New York City's capital program gets big boost with $1.08B TFA sale

New York City’s capital program will be getting a much-needed bond boost as the New York City Transitional Finance Authority readies a sale of $1.08 billion of future tax-secured subordinate debt.

Proceeds from the sale will be used to fund infrastructure projects in the city’s $164.8 billion .

Market conditions are much improved as municipals have mostly outperformed the U.S. Treasury market throughout June and July amid a relative dearth of new-issue supply and large reinvestment dollars cycling through.

The TFA is a strong, liquid credit as a bankruptcy-remote financing vehicle with statutory provisions that provide strong protections for the TFA and its bondholders from any fiscal distress that may be experienced by the city or the state, according to the investor presentation.

The fiscal 2024 capital commitment plan totals $20.1 billion, of which $18.9 billion is city funded.

The bonds are secured by two separate revenue streams: personal income tax revenues and sales tax revenues. The PIT and sales taxes are collected by the state and paid to the state comptroller and the PIT is then paid to the TFA monthly. The city gets the excess PIT revenues only after all TFA funding requirements are met.

PIT and sales tax revenues are not subject to appropriation by the city or the state.

In fiscal 2022, PIT revenues rose 10.7% in FY2022 and are projected to rise 3.1% in fiscal 2023 before declining 13.0% in fiscal 2024 and then increasing again by 7.9% in fiscal 2025, 3.7% in fiscal 2026 and 6.2% in fiscal 2027

If the mayor projects PIT Revenues will not be enough to generate at least 1.5 times coverage of maximum annual debt service (MADS), the state comptroller will transfer sales tax revenues in an amount sufficient, when combined with the PIT revenues, to provide 1.5 times coverage directly to the TFA. This, however, this has never been needed to pay the debt service, according to the city.

Sales tax revenues increased 31.3% in fiscal 2022 and are projected to increase another 11.6% in fiscal 2023.

Since 2012, the TFA has issued about $62.1 billion of bonds, with the most issuance in 2018 when it offered $7.8 billion of debt.

The TFA last issued subordinate bonds in March when it sold $950 million of tax-exempt Fiscal 2023 Series F, Subseries F-1 bonds, $180 million of taxable Fiscal 2023 Series F, Subseries F-2 bonds and $120 million of taxable Fiscal 2023 Series F, Subseries F-3 taxable bonds.

Moody’s assigned Aa1 ratings to those sales, saying its ratings “reflect strong debt service coverage provided by the pledge of City of New York personal income tax and sales tax revenues; a strong legal structure that insulates TFA from potential city fiscal stress; the open subordinate lien that permits future leverage of the pledged revenues; and New York State’s ability to repeal the statutes imposing the pledged revenues.”

The rating agency said its stable outlook reflected “strong legal and structural payment mechanisms help to insulate the bonds from potential city and state fiscal stress, including short-term liquidity strain. Even through periods of economic weakness, coverage of MADS remains strong, and while the TFA credit will continue to be used to finance New York City capital needs, we expect strong coverage to be maintained.”

The TFA last issued senior bonds in 2009; the final maturity of $100 million of the outstanding senior bonds is 2029. The TFA has about $45.1 billion of debt outstanding as of the second quarter of fiscal 2023.

New York is the largest city in the United States with a population of about 8.3 million as of July 2022. It has a high per capita income level and is the headquarters of many securities, banking, law, accounting, new media and advertising firms.

The city has a diversified economic base with a substantial volume of business activity in the financial, professional service, education, healthcare, hospitality, wholesale and retail trade, technology, and information services industries, the investor presentation stated.

As of May, the city’s unemployment rate was 5.1%, compared to 5.4% in May of last year.
While the city has seen challenges in the past — recessions in the 1970s and 1990s, the fiscal crisis of the 1970s, Sept. 11, 2001 terrorist attacks and the Great Recession of 2008 — its economy has recovered and expanded.

As of July, the city has recovered roughly 96% of the jobs that were lost during the pandemic.

The city just beat a July 1 deadline to get a legally mandated balanced budget. New York Mayor Eric Adams and the City Council agreed on a $107 billion spending plan for fiscal 2024.

The city is one of the biggest issuers of municipal bonds in the nation. Its general obligation bonds are rated Aa1 by Moody’s, AA by S&P and Fitch and AA-plus by Kroll Bond Rating Agency.

In the second quarter of fiscal 2023, the city had about $39.3 billion of GO bonds outstanding. Separately, the city’s Municipal Water Finance Authority has around $32.3 billion of outstanding debt.