City of New York Prepared by: Christopher Cairns Eric Lindsay Robert Merkovic Ranbir Khangura
City of New York (Fun Trivia) • How many miles of subway track are in NYC? • 722 miles • When, in New York City, was the first North American chess tournament held? • 1843 • When was the first New York City Pizzeria opened? • 1895
City of New York (Fun Trivia) • Why are NYC cabs yellow? • Studies indicated it was the easiest colour to spot • When did the NYSE begin? • 1792 when 24 brokers met under a tree facing 68 Wall Street • How many miles of street is the NYC transportation dept. responsible for? • 5700 miles of streets • 753 bridges and tunnels
Agenda • Strategy Analysis • Accounting & Financial Analysis • Forecast Analysis • Bond Rating • ‘Take Up’ handout sheet
Primary Issues • Analysis of not for profit organizations • Assessment of bond rating for the city
Strategy Analysis Role of Municipal Government • Provide services for which private sector solutions are imperfect • Public goods • Externalities • Provide a safety net in the community
Strategy Analysis Key Players • Customers • Business • Residents • Suppliers • Labor • Private companies (goods & services) • Capital (state, federal government & public market) • Competitors • Private companies • Other municipalities
Strategy AnalysisBargaining Power of Customers • Depends on mobility HIGH • Business & residents are increasingly mobile Result: Forced to compete for “customers”
Strategy AnalysisBargaining Power of Suppliers HIGH • Labor suppliers heavily unionized • Municipal employees rewarded on basis of seniority rather than performance • Suppliers of capital (state, federal and public capital market) LOW • Private companies that provide goods & services
Strategy AnalysisBargaining Power of Competitors HIGH • Private companies that provide competing services • Private schools • Health care providers • Competition from other municipalities LOW • Some services face little competition • Garbage collection
Accounting for Municipalities • Non-Profit Accounting Case (similar to accounting for United Way, Canadian Cancer Society, etc.) • Financial Statements do not tell us about profitability, but rather about risk • Analysis is similar: Strategy, Accounting, Financial
Accounting for Municipalities • Accounts or ‘Funds’ provide detailed information on inflow and outflow of cash • Each Fund a separate area of responsibility • Often up to 1000’s of ‘funds’ for cities as large as NY
Accounting for Municipalities • General: Primary Fund for Municipality • Governmental: Capital Projects, etc. • Proprietary: Hospitals, Water, Sewer • Fiduciary: Pension Plans
Differences in Financial Reporting • No charge for Capital Usage • Debt Service only covers interest payments • Revenues vs. Expenditures compared to budget: • Variances (Discrepancies) • Sources and Uses of cash
Differences in Financial Reporting • Discretionary Transfers and Expenditures used to eliminate any significant surplus or deficit • Use of ‘Accounting Tricks’ to get us to a situation where inflows match the outflows • Lots of ‘Accounting Slippage’
Case Fact: Since 1970-71, every expense budget has been balanced with an array of gimmicks- revenue accruals, capitalization of expenses, raiding reserves, appropriation of illusory fund balances, suspension of payments, carry forward of deficits, questionable accounts receivable, and finally, the creation of a public benefit corporation whose purpose is to borrow funds to bail out the expense budget
Key Performance Measures for Municipalities • Efficiency: • Cost of providing services • Comparison to other municipalities • Per Capita / Per household • Output Measures: • High School Students entering College • High School Test Scores • Crime Rates • Use of Public Services (i.e. Parks, Libraries)
Sustainability of New York City • Control of Revenue Sources: • What Revenues are controllable? Not Controllable? • Overall Percentage of controllable vs. non-controllable revenues? • Debt Level / Debt Capacity • However, will state and federal governments bail out cities in trouble?
