Fitch Ratings and Moody's Investors Service have both affirmed New York City's bond ratings, but each agency shifted its outlook from stable to negative. Moody's affirmed its Aa2 issuer rating, while Fitch maintained its AA rating. This move by Moody's marks the first negative bond rating action for New York City since the COVID-19 pandemic. The change in outlook stems from updated spending projections that reveal larger and more persistent multi-year budget gaps than previously anticipated, even under favorable economic conditions.
Moody's cited concerns that the city's forecast budget gaps, excluding one-time solutions, could approach 10% of city funds revenue. The agency explicitly stated that it would monitor the city's handling of these gaps over the next year, with a potential downgrade if the city continues to rely on non-recurring budget solutions or if its reserves diminish significantly. New York City Comptroller Mark Levine characterized the outlook cut as a "sobering wake-up call," noting that the city's preliminary budget for fiscal year 2027 shows operating expenses exceeding revenues by $4.5 billion.
Fitch also revised its outlook to negative on March 20, citing similar concerns about the city's financial resilience. A key factor for a potential downgrade by Fitch is the sustained erosion of the city's reserve cushion to levels below 7.5% of general fund spending. Fitch projects that, under the fiscal year 2026 preliminary budget assumptions, this ratio would drop below the 7.5% threshold. Both agencies emphasized the importance of the city narrowing projected budget gaps through recurring measures and demonstrating progress toward restoring structural balance.
While a rating downgrade does not affect interest rates on already issued bonds, it could lead to increased borrowing costs for new bonds. Estimates suggest that a downgrade could add a couple of basis points to interest rates, potentially increasing costs by millions of dollars annually. For example, a City Council study estimated a 0.25% increase in rates could cost the city $400 million a year. Moody's and Fitch are looking for evidence of sustainable, structurally balanced budgets, stronger reserves, and reductions in fixed costs to stabilize or improve the outlook.
The city faces significant projected budget gaps, including $6.66 billion in FY 2028, $6.75 billion in FY 2029, and $7.1 billion in FY 2030, according to Moody's. The current administration has seen the budget gap for FY2026 shrink to $5.4 billion from a combined $12 billion for FY2025 and FY2026, partly due to stronger-than-expected revenue and state support. State-level proposals to enhance revenue or modify spending policies could have a stabilizing effect, but Governor Kathy Hochul has stated she does not support raising taxes.
