Moody's lowers New York City's rating outlook to negative

Donna Alberico

Moody's Ratings lowered New York City's rating outlook to negative from stable Wednesday. It's the latest consequence in the ongoing fallout from the city's budget gaps. 

Moody's, which affirmed its Aa2 issuer rating of the city, cited the city's updated spending projections, which will create larger-than-expected multi-year budget gaps. This is the first negative bond rating action to hit New York City since the COVID-19 pandemic. 

"The outlook change to negative reflects New York City's updated spending projections, which give rise to larger multi-year budget gaps than previously forecast," Moody's analysts wrote in its rating report. "That the city projects large and persistent imbalances under still-favorable economic and revenue conditions highlights the extent of its underlying structural budget challenges."

In January, New York City Comptroller Mark Levine announced that the city had a combined budget gap of more than $12 billion for fiscal years 2025 and 2026. The gap comes from former Mayor Eric Adams' habit of consistently under-budgeting certain expenses, according to Levine and Zohran Mamdani, who took office as mayor Jan. 1. 

When Mamdani presented his preliminary budget in February, he said the gap had shrunk to $5.4 billion thanks to stronger-than-expected revenue and support from New York Gov. Kathy Hochul. 

Mamdani has pushed the state to increase the city's taxes on the wealthy and on corporations. In lieu of income tax hikes, his plan would raise property taxes and spend more than $1 billion of the city's reserves. 

"While the mayor's proposal is technically in balance for FY26, when we account for both the reduced operating surplus and the rainy-day fund draw down, the plan indicates that operating expenses this year exceed revenues by $4.5 billion," Levine testified before the City Council on Wednesday.

Levine also told the council that Mamdani's revenue projections were too optimistic. 

Levine said the outlook cut should serve as a "sobering wake-up call."  

"I will be pushing hard between now and the June budget deadline to help put the city on a stronger fiscal path," Levine said in a statement Wednesday. "I am relieved to see that the city's credit rating remains strong, and I have every confidence that our bonds remain safe and secure.  With an economy — and tax revenues — that continue to grow, the City's present financial position is still solid."

City Hall spokesperson Dora Pekec said the outlook cut was "premature." She pointed to support for Mamdani's requested tax hikes in the state legislature.

"Given the $5 billion in additional funding to the city proposed in both the Senate and Assembly budgets, Moody's decision to revise the outlook on New York City's credit rating — while maintaining it at Aa2 — is premature," Pekec said. "These proposals reflect a real commitment by Albany to investing in the services New Yorkers rely on, and the fiscal health of our city."

Hochul does not support raising taxes.

Moody's said it will monitor the city's handling of its budget gaps over the next year, paying attention to the revenue sources that close them. 

"Gap-closing strategies that rely on non-recurring measures, including the use of reserves, would limit financial flexibility, especially if economic growth slows sharply or an outright downturn materializes," Moody's rating report said. "State-level proposals to enhance revenue or other spending policy changes that benefit the city could have a stabilizing effect over time, if enacted."

The budget includes out-year gaps of $6.66 billion in FY 2028, $6.75 billion in FY 2029, and $7.1 billion in FY 2030. 

Moody's last downgraded New York to Aa2 from Aa1 in October 2020 as the pandemic set in. That move came with a negative outlook, although it was eventually lifted to stable in May 2021. Fitch Ratings also downgraded the city in 2020, and S&P Global Ratings lowered its outlook to negative. 

New York City is now rated AA by S&P, AA by Fitch and AA-plus by KBRA. Every rating agency besides Moody's assigns the city a stable outlook. 

In its report, Moody's wrote it could downgrade the city based on "forecast budget gaps, excluding one-time solutions, that drive them closer to 10% of city funds revenue." 

Factors that could lead to an upgrade included the "maintenance of sustainable, structurally balanced budgets;" "stronger reserves, including replenishment after the planned draw on revenue stabilization fund and establishment of a mechanism to make regular deposits to it," and "reductions of fixed costs ratio closer to Aa median of about 11%."