NYC Bond Sale Gives Investors Vote on de Blasio Budget

New York City plans to issue $850 million of general-obligation bonds this week, the first debt sale since Mayor Bill de Blasio’s proposed budget was called credit negative by Moody’s Investor’s Service.

Proceeds from the offering, managed by Morgan Stanley, will be used to refinance debt with higher interest rates.

Last month, de Blasio introduced a $73.9 billion spending plan and terms of a labor settlement with the 110,000-member teachers union. The nine-year contract includes two years of retroactive pay increases and raises totaling 10 percentage points. Extending the terms of the deal to the city’s 150 other municipal unions would cost about $17.4 billion through 2021, the mayor said.

Those expenses would be partly offset by savings of more than $9 billion, including almost $6 billion from unspecified health-care savings.

De Blasio’s financial plan projects a $2.6 billion deficit for the fiscal year beginning July 1, 2015, and deficits of about $2 billion and $3 billion in the following years. The labor contracts’ potential fiscal impact led some investors, including UBS Global Asset Management Americas Inc., to reduce holdings of city debt.

Moody’s on May 12 said the budget shows how labor costs can challenge the city’s finances even in a strong economy. The company rates New York debt Aa2, its third-highest investment grade. Fitch Ratings said the budget gaps are “fairly low” relative to spending on a historical basis and gives the city’s bonds a similar AA rating. Standard & Poor’s also assigned an AA grade.

Certainty Cited

“While the city’s projected gaps are growing based on the outcome of the United Federation of Teachers settlement and pattered bargaining with its other major units, the city now has an element of certainty in its financial plan that it lacked in the past,” S&P analyst Lindsay Wilhelm wrote in a June 5 report.

New York general-obligation bonds maturing in March 2027 traded at 3.08 percent, about 0.94 percentage point more than top-rated bonds of the same maturity, according to data compiled by Bloomberg. On May 15, the same securities traded at 0.78 percentage point more than top-rated bonds, indicating that investors now consider the debt riskier.