Last month, New York City sold $1.2 billion in general-obligation bonds, the fourth such sale this year. Some of those notes won’t mature until 2045, potentially putting the city in a long-term relationship with the people who purchased them. Unlike most other relationships, however, the city won’t really know who sticks it out for the long haul.
New York City certainly knows how much it owes to general-obligation bondholders—about $37 billion—for lending it the money to build bridges, schools and other important stuff. But it doesn’t know who holds all those IOUs. Only about 30 percent of the city’s outstanding general obligation debt is held by entities that publicly disclose it, like mutual funds and insurance companies. The city knows who originally bought the bonds representing the rest of the city’s debt, but those bonds can be traded again and again, so the city can’t tell who holds them now.
Looking solely at bonds whose holders do publicly disclose, companies that operate mutual funds control the largest share of city debt, about 14 percent of the total general-obligation debt. Firms that offer a mix of mutual funds and separately managed accounts (which are like mutual funds, except custom built for wealthy individuals) are right behind at 14 percent. Insurance companies hold under 2 percent. The biggest identifiable holder is The Vanguard Group, which offers mutual funds and held more than $2 billion in city bonds at last check.
Sometimes people running for office suggest that the country, states and cities should operate like households and “live within their means,” by which they mean avoiding debt. Of course, in real life, households often take on debt for very sensible reasons—borrowing for college, or to buy a house. Beyond that, the parallel between governments and households breaks down because, well, governments aren’t households. Household members die; governments don’t. And governments have taxing authority.
At the same time, debt isn’t free. According to the five-year financial plan released by the city’s Office of Management and Budget last summer, by fiscal year 2022, the city will pay $8.6 billion in debt service in a budget of about $98.5 billion, meaning debt will eat up about one in 12 dollars the city spends that year. The $6.7 billion New York City spent on debt service in the fiscal year that ended June 30 was about $800 million more than it spent on the police department.
Taking into account its general obligation debt and some of the other forms of borrowing it does, the city is well under its statutory debt limit of $106 billion. Independent ratings of the city’s debt are strong. The latest Standard & Poor’s rating of the city’s general obligation bonds (there are separate ratings for bonds issued by the water system and under a “transitional finance authority” created in 1997 whose bonds are secured in a different manner) was AA, which translates to “high grade/investment grade.” The S&P report praised the city’s strong economy, strong management and flexible budget, though it did mention that the city had a “very weak debt and contingent liability profile” with hefty debt service “as well as a large pension and other postemployment benefit (OPEB) obligation and the lack of a plan to sufficiently address the OPEB obligation.”
The bottom line is, debt is a policy reality for the city. There are reasons for it, and there are consequences. It’s unwise to go either Chicken Little or Pollyanna about it.
But why is it worth thinking about who holds the city’s debt? For one thing, it’s because debt creates a web of interests, some shared and some competing, and can establish power dynamics: Remember that it was the market’s refusal to purchase city debt that triggered New York’s 1970s fiscal emergency.
It’s also worth thinking about who owns the city’s debt to remind us that something or someone does.
It would be nice to know who makes up the other 70 percent of city bondholders. But as far as we can tell, the city’s debt is not held by some mysterious alien force. It’s not the Illuminati whom the city is borrowing from. It’s mutual funds that many city residents invest in, and insurance funds that pay out when New Yorkers crack up the car or cash in their chips. In other words, some New Yorkers are probably both creditors and debtors of the city, though their personal stake in either column might be pretty small.
That doesn’t lessen the fact that the city has IOUs to pay. It just means that we’re not talking about a clean transfer of money from New York City to some remote being. It’s more complicated than that.
City Limits and Gotham Gazette have teamed up to cover the big issues that will shape New York’s policy debate in 2019. This week’s theme is the city and state budget. Be sure to check out the whole Agenda 2019 series.
|Bondholder||Par value of debt held|
|The Vanguard Group||$2,082,195|
|Nuveen Asset Management||$454,875|
|T. Rowe Price||$360,185|
|BNY Mellon Wealth Management||$283,220|
|Deutsche Investment Management||$216,435|
|Thornburg Investment Management||$152,455|
|Capital Research & Management||$129,055|