The clown car that is New York politics, where the mayor is hanging on for his life and an assortment of leftists might find themselves running Gotham, is an unfortunate spectacle.
It’s also signaling danger to a chunk of the financial markets because it’s an existential threat to investors who hold tens of billions of dollars in New York City municipal debt, analysts tell On The Money.
The municipal bond market doesn’t get noticed like the stock market or crypto, but it’s pretty important. First, it’s nearly a trillion dollars larger than crypto, and vitally important to the nation’s economy.
Municipal bonds, or munis, are issued by states and cities to finance roads, bridges and infrastructure. The people buying them (that includes me) are what’s known as “retail,” aka small investors. Munis are big with individuals because they offer tax advantages, including triple-tax free returns if you buy bonds of the municipality where you live.
For the most part, they are considered super safe. They’re backed by various tax revenues or the full-faith-and-credit of the issuer. But, and this is a big but, they’ve been known to default. Municipal bankruptcies are a rarity, but they do happen.
New York City has always been a city with high debt levels because of our expansive welfare state and infrastructure needs. It has survived several budget crises, usually related to lower profits on Wall Street, a key driver of revenue.
It had its brush with bankruptcy during the 1970s fiscal crisis, barely avoided total default, but investors lost money as prices tumbled.
The Big Apple isn’t experiencing a 1970s moment or even a budget crisis, but the elements are in place to push us in that direction, and city bondholders could face some significant losses.
Consider: The city is on politically unstable ground. Mayor Eric Adams, a moderate, has been weakened by scandal.
An avowed socialist, Public Advocate Jumaane Williams would take over for the interim. The Democrats control the city and except for another moderate like former Gov. Andrew Cuomo — who is looking to make a political comeback but hasn’t officially announced a run for mayor — Adams’ likely successor would emerge from the bowels of the state’s progressive political infrastructure.
All these people want to raise taxes and expand the size of government even more, which will further erode the city’s tax base as more middle-class people and the rich flee for the low taxes of Florida. Many Wall Street firms are relocating outside the state because of high taxes and crime.
Most frightening: The far-left political class apparently can’t or won’t read a balance sheet. The city’s own budget estimates show that large deficits will start to appear in 2027 – of $4.25 billion and growing to $5 billion in fiscal 2029. And that’s before the progressives are fully in charge.
EJ McMahon, a fellow at the Manhattan Institute for Policy Research, tells me “New York City is always just a recession or market correction away from some serious problems.
“But,” he added, “the political center of gravity is moving further left, meaning budgets are in danger of being less disciplined than ever.”
And that would mean lower muni bond prices at minimum, and, yes, the growing possibility of default, something investors should factor into their investment parameters, some savvy investors tell me.
Am I saying you should sell all your holdings because a dolt like city Comptroller Brad Lander might become mayor? Absolutely not. For now, the city’s finances are okay because Adams held the line on some spending, McMahon tells me. The rating agencies, which assess an issuers’ chances of defaulting, give NYC pretty good grades. NYC bonds are still backed by ample tax revenues. Most muni defaults take years to materialize.
But that doesn’t mean you should ignore the warning signs. Bond raters are known to be Pollyannaish (they usually miss financial collapses until they happen). And who is to say that in a city and state run by leftists, the legislative choice that will be made is to increase the size of government at the expense of making hundreds of billions of dollars in payments to bondholders?
If you hold city debt, it might be time to be afraid, very afraid.
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