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From: To: Re: Date: ComptrollerJohnC.Liu MayorMichaelBloomberg MembersoftheNewYorkCityCouncil AnalysisandRecommendationsforNewYorkCityiftheFederalDebt CeilingisnotIncreased Friday,July29,2011
TheFederalGovernmentsstatutorydebtceilingiscurrently$14.29trillion.Becausebudgetary spendingexceedsrevenues,Congressmustborrowmoneytomakeupthedifference.TheUS Treasuryestimatesthatwithoutanyincreaseinthedebtceiling,byAugust2ndtheUnited Stateswillnothavesufficientfundstopayallofitsbills.InthemonthofAugustaloneitis estimatedthattheUSgovernmentwillhaveabudgetarystructuralimbalanceexceeding$135 billion.Thiswouldforcethefederalgovernmenttoprioritizebetweenseveralcritical budgetaryitemsincluding:thecontinuationofinterestpaymentsonthedebt,maintenanceof socialsecuritybenefits,paymenttofederalemployeesandfundingofothercrucialprograms. TheTreasuryhasyettoannouncehowitwouldgoaboutprioritizingpayments.Whilethe naturalassumptionisthatanyprioritizationwouldincludemakinginterestpaymentsonthe federaldebtandprotectingthesocialsafetynet(includingSocialSecurity,Medicaid,and Medicare)aWednesday,July27,2011articleintheNewYorkTimespointedoutthat: OfficialshavesaidrepeatedlythatTreasurydoesnothavethelegalauthoritytopay billsbasedonpolitical,moraloreconomicconsiderations.Itcannot,forinstance,set asideinvoicesfromweaponscompaniestopreservemoneyforchildrensprograms.The implicationisthatthegovernmentwillneedtopaybillsintheorderthattheycome due. InordertokeepthegovernmentrunningthroughNovember2012,itisestimatedthatthedebt ceilingwillneedtobeincreasedby$2.4trillion.Mostanalystsbelievethatthedebtceilingcan beincreasedonlythroughavoteofCongressalthoughthereisavocalminoritywhobelievethe Presidentcouldactunilaterally.TheRepublicanleadershipintheHouseofRepresentatives, spurredonbyconservativeandTeaPartymembersoftheRepublicancaucus,hasstatedthat anysuchincreaseinthedebtceilingmustbeaccompaniedbyspendingcutswhichexceedthis
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ImpactonCitysCashPosition:Low
TheCitycurrentlyhasapproximately$6.9billionofcashorcashequivalentsonhandand expectstoreceivemorethan$839millioninpaymentsfromthefederalgovernmentinthe monthofAugust. NewYorkStatealsoreceiveshundredsofmillionsofdollarsindirectfederalaideachmonth.If thesefundsweretodissipateasaresultofnotincreasingthedebtceiling,itisassumedthat theStatemayalsofinditdifficulttomeetallofitsliabilities. TheCitycouldthereforebeatriskoflosinguptoanadditional$461millionindirectStateaidin August.AccountingforalossofbothFederalandStatefundingtotheCity,thetotallost revenueinAugustcouldexceed$1.39billion. Fortunately,theCityscashpositionisstrongduringthesummer.At$6.9billion,thecurrent cashbalanceisadequatetosustainthedelayofFederalandStateaidreceiptsforalimited periodoftime.AlthoughunderaworstcasescenariotheCitystandstolose(temporarily) morethan$1.39billioninFederalandStateaidduringthemonthofAugust,theCityisinno immediatedangerofrunningshortofcash.Solongasthedebtceilingissueisresolved,andaid flowsarerestored,bytheendofAugust,thecashbalanceshouldnotfallbelow$2.6billion.
