The City of New York

1. The City of New York

2. Group Members Nick Milnthorpe Vitaly Paroshyn Jennifer Tremblay

3. Agenda • Overview • Key Constituents • Challenges • City Plan • Accounting for Municipalities • Key Performance Indicators • Assessment of City Plan • Debt & Risk Analysis

4. Overview • New York’s economy was closely linked to national economic events • In the early ’90s, NY experienced a decline in employment and real gross product • Growth picked up between 1992 and 1995 before slowing again after 1995 • Standard and Poor’s downgraded their debt rating from A- to BBB+ and both Moody’s and Fitch were also contemplating a downgrade

5. The Role of the Municipal Government Municipal Governments fulfill two main roles: • Providing services that taxpayers demand but private sector solutions are imperfect (i.e. public goods, externalities) • Providing a safety net in the community

6. Key Constituents Government Constituents: • Customers • Businesses • Residents The power of the “customer” depends on their mobility. New York is often forced to compete with neighboring municipalities in New Jersey and Connecticut. Tax Payers

7. Key Constituents 2. Suppliers • Include suppliers of labor, products and services consumed by local government, and suppliers of capital • Labor suppliers tend to be heavily unionized and have considerable bargaining power (employees rewarded based on tenure vs. performance • Private companies have less power • State/Federal Governments • Public Capital Markets

8. Key Constituents 3. Competitors • Two types: • Services provided by private companies • i.e. Private schools, Health Services • Other Municipalities • May provide incentives to attract taxpayers to move locations

9. Challenges Number of Challenges facing the city: • Deteriorating infrastructure • Stagnant revenues • Increasing cost structures • Unfunded mandates from federal and state governments to provide additional services • Pressures to increase the quality of public services provided • Increased competition between municipalities to attract new businesses

10. City of New York Plan • The city embarked on a series of programs to contain costs and increase revenue by: • Reducing entitlements; • Restructuring City Government through consolidating and privatizing operations; • Increasing federal and state aid; • Selling assets;

11. Accounting for Municipalities Governmental Funds • General Fund (all resources are unrestricted) • Special Revenue Funds & Capital Project Funds (restricted) • Debt Service Funds Proprietary Funds • Enterprise Funds intended to be operated like a business and to be self-supporting (hospitals; water and sewer operations) • Use same accrual format as a for profit firm Fiduciary Funds • Assets held in government trust • i.e. pension funds for government employees Statement of Revenues, Expenses & Fund Balances

12. Accounting for Municipalities • For Governmental Fund accounting closer to a cash basis accounting than accrual accounting; • Proprietary Funds are subject to accrual accounting; • Difference between cash and accrual accounting • Revenue reporting when it becomes available (Real estate tax revenues are recognized when they are levied, rather than when they are earned) • Interest on long-term debt not recorded until it becomes due rather than when it is accrued; • No depreciation for Government Funds (capital outlays expensed)

13. Key Performance Measures • Total revenues and expenditures of the General Fund increased proportionally by close to 1.5% in 1996; • Percentage Revenue Breakdown by Source

14. Key Performance Measures Revenue Diversification: Percentage Revenue Controlled by the City to total Revenue • Controlled • Real estate revenue (based on the billable assessed valuation of taxable real estate); • Volatile • Average sales revenue growth at 4% over the period of 1992-1996; • Personal and Corporate Income Tax and Other revenue harder to forecast (licenses; permits); • Federal, State and Other Categorical Aid (at historical percentage change levels) • Other than Taxes and Aid (highly volatile patterns)

15. Key Performance Measures • Costs of Services • Increase in health costs by 7-14% per year • Growth in public safety and judicial expenditures by 7-8% a year • Fluctuations in social services (increasing from 1992-1995 and a slight decline in 1996). Is it a sustainable trend? • Fluctuations in university costs and pension costs • University costs decreased by 38% in 1994 over 1993 and sustained over 1995-1996; pension costs declined by 11% in 1994 and increased by 7% in 1996.

