City of New YorkCity of New York

Prepared by:Christopher Cairns

Eric LindsayRobert MerkovicRanbir 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 AnalysisRole of Municipal Government

Provide services for which private sector solutions are imperfect• Public goods• Externalities

Provide a safety net in the community

Strategy AnalysisKey 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 CustomersBargaining Power of Customers

Depends on mobility

HIGH Business & residents are increasingly mobile

Result: Forced to compete for “customers”

Strategy AnalysisBargaining Power of SuppliersBargaining 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 CompetitorsBargaining Power of Competitors

HIGH Private companies that provide competing

services• Private schools• Health care providers

Competition from other municipalitiesLOW

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

Year 1997 1998 1999 2000

Revenues 32981 32155 32310 32829

Expenditures 32981 33839 34969 36250

Deficit 0 1684 2959 3421

Reasonableness of Forecasts• Recent and forecasted property tax growth

’93 ’94 ’95 ’96 ’97 ’98 ’99 ‘00

1% -1% -4% -5% - 2% 3% 4%

Growth in Total Expenditures

’93 ’94 ’95 ’96 ’97 ’98 ’99 ‘00

3% 4% 1% 2% 3% 3% 3% 4%

•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