Thorny Path Ahead for Sale of County Assets ROCHESTER, NY (WXXI) - Monroe County's plan to partially make up its budget gap by selling payment-in-lieu-of-taxes (PILOT) agreements could be more difficult than the county had previously predicted.

PILOT agreements are the deals that the county's economic development agency cuts to convince job-creating businesses to stay in Monroe County, or to move here. The county wants to "securitize" the PILOT agreements, which would net the county a lump sum in the 2009 budget year, for agreements that, unsold, could pay out for as many as seven years. When the county announced the move as part of the 2009 budget, it said that it anticipated there would be an active marketplace for the agreements, and that the county would have no problem securitizing them.

But that might not be the case, according to Charles Stone. He's an assistant professor at Brooklyn College, specializing in securities, who says the plan is unusual, and could lead to Monroe County selling the agreements at a "deep discount." That's because the securities markets are are in disarray, following Wall Street's collapse.

Stone says although he expects the markets to be significantly better by the end of 2009, when the county has said it plans to sell the PILOTs, the proceeds could still be slim.

"It's as if I told you, 'you have to sell your car in the next 24 hours'. You may say 'you know what, I'll drive this old car for awhile longer until the market picks up'. They [Monroe County] have to weigh against selling their future revenues at a discount or possible increasing their taxes marginally. If they borrow against their future, at some point, you're going to have to raise taxes or come up with another revenue stream."

Stone says while there are marketplaces for bonds backed by PILOT agreements, there are essentially no marketplaces for PILOT securities. The county's chief financial officer, Scott Adair, confirmed that the county is not looking to issue bonds backed by the PILOT agreements, but Stone says that's a much more common arrangement. There, a municipality would issue debt in the form of a bond, and pay the interest and principal back with the PILOT funds.

Stone says that by selling the agreements to another entity that might then turn them into bonds, or by moving them off the county's balance sheet into a "special purpose vehicle," the county could be trying to prevent more debt from going onto its books. But Stone says there's no reason to expect that bonds issued by another entity from Monroe County's PILOT agreements, would be anymore favorable to the county than bonds issued by the county itself.

Along with no marketplace for the securitized PILOT agreements, there is also no example to follow for the transaction. Monroe County spokesperson Noah Lebowitz confirms that no municipality has ever made the type of deal that Monroe County is pursuing. That leads Stone to question why, in a bad bond market, the county would want to be the guinea pig for the experiment. As of Thursday evening, the county hadn't responded to WXXI's questions about the matter.

Stone says another reason the deal is odd is because the county is seeking such a small amount of money - just $10 million, to help balance the $1.1 billion budget proposal. He says transaction costs, like consulting with accountants, lawyers, and ratings agencies, could eat into the profit on the PILOT deal. And he says the county could much more easily ask for a loan from a bank, using the PILOT agreements as collateral.

The small amount that the county is trying to sell could also make it hard to find an investor. Stone says that larger traditional investors won't be interested in such a small transaction, and that the county may have to turn to private individuals, a small group of wealthy individuals, or a hedge fund to buy the PILOT agreements.

Adair says the county has about $6.2 million dollars worth of PILOT agreements, varying in lengths from one to seven years. He says the county is only looking to securitize about $2.5 million worth of the agreements, but that there is not yet a criteria for which agreements will be sold. Length of agreements, the risk that the payment will be not be made, and conditions in the marketplace will all determine which PILOTS are sold, according to Adair.
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