New York City has received good news as it prepares to hit the market with more than $1 billion in general bonds next week.
Fitch Ratings revised the outlook for the city’s AA-less rated GOs to positive from stable, citing improved revenue performance as the city sees a recovery from the COVID-19 pandemic.
The rating agency also noted the improvement in budgeted reserve levels which would help mitigate existing unknowns, such as geopolitical uncertainties and inflationary pressures.
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“The city has a diverse revenue base and we have been very impressed with the revenue generated in 2021 and 2022,” Kevin Dolan, director of Fitch, told The Bond Buyer. “While it may be difficult to repeat this performance in some categories in the next fiscal year, which begins July 1, we believe there is momentum.”
He said the city could experience headwinds as it faces new labor negotiations with its unions, feels the sting of high inflation and sees growing geopolitical risks, including Russia’s war on China. ‘Ukraine.
Fitch also affirmed the city’s issuer GO and default ratings at AA-minus and affirmed A-plus ratings on NYC Health and Hospitals Corp’s outstanding healthcare system bonds. and Hudson Yards Infrastructure Corp. Series A and Series Fiscal 2017. B and Series A Revenue Bonds for fiscal year 2022.
The action comes amid the upcoming $1.08 billion sale of FY2022 Series D GOs, consisting of $950 million of tax-exempt D-1 sub-series and $130 million taxable D-2 sub-series dollars.
Lead book manager BofA Securities expects to price the bonds on Wednesday after a one-day retail order period.
Citigroup, JP Morgan Securities, Jefferies, Loop Capital Markets, Ramirez & Co., RBC Capital Markets, Siebert Williams Shank and Wells Fargo Securities will act as co-directors.
The co-managers of the agreement are Academy Securities, Barclays, Blaylock Van, BNY Capital Markets, BNY Mellon Capital Markets, Drexel Hamilton, Fidelity Capital Markets, Goldman Sachs, Great Pacific Securities, Janney, Morgan Stanley, Oppenheimer & Co., Raymond James, Rice Financial Products Co., Roosevelt & Cross, Stern Brothers, Stifel, TD Securities and UBS.
PRAG and Acacia Financial Group are the co-municipal advisers while Norton Rose Fulbright and Bryant Rabbino are the co-bond advisers.
The city also plans to sell $300 million of tax-exempt floating rate demand bonds during the week of May 23, bringing the total amount of bonds issued by the city to $1.38 billion.
Proceeds will be used to fund various capital projects.
GO bonds carry the full faith and credit commitment of the city and are backed by the city’s unlimited levy of ad valorem property taxes. The city is not subject to the state’s 2% property tax cap.
City Comptroller Brad Lander said the rating action followed a meeting his top executives had with Fitch to discuss city credit.
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“Prudent fiscal management is essential to ensuring a strong New York economy, especially in a time of unprecedented challenges,” Lander said in a statement emailed to The Bond Buyer. “NYC is in a better than expected financial position, made possible by historic federal relief, as well as strong revenue collections.”
However, he specifies that the work is not finished and that the city should take advantage of this opportunity to continue to strengthen the reserves.
Lander noted that Fitch said setting aside reserves above current levels and plausible structural solutions to year-over-year budget variances as factors that could cause them to improve the city’s credit rating.
“My office remains committed to critical oversight of the city’s budget and economy to ensure an inclusive recovery and a sustainable future for all New Yorkers,” Lander said.
The city is also responsible for five separate pension systems, of which the police and fire are single-employer plans. As of January, the funds had $265.9 billion in assets under management and were the fourth-largest public pension plan in the country. Lander is a systems trustee.
“Although the other three are cost-shared plans, the city bears responsibility for the majority of liabilities and nearly all of the two education-related plans,” Fitch said. “On a combined basis, the asset-to-liability ratio is 96% on a reported basis as of fiscal year 2021, or approximately 86% using Fitch’s 6% investment return assumption. .”
Mayor Eric Adams presented his $99.7 billion executive budget for fiscal year 2023 last month. The revised budget is up $1.2 billion from the $98.5 billion preliminary proposal unveiled in February and adds $200 million to the city’s rainy day fund, bringing reserves to 6 .3 billion, the highest level in the city’s history.
Dolan said the mayor’s executive budget “was relatively conservative” and the projected reserve growth was something the rating agency wanted to see.
City Council is currently holding a series of public hearings on the fiscal year 2023 budget. When these are concluded, Council, the Mayor, and the Office of Management and Budget will meet and negotiate final adjustments. By law, the 51-member council must vote on a balanced budget by July 1.
New York City is one of the largest issuers of municipal bonds in the country. As of the first quarter of fiscal 2022, the city had approximately $38.13 billion in general bonds outstanding.
This does not include the various municipal agencies that issue tax-exempt and taxable bonds such as the New York City Transitional Finance Authority or the Municipal Water Finance Authority, which have $41.64 billion and $31 billion, respectively. unpaid debts.
Fitch said factors that could lead to a rating upgrade include sustained revenue growth and resilience to various economic headwinds and geopolitical risks; financial reserves at or above current levels relative to expenditures and plausible structural solutions to off-year budget variances; or increased spending flexibility, as evidenced by manageable changes in fixed cost spending.
The agency said factors that could lead to a negative rating action or downgrade include an increased gap between revenue and expense growth or sustained erosion of the city’s reserve cushion or reduced ability to utilize budget management tools, such as the annual prepayment of expenses.
The city’s GOs were confirmed this week at AA by S&P Global Ratings, AA-plus by Kroll Bond Rating Agency and Aa2 by Moody’s Investors Service. They all attribute stable outlook.
