Long Beach, the Long Island shore town still reeling almost six months after Hurricane Sandy, is poised to be the first New York city in three years to get permission to sell debt to fill a spending gap.

New York’s second-wealthiest city by median income is asking state lawmakers to approve as much as $12 million in bonds, which would be the biggest deficit financing authorized since 2007 for a city in the third-most-populous state.

Sandy struck the Northeast Oct. 29, flooding Long Beach and destroying its signature boardwalk. As the municipality of 34,000 residents about 30 miles (48 kilometers) east of Manhattan awaits $200 million in federal disaster aid, investors are still drawn to its bonds, which are rated one step above junk. Amid the longest rally since 2010 in high-yield munis, buyers have pushed yields on some obligations to record lows.

“Yields are so low there’s been more and more interest in high-yield paper,” said Howard Cure, New York-based director of muni research at Evercore Wealth Management LLC, which oversees about $4.5 billion. “It has federal aid on the way and Long Island gets a lot of support from the state.”

Skelos Support

Long Beach is part of Senate Co-Majority Leader Dean Skelos’s district. Last year, the Republican blocked a request from the city for deficit financing, which requires lawmakers’ approval, saying if the state could balance its budget without extra borrowing then Long Beach could, too. At the time, the city was six months removed from a five-step downgrade by Moody’s Investors Service. Now, because of the storm damage, Skelos will back the debt plan, said Scott Reif, a spokesman.

Sandy, the largest Atlantic storm in history, caused about $60 billion in damages in New Jersey, New York and Connecticut. It killed more than 100 people in the U.S. and triggered the worst flooding in the more than 100-year history of the New York City subway system. Long Beach was among the hardest hit when the ocean met the bay to its north. The damage to the boardwalk and beach, its biggest draw, has cut revenue projections by $1.1 million just as city officials were restructuring finances.

Crisis Year

In February 2012, Long Beach declared a fiscal crisis after an audit revealed city officials had underestimated spending and revenue for several years, creating a more than $10 million budget gap. City Manager Jack Schnirman, hired the previous month to fill the fiscal gap, said the crisis, which allowed him to reappropriate a $60 million budget, is over.

“The city is certainly in both fiscal and physical recovery,” Schnirman said. “Investors want to invest in a positive story.”

Long Beach bonds maturing in July 2015 traded at an average yield as low as 1 percent this month, data compiled by Bloomberg show. While that was the lowest since the city issued the debt in 2005, it was still almost three times the interest rate on benchmark tax-exempt bonds. The yield spread over top-rated securities has averaged about 1 percentage point this month, down from about 1.3 percentage points in the month before the storm, using BVAL analysis.

The bonds are rated A2 by Moody’s, five steps below the top, with insurance from Assured Guaranty Corp. Without that backstop, the securities are graded Baa3, one level above junk. In December, Moody’s affirmed the grade with a negative outlook, saying it’ll watch to see if property values rebound.

Company Ahead

Other municipalities will probably join Long Beach in seeking deficit financing during the legislative session ending in June, state Comptroller Thomas DiNapoli said in an interview in Albany.

Rockland County, a suburb north of New York City, is seeking $80 million to close its gap. In June, Standard & Poor’s lowered the county to BBB-, one step above speculative grade, after lawmakers blocked a similar request for deficit bonding that would have helped close a $40 million imbalance.

DiNapoli said the requests show municipalities are struggling with revenue that hasn’t recovered from the recession that ended in 2009 and a 2 percent property tax cap introduced under Governor Andrew Cuomo.

“We’re going to see more and more localities in severe fiscal stress,” DiNapoli said. “Places like Long Beach that had problems before the storm are facing real troubles.”

Suffolk Shortfall

In March 2012, Suffolk County Executive Steve Bellone declared a fiscal emergency after Suffolk’s spending plan ended out of balance for the first time in two decades. The home of Long Island’s Hamptons beach towns was cut one level to A by Fitch Ratings last month. The county’s budget office projects a $51 million shortfall in 2013 on lower sales- and property-tax revenue because of Sandy, Fitch said.

Property values in Long Beach are already recovering, Schnirman said. The city doesn’t want to participate in a $400 million program Cuomo proposed to buy out beachfront homes that are in danger of flooding, he said.

Long Beach had median household income of $77,673 from 2006 to 2010, U.S. Census data show. That’s second only to the $146,069 earned in Rye, a city of almost 16,000 about 30 miles north of New York City.

“We’re seeing very strong evidence that our residents are adamant about staying in Long Beach,” Schnirman said. “People want to stay. It’s their home.”

In the municipal market this week, local debt is extending a five-week rally as issuers led by Wisconsin offer almost $8 billion of bonds.

Benchmark 10-year securities yield 1.73 percent, the lowest since Jan. 28, compared with 1.7 percent for similar-maturity Treasuries.

Munis are trailing gains in Treasuries this month, with a gain of 0.88 percent, versus 0.93 percent for federal debt, according to Bank of America Merrill Lynch data.