Wall Street’s Banner Year Cushions Blow to New York City Budget
(Bloomberg) -- New York City’s storefronts are peppered with “for rent” signs. Broadway’s lights have been dimmed for nine months. And Mayor Bill de Blasio says New Yorkers should be prepared for the possibility of a full shutdown to contain the spread of the coronavirus.
Yet the grim streetscape isn’t dealing as large a financial hit to the city as one might expect, thanks to Wall Street.
With U.S. stock-market indexes near record highs and the securities industry recording its biggest profits since 2009, New York collected $985 million more revenue than expected from July through October, the first four months of the fiscal year, and officials have cut their estimate for next year’s budget shortfall. That bodes well for the city as it prepares to borrow $1.5 billion Wednesday to refinance higher-cost debt, with its 10-year bond yields dropping to about 0.3 percentage point above what top-rated governments pay, indicating little concern about any long-term risks.
“There are a set of remote-working industries like finance and information and most of professional services that are relatively unscathed,” said James Parrott, director of Economic and Fiscal Policies at the Center for New York City Affairs at the New School. “Many of the companies are doing well. Some are doing really well, like the Big Tech companies and Wall Street firms.”
Wall Street’s strong performance, aided by near-zero interest rates and $2.4 trillion of federal stimulus, has defied the experience of prior recessions and helped cushion the pandemic’s blow to the city’s economy. Because job losses have been highest among low-wage workers who pay less tax, the impact on New York City’s finances has been less severe than the Great Recession, when the securities industry shed thousands of jobs and bonuses plummeted.
So far this fiscal year, New York City’s tax collections have fallen by 3.5%, half the drop seen in all of 2009, as a rise in property taxes, which account for half of city revenue, offsets drops elsewhere, according to figures from Comptroller Scott Stringer’s office. Income-tax revenue, which has been affected by business shutdowns and job losses, has exceeded forecasts by $365 million, falling about 10%, compared with a 23% drop in the immediate aftermath of the financial crisis.
Although New York City’s economy has diversified in recent years, the high-paying securities industry still accounts for a disproportionate share of income-tax collections: Finance employees make up less than 5% of city jobs, but represent almost 20% of wages.
Those wages are set to increase. The securities industry’s pretax profits over the first six months of 2020 surged 82% to $27.6 billion, state Comptroller Thomas DiNapoli said in October. The sum nearly surpassed the industry’s entire 2019 profit as market volatility boosted trading and companies raced to raise cash in the bond market to survive the pandemic. Investment-bank revenue is projected to hit almost $190 billion in 2020, an eight-year high, according to research firm Coalition.
The rising profits on Wall Street are a stark contrast to the economic pain in some other businesses. Coronavirus-related travel restrictions have crushed tourism, one of the city’s biggest industries, and wiped out more than 200,000 jobs in the leisure and hospitality industry. At 13.1%, New York City’s jobless rate is almost twice the national one, and city officials don’t expect employment to return to pre-recession levels until 2024.
Meanwhile, workers have been slow to return to the office and it’s unclear how many may continue working from home, which could hurt commercial real estate values. Only 10% of Manhattan’s 1 million office workers had come back to the office as of late October, according to the Partnership for New York City, a business lobbying group. In November, the amount of office space available for rent in Manhattan hit the highest level since 2003.
“Commercial real estate is a little worrisome,” said Thea Okin, a muni credit analyst at Western Asset Management. “It’s very much a wait and see because everybody’s talking about the new way of working, but what is that really going to translate into?”
So far, weakness in the real estate market hasn’t affected the city’s tax revenue. Property-taxes have risen 4%. That could be temporary, though, since declines in property values don’t appear until later assessments.
Fitch Ratings last week lowered the city’s bond rating one notch to AA-, its fourth-highest investment grade, citing a weak rebound in jobs, “considerable headwinds” to the city’s large tourism sector and the potential longer-term shifts in office use and population migration. The Metropolitan Transportation Authority, which runs the city’s buses and subways, is facing a fiscal crisis and has warned it may have to severely cut service to cope with a drop in revenue. That could further impair the city’s ability to recover.
New York City balanced its current $92 billion budget by drawing down reserves by $2.8 billion, deferring about $640 million in labor costs to next year, and refinancing debt to save $700 million. New York’s projected budget gap next year is 5.4% of city revenue, compared with 9.7% gap in November 2009.
However, the financial plan still faces the risk that an uptick in the virus this winter could lead to a wider economic shutdown. Moreover, without additional federal stimulus, the city faces potential state budget cuts of $3 billion.
“If there’s not a stimulus, the State of New York is going to be in dire, dire shape, and, unfortunately, might have to pass on cuts to localities,” de Blasio said last month.
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