New York City's risk of seeing a credit-rating downgrade has increased, according to JPMorgan Chase & Co. strategists.
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As New York State looks less likely to approve major personal and corporate tax hikes that would help the city overcome its expected budget gaps, the analysts say that revenue options look limited.
"We believe downgrade risk, which was already elevated, has increased as Albany appears unlikely to approve meaningful new revenue sources," JPMorgan strategists led by Peter DeGroot wrote in a report published Friday.
Moody's Ratings and Fitch Ratings have already revised their outlook on the city to negative, as the city faces a roughly $5.4 billion two-year budget deficit. New York City is currently rated Aa2 by Moody's, the third-highest level of investment grade, and an equivalent AA by S&P Global Ratings and Fitch.
Governor Kathy Hochul has resisted several tax proposals put forth by Mayor Zohran Mamdani. For instance, he's proposed that the state limit a tax credit used by hedge funds, private equity firms and other businesses. He and City Council Speaker Julie Menin said the change would raise $1 billion of additional city revenue, but Hochul said she opposes the proposal.
Meanwhile, Hochul and Mamdani have agreed on a potential surcharge for owners of second homes in New York City worth more than $5 million. The New York City comptroller's office said in an April 30 report that this proposed tax on pied-à-terre properties is "one of the most likely, and possibly only, new tax revenue."
That plan ignited fierce opposition from owners of luxury homes. At the Milken Institute Global Conference on Monday, Pershing Square founder and CEO Bill Ackman said he feels "not great" about Mamdani and his idea of taxing billionaires like Ken Griffin on their second homes in the city.
"You can't drive out the Ken Griffins of the world," Ackman said.
A spokesperson for the mayor did not immediately respond to a request for comment.
Based on commentary from ratings firms, the JPMorgan analysts said the city's credit rating could "hinge on the final adopted budget achieving two conditions simultaneously: narrowing projected gaps, and doing so through recurring measures that preserve reserves."
Without new revenue, the city would be forced to increase the property tax and tap into its rainy day fund and the Retiree Health Benefit Trust, Mamdani said in February, adding that this would be a last resort. The trust is used to pay for retiree healthcare.
The JPMorgan strategists noted that the use of reserves is frowned upon by credit ratings analysts. Those reserves generally include the rainy day fund, the Budget Stabilization Account and the Retiree Health Benefit Trust, they said.
Delaying payments into municipal pension funds is one option being considered by Mamdani, The New York Times reported in April. That would likely be "scrutinized by the rating agencies, which currently cite the city's strong pension funding practices as a key credit strength," JPMorgan's report noted.