Sustainability of New York City • Capital Maintenance: Capital Expenditures to Total Expenditures • Liquidity: Current Assets vs. Current Liabilities • Analysis of Sources vs. Uses (Continuous Balance) – but concerns rise when uses are always higher than sources
Red Flags • One time items to balance budget • Transfers among funds • Deferral of non-essential expenditures • Transfers from other government organizations • Slower Collections • Unexplained reductions in costs
Remember • Goal is to balance the sources of cash (Revenues) with the uses of cash (Expenditures) • within the various funds • Overall City Budget
Challenges Facing New York City • Revenue Sustainability: See Handout • Which of these sources are controllable; which are not • Expenditure Growth • Increase in Health Care Costs • Increase in cost of Services: • Less control over revenues • Movement from infrastructure to service based environment • Fluctuations in costs; Universities & Pensions
Challenges Facing New York City • One Time Effects on Fund Statements • i.e. Privatization; Sale of the Jails • Capital Expenditure Analysis • Cutbacks in transit, housing, hospitals, sanitation • Increases in education, environment, police • Debt and Debt Service increasing
Challenges Facing New York City • Increased Resistance from taxpayers • Increased skepticism as to if fair value is received • Improvement of Private Sector • Competition among municipalities to attract new businesses and jobs • Providing low cost environments and low taxes. • Leads to disproportionate share of the tax burden. • Deteriorating Infrastructure
Financial Plan 1997-2000
Reasonableness of Forecasts • Recent and forecasted property tax growth
Growth in Total Expenditures • Doesn’t include risks identified by the controller • Maintenance costs 1/3 of recommended • Capital expenditures 63% of recommended
Other Concerns • 1997 budget balanced by the sale of $1.4 billion of one-time items • Inter-governmental transfers may decrease more than forecasted • If debt levels continue to rise, will interest rates rise?
Other Concerns Cont’d… • Projected savings of $150 million due to changes in actuarial assumptions • Will proposed consolidation and privatization affect delivery of services? • Proposed infrastructure Finance Authority would allow debt levels to rise above covenants
Bond Rating • Credit Rating Agencies • Moody’s • Standard and Poor’s • Fitch Ratings • Dominion Bond Rating Services
Bond rating • Assigns credit ratings to issuers • Measures credit worthiness • Affects interest rates • Used by investors, issuers, investment banks, broker-dealers, and by governments
Standard & Poor's • Investment Grade • AAA: the best quality companies, reliable and stable • AA: quality companies, a bit higher risk than AAA • A: economic situation can affect finance • BBB: medium class companies, which are satisfactory at the moment • Non-Investment Grade • BB: more prone to changes in the economy • B: financial situation varies noticeably • CCC: currently vulnerable and dependent on favorable economic conditions to meet its commitments
Moody's • Investment grade • AAA: Obligations rated AAA are judged to be of the highest quality, with minimal credit risk. • AA1, AA2, AA3: Obligations rated AA are judged to be of high quality and very low credit risk. • A1, A2, A3: Obligations rated A are considered upper-medium grade and low credit risk. • BAA1, BAA2, BAA3: Obligations rated BAA are subject to moderate credit risk. They are considered medium-grade and as such may possess certain speculative characteristics.
Challenges of NYC • Stagnant property taxes • Growing cost • Growing budget gap • Inability to maintain and fund infrastructure • Growing debt • 1998 possibility to reach statutory ceiling
Some of the facts • 1996 total outstanding debt of $30.3 billion • $25.9 billion rated BAA1 • S&P downgraded from A- to BBB+ (5.70%) • 1996 the City issued $5.3 billion bonds • $2.7 to refinance outstanding bonds • Yield on bond • 1995 was 6.65% • 1996 was 6.18%
Class discussion Would you downgrade the City bonds and why?
Subsequent events • Moody’s did not downgrade the City bonds • 1996 Wall Street boom • 1998 Moody’s and S&P’s upgraded the City’s rating • Moody’s from BAA1 to A3 • S&P’s from BBB+ to A- • 1998 the City budgeted $1.2 billion surplus • Concern about tax cut of $700 million in the future
Thank you Any Questions?
City of New York Fun Facts • The ‘Fashion Institute of Technology’, in NYC is the only school in the world offering a BSc with a major in Cosmetics and Fragrance Management • J. C. Gayetty of NYC invented toilet paper in 1857 • NY State was the first to require license plates on cars • As late as 1840, thousands of pigs roamed wall street to consume garbage as an early sanitation system
City of New York Fun Facts • The New York Mercantile Exchange began as the Butter and Cheese Exchange of the 1750’s • The ‘Big Apple’ is a term coined by musicians meaning to play the big time • The “New York Post” is the oldest running newspaper in the United States, and was established in 1803
