New York City Economy Matters More Than Next Mayor: Muni Credit

Photographer: Victor J. Blue/Bloomberg

New York is selling into the biggest rally for muni debt since 2012 after the Federal Reserve delayed plans to reduce its monthly bond purchases. Close

New York is selling into the biggest rally for muni debt since 2012 after the Federal... Read More

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Photographer: Victor J. Blue/Bloomberg

New York is selling into the biggest rally for muni debt since 2012 after the Federal Reserve delayed plans to reduce its monthly bond purchases.

New York’s borrowing costs have fallen to the lowest this year even as the next mayor faces a struggle to negotiate expired labor contracts that may cost billions of dollars.

As the most-populous U.S. city wraps up an $899 million general-obligation sale today, the extra yield buyers demand on bonds maturing in August 2020 is about 0.29 percentage point, the slimmest since at least January, data compiled by Bloomberg show. The gap is shrinking as voters on Nov. 5 will choose a successor to Mayor Michael Bloomberg, 71, whose 12-year tenure ends Dec. 31.

Whoever takes office in January must resolve lapsed contracts for 300,000 public workers, with some union leaders clamoring for retroactive raises that Bloomberg has said may cost as much as $8 billion. A growing local economy and civil servants who work through different administrations will help tackle the fiscal challenges, said Clark Wagner, fixed-income director at First Investors Management Co. in New York.

New York “will be able to grow its way out of some of these issues,” said Wagner, whose firm manages $1.5 billion of municipal debt. The city has “an incredibly professional and experienced set of managers who are not going to change because of the election.”

Voting Battle

Democrat Bill de Blasio, 52, the city’s public advocate, faces Republican Joseph Lhota, 58, a top aide to former Mayor Rudolph Giuliani, in a battle to lead the city of 8.3 million. Bloomberg, an independent who is founder and majority owner of Bloomberg News parent Bloomberg LP, is legally barred from seeking a fourth term.

New York is selling into the biggest rally for muni debt since 2012 after the Federal Reserve delayed plans to reduce its monthly bond purchases.

The New York issue offered preliminary yields of 4.18 percent on 20-year debt, according to three people familiar with the sale who requested anonymity because pricing wasn’t final. That was 0.31 percentage point more than benchmark munis, down from 0.72 percentage point in July.

First Investors may buy some of the bonds, Wagner said.

Moody’s Investors Service and Standard & Poor’s assess New York two steps below top-rated bonds, after both companies raised the rating three times during Bloomberg’s tenure. New York had about $40 billion of debt as of June 30, compared with about $29 billion in June 2002, bond documents show.

Expansion Expectation

The metropolis’s economy is projected to grow 1.1 percent this year to about $588 billion, and then expand through at least 2017, the documents show.

“Although there are certainly concerns on the horizon, some of them very significant, no one’s expecting an immediate decline in credit quality,” said Tamara Lowin, director of research for Belle Haven Investments, which manages $1.6 billion of munis in White Plains, New York.

Democrats outnumber Republicans in the city by more than 6 to 1. In a Sept. 17 poll by the Poughkeepsie, New York-based Marist Institute for Public Opinion, de Blasio led Lhota 65 percent to 22 percent.

Yet New Yorkers haven’t elected a Democrat mayor since 1989, when David Dinkins beat Giuliani. Four years later, Giuliani, a former U.S. attorney for Manhattan, won in a rematch.

No Money

Among challenges awaiting the next mayor, who assumes office midway through the fiscal year, is resolving negotiations on contracts that expired at least three years ago with unions representing city workers.

Bloomberg’s final budget, enacted in June, contained no money for back pay in the event bargaining results in salary increases. The cost of retroactive raises could approach $8 billion, more than 10 percent of the city’s $70 billion budget, Bloomberg has said.

Future recurring labor-cost increases could tally almost $3 billion a year even without retroactive pay, Carol Kellermann, president of the non-partisan Citizens Budget Commission, a business-funded fiscal watchdog, said in a July interview.

“That would be my biggest worry with a new mayor who is likely to be pro-labor: If there are contracts with notable wage increases that get locked in for the next few years, that could be difficult for the budget,” Wagner said.

Lhota, who resigned in December as chairman of the Metropolitan Transportation Authority, has ruled out a settlement that includes retroactive pay.

Retroactive Resistance

“I’ll say it over and over again, I’m not under any circumstances in favor of retroactive pay,” he said in a March interview. He’s stuck to that position.

De Blasio said he was open to negotiating the issue when he was seeking labor support to secure the nomination. More recently, he’s questioned whether the city could afford retroactive compensation, after winning endorsements from most city unions.

“We have to balance our budget; everyone in labor knows it,” de Blasio said last week during a news briefing. “And that $8 billion figure that assumes full retroactive pay, I’ve said very publicly that’s not going to happen.”

In another challenge, the cost of worker and retiree health insurance, now about $6 billion, will rise to $8.3 billion by 2018 unless workers start paying part of their premiums, Bloomberg has said.

School Plan

De Blasio’s signature issue, a tax surcharge on income above $500,000 to raise $530 million for universal pre-kindergarten and after-school programs, was belittled by his primary rivals. They argued the increase wouldn’t win approval from the state legislature and governor.

Universal pre-kindergarten would cost about $290 million annually, with a start-up cost of about $50 million for new classrooms, according to the Independent Budget Office, a city agency that acts as a non-partisan fiscal monitor.

Lhota says that although he supports universal pre-school, financing it through a tax increase on the wealthiest New Yorkers runs the risk of slowing the city’s economy.

Universal pre-school is “the right thing to do,” Lhota said during a Sept. 13 appearance on WPIX television. Yet he disagrees that the city should raise taxes to pay for it. Lhota hasn’t proposed an alternative funding stream.

“ We have daunting fiscal challenges ahead and it is critical the next mayor have the experience and wherewithal to keep the city’s finances sound,” Lhota said in a statement yesterday. “I am the only candidate in the race with both public and private sector experience managing large budgets.”

Localities from California to Connecticut are issuing about $4.2 billion of long-term munis this week as yields are the lowest since June. At 2.7 percent, benchmark 10-year muni yields are the lowest since June.

To contact the reporters on this story: Michelle Kaske in New York at mkaske@bloomberg.net; Henry Goldman in New York at hgoldman@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net.

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