve. The limits are based on 2017 general revenues.
Senate Minority Leader Chuck Schumer (D-N.Y.), said in lobbying U.S. Treasury Secretary Steven Mnuchin and Fed Chairman Jay Powell to expand the program, "I told them two things: Number one, I said municipalities is not just some entity, it is policemen and firefighters, and teachers and so many essential workers. And second, I convinced them that if this didn't happen, the number of layoffs in state and local governments would be huge."
In an interview, Schumer said counties such as Nassau and Suffolk "don't have revenues, and the two choices are: Borrow or lay off. Which is better? We don't want to lay off hard working people who did nothing wrong."
It was unclear when the money would be available, a Fed spokesman said. And there is no guarantee Nassau and Suffolk will get access to large amounts of short-term money through the Fed program. The counties must apply, and the program has minimum bond rating requirements.
On March 27, Fitch Ratings, a major Wall Street bond rating agency, downgraded Suffolk's general obligation bonds to three notches above junk status.
Nassau's rating, A/Stable Outlook on its general obligation bonds, is two notches higher than Suffolk's, according to Fitch.
Nassau and Suffolk became eligible for the Fed program on April 27, when the central bank allowed counties with populations of 500,000 and cities of 250,000 people to apply. The previous population thresholds were 2 million for counties and 1 million for cities.
The bonds must be repaid within 36 months, compared with the 24-month limit set when the Fed announced the borrowing program April 9.
The counties' major concern is the collapse of their cash flow.
Typically, Nassau and Suffolk sell short-term tax and revenue anticipation notes on the private market to cover cash flow until taxpayers and others make their payments.
But because of revenue shortfalls since the pandemic hit in mid-March, the counties' access to private markets essentially has dried up, officials said. Municipal debt, which many investors consider relatively safe because of governments' predictable income streams from taxes and fees, suddenly became unattractive.
“Investors are reluctant to invest in municipal bonds at this time because of the financial uncertainty of the economy, so they're holding their money in cash … they're not buying bonds and not buying equity," said Stephen Acquario, executive director the New York State Association of Counties, a nonprofit lobbying group for the state's 62 counties.
"So, the governments are stranded and subject to extreme terms and high interest rates, which is penalizing and punishing the local taxpayers," Acquario said.
Investors "view government as high-risk right now," he said.
Raymond Orlando, Deputy Nassau County executive for finance, said the county likely will need access to short-term borrowing to cover payroll and vendor services.
The Fed's Municipal Liquidity Facility is "one of the tools in the toolbox [and] these are all kinds of things that we're looking at," Orlando said.
In considering ways to access private debt markets, Nassau has an advantage over Suffolk because it can use its financial control board, the Nassau Interim Finance Authority, to issue debt on its behalf.
In the 2021 state budget enacted last month, NIFA gained the ability to issue unlimited new debt on behalf of Nassau County through 2021, as long as the county Legislature signs off.
NIFA last issued new debt for the county in 2005.
NIFA's bonds are rated AAA, higher than the county's A-rated bonds, so NIFA can secure better interest rates.
"For folks who are not triple AAA rated, it's going to be a lot more expensive," to borrow on the private market, Orlando said. "The highest-rated, lowest risk folks are the ones who are going to get the lowest cost of capital financing."
Nassau County Comptroller Jack Schnirman said in the case of the Fed program, the central bank, “can offer access to cash at favorable rates, and that’s helpful, and that’s why larger counties like ours, need to have that backup to the backup, just in case."
NIFA Chairman Adam Barsky said while the Fed program may be able to help Nassau in the short term, "I don't think it's going to be more attractive than the rates that NIFA would be able to get. It's access, but it's not exactly cheap."
Suffolk's borrowing options appear to be more limited.
In March, Fitch Ratings downgraded Suffolk from A- to a BBB+ with a "negative outlook."
Fitch said the downgrade reflected Suffolk's, "limited financial resilience, which leaves it ill prepared to handle even a moderate economic downturn."
Fitch analysts said “current economic conditions, triggered by the coronavirus pandemic, are expected to place significant additional pressure on the county's revenues and cash position in the near term.”
Suffolk County Executive Steve Bellone said access to the Fed program would give the county financial “breathing room,” and allow officials to consider extending the deadline for property tax payments without having to pay interest or penalties.
Gov. Andrew M. Cuomo issued an executive order last month allowing Nassau County Executive Laura Curran to move the deadline to pay school taxes without penalty from May 11 until June 1. He did not include Suffolk in the order.
While town supervisors in Suffolk have requested a property tax extension, Suffolk County officials say they have not pushed publicly for one because the county could not afford to forego property tax revenues without financial aid.
Ideally, funding through the Fed would arrive before June or July, providing the county with cash so it could afford to extend property tax payments, Bellone said.
Suffolk County Comptroller John Kennedy said without the Federal Reserve program,
the county would have trouble borrowing in the regular market.
“It almost evaporated overnight," Kennedy said of the municipal bond market. "Billions and billions of dollars moved out of the municipal bond market out of concerns about viability.”
In an April 9 letter to Schumer asking for help accessing the Fed municipal liquidity program, Kennedy wrote: “Even as our workforce struggles to deliver necessary health services, we are struggling to maintain cash flow and operations more than ever.”
Suffolk typically would borrow $595 million for the year but will need to seek $615 million because of “our present economic uncertainty,” Kennedy told Schumer.
Suffolk County Legis. Robert Calarco (D-Patchogue), the presiding officer, said access to the Fed borrowing program would give the county financial flexibility.
But Calarco said the county still has to exercise caution because it will have to repay the borrowed money, likely with interest.
“We don’t want to use it as a mechanism to say, ‘our finances are solved,’” Calarco said. “It’s a short-term bridge to the next step.”
NEW FEDERAL RESERVE BORROWING PROGRAM
The Federal Reserve, under its $500 billion Municipal Liquidity Facility announced April 9, will purchase debt of states, counties and cities that have suffered revenue losses because of the COVID-19 pandemic.
Borrowing limits: Nassau County could borrow up to $618.1 million, while Suffolk is eligible to borrow up to $541.4 million.
Application process: Municipalities have until the end of 2020 to request to borrow through the program. A date has not been set for when they can begin selling their debt through the Fed program.
Interest rates: The rate must be considered a "penalty rate … that is a premium to the market rate in normal circumstances, affords liquidity in unusual and exigent circumstances, and encourages repayment of the credit and discourages use of the Facility as the unusual and exigent circumstances that motivated the program recede and economic conditions normalize."
Repayment: Notes must mature within 36 months.
Source: Federal Reserve Board
Scott Eidler is a deputy editor for the towns department at Newsday. Scott has worked at Newsday since 2012 and previously covered municipal government and education.
