Anyone intending to buy or already holding New York bonds needs to increase due diligence of those issuers’ risks. The recent Internal Revenue Service’s decision to deny the State and Local Tax (SALT) cap work around proposed by elected officials for high property tax municipalities in New York is viewed negatively by Moody’s credit rating agency. Analysts at Moody’s September Credit Outlook stated that “The SALT cap will likely dampen housing price growth in high-tax states and states with a high percentage of SALT filers by removing an incentive for homeownership. Slower price appreciation will curb growth in assessed values.” Moody’s analysts also emphasized that, “depending on how taxes are structured and local governments' capacity to raise them, reduced assessed value growth will also reduce growth in property taxes.” Giving food for thought to elected officials in all of New York, Moody’s said: “With a cap on SALT deductions, voters in some municipalities will be more likely to reject tax increases because they will not be partially offset by a federal tax benefit.”
Not only should the threat of lower tax revenues to New York State be a concern, but so should be the current state of the New York state economy and New York municipality balance sheets. Unfortunately, New York State lags behind the rest of the country in economic growth. Growth could slow down even more depending on how the New York state economy will fare with the Trump administration’s tariffs. According to the US Chamber of Commerce, about 2.7 million jobs in the state are supported by trade. New York State unemployment is about 4.5%, higher than the national average of 3.9%, though it has come down significantly since 2011 when New York state unemployment stood at 8.3%. Much of the job growth and decrease in unemployment, however, is being fueled by New York City.
At the state level, New York State Comptroller, Thomas Di Napoli announced that “spending will outpace revenues over the next three years with potential cumulative gaps totaling $17.9 billion.” New York counties are also suffering significant gaps. Westchester County, for example, is coping with a budget gap of almost $29 million; the amount of the shortfall could grow depending on the outcome of ongoing labor contract negotiations.
New York municipalities are challenged not only at revenue level, but they also have significant balance sheet problems due to unfunded liabilities. According to Truth in Accounting, a Chicago-based not-for-profit organization that analyzes municipal finances, New York State has about a $143 billion shortfall, a figure which also estimates off-balance sheet liabilities. Given this shortfall, Truth in Accounting gave New York State a failing grade of F for its state of finances. According to Truth in Accounting CEO Sheila Weinberg “hundreds of billions of dollars have been promised to government workers in the form of pension and health care benefits, but the state has set aside less than one percent in assets to fund these promises.” New York State’s shortfall means that each New York state resident would need to come up with about $21,500 to cover this significant gap; this figure is just for the state; each resident would also be on the hook for her own city and county gaps.
At the beginning of this year, Truth in Accounting published its research on New York City, which like New York State received a failing grade of F. According to the analysis, “New York City's financial problems are largely driven by long-term debt and runaway entitlement obligations in two categories: pensions and retiree healthcare benefits. The city has $69.7 billion in unfunded pension promises and $79.4 billion in unfunded retiree healthcare benefits. While New York City has promised these benefits, little money has been set aside to fund them.”
This month, Truth in Accounting gave a grade of ‘D’ to Westchester County and to the Village of Scarsdale, two of the most affluent counties and cities in the United States. According to the analysis of Westchester County “elected officials have made repeated financial decisions that have left the county with a debt burden of $2.8 billion.” This debt burden equates to $8,400 for every Westchester taxpayer. Westchester County's financial problems stem mostly from “unfunded retirement obligations that have accumulated over many years. Of the $5.8 billion in retirement benefits promised, the county has not funded $173.5 million in pension and $2.5 billion in retiree health care benefits.”
Truth in Accounting’s analysis found that Scarsdale Village’s Taxpayer Burden of $14,600 is higher than 88 of the 100 most populated cities in the U.S. ; the population of Scarsdale is under 20,000 residents. According to Weinberg this level of taxpayer burden, “is a result of Scarsdale’s elected officials pushing current costs, especially those related to unfunded pension and retiree health care promises, onto future taxpayers. Elected officials have been using the city’s and county’s credit cards to charge current services and benefits; future taxpayers will be the ones stuck with the government’s credit card bills when the time comes.” A taxpayer in the Village of Scarsdale is on the hook for a total of $44,500 in combined state, Westchester County and Scarsdale Village debt.
Between the curbs on SALT deductions and New York state, county and municipal levels of indebtedness, it is imperative that New York bond investors scrutinize elected officials’ actions more. Investors in New York bonds need to ask questions of elected officials such as: what is the expertise of their property assessors since these individuals hold the key to property tax levies? What pet projects that increase a municipality’s leverage can be cut? What municipal services can be shared? Do municipalities have strategic plans to increase retail in their towns to diversify the tax base? And do municipalities have long-term financial plans to withstand unexpected downturns in the economy? By not asking probing questions, investors in New York bonds might remember caveat emptor way too late in the next market downturn.
