Like dark clouds gathering on the horizon that signal a coming storm, the possibility of recession and retrenchment looms over New York City's post-pandemic economic recovery.
On Tuesday, the New York State Financial Control Board, which that has overseen the city's finances since its fiscal crises in the 1970s, heard a positive assessment of the Big Apple's finances tempered with a very wary gaze into the future.
"Federal relief and higher revenues in city fiscal year 2022 allowed the city to build reserves and other budgetary cushion, but many of the potential fiscal issues facing the city remain out of its direct control," state Comptroller Thomas DiNapoli told the board.
"The city faces
This was echoed by city Comptroller Brad Lander, who said the city needed to deposit an additional $800 million into its Revenue Stabilization Fund because the city saw excess revenues in the last fiscal year.
During a time of
Still, he said the city has benefited from stronger-than-expected tax revenue, strong job growth, rebounds in tourism levels and record numbers of new business applications.
The city's
"The city set aside $2.2 billion in long-term reserves (the Revenue Stabilization Fund and the Retiree Health Benefit Trust) in fiscal 2022 to help weather the possibility of a recession," Lander told the board. "While this deposit was slightly lower than the $2.5 billion that my office recommended, it was a strong step towards fiscal stability, and the mayor and City Council deserve credit for it. The total of our long-term reserves currently sits at 9.4% of tax revenues, below the 16% we estimate is needed to weather the full length of a recession."
CBC President Andrew Rein has also championed the push for greater reserves.
In June, Rein and Lander wrote in
"Too often the political winds of the moment shape our city's budget, with savings for the future left as an afterthought," they wrote. "Still, a 'one-and-done' deposit this year will not be sufficient to protect New Yorkers when they will be their most vulnerable. We both support adopting an annual deposit structure that would set aside a portion of the city's revenue growth toward long-term reserves in years when the economy is growing. While our proposed formulas differ slightly, their spirit aligns. The city should set a target size, mandate deposits and specify criteria for when these funds can be withdrawn."
The time to set funds aside is when revenues are robust and surpluses are strong, John Hallacy, founder of John Hallacy Consulting LLC, told The Bond Buyer.
"When the hard times arrive as many are calling for a recession soon, a few extra percentages of revenues in reserve may be drawn down in just a few months," Hallacy said. "It might help in attaining time for the next budget year when new preventative actions may be taken to ward off rating actions."
Mayor Eric Adams said keeping budget reserves high was a priority.
"I agree with my friends here today that building and maintaining budget reserves as a buffer against the unexpected is a critical priority. So at adoption, we partnered with the City Council to increase reserves by $2 billion, which is the largest single contribution to reserves in the city's history," Adams told the board.
"There is now $1.9 billion in the rainy-day fund, $4.5 billion in the retiree health benefits trust, and $1.6 billion in the general reserves as well as $250 million in the capital stabilization reserve," he said. "The $8.3 billion we have set aside and reserved is a record level and exceeds 10% of the city's funds revenue for the first time, which is a benchmark recognized by rating agencies and fiscal monitors."
New York City is one of the biggest issuers of municipal bonds. As of the first quarter of fiscal 2022, the city had about $38.13 billion of general obligation bonds outstanding.
That doesn't include the various city agencies that issue tax-exempt and taxable bonds such as the New York City Transitional Finance Authority or the Municipal Water Finance Authority, which have $41.64 billion and $31 billion of debt outstanding, respectively.
The city's GO bonds are rated Aa2 by Moody's Investors Service, AA by S&P Global Ratings, AA-minus by Fitch Ratings and AA-plus by Kroll Bond Rating Agency. Fitch assigns a positive outlook to the city while Moody's S&P and Kroll assign stable outlooks.
"The city is to be commended for building up its reserve funds given its relatively new ability to set aside funds," Howard Cure, director of municipal bond research at Evercore Wealth Management LLC, told The Bond Buyer.
However, he said a number of potential issues that can deplete these reserves.
"These include an outsized impact of a recession since the city's economy and revenue base is still overly dependent on the financial services industry, which could disproportionately feel the effects of a declining economy," he said. "Continued inflation and higher interest rates could make bond refinancings for savings uneconomical while increasing the cost of capital and construction material."
He also said the increase in reserves was needed based on a
He pointed out that several city labor contracts still need to be negotiated and that workers will seek large pay raises amid rising inflation and a tight labor market. Significant pay raises could add to the operating deficit, with only a small fraction of reserves being set aside for new contracts.
"There is also the potential for the city to restore education cuts that were originally enacted due to declines in enrollment. In addition, state legislation to cap the number of students in a class amounts to an unfunded mandate," Cure said. "Clearly there have been educational setbacks in student learning. However, the restoration of funds and additional mandates put a further burden on the budget."
Debt service is expected to be $253 million higher from 2022 through 2026 mostly due to higher interest rates, according to a report from the state comptroller's office.
The city's debt burden, which reflects debt service as a percentage of tax revenue, is expected to be 11.4% in fiscal 2023 and stay in the 12% to 13% range in fiscal 2024 through fiscal 2027. The state comptroller's office expects the debt burden will rise to 14.1% in fiscal 2028, just under the city's self-imposed cap of 15%.
City-funded debt service is expected to grow by 42.1% to $9.2 billion in fiscal 2026 from $6.5 billion in fiscal 2022. The report said that debt service may be lower than forecast, based on actual capital commitments and the city's ability to remain within its interest rate assumptions.
Debt service savings, which has been a contributor to budget savings, may also be more difficult to generate in a rising interest rate environment, according to the state comptroller's report.
Even though rates are rising, the current market conditions may let the city see additional variable-rate savings of $125 million in fiscal 2023.
Fiscal 2022 was a year of robust economic recovery, Lander said, as private sector payrolls increased by 300,000 and rose to 96% of pre-pandemic levels as the unemployment rate fell 4.6 percentage points.
Tourism made a strong comeback and tax revenues reached a new peak.
"However, the recovery remains incomplete, precarious, and uneven. High inflation is biting sharply into families' purchasing power to afford housing, food, health care, child care, and transportation," Lander said. "The city is still 160,000 jobs short of the pre-pandemic peak and commercial real estate faces a challenging adjustment to new work practices."
In June 2021, the Mayor's Office of Budget and Management forecast fiscal 2022 tax revenues at $62.4 billion; by this June the forecast had risen to $68.6 billion, 10% higher than originally projected. Based on June's tax collections, the final amount will be about $69.5 billion.
"No one sitting here today believes that these trends will continue," Lander said. "Looking ahead, we believe that economic growth will moderate and tax revenues will drop next year, in line with OMB's expectations."
Lander, fiduciary for the city's five main pension funds, noted that while they remain well-funded it is estimated the city will have to make higher levels of contributions totaling nearly $6 billion from fiscal 2024 to fiscal 2026.
"Going forward, it will be important to reassess the pension systems' asset allocations to better position the funds to meet the required rate of return," he said.
Lander pointed out that the expiration of federal stimulus funds creates fiscal cliffs in fiscal years 2025 and 2026 for recurring programs funded through these one-time dollars.
His office estimates budget gaps of $869 million in fiscal 2023, $6.43 billion in fiscal 2024, $7.07 billion in fiscal 2025, and $9.55 billion in fiscal 2026.
