Standard & Poor's Corp. affirmed its A-minus rating on New York City, general obligation bonds on July 2, after a review of the recently adopted 1994 budget and discussions with the city regarding potential future plans to address structural budget gaps in outlying years.
Our deliberations and discussions with the city focused on two areas - was the city currently in a state of crisis, and if not, was a crisis looming in the foreseeable future?
There has been a great deal of speculation in recent weeks over the possibility of a rating downgrade, fueled by our indications this past March that Standard & Poor's would be taking a hard look at the city's financial plans when it adopted its budget in June.
In our view, the city is not in crisis, and the recent announcements of additional spending cuts to be implemented in 1993 in anticipation of future budget gaps beginning next year gave Standard & Poor's comfort that the city was taking steps to avoid a crisis that could be building in future years.
Without doubt, the city is still facing significant fiscal challenges in future years, which are reflected in our continuation of a negative outlook for the city's rating. We still believe these challenges are manageable, and that steps to move the city toward structural budgetary balance are achievable. If taken, Standard & Poor's believes, these steps could lead to stabilization of the outlook for the city's A-minus rating.
Why do we feel these challenges remain manageable? A review of the current budget and financial plan indicates the following:
* Current plans to reduce the city's work force through 1996 amount to less than 5%, phased in over four years. This pales in comparison to the 25% buildup that occurred in 1982-1990.
* The city faced more severe fiscal stress in 1991 when it faced substantial mid-year revenue shortfalls and larger projected budget gaps in outlying years.
* The city continues to operate under a policy of freezing tax levels at current rates, despite an aggressive debt issuance program that in virtually any other city would trigger substantial annual tax increases.
* While some city programs will indeed be reduced, many programs continue to be maintained at historic service levels. And others are increasing, notably public safety.
Standard & Poor's has always viewed the city's four-year financial planning process as a strength. The plan identifies and quantifies the fiscal challenges facing the city well in advance of a crisis, allowing New York to devise and implement plans to address projected budget gaps on a timely and forward-looking basis.
Standard & Poor's' concerns this year focused on the city's relative lack of specificity for city-proposed actions to address future budget gaps in outlying years. In this respect, some say that Standard & Poor's holds New York to a higher fiscal standard than other cities that do not implement four-year future financial plans.
The weight that we have placed on the city's four-year planning process helps offset concerns over a high and growing debt burden, as well as a high tax environment in the city, which has historically been the case.
There has been considerable discussion on the level of one-shots employed by the city to balance the 1994 budget. Those one-shots are higher than in recent years. but lower than in 1990-91, and still remain at a manageable level of about 2% of all city spending.
To put it in perspective, analysts would generally not be concerned if an issuer with a $300 million annual budget incorporated one-shots totaling $6 million, or 20% of annual spending. The one-shots in New York's 1994 budget do raise concern because of the projected budget gaps beginning in 1995, which are driven in large part by the new costs of the January labor settlement.
The recent announcement of early budget response to looming future budget gaps alleviated some concerns over the need for one-shots, and is an indication of the city's commitment to keep future budget gaps manageable.
There remain areas of financial flexibility for the city to address any budget gap that may develop in 1994 and beyond. The city has not factored in any surplus money that may be available from the New York City Municipal Assistance Corp., estimated at $200 million. This would clearly be non-recurring, but could be looked at as a contingency against revenue shortfalls.
The current targets for city employee head count still remain somewhat above earlier downsizing forecasts, and well above pre-recession levels, indicating room for further shrinkage if necessary.
The city is still striving to freeze current levels of taxation, which is commendable given the city's high local tax burden. If necessary, the city would have to reconsider that position, if it felt that continuation of high levels of city services and its large capital and debt programs are warranted.
As I indicated earlier, a debt program the size of New York's would likely trigger annual tax increases to fund the increasing debt service in virtually any other local government jurisdiction.
The current discussions to create fiscal balance do not need to take on the appearance of crisis, unless the leadership and management of the city allow a crisis to occur. If that happens, the city's credit rating should be adjusted. Baltimore, with an A rating and a recently revised outlook of positive, has managed downsizing of greater relative magnitude than New York, without the aura or appearance of financial crisis.
Philadelphia, on the comeback trail after its major financial crisis, has achieved remarkable progress in reducing its personnel costs and other costs in the space of only one year, putting that city back on a track where ongoing budget balance can be achievable. New York has the tools and flexibility to achieve ongoing budgetary stability, and its track record of budgets balanced according to generally accepted accounting principles, even during the toughest times of the recent recession, attests to the city's ability to achieve that goal.
Finally, there is always speculation as to whether rating decisions are influenced by the political climate, especially during an election year. Standard & Poor's' ratings are not a report card on a current administration, and in fact are intended to portray the credit characteristics of an issuer beyond the tenure of elected officials that serve. If credit factors, longer term, warranted a change in a long-term rating of that issuer, an election year is irrelevant. Those factors and challenges that could result in a rating change would remain, regardless of whether the city is managed by the incumbent or a newly elected administration.