Financing

New York City Related Issuers - Variable Rated Debt

The City and other issuers supporting the City capital program have maintained floating rate exposure to minimize interest costs. When reviewing the City’s variable rate debt, it is useful to include all sources of financing with the exception of NYW, which is typically considered separately for such purposes. Variable rate demand bonds, which require an accompanying bank facility, comprise the majority of the City’s variable rate portfolio. The City, TFA, and the City’s related entities also have floating rate bonds which do not require a bank facility, where interest rates are set periodically according to a benchmark index, by auction, or by a remarketing agent. The City and TFA continue to explore various debt instruments that will confer the benefit of floating rates. Currently, the City and its related entities, excluding NYW, have approximately $8.2 billion of floating rate exposure, which typically provides attractive financing costs relative to long term fixed rate debt.

While floating rate debt continues to provide savings relative to fixed rate debt, the exposure is of note because certain events can cause unexpected increased costs. Those events would include rising interest rates, reductions in tax rates in the tax code (in the case of tax-exempt debt), and the deterioration of the City’s credit. Additionally, the deterioration of the credit of a liquidity provider can also have an impact on net interest costs.

The following table shows a breakout of the City’s and its related issuers’ floating rate exposure, excluding NYW. Floating rate exposure is currently at 9.3 percent, including $600 million of new floating rate bonds issued since July 1, 2022, which remains below the City’s policy guideline of 20 percent. This is even more manageable after taking into account the 10 year average balance of $8.1 billion of short-term assets in the City’s General Fund, which are an offset to these floating rate liabilities. Net of these floating rate assets, the floating rate exposure of the City, excluding NYW, is almost entirely mitigated. Moreover, the City uses conservative assumptions in budgeting interest rates and associated expenses from floating rate instruments.

In addition to the floating rate debt instruments previously discussed, the City has utilized synthetic fixed rate debt (issuance of floating rate debt which is then swapped to a fixed rate). In contrast to variable rate demand bonds and other floating rate instruments, synthetic fixed rate debt is relatively insensitive to changes in interest rates and changes in the City’s credit, though it can provide exposure to decreases in marginal tax rates in the tax code. Given the limited floating rate exposure by these instruments, they are counted at 25 percent of par or notional amount in the table above. While the City did not enter into any new interest rate swaps to date in fiscal year 2023, the City terminated one of its two remaining swaps. The TFA has no outstanding swaps. The City is a party to one remaining GO interest rate swap with an outstanding notional amount as of March 31, 2023 of $43 million, for which the mark-to-market value was negative $712 thousand. This is the theoretical amount that the City would pay if the swap was terminated under market conditions as of March 31, 2023.

After June 30, 2023, the London Interbank Offered Rate (LIBOR) will be discontinued. The City, TFA, and NYW have no floating rate debt instruments directly linked to LIBOR. Certain debt instruments included alternative rates based on LIBOR. For the outstanding GO and NYW swaps, variable rate payments received are based on a percentage of 1-Month LIBOR and are scheduled to still be in effect after June 30, 2023. Relative to their total debt portfolios, the City and its related issuers have very limited exposure to LIBOR. To address LIBOR discontinuation risk in relation to its swaps, the City and NYW have each adhered to the 2020 IBOR Fallbacks Protocol published by the International Swaps and Derivatives Association, which provides a mechanism to incorporate the Secured Overnight Financing Rate (SOFR) as a replacement for LIBOR. The debt instruments that reference LIBOR have been amended to replace LIBOR with SOFR.