New York City is grappling with a wave of financial woes, ranging from falling real estate prices to a decline in federal aid. With memories of the city's fiscal quandary of the mid-1970s still vivid to many, investors have pushed down city bond prices over the past year.
Nonetheless, some industry experts believe the city's bonds present attractive investment opportunities. One reason is that bond yields have rocketed higher than the city's ratings would justify, and much higher than comparable bonds issued by other municipalities.
For example, New York State Dormitory Authority City University bonds are currently trading at 7.72%, while City of Boston bonds are trading at 7.30%. The yield differential is even greater when compared with other issues.
"It can exceed 100 basis points", said Mark Tennenhaus, a vice president and municipal bond analyst at Dean Witter Reynolds. He noted that some long-term New York City bonds are yielding around 8.5%.
In most cases, high bond yields reflect investor uncertainty over an issuer's ability to repay the principal value of its bonds at maturity. And, to a certain extent, credit concerns have raised Big Apple yields.
The rising gap between revenues and expenses, early mixed signals from the administration of Mayor David N. Dinkins and ongoing wrangling over New York's state and city budgets are all cited as valid reasons for the upturn in yields.
However, more benign factors that don't necessarily reflect repayment risk are putting downward pressure on prices. "For instance, there's an oversupply of city bonds," said Mr. Tennenhaus. "Earlier this year, New York bond issues comprised 14% to 15% of the total supply of municipal issues."
The amount of publicity over every financial sneeze emanating from City Hall is also hurting the performance of New York bonds. The city's finances are regularly reported by local end national media, leading to unreasonable investor wariness, traders complain.
"Since the city has stringent reporting requirements, such as the public review of its finances by numerous public entities, it's always airing its dirty laundry. That doesn't help matters, either," said one analyst, who requested anonymity.
In the mid-1970s, New York City was unable to balance its budget from either incoming revenues, note issuances, or expenditures deferrals. Its attempt to borrow through the Stabilization Reserve Corp. was blocked by a taxpayer suit, and bankers refused to extend more credit.
The city's accumulated deficit was estimated to be at least $4 billion in 1975. In November of that year, the state attempted to declare a three-year moratorium on the repayment of certain city notes.
Long-term debt was unaffected. Calling the moratorium unconstitutional, the Court of Appeal ruled that an issuer must pay principal and interest on time, where tax-exempt debt in the state is supported by a pledge of full faith and credit.
This crisis, which locked the city out of the credit market for six years, stemmed from the city's practice of overestimating revenues and underestimating expenditures.
"Accounting definitions of revenues and expenditures were vague at best," explains Harrison J. Goldin, a former New York City comptroller. "New York City's accounting effectively treated revenues on an accrual basis, and expenditures on a cash basis, the least conservative of all possible accounting systems."
The city's management practices were poor, as well. "When there was a shortfall of a couple million dollars, city administrators were not always sure how the money was spent." said Thomas A. Dorsey, a senior vice present at AMBAC Indemnity Corp., a municipal bond insurer. "New York City was in need of sound financial management. It was run like a mom-and-pop operation."
Mr. Dorsey believes the city is in much better shape today than it was in 1975. Echoing the opinions of other insurers with exposure to city bonds, Mr. Dorsey said New York City general obligation securities, in particular, are among the least risky of all municipal debt available.
The good news resulting from the crisis is that these problems were corrected, Mr. Dorsey said. "Long-term provisions were put in place after the crisis that have helped make New York City a sold municipal credit. I think this city is more prepared to meet adversity that comes its way because of its past financial woes."
Elinor B. Bachrach, deputy state comptroller for New York City, pointed out some of the oversight mechanisms that have been put in place:
* The city has a sophisticaed and comprehensive budgeting and accounting system to forecast all expenditures and revenues, including debt service.
* The city must prepare and update its four-year financial plan. Those plans must include provisions to pay all debt service costs, among other expenses.
* Three separat state-level agencies monitor the city's budgets to make sure its revenue estimates are reasonable and that it can, in fact, meet all its expenditures, including debt service.
* Each year the city must achieve a balanced budget or risk having the state's Financial Control Board reimpose authority over its finances.
* The city's budget and accounting practices must conform to general accepted accounting principles.
Another important safeguard for bondholders is that the city does not have immediate access to its main revenue stream. "Money from property taxes goes into a special, state-held account, where it is then given to the city to pay its debt obligations," Ms. Bachrach added.
The result of all these internal and external New York City financial controls has been favorable. The city recently completed its 10th straight year of balanced operations, and has maintained a positive general fund balance since fiscal 1984. In fiscal 1990, property tax receipts covered debt service requirements 5.4 times.
"Today, the processes are much more sophisticated with regular management practices in place. Everything is computerized," Mr. Dorsey said. "The city employs some of the best talent found anywhere. These professionals can very accurately forecast anticipated revenues, expenditures, and other important data."
Three state-level agencies monitor the city's finances: the Control Board; the Municipal Acceptance Corp.; and the special state controller's office.
The city is required to submit periodic financial plans to the control board, which maintains the right to request additional details. During the city's fiscal crisis in the mid-1970's, the control board took over the city's finances, bringing it back from the threshold of bankruptcy.
While the Municipal Assistance Corp.'s board doesn't have specific review capabilities, it's involved in the retirement of debt issued. Such debt is paid from the dedicated sales tax surplus that flows to the city.
The special state controller's office is a persuasive body of senior-level state government people appointed by state legislature.
These individuals are concerned with how the city operates. They are commonly referred to as the city's economic conscience.
Mayor Dinkins has personal motivation to maintain a firm hold on the city's financial situation, since he will lose control over the city's finances should it fall into serious fiscal trouble. With so many controls in place, it would be an admission of incompetency for the mayor to lose control.
The major reason that New York City cannot allow its credit to suffer is its massive need for access to credit markets for future bond offerings. The city is planning to issue over $1 billion in debt over the next year alone. "And unless investment bankers, ratings agencies, and investors feel comfortable with the city's ability to repay debt, it could face exorbitant interest costs and a difficult time selling bonds in the future," Mr. Dorsey said.
"Despite these problems, the city is not going to fold up and go away," said H. Russell Fraser, chairman and chief executive officer of Fitch Investors Services, a ratings agency. "The city's problems have gathered a lot of momentum in the past year, like a stone gathers moss rolling down a hill. But many people who sell on bad news have already sold."
Mr. Del Prete is a freelance writer living in New York.