De Blasio’s Labor Deal Prompts Sell-Off of NYC Bonds

NEW YORK (Bloomberg) -

Mayor Bill de Blasio’s plan to pay for labor contracts that boost deficits is causing some top Wall Street firms to reduce holdings of city debt.

UBS Global Asset Management Americas Inc. cut its allocation of New York bonds in some of its national funds to as low as zero from as high as 3 percent, said Ebby Gerry, who helps oversee about $15 billion of state and local debt in New York as head of municipal investments.

De Blasio this month announced a union deal that
stretches out payments to teachers through 2021 and an affordable-housing program that will cost the city $8.2 billion.

“We’re concerned with what Mayor de Blasio might do in working with the unions, things like this housing project that he’s looking at with not having a full understanding of how he’s going to pay for it,” Gerry said. “We’re watching pretty closely.”

Moody’s Investors Service on May 12 called de Blasio’s fiscal 2015 spending plan “credit negative” because it boosts projected deficits.

“With the new mayor, there could be issues there that we could see in future deficits,” said Ron Schwartz, who helps manage $1.8 billion of munis as director of tax-exempt management at Atlanta-based RidgeWorth Capital Management Inc. The firm has pared its New York general obligations this year and now holds only debt that the city has pre-paid with funds in an escrow account, he said.

De Blasio, 53, took office in January as the first Democratic mayor of the most-populous U.S. city in 20 years. He won by the biggest margin for a non-incumbent in city history on what he called a “progressive agenda” that would address the growing income gap between rich and poor.

His $73.9 billion budget for the fiscal year starting July 1 spends more on school programs and teachers, social services and housing. It anticipates shortfalls of $2.2 billion for fiscal 2016, $2 billion in 2017 and $3.2 billion in 2018. Those gaps are up from $1 billion, $630 million and $370 million in de Blasio’s February budget, crafted before the teachers deal.

De Blasio took office facing the unprecedented situation in which contracts with all 152 municipal unions had expired, after years in which former Mayor Michael Bloomberg wouldn’t bargain unless labor leaders agreed to help reduce rising pension and health costs.

De Blasio and the United Federation of Teachers this month agreed to a nine-year contract that includes two years of retroactive pay increases and raises totaling 10 percentage points over the next seven years. The cost would be as high as $4 billion through 2018, not including at least $1 billion in reduced health-care costs.

If all goes according to de Blasio’s plan and the teachers pact provides a road map for settlements with all municipal unions, the total cost would be about $17.4 billion through 2021, the mayor said. Those expenses would be partly offset by savings of more than $9 billion, including almost $6 billion achieved through union-backed health-care savings, according to the administration.

The administration refused to say what their plan B would be if the expected savings fail to materialize.

“This is classic New York City budgeting, pushing past obligations into the future,” said Nicole Gelinas, a senior fellow in New York at the Manhattan Institute for Policy Research, which advocates less government spending and opposes de Blasio’s agenda. significantly adds billions of dollars to out-year deficits.”