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Will Senate Republicans Force New York into Default?

New York | In this issue of The Institutional Risk Analyst, we return to the fiscal situation facing New York and other major American cities in the wake of the apparent victory by Vice President Joe Biden in the 2020 Presidential election. The weak showing by the Democrats has stymied much of the promised Biden agenda, particularly trillions of dollars in aid to large cities in blue states that was seen as a given only weeks ago.

The situation facing New York is perhaps worse than that facing other cities, both because the government of Mayor Bill DeBlasio already had a spending problem as 2020 began and because the impact of COVID on New York is more severe. The extended lockdown imposed by Mayor DeBlasio and Governor Andrew Cuomo caused roughly half a million people to leave New York City between April and the end of July, according to the New York Times. This figure has increased since July and does not include the disappearance of tourists and other visitors from the streets of New York. And most of midtown Manhattan remains boarded up due to fears of rioting and looting.

The Rhino

The grim reality facing New York is summarized in the most recent annual report for the fiscal year ended June 30th from New York Comptroller Scott Stringer, who was formerly the President of the Borough of Manhattan. New York City is one of the best managed US cities in terms of financial reporting, but less so when it comes to spending and fiscal sanity. Under the free spending Mayor DeBlasio, the city has seen revenues rise by high single digits each year and expenses have more than kept pace.

In FY 2020, New York City had revenue of $95 billion and expenses of almost $99.5 billion. The details of the NYC budget are shown below from the FY 2020 annual report. Note that NYC has an accumulated deficit of over $200 billion and total long-term debt and other obligations of $270 billion. And these figures do not begin to capture the total debt and other obligations buried in the city’s over-extended financial statements.

Keep in mind that the revenue numbers for NYC through June reflect the strong momentum of the city coming into 2020 and only begin to show the deterioration in the revenue of New York City since the start of FY 2021 on July 1st. Several sources have talked about a fiscal deficit of $8 billion in 2021, but we think the actual deficit number could be twice that or more. The chart below shows the city’s cash balance through June 30 (blue line) and then the estimate from Comptroller Stringer’s office.

Notice that the estimated cash line from FY 2020 crosses through the cash line for FY 2019 in September and has trended below last year’s results since then. The estimates from Stringer’s office show cash balances falling below $2 billion around year end, then miraculously rising as the result of a Biden financial rescue plan. The FY 2020 annual report for NYC was finalized weeks before the Presidential election.

But now that the election has ended with the closest race in a century and has seen the GOP pick up seats in Congress, the Democratic calculous that assumed a financial rescue by Washington needs to be reassessed. If there is no fiscal rescue plan for the states and particularly the large cities in blue states like New York, then it seems safe to predict that several large American cities may be forced into default before Joe Biden takes the oath of office in January.

Big city mayors and Democratic state governors had been counting on a ‘blue sweep’ of national offices to help get them out of some very deep budget and pension funding holes. They also dreamt of green transport, more help with healthcare . . . the list was long,” writes John Dizard in the Financial Times.

“Now there is the grim winter reality of a surviving Senate Republican majority, led by Democratic bugaboo Mitch McConnell, which keeps its veto on all that progressive spending and redistributive taxation.”

Of course, Republicans in Congress have no intention of riding to the rescue of the blue states. Changing the state and local property tax (SALT) deduction was the first assault on the economic base of the Democratic Party. Step two is to push major cities like New York into bankruptcy, which would force a violent confrontation with the public sector unions. Such an apocalypse would see elected Democrats voiding union contracts and also see the end of New York’s New Deal era state constitution.