New York City: Down, but Not Out
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.
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