New York City can thank Fed for financial help while Congress dithers

New York City is planning to tap the booming US municipal bond market for $1.5bn in new funds next week, even as rating agencies warn it faces the prospect of further downgrades of its debt.

The divergence between record low funding costs and the ever more dire state of the city’s finances highlights how actions by the US Federal Reserve to hold down interest rates have eased the pressure on the country’s largest metropolis — at least for now.

The rating agency Fitch warned this week that the coronavirus outbreak was causing long-lasting economic damage to New York. It cut the city’s debt rating on Tuesday by one notch to double-AA minus and reaffirmed its negative outlook, an indication that another downgrade could be in the cards.

The move followed a decision earlier in the day by S&P Global, which lowered its outlook for New York City to negative from stable.

The deteriorating financial situation gripping the US economic hub and home to Wall Street has been worse than other parts of the country, Amy Laskey, an analyst with Fitch, said. Ms Laskey noted that the city had only recovered 46 per cent of the jobs lost in the crisis, lagging behind the national average, and that New York City’s large tourism sector faced a protracted comeback.

“This view is informed by the weak rebound to date in employment, real estate transactions, tourism and mass transit usage,” Ms Laskey said. “Very low rates of employees returning to offices and the potential for a longer-term trend of lower office usage could exacerbate current economic pressures on the city’s credit profile.”

The downgrade — across all of New York City’s $38bn of general-obligation debt — came as congressional negotiations on a new economic stimulus package continued to snag on the issue of whether to include aid to state and local governments. Policymakers have been stuck at an impasse since critical unemployment benefits expired in July, with Republicans reluctant to offer additional assistance to states and cities.

Andrew Cuomo, the New York state governor, is pleading for financial aid from the federal government. He said the consequences to the state and the families within it “are going to be devastating” if lawmakers were unable to agree a deal that includes aid.

The impact could include lay-offs of “several thousand” government workers, “dramatic tax increases” and New York City and the state having to borrow money “just to make the ends meet”, Mr Cuomo said at a press conference on Wednesday. He added that the MTA, the state-run transit system, might alone be forced to shed about 7,000 workers and would have to raise train and bus fares.

“Why you would want to lay off essential workers now when you’re just starting this ambitious vaccination programme, I have no idea,” said Mr Cuomo. “A more obnoxious coincidence of facts you could not have.”

The city’s unemployment rate has remained elevated, with Fitch estimating the level at 17.5 per cent in October when adjusting for workers who have dropped out of the labour force. That is roughly 7 percentage points above the median level for the 50-largest US metropolitan areas.

S&P Global analyst Nora Wittstruck said the rating agency saw a one-in-three chance it would need to downgrade New York City’s credit rating in the coming years. Service cuts by the MTA could hamper the region’s economic recovery, she said.

Both S&P and Moody’s still give New York their third-highest possible rating, however — double-A — and the city next week plans to borrow $1.5bn through a bond offering. The funds will be used to retire older, more expensive debt.

Reflecting rock-bottom interest rates and yields across the debt markets, investors have bid up the value of the city’s debt this year. A $355m bond that matures in 2031 was trading at 124.97 cents on the dollar on Wednesday, just below the year’s high. That pushed the yield on the bond down to 2.55 per cent, according to trading data collected by the Municipal Securities Rulemaking Board.

Line chart of Yield to maturity on New York City's general obligation bond that matures in 2031  (%) showing New York City bond prices have rallied in 2020, despite the crisis

Congressional aid has already helped in part to bridge budgetary gaps exacerbated by coronavirus-related expenses. The city received $1.45bn from the Cares Act this year.

Fitch noted that the city was also allocated $2.65bn from the Federal Emergency Management Agency, which will help offset the $5bn in coronavirus-related expenses New York City estimates it will owe.

The MTA also received assistance from the government. It became one of two issuers to tap the Fed’s $500bn municipal lending facility this year.

The facility, which was set up with the US Treasury department in order to support hard-hit state and local governments, is set to expire at the end of the month.

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