New York City retained its AA credit ratings from Fitch and Moody's on Friday, three business days before pricing $1.5 billion in general-obligation bonds this week. Both agencies issued the ratings with negative outlooks and explicit warnings that the city must narrow projected deficits within the next fiscal year or accept downgrades on its $53 billion outstanding GO debt. The timing was not coincidental. The city's finance desk had been in active dialogue with both agencies for six weeks ahead of the bond calendar.
Fitch maintained the city at AA minus with a negative outlook. Moody's held Aa2, also negative. The warnings centered on structural budget gaps projected at $7 billion annually through fiscal 2029 under current spending trajectories. Both agencies cited revenue volatility tied to Wall Street bonus cycles and property tax collections, which have softened 11% year-over-year in commercial real estate assessments. Fitch noted that the city's debt service as a percentage of tax revenue has climbed to 14.2%, the highest ratio since 2013. Moody's flagged pension liabilities, which now consume 18% of the general fund, up from 13% in 2019.
The rating hold matters because New York City is the largest municipal issuer in the United States and serves as a benchmark for state and local government credit. A downgrade would ripple through $4 trillion in outstanding municipal debt, widening spreads for every city and state that trades off the NYC curve. The $1.5 billion bond sale scheduled for this week was already priced with a 20-basis-point concession relative to AAA munis. A downgrade would have required an additional 30 to 40 basis points in yield, costing the city roughly $15 million annually in debt service. More importantly, it would have forced the city's comptroller to defend the budget in front of the City Council during an election cycle, a political cost the administration was unwilling to absorb.
Allocators should track three datapoints over the next nine months. First, the city's February revenue forecast, which will either confirm or revise the $7 billion deficit projection. Second, any negotiated labor settlements with the municipal unions, which represent 300,000 employees and are currently bargaining for contracts that expired in June. Third, the state legislature's budget process in Albany, which controls roughly 22% of the city's revenue through aid formulas. If the state cuts aid by even 3%, the city's deficit widens by another $1.2 billion, and the rating agencies have made clear they will not wait for a second fiscal year of inaction.
The bond sale will close Thursday. The city has already lined up $2.1 billion in orders from three Japanese insurance companies and two large domestic asset managers. The deal will price inside the negative outlook because the market believes the city will act before the agencies do.