New York Mayor Bill de Blasio's preliminary $73.7 billion budget proposal still leaves more questions than answers, some capital markets observers say.
While de Blasio, in office for 45 days, presented a spending plan that includes some cushion to cover the settlement of expired labor contracts, the cost of settling those contracts poses a huge variable.
So do out-year budget gaps.
De Blasio said Wednesday that this year's budget and next will be fully funded, though he warned of gaps that would begin in fiscal year 2016 at $1.1 billion. Surpluses of $1 billion and $1.8 billion will cover fiscal 2014 and 2015, respectively. De Blasio vowed to end the practice of rollovers.
"The positive here is that even though there are structural deficits, there's a surplus from the 2014 budget that will roll into the recommended 2015 budget. That's the good news. There's enough of a surplus to assist in balancing the budget for 2015," said John Hallacy, a managing director at Assured Guaranty Municipal Corp. "While there is still a projected gap for the 2016 budget, it's down substantially from the level of a few years ago."
De Blasio's budget, which the 51-member City Council must approve by July 1, calls for using additional tax revenue in the current fiscal year to restore $1 billion to the depleted retiree health benefits trust fund, established in 2006 to build reserves to fund a $92.5 billion liability.
Predecessor Michael Bloomberg used the fund since 2010 to help balance the budget.
"The restoration, which avoids depleting the fund, is a constructive step toward addressing this serious looming problem. No further withdrawals from this fund should occur unless and until clear guidelines for its use have been established," said Carol Kellermann, president of the Citizens Budget Commission watchdog organization.
De Blasio blamed Bloomberg for punting on the labor contracts. While Bloomberg's wage freeze contributed to the surplus, it also left a heartburn-inducing portion on his successor's plate. De Blasio acknowledged Wednesday that he is the first mayor since the early1970s to inherit unresolved labor contracts en masse.
"The murky waters have been created in part by the previous administration's unprecedented failure to resolve 152 collective bargaining agreements with city workers, some of whom have been without contract since 2008, fully six years ago," de Blasio said at City Hall on Wednesday.
Unions want retroactive back pay, which could cost the city as much as $8 billion.
"The New York City custom of 'backfilling' labor contracts is not the best fiscal practice," said Natalie Cohen, a managing director and head of municipal research at Wells Fargo Securities. "Punting contracts to the next administration is also a New York tradition but not a good practice either -- which the mayor highlights this in his presentation."
City Comptroller Scott Stringer, a de Blasio supporter, warned of impending challenges.
"There are serious fiscal threats on the horizon, stemming not only from the labor contracts, but also an uncertain economic climate and a pattern of disinvestment in New York City by the state and federal governments," said Stringer. "We are entering a critical period in which the continued fiscal health of our city is in the balance."
Stringer said he would discuss the budget "more broadly" in the coming days.
De Blasio, repeating the progressive tone of his State of the City address two days earlier, emphasized education spending, including his proposal to tax the wealthiest New Yorkers to pay for universal pre-kindergarten and after-school programs - despite Gov. Andrew Cuomo's desire to fund universal pre-K statewide. Cuomo opposes de Blasio's tax-hike plan.
"They mark the first firm demonstration of the new mayor's financial direction for the city," said Morningstar analyst Rachel Barkley.
Nicole Gelinas, a senior fellow with the Manhattan Institute for Policy Research, warned bondholders to monitor long-term problems such as unfunded pension and health care liabilities.
"Bond markets, if anything, are too complacent. They seem to need a crisis before they really notice the long-term problems that many of our cities and states face," she said. "We're certainly nowhere the situation of Detroit or Puerto Rico, but we do have some serious long-term concerns that bondholders should think about, and one of those concerns is what we do with these pension and health care benefits.
"The way not to become [Detroit or Puerto Rico] is to acknowledge the risk of becoming those places, so if you worry about it, you decrease the chances of it happening, which is a good thing."
Moody's Investors Service rates the city's general obligation bonds Aa2, while Fitch Ratings and Standard & Poor's assign AA ratings.
