Fitch and Kroll Join Moody’s in Flagging Mamdani’s Budget, Rainy Day Funds on the Line

As New York faces negative outlooks from three major credit agencies, the city’s budgetary gamble risks undermining both its fiscal footing and its standing on national and global stages.

For the second time in seven days, the capital markets have trained a wary eye on America’s biggest metropolis. This past Friday, two heavyweight firms—Fitch Ratings and Kroll Bond Rating Agency—issued a “negative outlook” for New York City debt. The warning took little time to reverberate along Gotham’s corridors of power. A week earlier, Moody’s had delivered a similar admonishment. Together, the trio now form an unprecedented chorus of fiscal unease.

The ratings agencies stopped short of downgrading the city’s bonds. But their verdict is plain: if the $127 billion budget put forward by Mayor Zohran Mamdani passes, New York’s vaunted credit rating is likely to slip. The main culprit, the agencies say, is not spending per se, but the city’s growing reliance on its savings—to the tune of $2.6 billion drained from reserves over the next two years—to finance new programmes.

Mr Mamdani, an energetic Democratic Socialist and former assemblyman, swept into office on promises of expanded social spending. His supporters say that turning to the city’s so-called “rainy day fund” is justified—after all, clouds have gathered around the city’s working poor. But the scale and timing of the drawdown trouble the city’s fiscal watchdogs. As Mark Levine, the city comptroller, put it, “A negative outlook from a credit rating agency is not a downgrade—but it is a warning.”

The implications for New York are as real as they are immediate. A lowered bond rating could raise borrowing costs, meaning taxpayers may soon foot a steeper bill for everything from bridge repairs to school upgrades. In fiscal year 2023, New York spent more than $7 billion on debt service alone—a figure which could soon balloon. For the sizable populations of renters, commuters, and union workers, that portends tighter budgets and fewer services.

If the city’s fiscal habits fray confidence further, investors will charge a premium for buying municipal debt. At the margins, that would sap resources from the very politics the mayor champions—public housing, transit, and mental health. City agencies, already tasked with wringing more value from fewer dollars, may find themselves enacting hasty cuts if external shocks—think pandemics, weather calamities, or another federal aid dry spell—appear.

Nor are the politics of spending likely to stay municipal. The mayor’s approach exposes a rift between New York’s ambitious political left and a more parsimonious—if nervous—moderate bloc. The leftovers of the COVID bounty, plus robust tax revenues from a buoyant Wall Street, emboldened progressives to rethink the old strictures of balanced budgeting. Onlookers inside City Hall whisper that the crisis is as much philosophical as financial.

Wall Street’s warnings reach further. New York is not the first to run deficits in lean years; Chicago and Los Angeles have faced similar reckonings. But unlike those comparably-sized peers, New York’s economic engine and fiscal behaviour reverberate across the national economy. The city is responsible for an outsized share of the municipal bond market—about $40 billion in outstanding general-obligation debt, as of early 2024.

Fiscal storms and political weather

A downgrade in New York sets a precedent. Federal officials and other states watch closely, mindful that turbulence here could rattle municipal finance elsewhere. Credit stress in other cities has triggered political headaches: recall Detroit’s bankruptcy, or the knife-edge municipal battles in Illinois. A slide in New York would send ripples through the bond market and provide fodder for budget hawks from Albany to Washington, DC.

New York’s challenge, then, is not new, but the stakes may be higher. The Covid-19 crisis prompted both ingenuity and excess; a period of recovery has since given way to harder choices. While the economic fundamentals have brightened—unemployment now sits near 5%, better than many American peers—costs in social care, migrant resettlement, and legacy pensions gnaw at the city’s margins.

It is tempting to dismiss the warnings as bureaucratic theatrics or, perhaps, as choreography in the ritual dance of budget season. But to ignore them would be unwise. The bond rating’s downstream effects—on projects, jobs, and investor perceptions—are real and not easily reversed once set in motion.

A more prudent city government might slow the pace of new spending, or at least pair it with credible plans for replenishment. Rainy day funds exist for crises; they are not bottomless. Drawing too deeply, too quickly from reserves courts the risk that, when the next crisis hits, politicians will find the cupboard bare.

Yet the Mayor and his allies fairly point to challenges that are, in part, national in origin: an eroding federal urban aid regime, and a state government wary of filling fiscal holes. Congress remains gridlocked on urban funding, while Albany’s own budget forecast is tepid at best.

Ultimately, New York is both symbol and bellwether. Its success—or stumble—will inform cities elsewhere that have grown accustomed to fiscal latitude. If negative outlooks become real downgrades, the city will have to learn, once again, the lessons of cost discipline and long-term planning. In a city that has bet on resilience before, we would wager there is still time to act—if City Hall puts facts before dreams. ■