Why a dedicated New York City rainy-day fund would appeal to the bond market
A dedicated rainy day fund for New York City’s budget — one of 17 ballot proposals from the Charter Revision Commission — would resonate favorably in the capital markets, according to a bond analyst.
“I think that would be well-received in the bond community,” said Howard Cure, director of municipal bond research for Evercore Wealth Management, after Mayor Bill de Blasio and the City Council reached a handshake agreement on a $92.8 billion operating budget for fiscal 2020.
The markets, he said, would favor such a fund over the current mechanism of accounts that range from general reserve to the Retiree Retiree Health Benefits Trust, to which the budget proposal adds $150 million and $100 million, respectively.
De Blasio and the 51-member council must ratify the spending plan by June 30. The budget agreement includes $329 million in new savings on top of the $2.5 billion in the citywide savings program in fiscal 2019 and 2020.
Splicing together a variety of reserve accounts — what Citizens Budget Commission President Andrew Rein calls “workarounds” — traces to financial controls New York State imposed after the city's 1970s fiscal implosion. That includes an oversight board that must approve the city’s budget.
“The state has a big say. Hopefully the city can argue for more local autonomy,” Cure said.
“The city is putting more into its general reserve and retiree accounts, but it actually needs to draw on these accounts," he said. "The city is continuing to expand, but not proportionally setting aside money for a rainy-day account to brace against a downturn. Right now, the mayor is able to balance the budget because the economy’s doing so well.”
Speaking to reporters in the City Hall rotunda on Friday, de Blasio defended the status quo.
“We don’t call it a rainy-day fund, we call it reserves,” he said, flanked by council leaders including Speaker Corey Johnson. “And now we’re up to almost $6 billion, which is a figure that previous mayors could only have dreamed of. It’s the equivalent concept, but we’ve made a consistent priority of building it.”
State restrictions force the city to work within budgetary parameters, according to Johnson.
“Right now we have to use budget maneuvers to do that in a way to put money aside, and even if the Charter Revision Commission decided to do that, the state would need to change its law,” Johnson said. “So it’s a much longer thing, it’s not something that could have been achieved through this budget process. But that’s why the reserves are so important.”
Rainy day is among 17 proposals for the November ballot the charter commission approved after nine months of hearings and debate. Other proposals range from tighter police oversight to ranked-choice voting.
The city is one of the largest municipal issuers. As of March 31, it had about $37.7 billion of general obligation debt outstanding. The Transitional Finance Authority had $37 billion of while the Municipal Water Finance Authority had nearly $30 billion.
Moody’s Investors Service rates the city’s general obligation bonds Aa1 while S&P Global Ratings and Fitch Ratings rate them double-A. All three assign stable outlooks.
Moody’s on March 1 upgraded the city’s GOs from Aa2. Moody’s said stronger reserves, at levels similar to higher-rated peers, or the establishment of formal policies to increase reserves could lead to an upgrade.
Cure said the budget involved “tinkering around the edges,” citing council priorities that included additional social workers in public schools and expanded senior citizen housing.
Separately from the city budget, Cure said the state legislature’s pro-tenant overhaul of rent regulations could affect upkeep of the city’s existing housing stock, and by extension, capital spending for its affordable housing initiative.
Kathryn Wylde, president of the business group Partnership for New York City, said the changes “substantially eliminate the tools that owners, investors and lenders have relied upon for funding building improvements and provide no replacement.”
She added: “It is not enough to maintain affordability if it means tenants are living in terrible conditions, as we have seen with the deterioration of the [New York City Housing Authority] stock.”