By Hilary Russ
(Reuters) - The small oceanside city of Long Beach, New York, had barely regained its footing after a near financial collapse this year when superstorm Sandy smashed into the eastern United States last week.
The city is now facing massive recovery costs it cannot afford to pay for damage to its water, sewer and other key systems. It is unclear how much the rebuilding will cost, and how much of a toll it will take on Long Beach's finances.
"As a small municipality, we don't have the resources to fund the extraordinary recovery effort that is necessary to restore our critical infrastructure without tremendous financial assistance," City Manager Jack Schnirman told Reuters in a telephone interview.
Long Beach is not alone. The massive storm hit just as some municipalities in New York and neighboring states were stabilizing financially after several difficult years. The recession slashed property tax revenues as public pension costs and health care costs mushroomed, leaving many local governments across the United States to trim their budgets to the bone.
Long Beach sits in Nassau County, which has a projected $25 million budget gap and was downgraded on October 23 by Moody's Investors Service. The county's finances are overseen by a state control board as it struggles to recover from a fiscal meltdown that began in 2000.
Cities and towns that suffered flood and other damage during the storm are expected to receive significant federal and state aid to help pay recovery costs.
But not all aid will arrive immediately, and some areas - especially those that were already struggling financially - may have to borrow money to cover the rest, according to a spokesman for New York State Comptroller Tom DiNapoli.
"There certainly will be communities that need to turn to this mechanism," spokesman Brian Butry said. "It's too early to put any predictions on how much borrowing we're going to see or how many communities will turn to it to recover costs they've incurred from the storm."
The added financial weight of the storm could squeeze cities' cash flow and possibly lead to higher borrowing rates.
Moody's is now examining local governments hit by Sandy to see whether their finances can withstand the strain of infrastructure damage and lost revenue.
HISTORY OF FINANCIAL PROBLEMS
States, cities, school districts - even sewer systems - raise money by selling bonds to investors. They use the proceeds to pay for everything from building repairs to transportation upgrades, pension funds and even operating costs.
The market for such financing in America is a whopping $3.7 trillion, with roughly 55,000 entities issuing public debt.
Major credit rating agencies give grades to that debt. And the grade matters: in general, the higher the grade, the lower a city's borrowing cost.
When Schnirman took office in January 2012, Long Beach was reeling from a five-notch downgrade by Moody's Investors Service about a week earlier. The cut, to Baa3 from A1 on the city's outstanding $48.3 million of debt, left the city clinging to its investment-grade status.
At the time, the city of 33,300 people had a $10.25 million deficit on its $84 million budget for fiscal year 2012, which ended June 31. Long Beach had to borrow money that December just to make payroll, Moody's said.
And rather than raise taxes to cover lost revenue from withering mortgage tax collections, the city previously pulled nearly $1 million out of its reserve fund.
But Long Beach does have some advantages. Its overall debt burden is manageable, and its families are well-off, Moody's noted, with a median household income of about $77,600 compared to $55,600 for New York state.
Earlier this week, bonds issued by Long Beach's school district traded on the secondary market at far higher yield spreads than they did about a year ago, according to Daniel Berger, senior market strategist at Municipal Market Data, a unit of Thomson Reuters.
Higher yield spreads indicate that investors are demanding fatter returns to compensate for heightened risk, with a potential impact on future borrowing costs.
Long Beach's school district bonds, which are higher rated than the city's debt, traded at 150 basis points over the MMD triple-A benchmark scale in the 10-year range. A year ago, the same bonds traded at a spread of between about 44 and 50 basis points.
General obligation bonds issued by Long Beach have not traded since the storm hit, but Berger believes their spread could be even higher.
NO DAMAGE ESTIMATES
Schnirman is now less than half-way through his first budget year at the helm of the city, which had no extra cash on hand before the storm hit, he said.
"We cut spending, reduced our personnel, made all those tough decisions to balance the budget, including having to raise the tax levy, to stabilize the city's situation," Schnirman said. "And then Sandy hit."
In September, Moody's hailed the city's property tax increase but kept its negative outlook on Long Beach.
Since the storm, Long Beach has been getting help from all levels of government and has not had many bills to pay yet.
"It's certainly premature to put any sort of real numbers on what it's going to cost, except to say it's going to be extraordinary," he said.
(Reporting by Hilary Russ, Editing by Tiziana Barghini and Jackie Frank)