Deal in Focus

N.Y.C. Selling $850M of TFA Debt

New York City Mayor ­Michael Bloomberg last week said he wants to rein in employee pension costs. But what he didn’t mention in his remarks at the annual meeting of the board that monitors the city’s finances was debt service costs, which are consuming a rising level of the city’s tax revenue.

Though borrowing for capital projects increased dramatically under Bloomberg compared to the two terms of former Mayor Rudolph Giuliani, the city hasn’t paid a penalty — in fact, its credit rating is high and market demand for its debt remains robust.

Officials plan to sell $850 million of new-money bonds this week through the New York City Transitional Finance Authority on the heels of a $963 million general obligation refunding last week.

The bonds will be marketed on the TFA’s future tax-secured credit, subordinate to senior-lien debt. The bonds are secured by a pledge of city personal income and sales taxes.

The TFA plans to sell $470 million of taxable Build America Bonds, $125 million of taxable qualified school construction bonds, and $155 million of tax-exempt bonds. It also plans to privately place $100 million of tax-exempt ­indexed floating-rate bonds with Wells Fargo Bank NA.

Sidley Austin LLP is bond counsel. Public Resource Advisory Group and A.C. Advisory Inc. are financial ­advisers. Citi will lead manage the public debt offerings.

A two-day retail order period begins today with institutional pricing following on Wednesday. Evan Rourke, portfolio manager at Eaton Vance, said the deal should be well received.

“TFA is a credit that people are very comfortable owning,” he said. “There’s clearly been some cash in the market. The market does seem like it’s starting to become a little bit tired, though ... but in general New York paper has received a very nice reception.”

Fred Yosca, managing director and head of trading at Bank of New York Mellon, said the highly rated credit would likely attract interest.

“High grades are the flavor of the month these days,” he said. “It’s not going to be cheap [to the investor] but that doesn’t seem to deter anybody who’s buying bonds at these levels.”

New-money borrowing on the city’s two main credits — GO and TFA future tax-secured debt — increased dramatically under Bloomberg compared to his predecessor.

The New York Legislature created the TFA in 1997. Under Giuliani, who served two terms from 1994 to 2001, the city sold $7.93 billion of TFA future tax-secured bonds and $12.34 billion of GO bonds, according to Thomson Reuters.

By comparison, the city sold $32.64 billion of GO bonds and $6.29 billion of TFA future tax-secured bonds during Bloomberg’s first two terms. So far this year the city has sold $2.77 billion of GO and $1.17 billion of the TFA bonds.

Debt service coverage on the TFA future tax-secured bonds is projected to decline from a projected 9.85 times in fiscal 2010 to 7.27 times in 2014 even as personal income and sales tax revenue is projected to rise from $12 billion to $14.74 billion during that time, according to a preliminary official statement.

Overall New York City debt service is taking a bigger and bigger bite out of the city’s tax revenue, rising from 11.9% in fiscal 2010 to a projected 15.7% in fiscal 2014. Annual debt service on the city’s GO, TFA and lease debt would increase by a projected $1.8 billion during that time to $6.8 billion.

The city plans to sell $3.03 billion of GOs and $3.03 billion of TFA future tax-secured bonds in fiscal 2011. It has approximately $41.49 billion of GOs and $15.87 billion of TFA future-tax secured bonds outstanding.

The heavy use of the TFA credit hasn’t affected its rating. Fitch Ratings and Standard & Poor’s rate it triple-A with stable outlook. Moody’s Investors Service rates the bonds Aa1 with a stable outlook.

“The TFA credit is really stable,” said Fitch analyst Laura Porter. “The strength of the structure is that it’s so insulated from the vagaries of whatever’s going on with New York City’s budget. You have very strong coverage from a very solid revenue stream and you have that flowing through a bankruptcy-remote entity.”

Though the growing cost of capital borrowing has not hurt the city’s credit rating, it does force officials to make choices.

Speaking at the annual meeting of the New York Financial Control Board last week, the board’s acting executive director, Jeffrey Sommer, said that projected city expenditure growth is outpacing revenue growth.

“While the assumption for tax revenue growth is moderate, expenditure areas such as pension, health care and debt service cost seem to be growing uncontrollably,” Sommer said.

“Despite $3 billion of agency reductions the last two years with total expenditures outgrowing total revenue, the city projects budget shortfalls of $3.3 billion in [fiscal] 2012, $4.1 billion in fiscal 2013 and growing to $4.8 billion in 2014,” he told the board.

The city adopted a $63.2 billion operating budget for the fiscal year that began on July 1.

In an interview, Sommer said that a difference between rising debt service costs and rising pension costs is that without changes to the system, pension costs will continue to keep going up.

Bloomberg has pushed for a new pension tier that would offer less generous benefits to new city employees, a move that would require the state Legislature to act. Debt service, on the other hand, rises based on what the city chooses to invest in.

“That’s more of policy decision the city has made to do that size program and you have to pay for it,” Sommer said. “Clearly as debt service rises it squeezes out other needs on the operating side but that’s a choice the city makes.”

Sommer said that the growth in the city’s capital program has been a more or less a steady progression from the fiscal crisis of the 1970s when the city lost access to the capital markets and its infrastructure went into decline.

Bloomberg spokesman Marc ­LaVorgna said in an e-mail that the city’s capital investments have created jobs and made the city a more attractive place to live.

“One of the reasons New York City has weathered the national recession better than most cities is because we have continued to invest in the city’s future,” he said. 

In 2008 the city stretched its four-year capital commitments to five years in order to slow the rate of debt service growth. The city has made capital commitments of $30.1 billion for fiscal 2011 through fiscal 2014.

In September, the city will release an update of its 10-year capital strategy.

Debt service is “becoming such an important component of [spending] growth,” said Charles Brecher, director of research at the Citizens Budget Commission, a fiscal watchdog organization.

The “next round of capital planning is going to be a very tough one,” he added. “Because I don’t think they are going to be able to continue to plan for the level of capital investment activity that they have in prior years.”



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