So it begins — Moody's downgrades New York City, State

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New York City and New York State, their finances reeling from the effects of COVID-19, were downgraded late Thursday by Moody's Investors Service.

Moody's dropped city general obligation bonds to Aa2 from Aa1, affecting $38.7 billion of city debt. The new rating will apply to the city's $900 million fiscal 2021 Serices C issuance coming to market next week. The rating agency made a similar downgrade to its rating on the state's GO, personal income tax revenue, sales tax revenue, New York Local Government Assistance Corporation (LGAC), and New York City Sales Tax Asset Receivable Corp. bonds.

Moody's also downgraded, to Aa3 from Aa2, roughly $4.5 billion of appropriation-backed debt issued through the Hudson Yards Infrastructure Corp., the city's Health and Hospitals Corp., Industrial Development Agency, New York City Educational Construction Fund, NY and the Dormitory Authority of the State of New York.

Later, Moody's announced it lowered to A1 from Aa3 the rating on the New York Convention Center Development Corporation, NY (NYCCDC) senior lien bonds and to A3 from A2 the rating on the NYCCDC's subordinate lien bonds. The outlook on the NYCCDC bonds is negative.

At the state level, Moody's also downgraded to Aa2 from Aa1 its rating on the New York State Workers' Compensation Board Pledged Assessment and Employer Assessment Revenue Bonds. Moody's downgraded to Aa3 from Aa2 ratings on other appropriation-backed debt including the New York City Transitional Finance Authority, NY's Building Aid Revenue Bonds. Moody's outlook for the state and these associated bond ratings to stable from negative.

The city downgrade also effects the reoffering of $219 million of outstanding variable-rate demand bonds as fixed-rate bonds taking place concurrently with the new-money sale. Moody's outlook remains negative. Moody's also downgraded from Aa2 to Aa3 the enhanced rating on the DASNY Municipal Health Facilities Improvement Program bonds.

Mayor Bill de Blasio is looking for more rescue aid from Washington and borrowing capacity from Albany.

"The downgrade reflects the substantial financial challenges New York City faces caused by the economic response to the coronavirus pandemic and our expectation that New York City is on a longer recovery path than most other major cities," Moody's said in a statement. "The public health response to the pandemic brought the city's infection rate down to among the lowest of big cities. The lasting economic consequences, however, will likely be among the most severe in the nation and require significant fiscal adjustments."

Mayor Bill de Blasio's budget team has projected a $9 billion revenue gap through the next fiscal year. The mayor is seeking $12 billion from the federal government, which is stalled over the next rescue package, and is also seeking permission from New York State to borrow to cover operating deficits.

"The city regularly identifies and closes future year budget gaps, but has delayed implementing more recurring savings and relied primarily on reserves, the possibility of direct federal fiscal aid, and a request for deficit financing authority from the state," Moody's said. "The current budget assumes $1 billion in savings will come from labor concessions or headcount reductions but those savings have not been formalized. Favorably, current year revenue is tracking ahead of forecast."

The city, Moody's said, also faces additional fiscal pressure from potential state cuts to balance its own budget as Albany tries to help the state-run Metropolitan Transportation Authority, which operates the city's mass transit system.

In additon, the phased-in reopening of public schools could cost the city an additional $38 million per week, according to the watchdog Independent Budget Office.

"In the end, it all comes back to the city budget," municipal analyst Joseph Krist said.

Concurrently, Moody's affirmed the Aaa senior and Aa1 subordinate ratings on $39 billion of outstanding future tax secured bonds issued by the New York City Transitional Finance Authority. The outlook on those bonds also remains negative. Moody's also affirmed the VMIG 1 ratings assigned to GO and TFA variable rate demand bonds with conditional liquidity support.

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City of New York, NY Coronavirus Downgrades Moody's State of New York