New York City: Down, but Not Out | Lord Abbett
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Fixed-Income Insights

The nation’s largest city has proven resilient through the years, and we believe its municipal credit standing will hold up through the pandemic crisis.

Read time: 5 minutes

This article is from the forthcoming edition of The Muni Quarterly.

In March 2020, New York City became one of the country’s first hot spots for the spread of COVID-19, resulting in a near complete shutdown of the city. In Fall 2020, the impact of COVID still lingers, and many fear a return to the 1970s, when crime rates were high, and the city faced severe budget deficits. COVID-19 has presented one of the most challenging operating environments for the most populous U.S. city, but the Big Apple has demonstrated historical resilience. Even with the threat of no further federal stimulus funding, we expect New York City to bounce back in coming years and remain a highly-rated borrower in the municipal bond market.

New York City benefits from a highly-diverse tax base, strong state oversight and fiscal controls, and budgetary flexibility. As such, it has strong credit ratings of Aa2 by Moody’s, AA by S&P, and AA by Fitch that allow for affordable borrowing. In our view, these strengths together should allow the city to manage through these challenging times.

To be clear, there are some definite areas of weakness that right now are unavoidable, including the loss of tourism, fewer transit customers, many retail businesses closing, along with performance venues and dining establishments. Hotel occupancy dipped to 46% in June. The rise of remote work along with virus concerns is hurting the city’s transit operator, the Metropolitan Transportation Authority (MTA), as transportation revenues dipped. The presence of fewer office workers in the city along with very strict dining restrictions will continue to hurt restaurants. We expect to see many small retailers and restaurants continue to close as a result of COVID-19. In addition, Broadway theaters and music venues will remain closed for a while.

A Strong Starting Point

Fortunately, New York City entered the COVID-19 crisis from a position of strength, with sizable reserves. To combat potential drops in revenue related to lower activity and revenue, the city has utilized reserves, cut expenditures, and received $1.4 billion of CARES Act funding. Talk of additional federal aid to the states and municipalities is ongoing. In addition, the city has asked the State of New York for permission to allow for deficit borrowing, which as of mid-September, Albany has denied.  The city also has the ability to lay off 22,000 workers to further reduce spending as a last resort and has demonstrated a willingness to cut expenditures while maintaining fiscal order in September by instituting furloughs for the Mayor’s office, which cut employees by 12%.

We see strong oversight and budget flexibility as strengths that will help steer the city through these challenging times. The city adjusts financial projections quarterly and continues to be subject to oversight from the Control Board, which was created as a result of severe financial difficulties and loss of market access in the 1975. It is important to note that even then, the city didn’t default on its debt. The Control board is headed by the Governor of New York and reviews four-year financial plans and operations of the City.

Due to the market access afforded by its high ratings, the city has been able to borrow $5 billion since the start of the pandemic crisis, at affordable rates. In addition, the Federal Reserve’s Municipal Liquidity Facility remains available for the city in the event rates in the current market are dislodged, but New York has not come close to needing to access it yet.  None of the borrowing to date has been for deficit financing.

Diverse Revenue Sources

City revenues are diverse coming from real estate, sales tax, and income tax as well as a variety of other sources. The largest source of revenue for the city is real estate taxes (30% of the total) driven by assessed taxable value and collections. For fiscal year 2021, assessed value (the base value upon which taxes are charged) is up over 5%, and historically total collections have been at 97% or higher since 2002, which includes the Great Recession of 2008–09. This data alone would lead us to believe that property taxes will be stable.

Although there is some evidence to support a continuing trend of population decline in New York, we think it is unlikely to be material enough to derail the city’s financial position.  According to the census bureau, the estimated net population loss for the city was 132,266 in 2019. A majority of people didn’t go far, with the number one destination being neighboring Nassau County, N.Y., indicating the move was just a transition to the suburbs, which is a typical occurrence for young families. For 2020, there is indication that those levels have ticked up, with United Van Lines reporting a doubling of the number of people looking to move out of the city and rental vacancy rates doubling to a 3.67%, the highest level in 14 years, but well below the national median vacancy rate of 7%.

Real Estate Remains Stable

Despite the unfavorable population trends and some negative press around Manhattan real estate, the data continue to show a stable residential real estate market. Zillow tracking data showed suburban New York City metro home values rose a strong 1.4% year over year in the month of June, versus home values in New York City proper that were up only 0.4% but still positive. The stability in prices was driven in part by gains in the outer boroughs (Queens, the Bronx, Brooklyn, and Staten Island) where demand remains robust. For the first half of 2020, median prices in these four boroughs were up 3% year over year.

Income taxes make up 22% of revenues. Even though many employees are working from home, they are paying income taxes to New York City if their company is located there. City taxes are also progressive, meaning higher wage earners are taxed at a greater rate. High-wage employment continues to be less impacted by the downturn than lower-wage occupations. (See Figure 1.) It is also important to note that unemployment benefits in New York are taxable, so the levies on the enhanced benefits from the federal government will partially offset the drop in wage collection.

