NYC’s Rising Labor Costs Prod UBS to Sell: Muni CreditMichelle Kaske and Henry Goldman
New York Mayor Bill de Blasio’s plan to pay for labor contracts that boost deficits is causing UBS Global Asset Management Americas Inc. and RidgeWorth Capital Management Inc. to reduce holdings of city debt.
UBS cut its allocation of New York bonds in some of its national funds to as low as zero from as high as 3 percent, said Ebby Gerry, who helps oversee about $15 billion of state and local debt in New York as head of municipal investments. De Blasio this month announced a union deal that stretches out payments to teachers through 2021 and an affordable-housing program that will cost the city $8.2 billion.
“We’re concerned with what Mayor de Blasio might do in working with the unions, things like this housing project that he’s looking at with not having a full understanding of how he’s going to pay for it,” Gerry said. “We’re watching pretty closely.”
While the extra yield that investors demand to buy New York City general obligations rather than top-rated munis has decreased this year, bondholder defections may reverse that trend, sending borrowing costs higher. Moody’s Investors Service on May 12 called de Blasio’s fiscal 2015 spending plan “credit negative” because it boosts projected deficits.
“With the new mayor, there could be issues there that we could see in future deficits,” said Ron Schwartz, who helps manage $1.8 billion of munis as director of tax-exempt management at Atlanta-based RidgeWorth. The firm has pared its New York general obligations this year and now holds only debt that the city has pre-paid with funds in an escrow account, he said.
De Blasio, 53, took office in January as the first Democratic mayor of the most-populous U.S. city in 20 years. He won by the biggest margin for a non-incumbent in city history on what he called a “progressive agenda” that would address the growing income gap between rich and poor.
His $73.9 billion budget for the fiscal year starting July 1 spends more on school programs and teachers, social services and housing. It anticipates shortfalls of $2.2 billion for fiscal 2016, $2 billion in 2017 and $3.2 billion in 2018. Those gaps are up from $1 billion, $630 million and $370 million in de Blasio’s February budget, crafted before the teachers deal.
De Blasio took office facing the unprecedented situation in which contracts with all 152 municipal unions had expired, after years in which former Mayor Michael Bloomberg wouldn’t bargain unless labor leaders agreed to help reduce rising pension and health costs. The former mayor is the founder and majority owner of Bloomberg News parent Bloomberg LP.
De Blasio and the United Federation of Teachers this month agreed to a nine-year contract that includes two years of retroactive pay increases and raises totaling 10 percentage points over the next seven years. The cost would be as high as $4 billion through 2018, not including at least $1 billion in reduced health-care costs.
If all goes according to de Blasio’s plan and the teachers pact provides a road map for settlements with all municipal unions, the total cost would be 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 achieved through union-backed health-care savings, according to the administration.
“This is classic New York City budgeting, pushing past obligations into the future,” said Nicole Gelinas, a senior fellow in New York at the Manhattan Institute for Policy Research, which advocates less government spending and opposes de Blasio’s agenda. “It significantly adds billions of dollars to out-year deficits.”
Marc Shaw, a former deputy mayor of operations for Bloomberg who served as city budget director under former Mayor Rudolph Giuliani, a Republican, said it was “a cheap shot” to criticize the new mayor for solving what had seemed to be an intractable problem.
De Blasio, he said, “had to make a decision whether to go to war or work things out with the unions, and the way they worked things out was to spread out the payments in a way the city could afford.”
Anticipating critics, de Blasio defended the labor deal and his budget at a May 8 City Hall news briefing. He called it “something that we can bank on for the remainder of our time in office in this term and I hope in the future.” The spending plan, he said, “reflects three core values, the same as what we talked about the time before I became mayor, a budget that is responsible, progressive and honest.”
Four days later, Moody’s issued its report calling the projected gaps “credit negative because it shows how personnel costs drive the city’s budget and challenge its finances.” The city’s rating remained at Aa2, third highest, with a stable outlook, said credit analyst Nick Samuels.
“Even after the first accurate picture in years of the costs of a labor settlement, the mayor’s Executive Budget keeps out-year gaps and debt service at manageable levels that are well below historical averages,” Budget Director Dean Fuleihan said in an e-mail.
Moody’s labeled de Blasio’s housing plan “credit neutral” and considered an increase in state aid to city schools to be “credit positive,” Fuleihan said.
The extra yield on New York general obligations maturing in August 2027 was 0.4 percentage point above benchmark munis on May 16, down from 1.3 percentage point in January, data compiled by Bloomberg show. In the broader market, benchmark 10-year yields have fallen to their lowest levels in 11 months as issuance this year is about 28 percent less than the same period in 2013.
The city is set to issue $850 million of general obligations as soon as June 9 to refinance older issues, according to a calendar posted on state Comptroller Thomas DiNapoli’s website.
“There are investors who like to talk down value just before the deal just so that they can buy at lower prices, and that’s fair game,” said Alan Anders, deputy director of finance in the city’s Office of Management and Budget. “We deal with that in every one of our issuances.”
De Blasio this month released his plan to build and preserve 200,000 units of affordable housing in the next decade by boosting rent protections for the poor and requiring developers to include below-market apartments in newly zones areas. The $41.1 billion program, financed with city, state, federal and private funds, would cost the city $8.2 billion.
“These are costly initiatives he’s bringing up,” said Howard Cure, head of municipal research at Evercore Wealth Management LLC, which oversees about $5.2 billion of assets. “And long-term they may be exactly what the city needs. It’s just in a shorter-term perspective, it could bust your budget.”