On Wall Street, New York City's de Blasio Is Getting Respectby
Mayor's plan adds to the city's reserves after revenue rises
Investors reward restaint by accepting lower yields on bonds
New York Mayor Bill de Blasio has taken heat from the press for rising homelessness, tensions with the police and his attention to fringe issues like restricting horse carriages in Central Park. He’s also winning respect from an unexpected corner: Wall Street.
De Blasio, who took office two years ago vowing to combat the growing gap between the rich and poor, last month proposed an $82.1 billion budget for the July 1 fiscal year that keeps $5 billion in reserves. The city, benefiting from an economy that boosted sales and income tax collections 15 percent since fiscal 2014, on Tuesday is selling $1 billion of bonds backed by that revenue to pay for capital projects. Tax-exempt bonds with a 5 percent coupon maturing in 2042 were preliminarily priced to yield 2.93 percent.
“Some of the rhetoric that was going around when the mayor was elected really didn’t describe the mayor we’re seeing,” said Charles Grande, head of municipal research for UBS Global Asset Management, which holds New York bonds among its $15 billion of state and local debt. “It really is refreshing to see this type of restraint in the face of the revenue surplus.”
That approach has reassured investors, who initially pushed up yields on New York City bonds amid speculation that de Blasio’s policies could jeopardize the government’s fiscal stability. The city’s 10-year debt yields 2 percent, or 0.33 percentage point more than top-rated securities. That gap has narrowed from as much as 0.6 percentage point more in late January 2014, weeks after de Blasio took office.
The Democrat won election by promising to preserve or build 200,000 units of low income housing and provide universal pre-kindergarten. When he took office, contracts with all 152 municipal unions had expired, casting uncertainty over the budget.
New York state provided the money for pre-kindergarten and de Blasio has since settled labor contracts with almost all of the city’s more than 300,000 employees. The agreements call for wage increases of 10 percent over seven years for civilian employees and 11 percent over seven years for police and firefighters. The city and the unions agreed to use $3.4 billion in anticipated health-care savings to help offset the $14.1 billion of wage increases during fiscal years 2014 through 2018.
New York’s general-obligation bonds carry the third-highest rating from Standard & Poor’s, Fitch Ratings and Moody’s Investors Service. The income and sales-tax bonds that are being sold Tuesday are rated AAA by S&P and Fitch and Aa1, the second-highest grade, by Moody’s.
The New York City economy added 213,000 jobs in 2014 and 2015, pushing its payrolls to a record 4.2 million.
At a Jan. 21 budget presentation, de Blasio said the city needs to boost its savings because of the risks facing the the economy, such as slower global growth, a strong U.S. dollar and stock market declines. Within two years of the Great Recession, New York drained $7 billion of reserves, raised taxes by $2 billion and cut services by $3.5 billion, de Blasio said. His proposed budget increases spending by 4.6 percent, less than the projected 5.5 percent growth in tax revenue.
“New Yorkers know the economy can turn on us suddenly and without warning,” de Blasio said at the budget presentation. “It happened after 9/11 and it happened during the Great Recession of 2008.”
The city is setting aside $3.4 billion in a trust fund for retiree health-care costs. It’s stashing another $1 billion in a general reserve and $500 million to provide additional security for the city’s capital plan.
De Blasio’s financial plan is also being threatened by his erstwhile friend and fellow Democrat, Governor Andrew Cuomo.
Cuomo’s budget proposal for the state fiscal year that begins April 1 cuts $800 million from New York City’s higher education and Medicaid programs. The governor’s plan shifts to the city $485 million of costs to run the City University of New York, a system of 24 campuses serving almost 600,000 students. Increased Medicaid obligations would amount to $480 million through June 2017 and increase to about $1 billion by 2020, de Blasio said.
The city has also pledged $2.5 billion to support the Metropolitan Transportation Authority’s five-year capital plan and is spending almost $340 million to subsidize its public hospitals. The New York City Health and Hospitals Corp. faces a fiscal 2019 deficit of about $2 billion.
The real test for de Blasio will come when he’s faced with an economic downturn, said Ted Molin, senior credit analyst at Wilmington Trust Co., a unit of M&T Bank Corp. that oversees $4 billion of municipal bonds.
Molin said he’s pleased the de Blasio administration has continued the stringent budgeting and financial controls of prior administrations.
“One of the great strengths that New York City has had has been very, very strong professional financial management,” Molin said.