Balancing Act: Lander says $12B hike in NYC’s debt limit is reasonable

While a move to raise New York City’s borrowing capacity by $12 billion is reasonable and sufficient for the city to meet future capital needs, the debt service threshold must be kept within safe limits, officials say.

Letting New York City sell more bonds will allow it to meet its capital needs over the next decade without harming its economic recovery, according to an analysis issued by the office of city Comptroller Brad Lander.

In the report, How Much Is Enough, the comptroller’s office looked at the cost of capital projects not yet included in the city’s capital commitment plan.

Lander concluded the state’s proposal to increase the city’s debt capacity by $12 billion was reasonably sized and enough to meet the city’s capital needs in the next 10 years.

“Investing in our infrastructure is fundamental to New York City’s long-term thriving and a fiscally healthy approach to municipal debt is how we pay for it,” Lander said.

“The $12 billion increase in the city’s capacity to incur debt proposed in the state budget — about 10% of today’s limit — would address the capital needs laid out by the Adams administration,” he added.

At those levels, the city’s debt service is projected to remain below 15% of tax revenues, the city’s affordability threshold.

Lander also proposed an amendment to the city’s debt management policy be passed to make sure the city adhered to the 15% threshold.

That level is relatively high for any city, according to John Hallacy, founder of John Hallacy Consulting LLC.

“I would expect that pending projects should be rank-ordered from the perspective of public health and safety,” Hallacy told The Bond Buyer. “The city should plan to refrain from drawing on the reserve for any amount over the 15% level, except for very short-term conditions.”

The city is currently allowed to incur indebtedness for capital projects up to the state constitutional debt limit of 10% of the five-year average of the full valuation of real estate in the city.

As of June 30, 2023, the city’s debt limit was $127.4 billion and total indebtedness counted against it was $96.9 billion, leaving remaining debt-incurring power of $30.5 billion, the comptroller’s office said.

“However, the remaining debt-incurring power is narrowing due to the growth in current and planned capital projects and to the effects of the COVID-19 pandemic on tax assessments,” the report said.

Gov. Kathy Hochul included the debt capacity hike in her proposed fiscal 2025 executive budget and the state Senate and Assembly have made similar proposals in their budgets. The Legislature and governor are working toward an April 1 deadline to get approval for the final budget, when the state’s new fiscal year starts.

Lander said in testimony before the New York City Council earlier this month the proposal was reasonable and his office was working on a more detailed report.

The comptroller’s office undertook the in-depth study to understand the need for the city to increase its debt capacity, which has been narrowing recently, said Francesco Brindisi, executive deputy comptroller for budget and finance.

“There are some substantial investments that are not being reflected in the city’s capital plan that need to be undertaken,” Brindisi told The Bond Buyer

He said the city could possibly exceed its debt capacity over the 10-year capital plan period and so there needs to be an increase in the amount of bonds the city could sell.

Brindisi noted the comptroller’s office estimates that over the 10-year period the city wouldn’t surpass the 15% threshold, even if faced with a recession.

Still, he said, there is no mechanism in place to make sure the city didn’t surpass that level.

“The challenge, of course, will be balancing the cost of investments against the other competing priorities in the budget while maintaining the city’s good credit rating and fiscal health,” Lander said.

“Toward that end, we propose a stronger debt management policy to make sure we keep debt service below 15% of tax revenues and maintain the city’s debt affordability moving forward,” he said.

Under the plan, the city would use its capital stabilization reserve, an expense which is already included in the financial plan, to pay debt service in any years when debt service is projected to exceed 15% of tax revenues.

This mechanism would ensure the capital planning process appropriately prioritizes and manages capital projects, while maintaining debt affordability, the comptroller said.

The city is one of the biggest issuers of municipal bonds in the nation. In the second quarter of fiscal 2024, the city had about $39.7 billion of GOs outstanding.

Additionally, the city’s Transitional Finance Authority has about $47.7 billion of debt outstanding as of the second quarter of fiscal 2024 while the Municipal Water Finance Authority has around $32.3 billion of outstanding debt.

The city’s general obligation bonds are rated Aa1 by Moody’s Ratings, AA by S&P Global Ratings and Fitch Ratings and AA-plus by Kroll Bond Rating Agency.

The Citizens Budget Commission agreed the city should formalize its currently informal policy to keep debt service below 15% of tax revenue.

“Debt affordability should be measured not only by outstanding debt, but by the impact of annual debt service on its operating budget and the city’s ability to support other critical programs,” said Ana Champeny, vice president for research at the CBC.

“Furthermore, effective capital management depends on rigorous project prioritization and cost-effective delivery,” she told The Bond Buyer. “The city should be reviewing its $157 billion 10-year capital plan to ensure projects are essential and appropriate, and identifying ways to reduce capital costs.”

“We keep an eye on affordability,” Brindisi said, adding the comptroller’s office watched a variety of factors, such as debt capacity, prioritization and efficiencies in making investments and efficiencies in carrying those investments out.

He said this includes a mechanism to make sure the city maintains the affordability of the debt, which is something that will work within guidelines while remaining flexible.

“We are very confident that this is a good way to deal with the affordability of taking on new debt,” Brindisi said.