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From: To: Re: Date: Comptroller John C. Liu Mayor Michael Bloomberg Members of the New York City Council Analysis and Recommendations for New York City if the Federal Debt Ceiling is not Increased Friday, July 29, 2011
The Federal Government’s statutory debt ceiling is currently $14.29 trillion. Because budgetary spending exceeds revenues, Congress must borrow money to make up the difference. The US Treasury estimates that without any increase in the debt ceiling, by August 2nd the United States will not have sufficient funds to pay all of its bills. In the month of August alone it is estimated that the US government will have a budgetary structural imbalance exceeding $135 billion. This would force the federal government to prioritize between several critical budgetary items including: the continuation of interest payments on the debt, maintenance of social security benefits, payment to federal employees and funding of other crucial programs. The Treasury has yet to announce how it would go about prioritizing payments. While the natural assumption is that any prioritization would include making interest payments on the federal debt and protecting the social safety net (including Social Security, Medicaid, and Medicare) a Wednesday, July 27, 2011 article in the New York Times pointed out that: “Officials have said repeatedly that Treasury does not have the legal authority to pay bills based on political, moral or economic considerations. It cannot, for instance, set aside invoices from weapons companies to preserve money for children’s programs. The implication is that the government will need to pay bills in the order that they come due.” In order to keep the government running through November 2012, it is estimated that the debt ceiling will need to be increased by $2.4 trillion. Most analysts believe that the debt ceiling can be increased only through a vote of Congress although there is a vocal minority who believe the President could act unilaterally. The Republican leadership in the House of Representatives, spurred on by conservative and Tea‐Party members of the Republican caucus, has stated that any such increase in the debt ceiling must be accompanied by spending cuts which exceed this
increase. Most Democrats are looking for an agreement that would involve both cuts to spending and increases to revenues. President Obama continues to call for a legislative compromise that would be in place past November 2012. While there are new developments, it is still unclear whether a compromise will be reached on time.
Impact on City’s Cash Position: Low
The City currently has approximately $6.9 billion of cash or cash equivalents on hand and expects to receive more than $839 million in payments from the federal government in the month of August. New York State also receives hundreds of millions of dollars in direct federal aid each month. If these funds were to dissipate as a result of not increasing the debt ceiling, it is assumed that the State may also find it difficult to meet all of its liabilities. The City could therefore be at risk of losing up to an additional $461 million in direct State aid in August. Accounting for a loss of both Federal and State funding to the City, the total lost revenue in August could exceed $1.39 billion. Fortunately, the City’s cash position is strong during the summer. At $6.9 billion, the current cash balance is adequate to sustain the delay of Federal and State aid receipts for a limited period of time. Although under a worst‐case scenario the City stands to lose (temporarily) more than $1.39 billion in Federal and State aid during the month of August, the City is in no immediate danger of running short of cash. So long as the debt ceiling issue is resolved, and aid flows are restored, by the end of August, the cash balance should not fall below $2.6 billion.
NYC Ending Cash Balances, July 1, 2011 – August 31, 2011
$6 $4 $2 $0
Worst Case Balance
This means that the City will continue to meet all of its normal obligations including payroll, payments to vendors, and interest payments on outstanding debt. We are therefore classifying the impact of not raising the debt ceiling on this category as “Low.”
Impact on City’s Social Security Beneficiaries: High
Over 1.09 million New Yorkers – many of whom are elderly and disabled ‐ receive an average $1,063 in Social Security benefits each month. In total, City residents receive over $1.16 billion in Social Security payments each month. Disbursements are staggered throughout the month depending on the recipients’ birth dates. The August disbursements are scheduled for the 1st, 3rd, 10th, 17th, and 24th days of the month. These benefits could be at risk if the debt ceiling is not increased. The Social Security profile for New York City is summarized below: NYC Social Security Recipient Population Profile, December 2010 # Beneficiaries Total Benefits Bronx 176,450 $169,942,000 Brooklyn 301,475 $298,082,000 Manhattan 235,805 $276,498,000 Queens 300,695 $324,533,000 Staten Island 81,015 $95,707,000 NYC Total 1,095,440 $1,164,762,000 Per Recipient Monthly Benefit $963 $989 $1,173 $1,079 $1,181 $1,063
NYC Breakdown by Beneficiary Category, December 2010 Retirement Survivors Bronx 111,655 20,375 Brooklyn 207,195 33,530 Manhattan 180,155 20,920 Queens 226,775 29,485 Staten Island 52,685 9,175 NYC Total* 778,465 113,485
Disability 44,420 60,755 34,735 44,440 19,160 203,510
Source: OASDI Beneficiaries by State and County, 2010, U.S. Social Security Administration. *Note: This estimate shows a deviation of 20 recipients greater than reflected in NYC Aggregate Profile
Since so many New Yorkers, particularly the elderly and disabled , rely on their monthly Social Security benefit as their sole source of income ‐ using their check to pay rent, buy groceries and just make ends meet – delaying their benefits for even a few days could inflict unacceptable hardship. We are therefore classifying the impact of not raising the debt ceiling on this category as “High.”
