(Bloomberg) -- New York City mayoral hopeful Zohran Mamdani has rattled Wall Street with his plans to raise taxes on the rich, freeze rents and boost spending to pay for free childcare and education at the city’s public universities.
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Still, bond investors are tempering concerns for now. That’s because many of Mamdani’s core polices — like hiking levies on corporations, providing free bus service and borrowing an additional $70 billion for affordable housing — are outside of his direct jurisdiction, requiring approval from state or local leaders that have a range of ideologies.
“While he has big plans, the practical realities of governance, legal constraints, market reactions, and political opposition are likely to temper the extent to which his agenda can be realized and, therefore, limit the fallout such full realization would have on credit quality,” said Richard Schwam, a municipal credit analyst at AllianceBernstein Holding LP, which holds New York City bonds.
There’s also the general election in November where Mamdani, who is poised to win the Democratic nomination for mayor, will have to beat Republican and Independent candidates, including current mayor Eric Adams.
Those hurdles are limiting investors’ concern that Mamdani’s agenda will materially impact the city’s credit quality. Plans for aggressive new debt or drastic fiscal changes could spark concern over ratings downgrades or higher borrowing costs.
The risk premium on New York City’s debt barely budged following the election results. Spreads on the city’s general obligation bonds maturing in 10 years widened by 2 basis points Wednesday, according to data compiled by Bloomberg. The city, which spends about $7.7 billion annually for debt service, had about $104 billion of outstanding debt as of June 30, 2024.
Not all markets were as placid. Shares of companies linked to real estate in the city fell on the same day as analysts fear Mamdani’s agenda could stifle corporate investment and hiring, reducing demand for office leasing. Meanwhile, a rent-freeze may force property owners to put off maintenance, hastening disrepair.
Budget Picture
New York City and state are facing billions of dollars in federal spending cuts for programs like Medicaid, housing vouchers and food stamps, and their ability to keep funding those programs at current levels, much less spend more, will be challenging. The city also has to comply with a state law mandating smaller class sizes, which may require spending an additional $1.9 billion for teachers and billions more for new class rooms.
Story continues“The ideas of things like free city buses and lower cost housing are not free from a credit perspective because they have to be paid for,” said Dan Solender, head of municipals at Lord Abbett & Co.
New York State Comptroller Thomas DiNapoli has warned that the state’s high taxes may already be pushing wealthy residents out of the city, providing little wiggle room for the state to raise more revenue during an economic slowdown.
“While people and businesses do not flock to NYC because it is a tax haven, there could be a point where the tax burden is too much, resulting in businesses leaving and city revenues declining,” said Howard Cure, director of municipal bond research at Evercore Wealth Management.
To be sure, New York City is becoming increasingly unaffordable for many residents and Mamdani’s social-media driven campaign centered on reducing that burden. His website, branded with flashy signage, articulates a simple mission: “Zohran Mamdani is running for Mayor to lower the cost of living for working class New Yorkers.”
The message energized the electorate, particularly young people. Mamdani could harness that enthusiasm to put pressure on lawmakers.
When former progressive Democratic Mayor Bill de Blasio took office in 2014, he proposed raising taxes on the rich to fund pre-kindergarten for four-year-olds. Former Governor Andrew Cuomo, who conceded the Democratic primary to Mamdani, successfully resisted a tax increase, but the state legislature agreed to fund the program without raising taxes.
“Investors should take comfort in the myriad of fiscal controls that are embedded into law to enforce fiscal discipline upon the city,” said Dora Lee, director of research at Belle Haven Investments
--With assistance from Amanda Albright.
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