Is New York City on the Brink Of Going Bankrupt?

New York City has a lot of paper out there, so the thought of it going bankrupt is particularly troubling. We need to look at how big this threat may actually be.

To hear the New York Post tell it, “New York City is edging toward financial disaster.” This was exactly the headline of a piece they ran a few days ago, and this paper does have a lot of readers, so many people no doubt came away with real concerns at least after reading this article.

It’s not that there aren’t concerns already out there, but the real worry is if we end up falling into a recession or experience a similar economic shock, which the article tells us would result in a “bloodbath.”

That’s a pretty strong word, so it at least pays those exposed to these risks, people living in the city as well as their bondholders, as well as other interested parties, to look at what the overall picture is and not just get their information from sources that may be sensationalizing things to attract interest.

A title such as this should indeed attract a lot of interest, but whether its message is legitimate and warranted requires us to go beyond it and look to where others feel that we are at, especially bond rating agencies, whose business is to know these things.

Some people are a little skeptical of these agencies, as their hands aren’t completely clean, since they get paid by people who hold a large stake in their ratings. These are the folks that, after all, brought us the subprime lending crisis, seeing the securities that held a lot of these debt as prime when they were actually just garbage, much more so than junk bonds.

They can’t come off as too influenced though, at least not very often, even though it was pretty clear that their due diligence was lacking in this instance. If investor confidence in them gets too undermined, their ratings, their stock in trade, would deteriorate so much that their livelihood would be in peril.

A lot of people and institutions were fooled by this though, and some pretty big names indeed, so perhaps bond rating agencies can be excused by falling for all of this as well, even though the grist that investment banks provided them has become public knowledge.

Governments Have Lots of Debt, But That Doesn’t Mean Their Bonds Are Weak

As for New York’s fiscal situation, there is always lots going on with governments of all types that it is pretty easy to paint a very bleak picture of the current situation if you want to. This is especially true when we look at the risks that may be present. Governments spend money like it’s going out of style, with very little regard to the long-term consequences, and if we project this forward enough, we do eventually get to the part of the map where the monsters lie.

The Post probably didn’t have to look very hard to find someone with credentials who will help them tell the story they want to, that New York is under a big cloud and it could burst at any time. There is usually considerable disagreement among economists, and all you need to do is look for someone who is playing the same tune as you are.

The Post enlisted the help of the chief economist at Vested, Milton Ezrati, which is actually a financial PR company, even though Ezrati does have a fairly distinguished background. He warns that “New York is already in a difficult financial spot, but it would be in an impossible situation if we have any kind of setback.”

The key words here are “any kind of setback,” and while there is always the potential for a big enough crisis to bring down a city or any government, any kind of setback would include the fairly minor ones as well, setbacks that are inevitable.

New York, both the city and the state, are number one in the category of local and state tax burdens, deficits that are widening, as these things tend to do everywhere these days. The prospect of fiscal reversal isn’t even on the table in most of these cases, with governments at all levels just borrowing more and more and getting more and more in debt.

The capacity of taxpayers is also being reduced, due to property tax rates rising so much in the city, and this is causing people to move to more tax-friendly states. Given that the wealthy people in New York City contribute such a large share of the city’s tax revenue, these losses could really shrink their tax revenue base.

It’s About the Likelihood of This Happening Anytime Soon

This is not so much about capacity though, and while seeing wealthy people leave for greener pastures is by no means a good thing, it isn’t near as bad as the Post article paints it, referencing such things as the fact that the top 1% of residents pay 50% of the city’s income tax contributions. This money goes elsewhere, to the state and to the IRS, so at worst, this portrays a state problem if they move to another.

The New York Post also enlisted the help of Peter Earle, an economist at the American Institute for Economic Research. He told them that “New York City could go bankrupt, absolutely.” Of course, New York City “could” go bankrupt, but what we need to know is how likely this is to happen anytime soon.

To get a good idea of this, we need to look at their current bond ratings, which aren’t seen as stellar, but still are getting very good marks. Moody’s in fact just raised their rating on them, bringing them up to AA1, just one notch shy of the perfect score of AAA.

Moody’s describes the rationale for their upgrade as reflecting “continued strengthening and diversification of New York City’s economy.” The other two main bond rating agencies, Standard & Poor’s and Fitch, haven’t upgraded New York’s bonds, they still believe strongly enough in the city to maintain their AA rating, an excellent one for munis.

This portrays quite a different outlook than what we have been fed by the Post. The popular media can be pretty entertaining, but we have to realize that this is the business that they are in. With their financial articles at least, it’s often wise to look beyond these attempts to entertain us to be able to judge the merit of these articles properly.

Chief Editor, MarketReview.com

Ken has a way of making even the most complex of ideas in finance simple enough to understand by all and looks to take every topic to a higher level.

Contact Ken: ken@marketreview.com

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