 

Figure 1. New York City Employment Rates by Wage Quartile


Source: https://tracktherecovery.org. Change in employment rates (not seasonally adjusted) is indexed to January 4-31, 2020. Data series is based on payroll data from Paychex and Intuit, worker-level data on employment and earnings from Earnin, and timesheet data from Kronos. The dotted line in the low-wage series is a prediction of employment rates based on Kronos data.

 

Sales tax collections, which represent 10% of the city’s revenues, were hit hard by the city-wide shutdowns in March but have since shown signs of a comeback. After dropping 46% in June 2020 year over year, sales tax revenue was down only 7.3% in July and 7.1% in August. Motor vehicle traffic into the city is also pointing to a recovery, with data showing toll collections for the MTA Bridge and Tunnel Authority only down 13% for the first week of September, as compared to the same period in the prior year.

A Final Word

The COVID-19 crisis is still evolving, and it appears that we still have a fair distance to go to get to the other side. But our research team remains confident in the city’s current ability to manage and maintain its strong credit ratings through this crisis. New York City may be down, but it is far from out.

 

SOURCES:

https://www.bloomberg.com/opinion/articles/2020-09-02/talk-of-new-york-city-exodus-to-suburbs-is-ahead-of-reality

https://www.zillow.com/research/2020-urb-suburb-market-report-27712/

https://www.wsj.com/articles/one-month-later-few-manhattan-office-workers-have-returned-despite-new-yorks-reopening-11595847600

https://www1.nyc.gov/assets/nypd/downloads/pdf/analysis_and_planning/historical-crime-data/seven-major-felony-offenses-2000-2019.pdf

https://compstat.nypdonline.org/2e5c3f4b-85c1-4635-83c6-22b27fe7c75c/view/89

https://www.cnn.com/2020/07/09/success/new-york-rental-market-june/index.html

https://www1.nyc.gov/assets/finance/downloads/pdf/20pdf/fy21-final-roll-guidelines.pdf

https://www.pods.com/blog/2019/03/nyc-moving-guide-the-new-york-city-boroughs-explained/

https://www.noradarealestate.com/blog/new-york-real-estate-market/

https://www.curbed.com/2020/7/8/21314969/manhattan-home-prices-covid

https://tracktherecovery.org/

 

IMPORTANT INFORMATION

This commentary may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.

This material is provided for general and educational purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, or any Lord Abbett product or strategy. References to specific asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations or investment advice.

References to specific securities and issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. The securities referenced may or may not be held in portfolios managed by Lord Abbett and, if such securities are held, no representation is being made that such securities will continue to be held. This is not a representation of any securities Lord Abbett purchased or would have purchased or that an investment in any securities of such issuers would be profitable.

A Note about Risk: The value of an investment in fixed-income securities will change as interest rates fluctuate and in response to market movements. As interest rates fall, the prices of debt securities tend to rise. As rates rise, prices tend to fall. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The municipal bond market may be impacted by unfavorable legislative or political developments and adverse changes in the financial conditions of state and municipal issuers or the federal government, in case it provides financial support to the municipality. Income from the municipal bonds held could be declared taxable because of changes in tax laws. Certain sectors of the municipal bond market have special risks that can affect them more significantly than the market as a whole. Because many municipal instruments are issued to finance similar projects, conditions in these industries can significantly affect an investment. Income from municipal bonds may be subject to the alternative minimum tax. Federal, state, and local taxes may apply. Investments in Puerto Rico and other U.S. territories, commonwealths, and possessions may be affected by local, state, and regional factors. These may include, for example, economic or political developments, erosion of the tax base, and the possibility of credit problems.

The CARES (Coronavirus Aid, Relief, and Economic Security) Act is a $2 trillion stimulus passed by the U.S. Congress in March 2020, to blunt the impact of an economic downturn set in motion by the global coronavirus pandemic.

The information provided is not directed at any investor or category of investors and is provided solely as general information about Lord Abbett’s products and services and to otherwise provide general investment education. None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action, as neither Lord Abbett nor its affiliates are undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity. If you are an individual retirement investor, contact your financial advisor or other fiduciary about whether any given investment idea, strategy, product, or service may be appropriate for your circumstances.

The opinions in this commentary are as of the date of publication, are subject to change based on subsequent developments, and may not reflect the views of the firm as a whole. The material is not intended to be relied upon as a forecast, research, or investment advice, is not a recommendation or offer to buy or sell any securities or to adopt any investment strategy, and is not intended to predict or depict the performance of any investment. Readers should not assume that investments in companies, securities, sectors, and/or markets described were or will be profitable. Investing involves risk, including possible loss of principal. This document is prepared based on the information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy and completeness of the information. Investors should consult with a financial advisor prior to making an investment decision.

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