24 BARRON’S April 6, 2020
down that is undermining hard-won
gains in its fiscal health that have been
achieved since the financial crisis of
the 1970s.
The country’s largest metropolis
operates on a massive scale, with an
annual budget of $95 billion that ex-
ceeds that of nearly every state. It has
a population of 8.4 million, total em-
ployment of 4.7 million, public-school
enrollment of 1.1 million, a municipal
labor force of 327,000, nearly
300,000 retirees drawing from a huge
underfunded pension plan, and $91.6
billion of outstanding debt.
New York’s situation is emblematic
of the one that many states and cities
across the country soon will be facing
as unemployment surges and tax reve-
nues drop.
The impact on New York City’s
finances will depend on the depth and
duration of the economic downturn.
Unemployment, which recently
stood at a record low 3.4%, should top
the 10.5% hit in the 2008-09 reces-
sion and even approach 15% or 20%—
levels not seen since the Great Depres-
sion of the 1930s, according to James
Parrott, the director of economic and
“We don’t
believe the
city’s credit
fundamen-
tals have
changed.”
Eric Kim, an
analyst at Fitchfiscal policy at the Center for New
York City Affairs at the New School.
The downturn is cutting sharply
into the city’s revenue, and that will
probably mean greater austerity and
more contentious relationships with
its powerful labor unions.
Most municipal finance experts
think that New York City will get
through the coronavirus crisis with-
out a major hit to its credit rating.
Bond investors, in short, shouldn’t
worry too much about getting paid.
The city came into the downturn
with a strong economy and double-A
credit ratings from Moody’s, Standard
& Poor’s, and Fitch.
“New York City has always been
cyclical, with a high concentration of
employment in financial services,”
notes David Hammer, head of munici-
pal bond portfolio management at
Pimco. “There could be some modest
ratings pressures, but it remains a
high-quality investment-grade munic-
ipal credit, due to budget flexibility,
financial reserves, and significant
support from the federal government.”
Potentially more troubling, how-
ever, are New York–related agencies,
such as the Metropolitan Transporta-
tion Authority, which has been hit
hard by enormous declines in rider-
ship on the city’s subways and buses,
as well as on commuter rail lines.
New York City Transitional Finance
Authority 4% bonds due in 2044 yield
about 3.25%. The TFA, with a triple-A
bond rating, accounts for half of the
city’s outstanding debt. Comparable
triple-A obligations from other parts of
the country yield close to 2.5%. The
TFA has such a high credit rating—
higher than the city’s general-obliga-
tion bond rating of double-A—because
of pledged revenues from the city’s
income tax and other sources. Hammer
says that high-income city residents
would need to buy triple-B-minus or
junk-grade double-B corporate debt to
get the same tax-equivalent yield; those
corporates yield about 6%.
Various MTA bond issues yield
about 5%, compared with less than
2% before the Covid-19 crisis. The
agency has $45 billion of debt out-
standing and has seen subway and
commuter rail ridership plunge
around 90%. It is expected to receive
$4 billion of federal aid as part of a
recent stimulus.
In a recent interview, the MTA’s
director, Pat Foye, said that the agency
is working on a “survival financing
plan.” “We expect to make every prin- Alvaro Dominguez
New York’s Economy Is
In Crucible of the Crisis
The nation’s biggest city is
grappling with the kinds of fiscal
challenges that will soon be faced
by states and cities nationwide
N
ew York City, as the nation’s
epicenter of the Covid-19 pan-
demic, is battling an unprece-
dented health crisis. It is also
grappling with a rapid economic slow-
ByANDREW BARY
April 6, 2020 BARRON’S 25unknowns. The biggest: How soon
can life return to normal once the ini-
tial crisis passes?
Much depends on how quickly a
Covid-19 vaccine is available. Without
one, fear of the disease could make it
difficult for the city to return to nor-
mal, even after the outbreak is curbed.
Corporations may also reassess
whether they need such a significant
presence in New York, given that they
now appear to be operating well with
most of their workers at home.
At Goldman Sachs Group (GS),
for instance, some 98% of New York–
based staff members are working in
their residences. At Goldman and
other big financial companies, jobs
such as trading, which once required
a physical presence, are now being
done remotely. And it’s uncertain
whether theGoogle unit of Alphabet
(GOOGL), Facebook (FB), and
Amazon.com (AMZN) will continue
to expand their presence in the city.
Worries about the New York office
market are evident in plunging share
prices of Vornado Realty Trust
(VNO) and SL Green Realty (SLG),
two leading Manhattan landlords. Both
stocks are off more than 50% this year.
New York City’s huge tourist indus-
try, meanwhile, is on ice. If social dis-
tancing remains in effect long after the
immediate crisis, when do the lights
go back on Broadway, and when will
bars, clubs, and restaurants fill up
again? Last year, New York attracted a
record 67 million tourists, who
pumped $45 billion into its economy.
Gotham does have some advantages
from a financial standpoint. It comes
into the crisis in relatively good shape,
with ample liquidity, modest reserves,
and financial controls.
“We don’t believe the city’s credit
fundamentals have changed,” says
Eric Kim, an analyst at Fitch. He notes
that “it’s a rapidly evolving situation,”
depending on how quickly and
strongly the city emerges from the
downturn. It will be receiving federal
aid, including more than $1 billion
from the recent stimulus bill for
Covid-19 expenses.