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NYCEndingCashBalances,July1,2011August31,2011
$10 $8
(inBillions)
$6 $4 $2 $0
WorstCaseBalance
StatusQuo
ImpactonCitysSocialSecurityBeneficiaries:High
Over1.09millionNewYorkersmanyofwhomareelderlyanddisabledreceiveanaverage $1,063inSocialSecuritybenefitseachmonth.Intotal,Cityresidentsreceiveover$1.16billion inSocialSecuritypaymentseachmonth.Disbursementsarestaggeredthroughoutthemonth dependingontherecipientsbirthdates.TheAugustdisbursementsarescheduledforthe1st, 3rd,10th,17th,and24thdaysofthemonth.Thesebenefitscouldbeatriskifthedebtceilingis notincreased.TheSocialSecurityprofileforNewYorkCityissummarizedbelow: NYCSocialSecurityRecipientPopulationProfile,December2010 #Beneficiaries TotalBenefits Bronx 176,450 $169,942,000 Brooklyn 301,475 $298,082,000 Manhattan 235,805 $276,498,000 Queens 300,695 $324,533,000 StatenIsland 81,015 $95,707,000 NYCTotal 1,095,440 $1,164,762,000 PerRecipient MonthlyBenefit $963 $989 $1,173 $1,079 $1,181 $1,063
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NYCBreakdownbyBeneficiaryCategory,December2010 Retirement Survivors Bronx 111,655 20,375 Brooklyn 207,195 33,530 Manhattan 180,155 20,920 Queens 226,775 29,485 StatenIsland 52,685 9,175 NYCTotal* 778,465 113,485
Source:OASDIBeneficiariesbyStateandCounty,2010,U.S.SocialSecurityAdministration. *Note:Thisestimateshowsadeviationof20recipientsgreaterthanreflectedinNYCAggregateProfile
ImpactonCitysMedcaid,Medicare,PublicAssistancePrograms:Medium
TheFederalgovernmentprovidesfundingforseveralmajorsocialservicesprogramsinNew YorkCitywhichcouldbeatriskifthedebtceilingisnotincreased.Currently,Federal reimbursementforMedicaidexpenditurestotalsmorethan$1billioneachmonth.Adelayin FederalMedicaidsupportcouldalsojeopardizetheStatesabilitytopayMedicaidservice providersonatimelybasis.InJune2011,FederalandStatefundsaccountedfor$1.8billionor 81percentofNewYorkCitysMedicaidexpenses.AnydelayinthereceiptofMedicaidfunding wouldimpactthefinancialconditionofhospitals,serviceprovidersandtheCitysMedicaid populationofcloseto3millionindividuals. Inaddition,anyimpactontheprovisionsofMedicareservicescouldaffecttheapproximately1 millionMedicareenrolleesresidinginNewYorkCityandcouldreducerevenuestotheHealth andHospitalsCorporationbymorethan$50millionamonth. Receiptofpublicassistancebenefitswouldalsobeadverselyaffected.TheFederalgovernment providesapproximately44percentofthetotalfundingfortheCitysincomemaintenance program.Basedonthispercentage,theFederaloutlayforpublicassistancewouldbe approximately$44millionmonthly,alongwithStatesupportofanadditional$20million.
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ImpactonMunicipalBondMarkets:Medium
Currentlyanyattempttopredicthowthebondmarketswillreacttoafailuretoraisethedebt ceilingor,evenworse,toadefaultbytheUSgovernmentishighlyspeculative.However,New YorkCityisoneofthenationslargestissuersofmunicipalbondsandassuch,standstobe affectedbythegrowingmarketturmoil,andtoagreaterextentbyfalloutifthecurrentfailures inWashingtonarenotresolvedpromptly.TheCityisscheduledtoissueover$9.3billionbonds inthecurrentfiscalyearacrosstheGO,TFA,WaterandHudsonYardscredits.Thesebonds fundimportantcapitalprojectsandlowinterestratesmaketheprojectsmoreaffordable.In addition,theCityactivelyseeksopportunitiestorefinancehighinterestratedebtatalower costtosavetaxpayersmoney.Theseopportunitiesmaybeconstrainedifinterestratesrise. TheCityhassuccessfullymanageditscapitalborrowingthroughpriorperiodsofmarket turmoil,includingthefalloutfromtheLehmanbankruptcyin2008.However,higherdebtcosts wouldbeaburdenontaxpayersforyearstocome.WhileadefaultbytheFederalgovernment onitsdebtisstillonlyaremotepossibilityitdoesunfortunatelyremainapossibility,anda defaultwouldhaveseriousimplicationsforallmunicipaldebtissuers,includingNewYorkCity. Wearethereforeclassifyingtheimpactofnotraisingthedebtceilingonthiscategoryas Medium.
