New York City, with mixed fiscal conditions, to bring $1B of GOs

New York City is set to bring more than $1 billion of general obligation bonds starting Tuesday amid an influx of New York paper in the market and growing fiscal headwinds led by a wave of migrants into the city and declining commercial real estate values.

The city plans to price $950 million of new-money GOs and a $65.5 million reoffering that will refinance floating-rate bonds originally sold in 2012 with fixed-rate debt. A retail order period is planned for Tuesday and institutional pricing is planned for Wednesday.

The new-money GOs will have serial maturities from 2025 to 2053 and the refinancing bonds will have serial maturities from 2028 to 2040.

Loop Capital Markets is the senior manager on the deal.

The GOs are rated Aa2 by Moody’s Investors Service, AA by S&P Global Ratings and Fitch Ratings, and AA-plus by Kroll Bond Ratings. All ratings have stable outlooks.

The city’s credit strengths are an “exceptionally large and diverse economy driven by [the] city’s position as an international center of financial services, media, hospitality and a growing high tech sector; strong governance and financial best practices, including conservative revenue forecasting… as well as strong liquidity; [and] strong pension funding practices,” noted Moody’s Investors Service in a credit opinion from February.

For credit challenges, Senior Vice President Nicholas Samuels, Senior Vice President Emily Raimes and Managing Director Timothy Blake cited, “lagging post-pandemic economic recovery compared to the nation and commercial estate challenges as the local economy adjusts to hybrid office work; ongoing need to find recurring budget solutions to close future year budget gaps; [and] significant exposure to physical climate risks, especially hurricanes and sea level rise.”

Despite the stable outlooks, there are positive and negative pressures on New York City’s finances.

On the positive side, the city’s economy is growing faster than those in upstate New York’s local economies.

On the negative side, the city government’s finances are being buffeted by the costs of absorbing a wave of migrants and are increasingly being hit by lower commercial property values.

New York State Comptroller Thomas DiNapoli Wednesday released a report that said city sales tax growth in the April through June slowed to 3.7% compared to a year earlier. This ended the year-over-year double-digit growth in sales tax collections that had prevailed in the previous eight consecutive quarters.

“While the city’s restaurants are seeing activity above pre-pandemic levels, other parts of the economy have yet to fully recover,” the comptroller’s report said.

In May S&P Global Ratings Senior Director Nora Wittstruck said, “While fiscal 2023 results are trending above the adopted budget’s forecast, the $106.7 billion fiscal 2024 executive budget and updated financial plan, released in April, incorporates various headwinds, including expectations for weaker Wall Street profits and securities bonuses, increased office vacancy rates of more than 20% as new properties are added to the inventory, lower real estate transaction taxes, and costs associated with asylum seekers.”

Evercore Director of Municipal Bond Research Howard Cure said New York City has a remarkably resilient economy, conservative auditing and budgeting standards, but “I think there is a greater downside than upside risk in maintaining their double-A-category ratings.”

Cure said the city and New York State “are very dependent on the federal government to help supplement the costs of various programs. Besides the migrant crisis, basic healthcare, transportation, public housing, and social service programs require significant federal appropriations.”

Coming on the heels of Fitch Ratings’ downgrade of the United States sovereign rating to AA-plus from AAA, concerns loom on what’s on the horizon with federal funding.

“Depending on federal budget negotiations and which party controls the House, Senate and the While House, funding levels for these social services could undergo substantial cuts,” Cure warned.

“Any change in federal funding due to the budget constraints at that level have the potential to affect the city’s finances,” said John Hallacy, president of John Hallacy Consulting LLC.

State fiscal pressures and the resulting spending cuts may also force the city to find additional funding, Cure said.

Cure said falling commercial real estate values are also a headwind. If the revenues associated with commercial real estate continue to fall, it would be difficult for the city to turn to residential property owners to make up the shortfall.

Commercial real estate occupancy rates are well below the levels prevailing before the COVID-19 pandemic. As commercial leases expire and come up for renegotiation, New York City commercial property values are declining.

“In the long term, [workers’] return to office is important from the economic activity standpoint and from the property valuation standpoint,” Hallacy said.

The city’s public school students learned poorly during the COVID-19 period and money will have to be spent to reverse this, Cure said.

He said he also expected cost pressures at the city’s Health and Hospitals Corporation to pressure city finances. 

Cure said another challenge is the city’s public housing projects have “incredibly high capital costs and deferred maintenance.”

At the end of June, New York City government approved a $107 billion budget for fiscal 2024. Included in the budget are projections for deficits in fiscal 2025 to fiscal 2027 from $5.1 billion to $7.9 billion.

To address deficits in future years, Mayor Eric Adams has a Program to Eliminate the Gap.

“Projected out-year gaps are slightly higher than recent years’ forecasts but remain manageable at an estimated 4% to 6% of spending though fiscal 2027,” said Fitch Ratings Director Kevin Dolan and Senior Director Michael Rinaldi in May. “Fitch expects management will absorb the additional costs, given conservative revenue assumptions, and will make appropriate budget adjustments in future budget years as done historically.”

“It is quite early in the fiscal year. The effectiveness of any PEG programs will take some time to evaluate,” Hallacy said. “Revenue performance has been solid. Spending has been pressured upward by many factors including spending for relocated migrants. Reserves are at a good level.”

City government anticipates spending $4.3 billion on migrant care in fiscal 2023 and 2024. Adams said an increasing flow of immigrants to the city must be dealt with differently and he is looking for federal and state aid for the situation as well as other solutions.  

In late June the federal government OK’d a plan to charge motor vehicles visiting the New York City Borough of Manhattan below 60th ^{Street. Revenue from the charges is expected to be used for capital needs of the local public transit system, the state-owned Metropolitan Transit Authority. The “congestion pricing” on cars may roll out in spring 2024.}

“Congestion pricing will likely have some effect in the central business district [of Manhattan] that cannot be fully quantified at this time,” Hallacy said. “The elasticity of demand to enter the zone will be tested in calendar year 2024.

“A long-anticipated recession … would have some bearing on the financial results but it has not appeared,” Hallacy said.

Cure said, “One other long-term concern I have is the cost of housing and the ability to attract and retain young professionals. As it becomes increasingly unaffordable for this group to live and expand as a family … the city will lose an opportunity to grow this important demographic. To provide reasonably affordable housing for this group, by giving tax advantages to developers, the state needs to renew those programs that have recently expired (i.e., 421-a). And the state needs to enforce some kind of density zoning standards in suburban areas.”

The GOs are being issued as multi-modal bonds in the fixed-rate mode, and no mode change can occur before the first optional redemption date in 2033, according to an online investor presentation about the deal.

The city expects from the current fiscal year to fiscal 2027, combined debt service on the city’s GO, Transitional Finance Authority, and conduit debt to be between 10.9% and 12.6% of city tax revenues.

Despite the city’s credit challenges, “There continues to be a ready market for city paper,” Hallacy said.