New York Dormitory Authority to Offer FIGS for Suffolk County Budget Relief

No, the New York State Dormitory Authority has not gone into the green grocer business.

Tomorrow's offering of FIGS is a $100 million judicial facilities lease revenue bond sale slated to provide budget relief to Suffolk County, which has been embroiled in passionate budget politics for the last year. For example, the county executive filed a lawsuit against the county Legislature earlier this year over its proposed fiscal 1991 budget cuts.

Proceeds from the issue will be used to refund most of the $127 million of outstanding bonds sold in 1986 for court facilities in the county.

The FIGS, or Future Income Growth Securities, are being priced by a syndicate headed by PaineWebber Inc., with Lazard Freres & Co. and Smith Barney, Harris Upham & Co. serving as co-senior managers.

The county expects to reap about $52 million for its hemorrhaging fiscal 1991 budget, which began Jan. 1, and a proposed fiscal 1992 with tomorrow's refunding and a planned $30 million new-money issue, also to be structured as FIGS, scheduled for sale in November.

The structure of the bonds is similar to capital appreciation bonds, where the investment return on an initial principal amount is reinvested at a stated compound rate until maturity.

But in the case of the refunding, the FIGS, created by PaineWebber in 1985, do not bear the fruit of interest payments until April 15, 1993, after converting to a current coupon bond on July 1, 1992.

This is the first time PaineWebber has applied a FIGS structure to an entire bond issue, and the first time the firm has used this kind of financing in New York. The firm has generally applied FIGS to certain maturities in a deal, usually housing deals, a PaineWebber official said on Friday.

The PaineWebber official said the bonds will be sold at a premium and tentatively structured with terms due in 2001 and 2014, with a coupon of around or just above 9%. There are also incentives built into the offering to protect an investor's premium payment against sinking bond fund calls, the official said.

The offering is being targeted to institutional investors, especially those with extra cash to invest, the official added.

Moody's Investors Service rates the outstanding court bonds Baa1, and Standard & Poor's Corp. rates them A-minus, but placed them on CreditWatch with negative implications in July.

Moody's said on Friday it would announce its rating today. An official with Standard & Poor's said the authority did not request a rating from them, although the agency last week upgraded the county's GOs to BBB from BB. Moody's rates the county's GOs Baa1.

The innovative refunding, selected by county officials after reviewing three proposals by the senior managers, is structured to generate additional bond proceeds over the par amount sold by offering high coupon bonds at a premium, or at a higher cost above par to investors, said Thomas A. Devane, deputy executive director of planning and financial analysis for the dormitory authority. The bond sale is expected to net a total of $118 million and would be "present value neutral," Mr. Devane noted.

The rest of the money to refund the entire outstanding bond issue will come from other funds, such as a portion of a debt service reserve fund, he said. The bond sales are part of the county's $150 million fiscal stabilization plan that was prepared and approved by the county executive and the 18-member county Legislature last summer.

"The refunding is a complicated transaction that will enable the county to have a more level debt service payment structure in the future and is more in line with the operating life of the facility," said Robert A. Kurtter, deputy county executive for finance since January 1988.

The 1986 bond proceeds were sold to finance the John P. Cohalan Court Complex, a project consisting of the design and construction of a 41-court complex to house State Supreme, State District, and State Family Courts. The facility is slated for completion in July 1992.

Mr. Kurtter said the original financing "was a little bit unusual in that it took care of tax law and political considerations."

To comply with changing federal tax laws in 1986 and the local political climate, the bonds were hurriedly sold before design plans had been prepared for the project, he noted. The county has been making lease payments on an unfinished and unused facility, he said.

"Right now, in essence, it is like we are paying the mortgage on a new house while we are still in rented quarters," Mr. Kurtter said. He added that the facility was named after the father of Peter Cohalan, the Republican county executive who was in office when the bond sale was approved in 1986. Patrick G. Halpin, a Democrat, took office as county executive in January 1988.

Mr. Devane said the authority used FIGS "for the basic reason you don't have to pay debt service requirements in the early years," which provides some budget relief.

To allay any potential investor concerns about losing money on their investment, PaineWebber included a unique sinking fund redemption feature: The yield on the bonds to each sinking fund payment would be the same as yield to maturity.

Under an optional redemption program, the firm is working to create a short call with an added feature of protecting some if not all the premium paid by the investor.

The bond sales are expected to provide the county with $42 million in fiscal 1991 and about $9 million in fiscal 1992, Mr. Krutter said.

To achieve about $12 million of the fiscal 1991 budget relief, the Dormitory Authority will use a surety bond rather than the bond proceeds to secure the debt service reserve fund for the series 1991A refunding bonds. Financial Guaranty Insurance Co. is providing the surety bond at a premium of about $500,000 paid by the county out of bond proceeds, Mr. Krutter said.

Mr. Devane said this was the second time the authority has used a surety bond. The first time was last summer, when FGIC provided a surety bond for a $39 million revenue bond offering by the authority for Rockefeller University.

The court refunding bonds are a special obligations of the authority and are secured with semi-annual lease payments made by the county to the authority. The lease payment has amounted to between roughly $10 million and $14 million annually since the county started paying in 1989, said Mr. Kurtter.

If the county does not make its lease payments, the state comptroller is authorized to make the payment from money appropriated to the county from state aid.

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