New York’s debt is rallying the most in four years as investors bet the most-populous U.S. city will overcome a midyear deficit and cope with health costs projected to grow 35 percent by 2016.
Mayor Michael Bloomberg will say next month how he will bridge a $635 million hole in his $68.5 billion budget created when a judge blocked a plan to sell 2,000 taxi medallions. Yet investors this week accepted as little as 0.41 percentage point of extra yield to hold 10-year New York general-obligation bonds rather than AAA municipal bonds, the smallest spread since August 2008, data compiled by Bloomberg show.
Investors are unfazed by the city’s looming fiscal crunch because of its diverse economy and stable financial management, said Joseph Pangallozzi, a managing director with New York-based BlackRock Inc. (BLK:US), the world’s biggest asset manager.
“They respond decisively to budget gaps, and there is a lot of longevity of key managers that have served successive mayoral administrations and those folks are very good managers,” said Pangallozzi, whose firm oversees $105 billion of municipal debt. “New York’s economy is very diverse, broad and has a very strong real-estate property base.”
New York, rated two steps below AAA by the three major rating companies, is benefiting from demand for riskier assets with Federal Reserve Chairman Ben Bernanke pledging to keep the central bank’s key overnight rate near zero through mid-2015. For the city, it’s a reversal from the mid-1970s, when it was on the brink of bankruptcy and banks stopped buying its debt.
That crisis led to a state law creating the Financial Control Board to oversee New York’s fiscal policies. The board this year certified the budget as balanced while raising questions about how the mayor and City Council did it.
Board members cited as a risk the mayor’s reliance on the sale of the taxi medallions for $1.5 billion over three years. That plan went awry in June when a judge blocked it, forcing the mayor to seek $635 million in agency spending cuts by the June 30. The city has appealed the ruling.
The board expressed even more concern about pension contributions, which have ballooned to about $8 billion this year from $1.3 billion in 2002, and health costs for current and retired employees, which are forecast to grow to $2.7 billion by 2016 from $2 billion.
The board’s focus on pensions was heightened after the mayor and council adopted a plan by Chief Actuary Robert North to reduce the assumed rate of return on the city’s $120 billion in pension-fund assets to 7 percent from 8 percent. The new rate still must be approved by the state legislature.
The reduced assumption, combined with increased life expectancy, work longevity and compensation, means the city would have had to pay at least $2 billion more a year to meet its pension obligations, North said. Instead, he devised a plan to spread some of those payments over 22 years.
While such tactics may balance the spending plan, “pensions and health-care costs threaten the long-term financial viability of the city,” said Jeffrey Halis, president of the New York-based investment company Tyndall Management LLC, who serves as the board’s public representative.
Marc LaVorgna, Bloomberg’s spokesman, said the mayor shares the Financial Control Board’s concerns. The mayor, 70, whose third and final four-year term ends next year, is the founder and majority owner of Bloomberg News parent Bloomberg LP.
“The mayor will walk out of office with the budget in balance,” LaVorgna said. “He’s spent his entire tenure talking about rising pension and health-care costs, but pensions can’t be reduced without state approval and health costs can’t be reduced without unions’ cooperation in collective bargaining.”
The city has benefited by adapting to the highs and lows of Wall Street, said Joe Darcy, who helps manage $15 billion as head of municipal fixed income for Hartford Investment Management Co. The financial industry’s cash bonus pool is likely to fall for a second straight year as it grapples with market turmoil, economic weakness and new rules, New York state Comptroller Thomas DiNapoli said Oct. 9.
City officials are “taking the steps to not get overly generous during periods of strength, which would leave one over- extended during periods of downturn,” Darcy said.
The city’s credit ratings have been raised three times by Moody’s Investors Service and Standard & Poor’s in the past seven years, and twice by Fitch. The upgrades came during times when New York endured two of its most serious fiscal challenges since the 1970s: the recovery from the Sept. 11 terrorist attacks and the 2008 financial collapse.
Fitch restated its AA rating and stable outlook in an Oct. 18 statement ahead of a $325 million sale of variable-rate bonds, saying New York has a “sound approach to budget development,” featuring “conservative revenue and expenditure forecasting and effective budget monitoring.”
In the broader tax-exempt market yesterday, yields on benchmark 10-year munis were little changed at 1.7 percent, the highest since Oct. 1, a Bloomberg index shows.
Following are pending sales:
COLORADO HEALTH FACILITIES AUTHORITY plans to sell $1.5 billion in taxable revenue bonds as soon as tomorrow on behalf of Catholic Health Initiatives, according to data compiled by Bloomberg. (Updated Oct. 24)
NEW JERSEY plans to sell $2.6 billion of general-obligation tax-and revenue-anticipation notes through competitive bid as soon as Oct. 30, data compiled by Bloomberg show. It’s the state’s largest short-term note deal, the data show. Proceeds will repay a loan from Bank of America Merrill Lynch and boost cash flow. (Updated Oct. 24)
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To contact the editor responsible for this story: Stephen Merelman at email@example.comNew York's credit ratings have been raised three times by Moody’s Investors Service and Standard Poor’s in the past seven years, and twice by Fitch. Photographer: Peter Foley/Bloomberg