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New York's Suffolk County notes seen getting low rates despite crisis

By Joan Gralla

NEW YORK (Reuters) - New York's Suffolk County, which last week declared a financial crisis, is still expected to obtain fairly low interest rates when it sells short-term notes, a stop-gap measure needed to avoid running out of cash in April. Suffolk County, located on Long Island's eastern half and home of The Hamptons, the beach resorts where rich people from Wall Street and around the world spend summers, has run into the same sorts of problems now bedeviling other communities in the United States.

On Monday, the county's credit rating was cut two notches to A1 by Moody's Investors Service, which cited liquidity strains and recurring operating deficits that have drained reserves.

Though Suffolk County has a "sizeable and diverse tax base," its outlook is negative, Moody's said in a statement that affects $1.3 billion of long-term general obligation debt.

Last week, County Executive Steve Bellone, a Democrat, declared a fiscal emergency after a three-year $530 million deficit was uncovered.

On Tuesday, the Democrat-led Suffolk County Legislature will be asked to authorize the sale of up to $90 million of revenue anticipation notes maturing in March 2013, according to County Treasurer Angie Carpenter. "The hope is to pay them back in nine months," said Carpenter, who is a former county legislator. In addition to the April cash crunch, Suffolk County faces some summer and autumn pressure points. About $465 million of tax anticipation notes must be repaid from July to September. Future tax revenue will be used to repay those notes.

Suffolk County's increasing reliance on short-term debt has alarmed fiscal monitors. In 2012, the county's sales of notes for cash-flow purposes will rise to about $650 million from under $300 million in 2007. This year's note sales will total almost a fifth of the county's $3 billion budget. Yet bond investors now have so much cash and are so starved for even slightly higher-yielding tax-free debt that Suffolk County's note sale probably will yield less than 1 percent, said Michael Pietronico, chief executive officer of Miller Tabak Asset Management in New York. One of the bigger hurdles Suffolk County will have to clear when it competitively sells the notes is the likelihood that money market funds - often among the main buyers of such paper - will shun the notes as Moody's Investors Service is expected to rate them MIG 2 instead of the top rating of MIG 1. "The chances are, it is not going to be MIG 1," said an analyst with Thomson Reuters Municipal Market Data, who spoke on condition of anonymity. As a result, "the money funds will not touch it," he said as some of them can buy only top-rated notes.

A CRISIS YEARS IN THE MAKING The fiscal crisis in Suffolk County is the result of years of mismanagement. Former County Executive Steve Levy, a Democrat turned Republican who had flirted with running for governor, masked budget gaps with hundreds of millions of dollars of one-shots or nonrecurring revenue, said a report released last week by Bellone, the current county executive. Suffolk County does not plan to preserve cash by delaying payments to vendors and others, a strategy adopted by some notably cash-starved borrowers, including California and Illinois. "I don't believe that is something we would choose to do," said Carpenter, the county treasurer. Some portfolio managers and analysts are waiting for more information about how Suffolk County plans to fix its finances before assessing the note sale.

David Manges, a managing director with BNY Mellon Capital Markets in Pittsburgh, said, "County executives are often screaming poverty or worse, so it's tough to know whether this is something that can be dealt with in some manner or whether it is truly outside the county's ability to do so." The State of New York created fiscal control boards for Nassau County, located on Long Island's western half, as well as Erie County, Buffalo, Troy, and New York City, whose finances have been monitored since its fiscal crisis in the mid-1970s. Erie County Executive Mark Poloncarz, a Democrat who served as comptroller during its 2005 fiscal crisis, said he would advise Suffolk County's executive "to take the difficult decisions and avoid the creation of a control board." Though Erie County's finances have improved, it cannot get out from under the state overseer until 2033, which is when debt the control board issued on the county's behalf will mature. For Suffolk County's deficit report, see: http://suffolkcountyny.gov/Portals/0/countyexecutive/PDF/Suffolk%20County%20Fiscal%20Analysis%20Task%20Force%20Report%20Presented%20to%20the%20Suffolk%20County%20Legislature%203-6-2012.pdf

(Reporting by Joan Gralla; Additional reporting by Pam Niimi in New York and Karen Pierog in Chicago; Editing by Jan Paschal)

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