New York, New York
NYC’s 2 New Offerings Underscore Challenges of Funding 10-Year, $133B Capital Strategy
Tue 08/16/2022 17:01 PM
The City of New York’s latest offerings, a $1 billion general obligation and another $1 billion out of the NYC Transitional Finance Authority, or TFA, underscore the challenges of financing its 10-year, $133 billion capital strategy, said market sources.
The 10-Year Capital Strategy, which is published every odd year and most recently in April 2021, totaled $133.7 billion for fiscal years 2022 through 2031. The city will finance 97% of the plan with debt. But as of July 1, the city’s debt-incurring power was $41.5 billion out of a total debt limit of $127.45 billion.
Long-term general obligation indebtedness as of June 30 was $38.84 billion, while total TFA debt was $43.5 billion in future tax secured bonds. The combined city and TFA debt-incurring capacity is projected to decrease to $12.1 billion for fiscal year 2026 from $41.5 billion as of July 2022, according to the preliminary offering statement.
“I do expect that the state will act to increase the city’s borrowing capacity through TFA,” said John Ceffalio, senior municipal research analyst at CreditSights.
Primary Issuance Trends
Jefferies is pricing this week $1.075 billion of fiscal 2023 Series A general obligation bonds, and Ramirez will lead next week’s $1.08 billion sale from the TFA. According to a CreditSights report, the 10-year NYC GO benchmark was 37 basis points wide of the AAA benchmark.
“As with other recent large sales from New York City, spreads may continue to widen in advance of this deal getting priced, but we would expect them to revert subsequently,” according to the CreditSights report.
Below is a snapshot of pricing on select negotiated maturities for the retail orders for this week’s general obligation sale:
In May, the city issued $1.08 billion in fiscal 2022 tax-exempt Subseries D-1 bonds and taxable Subseries D-2 bonds. The Subseries D-1 term bonds due May 2049 have a final yield of 4.64% and a 4.5% coupon.
Debt Service Grows
In the Message of the Mayor published in April 2022, which included the fiscal year 2023 executive budget, total debt service expenses are expected to increase from 10.2% of total tax revenue in 2022 to 13.2% in 2026, which is still below the 15% threshold stated in the preliminary offering memorandum, said sources familiar with the city’s budget.
“The city’s Financial Plan does project that debt service will grow more quickly than revenues. I still believe debt service will be affordable but this is something we will be watching,” said John Ceffalio from CreditSights.
In addition, the city has entered into agreements to make payments, subject to appropriation in the city’s budget, to be used to fund debt service for public benefits corporations, or PBCs. For certain PBCs, the city’s payment obligations to fund debt service are contingent on PBC revenue not being sufficient to pay the debt service itself. PBC, or “conduit debt,” is roughly $3.7 billion outstanding spread across 10 issuers, according to the Independent Budget Office.
In the financial projections for fiscal years 2024 through 2026, the city anticipates projected gaps in budget between revenue and expenditures, as reported.
“While it may show gaps in future years, when those years become the current year, they either have to show increased revenue or decrease expenses to [comply with] generally accepting accounting principles, or GAAP financing, which the city has followed since 1981,” said Elizabeth Brown, communications director of the NYC Independent Budget Office.
To eliminate the projected gap by cutting agency expenditures, Brown added, most recently the city focused on reducing originally budgeted but vacant positions in the city, such as positions within the food waste collection program that was halted during the pandemic.
There’s no projected deposit into the rainy day fund beyond the current fiscal year, since “it’s actually a very new fund” that was created in early 2021 after the pandemic-related economic downturn, she said. Deposits into the rainy day funds include both surpluses from the year prior and any additional amount pursuant to the city’s budget process.
--Hoa P. Nguyen
The 10-Year Capital Strategy, which is published every odd year and most recently in April 2021, totaled $133.7 billion for fiscal years 2022 through 2031. The city will finance 97% of the plan with debt. But as of July 1, the city’s debt-incurring power was $41.5 billion out of a total debt limit of $127.45 billion.
Long-term general obligation indebtedness as of June 30 was $38.84 billion, while total TFA debt was $43.5 billion in future tax secured bonds. The combined city and TFA debt-incurring capacity is projected to decrease to $12.1 billion for fiscal year 2026 from $41.5 billion as of July 2022, according to the preliminary offering statement.
“I do expect that the state will act to increase the city’s borrowing capacity through TFA,” said John Ceffalio, senior municipal research analyst at CreditSights.
Primary Issuance Trends
Jefferies is pricing this week $1.075 billion of fiscal 2023 Series A general obligation bonds, and Ramirez will lead next week’s $1.08 billion sale from the TFA. According to a CreditSights report, the 10-year NYC GO benchmark was 37 basis points wide of the AAA benchmark.
“As with other recent large sales from New York City, spreads may continue to widen in advance of this deal getting priced, but we would expect them to revert subsequently,” according to the CreditSights report.
Below is a snapshot of pricing on select negotiated maturities for the retail orders for this week’s general obligation sale:
In May, the city issued $1.08 billion in fiscal 2022 tax-exempt Subseries D-1 bonds and taxable Subseries D-2 bonds. The Subseries D-1 term bonds due May 2049 have a final yield of 4.64% and a 4.5% coupon.
Debt Service Grows
In the Message of the Mayor published in April 2022, which included the fiscal year 2023 executive budget, total debt service expenses are expected to increase from 10.2% of total tax revenue in 2022 to 13.2% in 2026, which is still below the 15% threshold stated in the preliminary offering memorandum, said sources familiar with the city’s budget.
“The city’s Financial Plan does project that debt service will grow more quickly than revenues. I still believe debt service will be affordable but this is something we will be watching,” said John Ceffalio from CreditSights.
In addition, the city has entered into agreements to make payments, subject to appropriation in the city’s budget, to be used to fund debt service for public benefits corporations, or PBCs. For certain PBCs, the city’s payment obligations to fund debt service are contingent on PBC revenue not being sufficient to pay the debt service itself. PBC, or “conduit debt,” is roughly $3.7 billion outstanding spread across 10 issuers, according to the Independent Budget Office.
In the financial projections for fiscal years 2024 through 2026, the city anticipates projected gaps in budget between revenue and expenditures, as reported.
“While it may show gaps in future years, when those years become the current year, they either have to show increased revenue or decrease expenses to [comply with] generally accepting accounting principles, or GAAP financing, which the city has followed since 1981,” said Elizabeth Brown, communications director of the NYC Independent Budget Office.
To eliminate the projected gap by cutting agency expenditures, Brown added, most recently the city focused on reducing originally budgeted but vacant positions in the city, such as positions within the food waste collection program that was halted during the pandemic.
There’s no projected deposit into the rainy day fund beyond the current fiscal year, since “it’s actually a very new fund” that was created in early 2021 after the pandemic-related economic downturn, she said. Deposits into the rainy day funds include both surpluses from the year prior and any additional amount pursuant to the city’s budget process.
--Hoa P. Nguyen
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