New York's Nassau County lease of sewer plant faces hurdles

Mon Apr 23, 2012 4:45pm EDT

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(Reuters) - New York's Nassau County taps the debt market this week, with plans to lease its sewer system for nearly $1 billion to help fill a budget hole running into obstacles.

Nassau's severe and lasting fiscal problems led the state to set up a control board in 2000, preventing a bankruptcy. Since then Nassau, on Long Island's western half and one of the nation's wealthiest counties, has continued to struggle. It faces a $310 million deficit in 2012.

A long-term lease of Nassau's Sewer and Storm Water Finance Authority, outlined in September by Republican County Executive Edward Mangano, has drawn interest from Severn Trent Services, Veolia Environment VE SA and United Water, a unit of Suez Environment Company SA.

However, it is not clear if and when any lease contract might be approved.

State control board officials and Democratic legislators have criticized the proposal. Credit agencies say public assets - from roads to parking garages - should not be leased to private companies if the cash raised from them just papers over deficits.

About $115 million of the money raised by a long-term lease of the sewer system would be spent closing deficits in 2013 and 2014, according to Fitch. It views this strategy "negatively."

If the sewer system were leased, its bondholders might benefit, as all of its $465 million debt is expected to be retired.

The sewer system itself might need a financial overhaul.

The Nassau legislature's GOP leader, Peter J. Schmitt, said: "Thanks to the actions of the previous administration, it will go bankrupt in 2014." He noted the county has used $200 million of the system's reserves to fill budget holes.

Kevan Abrahams, a Democratic legislator who serves on the contract-approving Rules Committee, said the sewer authority should produce about $270 million of revenue in 2012.

He raised concerns about the risk of costly rate hikes under a lease and questioned how a private operator might treat the largely unionized workforce.

Veolia said it would have no power to set rates if it were chosen but would aim to improve the utility's environmental performance, which has been sanctioned. United Water declined to comment on the terms of its proposal but noted it has no rate-setting power in other deals and smooth relations with unions.

Morgan Stanley, hired as adviser, declined to comment, and Severn Trent had no immediate comment.

Meanwhile, Nassau will turn to the $3.7 trillion municipal bond market for funding on Wednesday.

It will sell $35 million of taxable bond anticipation notes to pay for sewer upgrades and another $207 million of general obligation debt for other capital projects and purposes.

Fitch rates the notes F-plus and the county at A-plus with a stable outlook. Moody's Investors Service rates Nassau's $1.4 billion of general obligations A1 with a negative outlook.

As often is the case in the municipal bond market, individual issues of Nassau County's sewer and general obligation bonds are not particularly liquid. Sewer bonds that mature in 2033 and carry a 4.125 percent coupon traded at 3.787 percent on March 9, according to EMMA, the Municipal Securities Rulemaking Board's database. On January 3, they traded at a higher 4.336 percent.

Nassau County general obligation bonds that mature in 2020 and have a 5 percent coupon went in the opposite direction. The issues traded on March 9 at a 3.121 percent yield, up from a yield of 2.944 percent on December 29, 2011.

Like a proposed lease of Nassau's sewer authority, some other public-private partnerships have face criticism.

Chicago embarked on the nation's first mega public-private partnership in 2005, capturing $1.83 billion for leasing its Skyway commuter toll bridge to Indiana. But critics say the deal failed to give the city the extra toll revenue the operators could win and that the 99-year lease was much too long.

Concerns that private companies would be enriched at the expense of taxpayers killed Turnpike privatization plans in New Jersey and Pennsylvania. A Texas plan to join fast-growing cities with toll roads, railroads and utility lines died due to opposition from ranchers, environmentalists and legislators.

Credit agencies prefer public-private partnerships mainly for building new roads, bridges and other projects, instead of leasing existing assets, because this shifts the risk of cost over-runs or failure to private companies from taxpayers.

(Reporting By Joan Gralla; Editing by Dan Grebler)

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