Municipal Market Reacts to Moody’s Negative Outlook for NYC, Awaits Clarity on How Mamdani Administration Addresses Structural Budget Deficits

Moody’s revision of New York City’s outlook to negative while keeping an Aa2 rating arrived after Mayor Zohran Mamdani’s administration unveiled its preliminary budget for fiscal year 2027 and financial plan for FY 2026 through FY 2030 last month. Against the backdrop of intensifying economic uncertainty driven by geopolitical tensions and AI-driven risks, the city’s spreads have already been pushed 10 to 15 bps wider, according to a recent Municipal Market Analytics report. The administration’s next moves will likely set the stage for how local governments garner broad state support to address budget gaps, according to market participants.

Rising fiscal pressures, elevated debt and pension obligations, and uncertainty ahead of the March 31 state fiscal year-end are driving wider spreads, said James Pruskowski, managing director at Hennion & Walsh. “Market reaction will hinge on the tone and scope of the Mayor’s budget proposals: Aggressive measures could dampen hiring and private-sector growth, while overly cautious adjustments may fail to stabilize finances,” he said.

The last time New York was assigned a negative outlook was in October 2020, when Moody’s downgraded the city because of the pandemic’s economic impact. In May 2021, the outlook returned to stable. In last week’s negative outlook, Moody’s points to “the persistent projected budget gaps that signal underlying structural imbalance and reduced financial flexibility.”

News headlines over the past year – from the Metropolitan Transportation Authority and its congestion pricing program, to the Hudson Tunnel Project to the mayoral race that drew national attention – have all made New York City more susceptible to moves in the market, sources said. All eyes are on how Mamdani would amass support from the governor and Albany to materialize his initiatives. The Moody’s outlook change, therefore, is a forward-looking move that serves as an indicator of the market’s desire for structural solutions, not one-time adjustments to close the gap for a year or two, sources said.

Others say they believe that there has been a somewhat muted reaction to the outlook change. At a high level, big cities have grappled with the broader economic landscape in the past few years. With Covid-19 relief funds sunsetting, inflationary pressures and migrant issues impacting housing affordability and social services, it’s not uncommon to witness fast runups in spending in big cities while revenues fail to keep pace, said Justin Marlowe, research professor at the University of Chicago Harris School of Public Policy.

“We’re seeing this everywhere, in Chicago, San Francisco, Los Angeles, and the market as a whole has been pricing some of this in for a while now,” Marlowe said, adding that New York City remains a very strong credit, the underlying economy is very strong, and revenue collections are up.

Karel Citroen, managing director of municipal research at Conning, echoes this sentiment. “Moody’s action is like a warning shot to the city of New York to make sound, structural decisions to close these gaps so it doesn’t become the city of Chicago,” he said, explaining that New York City “is managing [the] policy problem of expenditures and projections around revenues, Chicago is managing a real balance sheet problem, and New York doesn’t have this yet.”

The city’s preliminary budget has already been lauded by the city’s Independent Budget Office, or IBO, and the city’s comptroller Mark Levine; both highlighted the administration’s efforts to “lay bare” how the city’s spending surpasses what it takes in.

New York City originally reported a $12 billion combined deficit for the FY 2026-FY 2027 period, but in February the administration said the gap was $5.4 billion. Historically, the gaps shrink during budget negotiations, according to AllianceBernstein. However, the IBO is more pessimistic.

While the Mamdani administration projects a balanced budget for FY 2026 and FY 2027 and budget gaps growing from $6.6 billion in FY 2028 to $7.1 billion in FY 2030, the IBO anticipates wider gaps during the period, increasing from a $535 million gap in FY 2026 to an $11 billion gap in FY 2030. IBO bases its projections on an assumption that annually, total revenue will grow 2% and expenditures will increase an average of 4.5%, excluding impact of the Iran war, tariff issues and other potential additional cuts to federal aid or the next round of collective bargaining.

Levine warned that the administration is planning to use too much of the city’s emergency savings to fill normal budget gaps. The rainy day fund, which is known as the revenue stabilization fund, or RSF, has $1.97 billion, and the administration wants to take almost half, $980 million, for closing the FY 2026 budget gap. The city also wants to take $229 million from the Retiree Health Benefit Trust, or RHBT, that is supposed to pay for retired workers’ healthcare. The only recent time this was used like a rainy day fund was during the Covid-19 pandemic.

“The RHBT is intended to fund the current cost and long-term liability deriving from retiree health care benefits (or Other Post-Employment Benefits, or OPEB),” he said, adding that “the RSF was created to help the city weather a recession or other disaster.”

State law authorizes the withdrawal of up to 50% of the RSF without a message of fiscal necessity in an economic recession or other shock, Levine said. “There is no mandate of minimum deposits into the RSF. The Comptroller’s Office has advocated for the adoption of a rainy-day fund policy, including proposals for withdrawing funds from the RSF.”

The administration proposes two paths forward: increasing personal income tax on individuals earning more than $1 million and corporate taxes on most profitable corporations, or raising property taxes by 9.5% and drawing down on reserves. As “actions of last resort,” the city proposes drawing down $980 million from the rainy day fund in FY 2026 and $229 million from the RHBT in FY 2027, which would leave $6.3 billion in FY 2026 and $6.1 billion in FY 2027 in reserves to serve as a cushion against “an economic downturn or harmful federal policy changes.”

Dora Pekec, senior spokesperson for the mayor, said in a statement to Octus that given the $5 billion in additional funding to the city that has been proposed in both the state Senate and Assembly budgets, Moody’s decision to revise the outlook on New York City’s credit rating, while maintaining it at Aa2, is “premature.”

“These proposals reflect a real commitment by Albany to investing in the services New Yorkers rely on, and the fiscal health of our city,” said Pekec. “We look forward to continuing our productive conversations with our partners in Albany and the City Council as we work to close the inherited deficit and restore the city to firm financial footing after years of underbudgeting and mismanagement.”

AllianceBernstein’s March 16 report notes that even with the negative outlook, NYC has very strong credit ratings compared with other major cities. AllianceBernstein says Mayor Mamdani’s administration will respond to Moody’s concerns likely by finding new recurring revenue and finding ongoing savings, so the city’s budget is not held together with temporary fixes. “Further evidence to the contrary could change our opinion.”

Nuveen says the budget gap is manageable and said it expects meaningful revisions to the final budget.

S&P notes that the city’s new budget plan uses a mix of structural solutions, one-time fixes and short-term solutions, a combination that might make it hard for NYC to keep its budget balanced after 2027. Although S&P says NYC is resilient because of the city’s large and diverse economy, and it has handled financial challenges before, the ratings agency warns the rating could go down if the city keeps relying on temporary fixes or if the reserves fall too low.

Next week, New York City is contemplating an issuance of general obligation bonds to potentially refund all or portions of certain subseries of the city’s outstanding Build America Bonds and other outstanding bonds of the city, according to a March 18 EMMA filing.