N.Y.C. Readies $1.3 Billion of VRDBs In a Tougher Fiscal Environment

When New York City markets approximately $1.3 billion of variable-rate demand bonds tomorrow, it will do so in a much tougher fiscal environment than existed less than a year ago.

Most of the bonds, $1.2 billion, will refund outstanding auction-rate securities, while the remaining debt will refund insured variable-rate demand bonds. The VRDBs will be marketed with letters of credit or standby bond purchase agreements.

The bonds will be sold in nine subseries of tax-exempt bonds totaling $963 million and three taxable subseries totaling $343 million. Auctions for some of the city's auction-rate securities have failed since widespread market dislocation began in mid-February.

Last week the New York City Independent Budget Office, a nonpartisan fiscal watchdog within the city government, projected that the city's financial service industry would lose 12,600 jobs in the current year and 7,600 jobs next year.

Any hit to Wall Street affects bottom line for both the city and New York state. The financial industry accounts for just 5% of the city's jobs but 23% of wages, according to the state comptroller's office. The city counts on the securities industry for 9% of its business and personal income tax collections. The state is even more dependent, receiving about 20% of its tax revenue from the financial sector.

"Because the New York City economy relies so heavily on the financial sector, IBO expects the city to experience a sharper recession than the nation as a whole, starting in the first quarter of 2008 and continuing through the third quarter," the IBO report said. "If the problems affecting the financial and housing sectors worsen ... the recession will be deeper, job losses greater, and fiscal pressures on the city will quickly mount."

Since last summer, both the city and the state have revised their revenue projections downward, and newly installed Gov. David Paterson called for cuts of $800 million from the executive budget of his predecessor, Eliot Spitzer, before trying to pull together a budget in time for the new state fiscal year, which begins tomorrow.

"Even without the transition in the governor's office that we went through recently, we face a very difficult budget season," state Comptroller Thomas DiNapoli said last week in a prepared speech. "We must meet our policy and spending goals with limited resources and revenue that has been curbed by the difficulties on Wall Street."

DiNapoli warned against using debt as a way out of a fiscal crunch.

"We can't keep borrowing without acknowledging that debt is not a cost-free option," he said. "It's not free money. And too much debt limits budget options, limits flexibility."

As bad as the news on Wall Street has been lately with multibillion-dollar write downs and the collapse of Bear, Stearns & Co., the economic impact that has shown up in employment data has not been as bad as the double whammy of the tech bubble bursting and the Sept. 11, 2001, terrorist attacks.

In the late 1990s, the financial sector was growing. According to non-seasonally adjusted data from the U.S. Labor Department, the financial sector as a whole employed 472,700 people in New York City in January 1998. The sector peaked in December 2000 at 494,600 before sloping off.

Jobs dropped off sharply in October 2001, falling from 475,700 the previous month to 446,400 following the Sept. 11, 2001, terrorist attacks. Employment in the sector bottomed out in October 2003 when it hit 430,500 and began a long rise to what now seems like a peak of the most recent growth period at 474,700 in July 2007. Preliminary numbers from January show the employment in the sector having dropped to 467,900.

"What we have heard so far has largely been anecdotal reports of announced layoffs by investment banks and other financial services firms," said Moody's Investors Service vice president Nicholas Samuels. "Those numbers aren't yet showing up in the employment data."

Employment in the securities industry gained 3.9% in 2007 compared to 2006 but on a month over month basis has been declining, according to Samuels. One reason the employment numbers aren't reflecting recent layoffs is that a lot of people in the securities industries received severance packages that could last six to 12 months or longer and those people aren't counted as unemployed, he said.

Mayor Michael Bloomberg has long earned kudos for conservative budget practices that assumed the good times would someday end but it remains to be seen whether or not the city needs to take more action when putting together its budget for the fiscal year beginning July 1.

"A lot depends on how much more spending action they have to take, how much more the economy slows down between now and June," Samuels said. "There are many factors working to slow the national and city economy certainly faster than most people expected. It may be necessary for the city to take further action."

Both the state and the city have bond ratings in the double-A to double-A minus range.

The following investment banks will act as remarketing agents for Tuesday's sale: JPMorgan, Banc of America Securities LLC, Morgan Stanley, Depfa/First Albany, Citi, UBS Securities LLC, Goldman, Sachs & Co., and Merrill Lynch & Co. Sidley Austin is bond counsel.

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