Another New Governor for New York: The Muni Outlook
Andrew Cuomo is the second New York governor forced out of office in 15 years, along with two Senate leaders, a state attorney general, an assembly speaker and a state comptroller.
For bondholders, the transition of power to Kathy Hochul, a politically moderate former member of Congress from Erie County and New York’s lieutenant governor since 2015, shouldn’t be much cause for concern. Ms. Hochul has some important decisions to make, of course. Staffing, managing all the issues associated with the coronavirus pandemic, infrastructure spending, and running for office will likely be top of mind. Here’s a brief summary of each, followed by our outlook for the market:
While New York State has an entrenched bureaucracy to assist in maintaining order during this transition, it is unclear whether all state agency heads under Mr. Cuomo will stay on for the remainder of the term. It will be up to Ms. Hochul to decide which members of the current administration are wrapped up in the various controversies that led to Cuomo’s resignation and to staff her administration accordingly.
Managing the recent uptick in coronavirus cases and hospitalizations, fueled by the Delta variant, is obviously a huge challenge for the incoming Administration, in whatever form it takes. About 700 school districts – and millions of families – need decisions on masking, testing, quarantining and other safety measures. Reverting to online learning, effectively forcing parents to stay at home, could cause unemployment rates to increase. Funding for additional federal unemployment supplemental payments is not a guarantee and lack of funding could result in another economic slowdown and state budget deficits. At the same time, tenants and landlords are waiting to hear about evictions with the potential for an increase in homelessness during another outbreak and further financial burdens for state and local governments.
One of the areas of state operation most heavily influenced by Governor Cuomo was transportation, specifically, from a bond perspective, the Metropolitan Transportation Authority, or MTA, which controls the city’s subways and buses, the commuter railroads (the Long Island Rail Road and Metro-North), as well as the Triborough Bridge and Tunnel Authority. Although the MTA has lost about half of its riders since the pandemic started, emergency federal aid has bolstered the authority against a huge operating deficit. However, budget gaps are on the horizon, as soon as 20251. Fortunately, the state, recognizing the importance of the MTA to the functioning and recovery of the economy, has proven to be very supportive with increased financial resources for both operations and capital expenditures.
On a related note, implementing congestion pricing in New York City, which is expected to generate $1 billion a year, is also an issue. The revenue from congestion pricing was meant to help fund the MTA’s $51 billion, five-year capital program. Congestion pricing needs to reasonably maximize revenues while determining possible exemptions to the fee. It remains to be seen if capital priorities under this massive program shift under a new administration, such as extending the Second Avenue Subway, completing the Eastside Access project, or the AirTrain rail connection to LaGuardia Airport.
The relationship between Mr. Cuomo and New York City Mayor Bill DeBlasio always seemed particularly adversarial, even by New York standards. New York City needs state approval for most tax reforms or implementing important programmatic changes and a constructive relationship between the incoming governor and Eric Adams, the presumptive new mayor, could result in real benefits for the city, including increased education funding, public housing assistance, financial help for the city run hospital system and more autonomy in determining tax rates, economic development projects and transportation projects. Certainly, Ms. Hochul will be eager to build this and other alliances, especially if she plans to run for governor in her own right.
New York State has proven its resiliency time and again. A transition to a new governor, even under these unfortunate circumstances, does not diminish our confidence in the state’s credits. We continue to focus on issues that have a broad revenue base and strong legal pledge such as New York State General Obligation, Personal Income Tax and Sales Tax Bonds, as well as essential purpose revenue systems such as water, sewer and public power issues while being more cautious and selective when it comes to sectors more severely impeded by the pandemic such as transportation bonds (MTA, Port Authority, various toll facilities) and the healthcare sector.
Howard Cure is a Partner at Evercore Wealth Management and the Director of Municipal Bond Research. He can be contacted at cure@evercore.com.
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