NYC's fiscal outlook on downslide over budget gaps

(The Center Square) – Two of the nation's largest credit rating agencies are sounding alarms about New York City's escalating budget crisis, as Mayor Zohran Mamdani ramps up spending and pushes for tax increases to offset projected revenue shortfalls.

A report issued Wednesday by Moody's – one of the nation's big three credit rating agencies – warned investors that it may soon lower New York City’s AA credit rating and change the city’s credit status to "negative" from "stable" while affirming its Aa2 issuer rating, citing “sizable and persistent projected budget gaps."

“The negative outlook reflects the emergence of sizable and persistent projected budget gaps that signal underlying structural imbalance and reduced financial flexibility, despite New York City’s still favorable economic conditions,” Moody’s said in a statement.

The warning follows a report earlier this week by S&P — another of the big three — which cautioned that it might also downgrade the city’s fiscal outlook if Mamdani moves ahead with plans to balance the budget by drawing down billions of dollars from the city's 'rainy day' reserve fund.

“We believe the use of reserves for baseline budget management in the near term rather than developing other corrective measures to close the structural gap could expose New York City to risks if adverse financial or economic conditions were to materialize,” S&P analysts wrote in the report.

“We will closely monitor the trajectory of the city’s reserves during the outlook period, and it could weaken our view of New York City’s financial flexibility if it falls out of alignment with that of peer cities," they added.

Mamdani unveiled his $127 billion preliminary budget proposal last month. He has called on state lawmakers to increase income taxes on New York City's wealthy and corporations, threatening to increase property taxes by 9.5% if they don't approve the plan.

Speaking to reporters on Thursday, Mamdani called Moody’s report “premature" and pointed out that the state legislature is considering plans to draw up $5 billion from increased taxes on millionaires and large corporations. He also noted that Moody's affirmed NYC's Aa2 issuer rating.

"I think that the decision to revise the outlook, frankly, is premature,” he said. "The proposals that we’re seeing from Albany reflect a real commitment to ensuring that we can bridge this inherited fiscal deficit."

But City Comptroller Mark Levine noted that it was the first time that Moody’s has revised NYC’s outlook from “stable” to “negative” for the first time since the COVID-19 pandemic. He has cautioned that the city faces a $7.3 billion deficit over the next two years and has criticized Mamdani's rosy budget projections.

"The underlying challenge is clear: New York City is currently spending more than it is bringing in," he said in Wednesday testimony before the New York City Council, which is considering Mamdani's budget. "The fact that the preliminary budget achieves balance only by drawing down reserves underscores the need for a more sustainable fiscal plan."