Is the Big Apple Rotting?

Morningstar

New York City infrastructure has made the news again in recent weeks, for all the wrong reasons. The Center for an Urban Future, a New York based think tank, has released a report identifying a massive $47 billion in city-related capital needs over the next five years. Concerns include structurally deficient bridges, 100-year-old water mains, a sewer system under multiple consent decrees, public housing complexes that do not meet housing codes, and roads rated "poor" by the state Department of Transportation.

While this is certainly a considerable figure, it is sadly not completely shocking. Morningstar as well as the credit rating agencies and other market participants have been cautioning investors regarding the city’s sizable infrastructure needs for years. The city’s five-year capital plan for fiscal 2013-2017 totals $42.5 billion on an all-funds basis, with $32.3 billion from city funds. The report also includes the Port Authority, which maintains its own capital plan.

However, the city’s capital plan includes new projects as well as maintenance needs. This means that a significant amount of structural capital needs are not being addressed. The Center for an Urban Future’s report estimates a $34 billion funding gap, consisting of previously deferred maintenance as well as current identified "state of good repair" needs that are not included in the current capital plans. Many of the assets that require repair are critical to the health and safety of city residents and vital to the city’s economy.

Deferring necessary capital needs is especially worrisome. It not only leads to increased future infrastructure costs but also could potentially impair the city’s safety and economic capabilities.

Funding these needs will be a credit pressure for the city going forward. Debt levels for the city are already elevated at more than $9,000 per capita and 9.3% of market value at the close of fiscal 2013. Additional city funding will be complicated by the city’s ongoing structural deficit, which currently stands at $1 billion for fiscal 2014 and $1.8 billion for fiscal 2015. The Center for Urban Future recommends a mix of increased funding from the state and federal governments as well as new revenue sources in order for the city to better address these needs. Of course, this additional funding is far from guaranteed. Especially with the city currently lobbying the state for a potential tax increase to fund universal pre-kindergarten, securing additional revenues may prove difficult.

We will continue to monitor the city’s progress on addressing its infrastructure needs as well as any impact this may have on the city’s debt levels, finances, and economy going forward.

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