New York City and state both had their credit ratings lowered Thursday by Moody’s Investors Service, which said the impact from the coronavirus on the most populous U.S. city -- the core of the state’s economic engine -- is among the most severe in the nation.
In a pair of downgrades announced within an hour of each other Thursday, Moody’s dropped both the city and state by one notch to Aa2, the third-highest investment grade rating, and warned of a long return to normal as the region tries to rebound from the pandemic. The downgrades come as New York reported the most coronavirus cases since May, even as the U.S. pace of infections remained steady. In New York City, cases are rising as schools reopen.
“The downgrade reflects the substantial financial challenges New York City faces caused by the economic response to the coronavirus pandemic and our expectation that New York City is on a longer recovery path than most other major cities,” Nicholas Samuels, a lead analyst at Moody’s, said in a credit ratings report announcing the downgrade.
It’s the first time Moody’s has lowered the ratings on either in about three decades. The cuts impact $38.7 billion of city general obligation bonds and $65 billion of state debt. Moody’s kept its negative outlook on the city, signaling another downgrade is possible.
That negative outlook “reflects ongoing uncertainty about how long the pandemic’s economic consequences will impact the city’s economy and budget, including the return of office workers, business and leisure travel and real estate markets,” Moody’s said. “The outlook also reflects our opinion that the city cannot shift to a ‘back to normal’ economy until a vaccine is widely available.”
Disproportionate Impact
The virus has killed more than 33,000 New Yorkers, the biggest toll among U.S. states, and has shuttered thousands of storefronts in all five boroughs. The pandemic could permanently close as many as a third of New York’s 230,000 businesses, according to the Partnership for New York City, a business group.
New York City’s unemployment rate reached 20.4% in June and was 16.3% in August. Revenue in the city’s $88.2 billion budget is $7.1 billion lower than projected in January. Marcia Van Wagner, a lead analyst at Moody’s for state ratings, cited a “disproportionate impact” of the pandemic on the city and the Metropolitan Transportation Authority, the largest public transit agency in the U.S.
New York State’s budget director blamed President Donald Trump for the downgrade and said Moody’s action was a wake up call to Washington to approve $500 billion in additional aid to states and local governments. On Thursday, talks between House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin brought no immediate breakthrough on a deal for a fresh relief package. The House is preparing to vote on a Democrat-only plan.
“We now have to overcome the pandemic’s economic fallout, and as we’ve said very clearly, the federal government needs to take responsibility and deliver the funding New York State needs to revive its economy,” budget director Robert Mujica said in an email.
Mayor Bill de Blasio has said the city may be forced to cut 22,000 jobs. It has asked the state for authority to borrow $5 billion to pay operating expenses over the next two years, but Governor Andrew Cuomo opposes the move.
“We are disappointed in the downgrade given our track record of strong fiscal management,” said Julia Arredondo, a spokesperson for the Mayor. “New York City continues to have strong credit ratings that outrank large cities across the country, and we will continue to forge ahead on our path to recovery like we have before.”
Most Severe
While the public health response to the pandemic lowered the city’s infection rate, the lasting economic consequences “will likely be amongst the most severe in the nation and require significant fiscal adjustments,” Moody’s said.
The city faces additional fiscal pressure from potential actions the state of New York may take to balance its own budget and assist the finances of the Metropolitan Transportation Authority, according to the ratings company. New York has said it will have to cut $8 billion in aid to cities and schools without more federal help.
The spread between New York City’s 10-year general obligation bonds compared to AAA rated debt widened to as much as 0.7 percentage point in May from 0.12 percentage point at the beginning of March, according to data compiled by Bloomberg. The yield premium is currently 0.55 percentage point.
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