Standard & Poor's Corp. has all but ruled out downgrading New York City's general obligation bonds and may even take city debt off its negative outlook watch list.
Managing director Richard Larkin, who only last year threatened to cut the city's rating from its current A-minus, said Friday that Mayor Rudolph W. Giuliani's fiscal 1995 budget has helped assure rating agency officials that the city is moving toward financial stability. Fiscal 1995 begins July 1.
The Giuliani budget, approved Thursday by the city council, calls for reducing the city's work force by 15,000 and other measures to shrink the city's vast, expensive government. The plan also features a series of fiscal gimmicks, such as a $1 billion debt restructuring, to balance a $2.3 billion budget gap in fiscal 1995.
Standard & Poor's has yet to receive the final documents on the city budget, and the rating agency will not make a formal comment until executives complete a review of the spending plan. Indeed, the final budget may contain some fiscal gimmick that could damage the city's credit outlook.
But barring something unforeseen, Larkin said the cuts proposed by Giuliani and approved by the council represent a significant step toward eliminating the city's largest credit hurdle: billions of dollars in budget gaps through the life of the city's fiscal plan.
"Pending our review of the final budget numbers, what we know so far doesn't lead us to consider a downgrade at this point," Larkin said.
In terms of the rating agency's negative outlook on city GO debt, Larkin said, "We're looking whether or not we can stabilize this rating. The negative outlook has been there too long. If we feel the outlook is that negative, we should be seriously considering lowering the rating."
In many ways, the Standard & Poor's assessment of the city's bond rating is a controversial one among municipal bond analysts. Last year, the ratings company threatened the administration of former Mayor David N. Dinkins with a downgrade after the city's fiscal 1994 budget showed significant risks.
Standard & Poor's later backed off its stance, following promises of fiscal reform by the Dinkins Administration. But many analysts still say the city's structural budget gap is more accurately reflected in the Baal assessment by Moody's Investors Service. The Baal grade is equivalent to the BBB-plus rating on the Standard & Poor's scale. Fitch Investors Service rates the city's bonds A-minus.
"I'd love to see Giuliani pull it off, but there are some tough times ahead," said Michael Brooks, a senior municipal credit analyst at Sanford C. Bernstein & Co. Saying he feared that several key aspects of the Giuliani gap-closing plan could dissolve, Brooks cited the idea of having the municipal work force pick up the tab for part of its health-care benefits.
"There are big risks in this plan," Brooks said. "I don't know how you can ignore them."
Larkin, for his part, said Standard & Poor's is not ignoring the problems at hand, but responding to a new credit direction. Larkin said he is concerned about possible increases in the city's short-term borrowing because of additional cash-flow needs.
The city's cash-flow problem, which forces the city to borrow money in the municipal bond market, is partially caused by the large number of one-shots used by the city to balance both current and past budgets, according to a report published by the city's Financial Control Board.
"On balance, this is a more positive budget than we have seen in different years," Larkin said. "The level of concern with this year's budget is nowhere near the level of concern with last year's budget."
