NYC Bonds

To Our Investor Community:

July 1st marked the beginning of the City’s 2017 fiscal year along with its $84.6 billion adopted budget. Both the New York City Transitional Finance Authority (TFA) and the City (GO) entered the market in July.  In non-bond related news, the Comptroller released his analysis of the City’s fiscal 2017 adopted budget and his Bureau of Financial Analysis released its July Cash Letter.

$1 Billion TFA New Money Bond Sale

During the week of July 11th, the TFA sold over $1 billion of tax-exempt and taxable fixed rate new money subordinate bonds. The $800 million of tax-exempt bonds were sold via negotiated sale led by book-running senior manager Siebert Brandford Shank & Co., L.L.C. Throughout the two day retail order period, the TFA received approximately $231 million of orders. At the final pricing, strong investor demand made it possible to reduce yields by up to 5 basis points in 11 maturities. Final stated yields on the tax-exempt bonds varied by coupon and maturity, ranging from 0.60% in 2018 to 2.24% in 2040 for a 5.00% premium coupon bond and 2.51% in 2042 for a 4.0% coupon bond. In addition to the senior-book running manager, BofA Merrill Lynch, Citigroup, Goldman Sachs & Co, Jefferies LLC, J.P. Morgan, Loop Capital Markets, Ramirez & Co., RBC Capital Markets, and Wells Fargo Securities served as co-senior managers on this transaction.

The TFA also sold $250 million of taxable fixed rate bonds, consisting of two subseries, via competitive bid. The winning bidder for the first subseries of approximately $187 million of bonds maturing in 2020 through 2026 was RBC Capital Markets at a true interest cost of 1.978%. The winning bidder for the second subseries of approximately $63 million of bonds maturing in 2027 and 2028 was BofA Merrill Lynch at a true interest cost of 2.581% Standard & Poor’s rates the TFA subordinate lien bonds at AAA, Fitch Ratings rates the TFA subordinate lien bonds at AAA andMoody’s Investors Service rates the TFA subordinate lien bonds at Aa1.

$1 Billion GO New Money Bond Sale

In the last week of July the City of New York through its GO credit sold approximately $1.05 billion of fixed rate General Obligation bonds, comprising of $800 million of tax-exempt new money bonds and $250 million of taxable new money bonds.

During the two day retail order period that began on Friday, July 29th, the City received over $215 million of retail orders for the tax-exempt fixed rate bonds. At institutional pricing, the City received over $581 million of orders. This allowed the yield on the 2038 maturity to be reduced by 1 basis point. Stated yields on the tax-exempt bonds ranged from 0.60% in 2018 to 2.85% in 2040. The tax-exempt fixed rate bonds were sold via negotiated sale through the City’s syndicate, led by book-running senior manager Goldman Sachs & Co. with BofA Merrill Lynch, Citigroup, Jefferies LLC, J.P. Morgan, Loop Capital Markets, Ramirez & Co., RBC Capital Markets, Siebert Brandford Shank & Co., L.L.C. and Wells Fargo Securities serving as co-senior managers on this transaction.

The City also sold $250 million of taxable fixed rate bonds, consisting of two subseries, via competitive bid. The winning bidder for the first subseries of $174 million of bonds maturing in 2022 through 2026 was J.P. Morgan at a true interest cost of 2.202%. The winning bidder for the second subseries of $76 million of bonds maturing in 2027 and 2028 was BofA Merrill Lynch at a true interest cost of 2.662%

In addition to the sale of new money bonds, the City sold $55 million of tax-exempt bonds which will be converted from variable-rate demand bonds to fixed rate bonds.

The ratings for New York City General Obligation Bonds are Aa2 from Moody’s Investors Service, AA from Standard & Poor’s, and AA from Fitch Ratings.

July 2016 Cash Letter

The Cash Letter details the cash balance projection for the City through November 30, 2016. As of July 27, 2016, the NYC cash balance stands at $11.782 billion, compared to $11.171 billion at the same time last year.

Throughout FY16, the City experienced strong cash balances. The average cash balance for FY16 measured $10.684 billion, which was $1.225 billion, or 12.9% above last year’s balance. The City recorded a FY16 closing cash balance of $11.719 billion, the highest year-end closing balance on record, up $2.217 billion compared to last year.  For further information you may download the entire cash letter.

Comptroller Analysis of City’s FY 2017 Adopted Budget

On July 27th Comptroller Scott Stringer released his analysis of the City’s fiscal year 2017 adopted budget.  City-funded expenditures will increase by 5.4 percent in the coming year, above the projected 1.6 percent growth in tax revenues. The Comptroller’s report also found that while the City has added to its budgetary cushion, it remains more than $750 million short of the minimum amount to be fully prepared for an economic downturn.

The Comptroller’s Office analysis detailed that the City’s budget savings program relies heavily on spending reductions which would have previously been labeled as budget adjustments. This list includes expenditures, re-estimates, debt service savings, and hiring delays. Agency efficiency initiatives account for only 7.4 percent of the savings over FY16 and FY17. The finds include:

• The Comptroller’s Office projects larger out-year gaps than forecasted by the Administration. Projected gaps are $3.6 billion in FY 2018, $4.0 billion in FY 2019, and $3.4 billion in FY 2020.
• The greatest risk to the City’s finances remains New York City Health and Hospitals, which faces significant roadblocks to achieving its deficit reduction goals. Additional risks include under-budgeted overtime costs, increased homeless shelter spending, and low federal Medicaid reimbursements for special education services.
• Preliminary pension investment returns, after fees, are estimated to be 1.46 percent for FY 2016. The shortfall will result in an estimated increase in City contributions of approximately $122 million in FY 2018, $244 million in FY 2019, and $366 million in FY 2020. The Comptroller’s Office will release final audited returns for FY 2016 this fall.
• Offsetting some of the risks is the Comptroller’s Office’s higher revenue forecast. The Comptroller’s Office projects that revenues will be more than the Plan’s by $601 million in FY 2017 and $1.0 billion over the Plan period. However, tax revenues in FY16 grew by only 3.6 percent, which is significantly less than the average growth of 6.5 percent over the last four years.
• Since the proposed Executive Budget in April, expenditures in FY17 have increased by $543 million, including $473 million for City Council initiatives.
• The Adopted Budget Plan includes an additional $21 million in each year of the Plan to improve access to libraries. The City also baselined an additional $38.5 million in each year of the Financial Plan to fund Summer Youth Employment Programs.
• Eleven months into FY16, the City only achieved 52 percent of its planned headcount growth, adding only 8,791 staff of the planned 16,845 increase. The June Plan counts this shortfall as part of its savings program for FY17.

Looking Ahead

There are no planned bond sales during the month of August. You can subscribe to receive sale announcements and other City publications and reports. The New York State Comptroller also maintains a website with a preliminary forward calendar for major State and City issuers.

As always, we appreciate your interest in New York City bonds. Please contact us if you have any questions or suggestions as to how we can improve our investor communications.

Carol S. Kostik
Deputy Comptroller for Public Finance