NYC’s Rising Migrant Costs Won’t Destroy Its Finances, Bondholders Say

New York City Mayor Eric Adams says the migrant crisis “will destroy” the city. Not so, say credit analysts and bondholders.

(Bloomberg) — New York City Mayor Eric Adams says the migrant crisis “will destroy” the city. Not so, say credit analysts and bondholders. 

The cost to shelter and care for tens of thousands of migrants is projected to add nearly $5 billion in spending to the city’s $107 billion budget for this fiscal year and an additional $6 billion the following year, according to Adams. But the city has $8 billion in reserves to help cushion against the extraordinary expense. 

“New York comes into this in great financial condition,” said Dan Solender, head of municipal debt at Lord Abbett & Co. “It’s a concern if it becomes something that shows up in the financial statements. So far, it’s not at that point.”

When Solender started in the municipal bond market in the 1990s, rating companies graded the city’s debt close to junk, at BBB. Currently New York City’s general obligation bonds are rated AA, by S&P Global Ratings Inc. and Fitch Ratings, their third-highest investment grade. Moody’s Investors Service rates the city at a comparable Aa2.

Fitch raised the most-populous city’s credit rating by one level in February as rising personal income-tax collections boosted its rainy-day fund to a record high of $8.3 billion.

The city, which has rebounded from near bankruptcy in the 1970s, the Sept. 11 terrorist attacks and the Great Financial Crisis, has a track record of closing budget gaps, investors said. 

Adams has asked city agencies to submit proposed annual budget cuts of 5% by November as the city seeks to manage the financial burden of taking in a wave of 110,000 migrants since 2022. The federal government has allocated $135 million and the state $562 million to reimburse the city’s asylum seeker expenses for the current fiscal year. The mayor has criticized President Joe Biden and New York Governor Kathy Hochul for failing to send more aid to the city. By law, New York City is required to provide shelter to anyone who asks for it.

Read more: New York Leads Big Cities’ Anger Over Biden’s Border Response

The mayor’s call for citywide cuts will allow New York’s credit outlook to remain stable in the near term, said Andrew Clinton, chief executive officer of Clinton Investment Management.

“The mayor is acting proactively,” Municipal Market Analytics Inc. wrote in a research note Monday. “A more reasonable downside scenario is that moderately higher spending requirements would amplify budget pressures should an economic recession emerge next year.” 

To be sure, skyrocketing costs to shelter migrants aren’t the only fiscal pressures facing the city. New labor contracts are projected to cost New York about $18 billion over four years. To address an affordable housing crisis, the City Council recently expanded a rental assistance program that could cost $18 billion over five years, according to Adams.

The city’s budget is balanced but it is estimating a $5 billion deficit for next fiscal year beginning in July that it expects to widen.  

Meanwhile, the city projects personal income-tax revenue will decline by about $2.3 billion in the fiscal year that began July 1 and the city has exhausted pandemic stimulus money. The federal government has awarded the city more the $26 billion in stimulus funds, according to city Comptroller Brad Lander.

New York may ultimately receive more financial support from the state as well as the federal government, said Clinton.

Despite his optimism, Clinton said his firm is reducing holdings of New York City general obligation bonds because they offer less value relative to other similarly rated issuers. 

“We believe the additional yield that NYC GO’s offer, relative to out-of-state credits, is insufficiently compensating investors for the credit risk,” Clinton said in an email. “Hence, we are seeking to reduce exposure to NYC and NY exempt debt more broadly, for our clients, due to the narrow spreads and lower total return potential they offer over time, in our view.”

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