It came as no surprise that Zohran Mamdani was elected as the next mayor of New York City given his commanding lead in the polls. A self-professed democratic socialist, the mayor-elect has proposed various agenda items that have raised concerns from within the municipal bond community.
Speculation can often get ahead of itself with unintended consequences and oftentimes actual policy implementation looks very different than campaign rhetoric.
This is why it is important for market stakeholders to have clarity and guidance, particularly when it comes to making investment decisions. Once Mamdani assumes office, market stakeholders will be closely monitoring his administration's fiscal and operational coordination with both the city council and state government and watching for elevated trading volatility with perhaps widening spreads.
Beyond that, eyes will be on the 2026 midterm elections. with a New York State gubernatorial race on the ballot giving rise to even deeper concerns over governance.
The purpose of this commentary is, therefore, not to politicize the election outcome, but to offer a view into New York City's two primary debt financing vehicles and to guide investors as they contemplate existing and future New York City bond holdings. The city accesses the municipal market for its general capital needs through its traditional general obligation bond structure (GOs) and the New York City Transitional Finance Authority (TFA), each offering a sound credit profile touting prime quality ratings. Both are active and liquid issuers with broad market acceptance and they are among the most analyzed, reported on and critiqued credits.
Various guardrails factor extensively into the assigned ratings and should greatly temper much of the political risk as well as the vagaries of New York City's budgetary and economic cycles, thus providing investors with relative comfort.
Although insulated from the city's budgetary process, TFA benefits from New York City's stringent requirements for financial controls and reporting through activist state involvement following the city's cash-flow crisis of the mid-1970s and resultant establishment of the Financial Emergency Act of 1975.
New York City GOs and TFA bonds have demonstrated resiliency despite periods of national recession, a general seizing up of credit, dislocation in the housing market, stock market declines, and the 9/11 terrorist attacks. Throughout these events, ratings stability has been exhibited thanks to well-crafted credit structures that are separate, yet tied to the strength of a common economic base. The two credits benefit from defined borrowing limitations and extensive and diversified financial and economic resources, highlighted by above-average socio-economic attributes.
New York City has demonstrated fiscal discipline and has produced a balanced budget since 1981 despite challenging economic and fiscal cycles and events.
The city is mandated to present a balanced budget and a city charter requirement that New York annually prepares a four-year financial plan to be reviewed and updated quarterly enables it to identify structural imbalances early and to pursue corrective measures. These features help to offset concern over the city's disproportionate, albeit declining, reliance upon Wall Street activity and its cyclical impact upon revenue projections and actual performance, and to a lesser extent, upon the volatility in sales tax collections.
New York City GOs, with approximately $47 billion outstanding, are rated Aa2/AA/AA. The constitution and laws, particularly the Local Finance Law of New York state, establish clear mechanisms for repayment of debt service on New York City general obligation bonds and notes. The constitution requires the city to pledge its faith and credit, with general obligation bondholders having a first lien on city property tax receipts, authorizing the city to levy a real estate tax without limit as to rate or amount to cover scheduled debt service. New York's real estate tax represents the single largest source of city revenues, the primary source of funds for its general debt service fund, and about 43% of its total tax revenues.
The fund for city bonds and certain city notes is maintained by New York State or a third-party trustee.
Payments of the city real estate tax must be deposited upon receipt into the fund and retained under a statutory formula for the payment of debt service. While the statutory formula has, in recent years, retained sufficient real estate taxes necessary to comply with city covenants, should the formula fail to produce required taxes, the city will either provide for early retention of real estate taxes, or advance cash payments into the fund. Since its inception, the fund has been fully funded at the beginning of each payment period.
The New York State Financial Control Board has broad powers to ensure sufficient debt service coverage and the city covenants provide a general reserve for each fiscal year to cover potential reductions in projected revenue or increases in projected expenditures.
The city further covenants to comply with the financial reporting requirements of the Financial Emergency Act and to limit its issuance of cash-flow notes.
New York City is bound by continuing disclosure requirements and New York State is subject to non-impairment covenants within the act, such that the state will not take any action that would undermine the city's ability to comply with its own covenants. This backdrop helps to offset recurring credit pressures including elevated debt service requirements, pension obligations and retiree health care costs (other post-employment benefits).
The second largest revenue source for the city is its personal income tax, approximating 38% of non-real estate tax revenues. This represents the primary statutory revenue source of repayment on TFA bonds, with $57.1 billion of outstanding debt.
Since the TFA does not currently have senior lien debt outstanding, the subordinate lien structure is the working lien, having a three times additional bonds test. Aa1/AAA/AAA ratings reflect a strong legal construct that provides bondholders with a first lien on New York City personal income tax receipts as well as a lien on city sales tax collections to the extent necessary. The city personal income tax was adopted in 1966.
The TFA structure is legally viewed as a bankruptcy-remote, separate legal entity with a dedicated revenue stream not subject to appropriation, enabling TFA to maintain ratings higher than those of the city GO credit.
Pledged taxes are collected by the state comptroller, with personal income taxes remitted directly to the bond trustee, and sales taxes paid to the trustee should income tax receipts decline below 150% of maximum annual debt service. The trustee is required to make quarterly set-asides for debt service before tax revenue can be used for city operations.
The New York state legislature created TFA in 1997 to provide the city with alternative access to the capital markets in the wake of an approaching GO debt limit. TFA bonds are not debt of New York City, and city GO bondholders do not have a first claim on New York City personal income tax receipts.
Only residual amounts remaining after payment of TFA debt service can be transferred to the New York City general fund. Per the NYC Office of Management and Budget, personal income and sales tax revenue is forecast to grow by about 11% from FY 2025 to FY 2029. FY 2025 pledged tax revenue provided 7.6x debt service coverage on outstanding TFA debt.