Impact on City’s Medcaid, Medicare, Public Assistance Programs: Medium
The Federal government provides funding for several major social services programs in New York City which could be at risk if the debt ceiling is not increased. Currently, Federal reimbursement for Medicaid expenditures totals more than $1 billion each month. A delay in Federal Medicaid support could also jeopardize the State’s ability to pay Medicaid service providers on a timely basis. In June 2011, Federal and State funds accounted for $1.8 billion or 81 percent of New York City’s Medicaid expenses. Any delay in the receipt of Medicaid funding would impact the financial condition of hospitals, service providers and the City’s Medicaid population of close to 3 million individuals. In addition, any impact on the provisions of Medicare services could affect the approximately 1 million Medicare enrollees residing in New York City and could reduce revenues to the Health and Hospitals Corporation by more than $50 million a month. Receipt of public assistance benefits would also be adversely affected. The Federal government provides approximately 44 percent of the total funding for the City’s income maintenance program. Based on this percentage, the Federal outlay for public assistance would be approximately $44 million monthly, along with State support of an additional $20 million.
Since millions of people and thousands of service providers rely on these programs, any aid delay in payments could create real challenges. We are therefore classifying the impact of not raising the debt ceiling on this category as “Medium.”
Impact on Municipal Bond Markets: Medium
Currently any attempt to predict how the bond markets will react to a failure to raise the debt ceiling or, even worse, to a default by the US government is highly speculative. However, New York City is one of the nation’s largest issuers of municipal bonds and as such, stands to be affected by the growing market turmoil, and to a greater extent by fallout if the current failures in Washington are not resolved promptly. The City is scheduled to issue over $9.3 billion bonds in the current fiscal year across the GO, TFA, Water and Hudson Yards credits. These bonds fund important capital projects and low interest rates make the projects more affordable. In addition, the City actively seeks opportunities to refinance high‐interest rate debt at a lower cost to save taxpayers money. These opportunities may be constrained if interest rates rise. The City has successfully managed its capital borrowing through prior periods of market turmoil, including the fallout from the Lehman bankruptcy in 2008. However, higher debt costs would be a burden on taxpayers for years to come. While a default by the Federal government on its debt is still only a remote possibility it does unfortunately remain a possibility, and a default would have serious implications for all municipal debt issuers, including New York City. We are therefore classifying the impact of not raising the debt ceiling on this category as “Medium.”
Impact on City’s Pension Funds: Medium
While it is uncertain exactly how the financial markets will react to not raising the debt ceiling or a default by the US government, it is assumed that any such occurrence would likely create increased volatility and short term dislocations. As long term investors, while the markets may readjust in the short term, the City’s asset allocation will need to be reviewed for the longer term implications. With over $7 billion of short term securities, the pension funds are well equipped to make their near term pension payments to beneficiaries regardless of the near term stock and bond market volatilities. We are therefore classifying the impact of not raising the debt ceiling on this category as “Medium.”
1) Create Contingency Plan for City’s Seniors and Disabled 5|Page
Explore the feasibility of implementing a contingency plan whereby the City would temporarily finance, in a way that would not increase the federal debt ceiling, at least one month of Social Security payments to its residents in the event that the federal government is unable to meet these scheduled obligations. While the financing could come from a City source, the Social Security Administration would need to continue to disburse the funds to beneficiaries and facilitate reimbursement to the City as soon as federal funds are once again made available. An alternative option may be for the City to encourage local banks to automatically extend a zero or low‐interest credit line (or overdraft protection) to social security beneficiaries. It is estimated that more than 85 percent of beneficiaries receive their payments through direct deposit so this solution might be capable of addressing the needs of a significant portion of beneficiaries. We note that this option could be administratively complicated for the banks to manage. The City could also explore ways in which short‐term financing could be made available to assist banks. In lieu of being able to continue financing benefits through the Social Security Administration or area banks, the City must identify a comprehensive way to provide emergency support to these beneficiaries through other means – perhaps by making short term zero‐percent loans available at all senior centers or suspending property tax, water and sewer bills or other payments due from beneficiaries to the City. Because of the unknown levels of demand, the provision of services must extend beyond what the City can do on its own. The City must coordinate with the existing network of not‐for‐profit service providers in order to make available all means of assistance to those most vulnerable New York City residents. This could include temporarily raising the amount of City support of such service providers to facilitate an increased service level. 2) Establish Debt Ceiling Taskforce Immediately convene an Inter‐governmental Debt Ceiling Taskforce which would include representatives of the Comptroller’s Office, Mayor’s Office of Management & Budget, New York City Council, and other relevant parties. The taskforce will monitor and address the rapidly changing legislative and financial environments and consider the above recommendations.
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