16. Key Performance Measures Debt and Debt Service Capacity • The city’s debt outstanding required to be less than 10% of the average market value of taxable real estate for the last 5 years • After the 1975 financial crises, a special agency, the Municipal Assistance Corporation of the City of New York (MAC) was created as a vehicle to issue new municipal debt. • Debt increase by 10% per year • Personal income up only 4% per year • Fluctuations in debt service costs • In 1995, debt service costs decreased from $2,454 million to $2,289 million; • Debt refinancing at a lower rate

17. Key Performance Measures • Debt as a percentage of the legal debt limit – 3.93 (4 times the legal debt level) • Legal limit - $7,712.7 million (based on the average market value of the taxable real estate) • Combined Net City Debt - $30,343 million • Debt Service Expenditures to total Revenue – 8% • Debt Service Expenditures - $2,574 million • Revenue - $32,071 • Debt per Capita increased from $2,490 in 1990 to $3,901 in 1996

18. Key Performance Measures • Capital Maintenance • Capital expenditures to total expenditures – 12.2% • In 1996, the City made capital outlays of $3.8 billion financed by the issuance of bonds as well as by state and federal grants. • The report by the City suggested that the municipality let its fixed assets deteriorate. • Actual maintenance expenditures stood at 33% f recommended levels • Actual budgeted capital expenditures in the Capital Commitment Plan were only 63% of those recommended. • Decrease in capital commitments for transit, housing, hospitals, and sanitation; • Increase in capital outlays for environmental protection, and other expenditures

19. Key Performance Measures • Analysis of Sources versus uses of cash • Use of one-time items to balance the budget (such as discretionary transfers and expenditures) • Increase from $72 million in 1994 to $229 million in 1996 • Deferral of nonessential expenditures such as maintenance and capital outlays (33% of recommended levels) • More reliance on federal and state grants ($11,501 in 1996 from $11,336 in 1995) • Slightly improved Delinquency as Percentage of Tax Levy rate (3.67% in 1996 from 4.9% in 1993)

20. Key Performance Measures Were the resources used the way they were intended? • Budgeted versus Actual • 3 % discrepancy between budgeted and actual expenditures; • Biggest deviations in education expenditures, social services, health, fringe and other benefits;

21. Key Performance Measures Implications • Failure to enhance its existing revenue sources and reducing its reliance on federal and state aid and grants while maintaining a competitive business environment, can lead to ever increasing fiscal imbalance • Fiscal imbalance can significantly impede the prospects of intergenerational wealth transfer since most of capital projects are funded through borrowing and grants and not through general operations

22. Assessment of City Financial PlanGeneral Fund Revenues

23. Assessment of City Financial PlanGeneral Fund Expenditures

24. Lender Risk Analysis Strategic Risk Credit Risk Operational Risk Market Risk Legal & Regulatory Risk Reputational Risk Liquidity Risk

25. Definition of Risk What is a Risk? The threat that an event or action will adversely affect an organization’s ability to achieve its objectives and execute its strategies successfully

26. Strategic Risk • The risk that arises from an government’s inability to implement appropriate business plans, strategies, decision making, resource allocation and its inability to adapt to changes in its business, economic, legal & regulatory environment

27. Credit Risk • The risk of loss if a borrower or counterparty in a transaction fails to meet its obligations.

28. Operational Risk • The risk of loss resulting from inadequate or failed processes, people and systems or from external sources.

29. Market Risk • The risk of loss in financial instruments or the balance sheet due to adverse movements in market factors such as interest and exchange rates, prices, spreads, volatilities, and/or correlations.

30. Liquidity Risk • The risk of loss resulting from the unavailability of sufficient funds to fulfill financial commitments, including customers’ liquidity needs, as the fall due. Liquidity risk also includes the risk of not being able to liquidate assets in a timely manner at a reasonable price.

31. Legal & Regulatory Risk • The risk of non-compliance to laws, rules, regulations, obligatory practices or standards or other legal requirements.

32. Reputational Risk • Reputational risk is the potential that negative publicity, whether true or not regarding an institution’s business practices, actions or inactions, which will or may cause a decline in the institution’s value, liquidity or customer base.

33. Challenges • Stagnant revenues • Increasing cost structures • Deteriorating infrastructure • Unfunded mandates from federal and state governments to provide additional services • Pressures to increase the quality of public services provided • Increased competition between municipalities to attract new businesses

34. Risk – What do you think?

35. Was the debt downgraded? • Debt was not downgraded • Since 1996 the short term situation has improved due to continuing Wall Street Boom • In 1998 both S&P and Moody’s upgraded the city’s rating • February 1998: Moody’s upgraded general obligation bonds from Baa1 to A3. • July 1998: S&P increased NY’s rating to A- up one from BBB+ • Analysts continued to be concerned about rising long term debt

36. THANK YOU!!!! QUESTIONS