For Michael Shamosh, vice president and municipal strategist at the investment bank of Cowen & Co., fiscal stability is not one of New York State's strong points.

Over the past eight years, Shamosh has emerged as one of the municipal bond community's sharpest critics of New York from a credit standpoint. Shamosh, who also worked at Yield Line Service, a portfolio management firm, and First Albany Corp., a New York regional investment banking firm, has sounded the clarion call on a range of issues affecting state bonds. They include New York's reliance on appropriated debt, high taxes, and deficit notes to balance four straight budgets.

State officials say their budget problems are caused by a stiff regional recession that has cost New York 550,000 jobs since 1989. At the moment, unemployment in the state hovers at around 9%, according to the state Department of Economic Development.

In addition, officials defend the use of appropriated debt, which does not need voter approval, on the grounds that these securities are approved by law-makers voted into office by taxpayers.

The state has about $17.5 billion outstanding in appropriated bonds, compared with about $5.8 billion of general obligation debt, which is rated A-minus by Standard & Poor's Corp., A by Moody's Investors Service, and A-plus by Fitch Investors Service Inc.

In a interview with staff reporter Charles Gasparino, Shamosh says no one party is to blame for the state's fiscal problems. Rather, he places equal responsibility on the governor's office and the Legislature for not living within the state's means, and at the same time, sacrificing the holders of New York State bonds to the state's operating needs.

Q: What is the biggest issue facing New York State's credit rating?

A: The most significant issue from a credit standpoint is that the state needs to develop some fiscal consistency. Well, let me rephrase. There has been fiscal consistency, but the consistency has been negative.

There's been excess spending when compared to revenues and miscalculations of where revenues and expenditures should be. The credit markets basically want to see more fiscal prudence on the part of the state government.

Q: If there is a crisis in confidence, why does the state have no problem selling its debt? Why do state bonds trade so well?

A: They don't trade well compared to years ago. New York State bonds used to be the highest-priced bonds around. Now in order to do trades, you have to [pay higher] yields in many cases, especially when you complete trades with investors from better-rated states where the bondholder feels more confident that his or her interest is protected.

Q: Is there a lot of trading in New York State bonds?

A: One of the good things about New York is that the bonds trade with relatively high yields, higher then they would be if state finances were sound. As a result, there is demand for New York paper. You can almost always get a bid on bonds from New York, and you can get it from anywhere in the country.

Q: Doesn't New York State really sell two different kinds of bonds, the higher-rated general obligations and lower-rated appropriated credits?

A: Yes, they do. Voters have rejected every major bond issue in the state in recent years, and these are general obligation bonds. There will be one put on the ballot in November for the governor's [$800 million] jobs bond act.

The use of appropriated debt is largely the result of the voter rejection of GO debt. And to some degree, investors are uncomfortable with the state's reliance on appropriated debt.

I have even heard about meetings among investors to discuss the issue of the state's use of appropriated debt and where this paper might trade.

Q: Would you put securities sold by the Local Government Assistance Corp., set up to eliminate the state's spring borrowing for local assistance, in the category of lower-rated appropriated debt?

A: No. With LGAC, the bondholders have a claim on sales tax revenues. Basically, the money cannot be used for anything but to pay down the LGAC debt. It's a forced appropriation, unlike the appropriation for the Urban Development Corp. bonds, in which debt service payments must be decided annually by the state Legislature.

The point here is that the Legislature is binding future Legislatures, which the bondholders don't know and taxpayers today will have no say in electing, with debt payments. No one can say for sure if these political bodies will approve debt payments they had no choice in creating.

The state has basically allowed its debt to be devalued to meet the needs of its operating budget. And in the process it has sacrificed the bondholder. I believe that because of the state's reliance on appropriated debt, the bondholder has been placed on the same line as any other interest group. And if these interests see their benefits cut, so can the bondholder.

Q: With all these problems, why haven't bondholders raised the issue of the state's reliance on appropriated debt and its effect on the state's ability to make debt payments?

A: When the city [of New York] was cut off from the financial markets during the financial crisis of the 1970s, banks were the main buyers of municipal debt. That was before the [Tax Reform Act of 1986] drove the banks from the market.

Now the banks have been replaced by the mutual funds, which are in a tough competitive market to produce yields for their customers. As a result, it's difficult for the mutual funds to act in concert, although like I've said, I've heard of instances when some funds have come together to discuss these issues.

In addition, the mutual funds hold all this debt, and if they squeal too loudly, they will start to drive down the value of their portfolios.

Q: Do you think the state's credit trend will limit its access to the credit markets?

A: Everybody views New York's access to the capital markets as a necessity. But it will take a rating downgrade below investment grade by one or both of the rating agencies to cause a significant reaction from the market.

Q: Do you see that happening?

A: Not at the moment. The state isn't doing all that badly this year, though all the data isn't in yet. But the initial indicators look like the state will have a reasonably even fiscal year. We'll have a better picture of what the year will look like in November and December.

Q: Are you saying the state's fiscal condition is improving?

A: Not by any means. It's stabilized. But between what the state needs to service its constituencies and the discomfort level the bond buyer has to put up with, debt holders have reached a point where there's equilibrium.

Q: What do you think could upset this equilibrium?

A: If the economy deteriorates, and it now appears the economy could be slipping back into recession, that could upset the balance. You have to keep in mind that New York State's economy is likely to perform worse than the general economy because taxes here are so high.

Q: So what advice do you give bondholders looking to judge the credit quality of state bonds if the economy starts to deteriorate? Do you say, "Don't buy New York State bonds"?

A: You never say, "Don't buy New York State bonds." There's always an appropriate yield where even the lowest-rated bonds should trade at. But if you are worried about the state's credit scenario, you should look toward later this year and see how the state compares with the rest of the economy and then make a judgment on how much yield you should receive.

Q: How would you compare New York City's credit to that of the state's?

A: They bear no resemblance. The city is actually doing quite well. I would say that the administration [of Mayor David Dinkins] has kept the city solvent, served its constituencies, and at the same time, it has kept the bondholder comfortable.

Q: How do you think the Dinkins administration has accomplished this?

A: Mr. Dinkins has a big club over his head in the form of [Allen J. Proctor, executive director of the New York State Financial Control Board, one of the city's fiscal monitors] and the Financial Control Board. This body was basically put into place to protect bondholders after the fiscal bailout of the 1970s. If the state had something like this, it would save millions of dollars in interest.

Q: Does the possible passage of the governor's bond act pose any credit quality problems for holders of state debt?

A: Any increase in tax-supported debt reduces the comfort level of existing bondholders, especially when the fiscal situation is unstable.

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