One consolation for the city is that
property taxes are relatively reliable.
They account for $30 billion in annual
revenue, or nearly half of the $64 bil-
lion in tax collections projected for the
current fiscal year. The difference of
about $31 billion between the city bud-
get and tax collections largely reflects
state and federal grants.
The annual revenue from income
taxes (about $14 billion) and from $8
billion in sales taxes are more problem-
atic. Both the city and the state rely
heavily on wealthy residents for in-
come taxes. The top 1% or so of city
taxpayers with incomes above $1 mil-
lion pay about 40% of all income taxes,
and 30% of the taxes paid by the top
1% often comes from capital gains.
Reliance on the wealthy may be
somewhat of a silver lining, as the bulk
of the city’s job losses is probably to be
among lower-income workers. But
absent a strong stock market recovery,
upper-income taxpayers won’t see big
capital gains this year, like those many
have enjoyed during the bull run over
the past decade. Taxes related to such
gains will plummet.
New York state is also in a fiscal jam,
with a potential $15 billion deficit in the
coming year. That could pressure state
payments to the city, which total $15
billion a year.
Some municipal watchdogs think
that New York should have done more
to be ready for a potential crisis. “The
city was not well prepared coming into
this,” says Andrew Rein, the president
of the Citizens Budget Commission, an
independent civic group. “It came into
this with a large workforce and rela-
tively small amounts of reserves. Good
times are when you should have been
socking money away.”
Based on theexperience of past
recessions, he projects that the city
could face a total budget gap of $7
billion to $8 billion over the current
and next fiscal year—above the comp-
troller’s recent worst-case estimate.
Rein warns that “sacred cows” must
be addressed to reduce the budget.
“Labor has to be part of the solution.”
Salaries and benefits for city employees
consume 55% of municipal outlays.
The city could ask the unions for a
wage freeze to avoid layoffs.
Like many other cities, New York
has an underfunded pension plan, de-
spite annual contributions of $10 bil-
lion. The deficit stood at $43.3 billion
on June 30, 2019, and that assumes a
7% annual return on plan assets.
The stock market slump will make
things worse. The city’s Independent
Budget Office recently estimated that
if returns on the equity-heavy plan are
zero in the current year on the $153
billion of assets, the city will have to
make up a $10.7 billion shortfall. The
city also has a huge unfunded liability
for employee post-retirement health
care of more than $107.8 billion.
And the city has a $126 billion, 10-
year capital spending program.
All this may have to be scaled back
as New York retrenches in what could
be a prolonged economic downturn.B
cipal and interest payment—we’re not
asking for forgiveness from our credi-
tors,” he said on The Brian Lehrer
Show on WNYC.
But Fitch has now downgraded the
MTA to single-A-plus from double-A-
minus, citing “significant deteriora-
tion of the MTA’s finances precipi-
tated by the coronavirus outbreak
and its unprecedented effect on sys-
tem utilization and revenue.”
“It’s a pretty scary revenue and
expense equation,” says Nick Venditti,
a muni portfolio manager at Thorn-
burg Investment Management. Still, he
adds, “The system is integral to the
region. New York City, state, and the
federal government have incentive to
keep the MTA financially sound.”
The city and its related agencies
could well weather the storm. Yet to
gauge the impact of the crisis, inves-
tors might need to pay more attention
to the city’s finances than those of
other muni-bond issuers.
City Comptroller Scott Stringer
recently estimated that New York’s
tax revenue could fall as much as $1.5
billion in the current fiscal year end-
ing in June and $4.6 billion in the
coming year. This scenario assumes a
“state of emergency lasting at least
into June or July, with a slower recov-
ery to normal economic activity.”
The financial hit would be less, he
said, if the coronavirus is contained
more quickly and the shutdown of
the city’s economy ends in May. A
longer shutdown and bigger financial
impact look more likely now.
The New School’s Parrott projects
that job losses could total 750,000,
or about 15% of the city’s payroll
employment.
The biggest hits could come in
restaurants (225,000), transporta-
tion (120,000)—reflecting Uber
Technologies (ticker: UBER), Lyft
(LYFT), taxi drivers, and airport
workers—and culture and recreation
(85,000). Other hard-hit sectors
include retail and hotels.
“The recovery will depend on how
ravaged small businesses are by
weeks or months of mandatory clo-
sures,” Parrott says. “In the absence
of regular, automatically triggered
stimulus measures, a significant por-
tion of current job losses will likely
continue into 2021, since we’ll still be
in a recession when the public health
crisis winds down.”
Looking ahead, New York faces a
Allan Tannenbaum/Getty Imagesnumber of economic and financial
In the 1970’s, New
York City teetered
on the brink of fi-
nancial collapse.New York City By the Numbers
*June 2019 **Feb. 2020Sources: NYS Dept. of Labor; Office of the
NYC Comptroller; NYC Independent Budget
Office; Citizens Budget Commission; BloombergProposed FY21Budget $95.3 bilLiabilitiesDebt * $91.6 bilPensionDeficit* $43.3bilRetireeHealthCare* $107.8bilEmployment DataTotal NYC Employment ** 4.7 milJoblessRate** 3.4%City Employees* 326,739City Retirees * 288,283City Bond RatingMoody’s Aa1S&P AAFitch AABond YieldNYC3%GOdue2045 3.1%MTA5%due2045 5.1NYCTransitionalFinanceAuthority4%due2044 3.2