April 8 (Bloomberg) -- New York state and localities includingWestchester County borrowed a record $1.4 billion to coverretirement contributions this year, showing how even the wealthiestcommunities are struggling to make the payments.

The IOUs to New York’s $161 billion pension fund rose about 22percent from last year, according to budget documents and data fromComptroller Thomas DiNapoli. The programs let the governmentsspread out some obligations over as long as 12 years with interest.The state put off $937 million and municipalities $472 millionthrough two programs, one created by DiNapoli in 2010, the other byGovernor Andrew Cuomo last year.

Even as Standard & Poor’s is poised to raise the state’sgrade to its highest since 1972, rating companies have cut some NewYork City suburbs, citing the loans as a sign of imbalancedbudgets. Westchester, north of New York City, lost its top markfrom Moody’s Investors Service in November. In March, Moody’slowered Suffolk County, home to the Hamptons beach towns, to foursteps above junk.

“It’s a one-time shot, and a one-time shot to fill a budget holeis never a positive thing in our minds,” said Chad Farrington, headof municipal research in Boston at Columbia Management InvestmentAdvisors, which oversees $161 billion, including New York debt.“You expect it from weaker credits like Suffolk.”

$1 Trillion

From California to New York, obligations to retiring workershave strained local finances after pension funds sufferedinvestment losses during the 18-month recession that ended in 2009.As of 2012, there was a gap of more than $1 trillion betweenpromised payments and available funds, according to the PewCharitable Trusts.

New York’s pension, which covers more than one million state andlocal-government employees and retirees, had about 90 percent ofthe cash needed to meet its pledges as of 2012. That made it thesixth-best-funded state plan, according to data compiled byBloomberg.

To help maintain it, DiNapoli raised governments’ annualcontributions. Since fiscal 2010, the average rate they owe onevery dollar that police and fire employees earn has almost doubledto 28.9 percent, and almost tripled for other workers to 20.9percent, according to statements on DiNapoli’s website.

Deferral Cost

“Pension rates, which spiked due to the recession, remainextremely high,” Morris Peters, a spokesman for Cuomo’s budgetdivision, said by e-mail. “Amortization takes volatility out of thestate’s pension contribution costs and helps us maintainstability.”

Moody’s has lowered grades for some localities deferring pensionobligations. Last week, Hempstead, a Long Island town of about750,000, lost its Aaa rating from Moody’s, which cited the IOUprogram, as it did with Westchester and Suffolk.

“When we look at expenditures, we include full payment ofpensions,” said Robert Weber, a Moody’s analyst in New York.“Anybody who enters into these programs will still havestructurally imbalanced budgets.”

Rob Astorino, the Westchester County executive who is seekingthe Republican nomination for November’s gubernatorial election,said he was “disappointed” with Moody’s move. S&P and FitchRatings give top grades to the county, whose median householdincome of about $81,100 is about $28,000 above the national level,Census data show.

Best Option

Westchester borrowed $43.5 million from the system this year, upfrom about $25 million in 2013, after cutting 14 percent of staffin the last four years, according to data from DiNapoli andAstorino.

“It was the best of bad options,” Astorino said. “This is theone we chose as opposed to raising taxes a lot, or decimatingdepartments with layoffs and service cuts.”

Suffolk, with a median household income of about $88,000,deferred about $87 million, more than any of the 134 localities inthe programs. Moody’s cut its rating in March one step to A3.

Vanessa Baird-Streeter, a Suffolk spokeswoman, said spreadingout pension costs has helped balance combined deficits of close to$530 million since 2011.

Suffolk chose the deferral “because of the fiscal crunch” fromthe recession and Hurricane Sandy, which struck the region in 2012,she said by phone.

In Suffolk’s $68 million sale of tax-exempt bonds this month,notes maturing in February priced to yield 0.55 percent, or about0.31 percentage point above benchmark one-year munis, Bloombergdata show.

2014 Peak

Hempstead is working to wean itself off the borrowing program,said Kevin Conroy, town comptroller.

“The rising pension costs are impacting any municipal orgovernmental entity in this state and it has been difficult,” hesaid.

For New York and its municipalities, the 2014 levels representthe peak as the pension system’s assets have rebounded to anall-time high. For the bill due in 2015, rates will fall to 27.6percent for police and fire and 20.1 percent for other workers,DiNapoli said in August.

Next year, the state expects to defer about $200 million lessthan in 2014 and by 2016 it plans to end the practice altogether,budget documents show. Yet, that year the total amount New Yorkpays toward pensions will tally $2.1 billion, up from $1.3 billionin fiscal 2011, partly because of $396 million it owes for previousdeferrals, documents show.

‘Conservative Approach’

“Our employers are looking for some stability and the ability tobudget as rates have risen,” Thomas Nitido, deputy comptroller forthe New York State and Local Retirement System, said in an e-mail.“Many systems address rising rates by doing things that havelong-term consequences and result in underfunding. We believe thismore conservative approach to mitigate rate increases isappropriate.”

The borrowing practice hasn’t undermined the state’s standingwith Moody’s. The company has the third-most-populous state onpositive outlook, and said April 4 that the budget that theDemocratic governor and lawmakers passed March 31 is “creditpositive” because it restrains spending.

S&P said in August 2012 that two more on-time budgets maywarrant New York earning its highest credit rating since 1972.Lawmakers achieved that goal this year with their fourth straighttimely spending plan. Both rating companies give New York theirthird highest rating.

“The fact that they aren’t making the full pension payment issomewhat concerning,” said Guy Davidson, who helps manage $30billion of local debt as director of munis at AllianceBernsteinHolding LP in New York. “But helping offset that is the fact thatthey have high funding ratios.”

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