ImpactonCitysPensionFunds:Medium
Whileitisuncertainexactlyhowthefinancialmarketswillreacttonotraisingthedebtceiling oradefaultbytheUSgovernment,itisassumedthatanysuchoccurrencewouldlikelycreate increasedvolatilityandshorttermdislocations.Aslongterminvestors,whilethemarketsmay readjustintheshortterm,theCitysassetallocationwillneedtobereviewedforthelonger termimplications.Withover$7billionofshorttermsecurities,thepensionfundsarewell equippedtomaketheirneartermpensionpaymentstobeneficiariesregardlessofthenear termstockandbondmarketvolatilities. Wearethereforeclassifyingtheimpactofnotraisingthedebtceilingonthiscategoryas Medium.
Recommendations
1) CreateContingencyPlanforCitysSeniorsandDisabled 5|Page
ExplorethefeasibilityofimplementingacontingencyplanwherebytheCitywould temporarilyfinance,inawaythatwouldnotincreasethefederaldebtceiling,atleastone monthofSocialSecuritypaymentstoitsresidentsintheeventthatthefederalgovernment isunabletomeetthesescheduledobligations.WhilethefinancingcouldcomefromaCity source,theSocialSecurityAdministrationwouldneedtocontinuetodisbursethefundsto beneficiariesandfacilitatereimbursementtotheCityassoonasfederalfundsareonce againmadeavailable. AnalternativeoptionmaybefortheCitytoencouragelocalbankstoautomaticallyextend azeroorlowinterestcreditline(oroverdraftprotection)tosocialsecuritybeneficiaries.It isestimatedthatmorethan85percentofbeneficiariesreceivetheirpaymentsthrough directdepositsothissolutionmightbecapableofaddressingtheneedsofasignificant portionofbeneficiaries.Wenotethatthisoptioncouldbeadministrativelycomplicatedfor thebankstomanage.TheCitycouldalsoexplorewaysinwhichshorttermfinancingcould bemadeavailabletoassistbanks. InlieuofbeingabletocontinuefinancingbenefitsthroughtheSocialSecurity Administrationorareabanks,theCitymustidentifyacomprehensivewaytoprovide emergencysupporttothesebeneficiariesthroughothermeansperhapsbymakingshort termzeropercentloansavailableatallseniorcentersorsuspendingpropertytax,water andsewerbillsorotherpaymentsduefrombeneficiariestotheCity.Becauseofthe unknownlevelsofdemand,theprovisionofservicesmustextendbeyondwhattheCitycan doonitsown.TheCitymustcoordinatewiththeexistingnetworkofnotforprofitservice providersinordertomakeavailableallmeansofassistancetothosemostvulnerableNew YorkCityresidents.ThiscouldincludetemporarilyraisingtheamountofCitysupportof suchserviceproviderstofacilitateanincreasedservicelevel. 2) EstablishDebtCeilingTaskforce ImmediatelyconveneanIntergovernmentalDebtCeilingTaskforcewhichwouldinclude representativesoftheComptrollersOffice,MayorsOfficeofManagement&Budget,New YorkCityCouncil,andotherrelevantparties.Thetaskforcewillmonitorandaddressthe rapidlychanginglegislativeandfinancialenvironmentsandconsidertheabove recommendations.
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