Fitch Rates Nassau County, NY's General Obligation Bonds 'A'; Outlook Negative
NEW YORK--()--Fitch Ratings assigns an 'A' rating to the following general obligation
(GO) bonds of Nassau County, NY (the county):
--$127,500,000 general improvement bonds, 2013 series B.
The bonds are expected to be sold through competitive bid on August 8.
The bonds are being issued to finance capital projects, tax certiorari payments, environmental projects, and judgments and settlements.
In addition, Fitch affirms the following ratings:
--Approximately $1.5 billion in outstanding GO bonds at 'A';
--Approximately $259 million in outstanding Nassau Health Care Corporation (NCHCC) county guaranteed bonds at 'A';
--Approximately $13.1 million in outstanding Nassau Regional Off-Track Betting Corporation (NROTBC) revenue bonds series 2005 at 'A-'.
The Rating Outlook for all long-term debt is Negative.
SECURITY
The GO bonds, and NCHCC bonds are secured by the county's faith and credit and taxing power, subject to a 2011 state statute limiting property tax increases to the lesser of 2% or an inflation factor (tax cap law). This limit can be overridden annually by a 60% vote of the county legislature.
The NROTBC bonds are backed by the county's covenant under a support agreement with the NROTBC to make loans to NROTBC equal to debt service on the bonds from legally available funds of the county as appropriated for such purpose. The county commits to transfer funds to the trustee to pay debt service not later than 15 days prior to any debt service payment date. The obligations of the county under the support agreement are unconditional and irrevocable, and the support agreement is not subject to cancellation or termination.
KEY RATING DRIVERS
NEGATIVE OUTLOOK CONSIDERATIONS: The county is exposed to potential significant liabilities related to tax refund and wage freeze litigation, both of which have recently been decided against the county subject to appeal. An adverse decision on appeal for either or both cases would further stress the county's already limited financial flexibility.
LIMITED FINANCIAL FLEXIBILITY: The county's lack of financial flexibility is evidenced by limited reserves, high dependence on economically sensitive sales tax revenue, use of non-recurring measures, and long-term labor contracts that will continue to challenge the county's ability to achieve structural balance.
WEAK INTERGOVERNMENTAL RELATIONSHIPS: Absent improvement in the county administration's interactions with either its legislative minority or NIFA, Fitch believes the ability to implement programs to improve fiscal stability will continue to be impaired.
SHORT-TERM MARKET RELIANCE: Low liquidity remains a concern, as does the county's reliance on short-term market access to fund operations in anticipation of sales tax receipts and for note repayment. Coverage from operating cash and cash balances is substantial at roughly 3x.
STRONG ECONOMIC INDICATORS: The county benefits from a broad and wealthy economic base characterized by above-average wealth and income levels.
MANAGEABLE DEBT BURDEN: The sizable and wealthy tax base results in a manageable debt burden with above-average amortization and moderate capital needs.
RATING SENSITIVITIES
CONTINUED COST-CUTTING MEASURES ESSENTIAL: Management's ability to continue to reduce costs, of which labor is by far the largest, is essential to near-term budget balance and rating stability.
OUTCOME OF LITIGATION: A favorable outcome to pending litigation in conjunction with the alleviation of fixed-costs burden could stabilize the rating at the current level.
CREDIT PROFILE
The county is located on Long Island, approximately 15 miles east of Manhattan. The population of about 1.3 million has remained fairly steady, growing by 1.1% since 2000.
OPERATING SURPLUS ACHIEVED; CUMULATIVE DEFICIT REDUCED
Financial margins have been slim for many years even with consistent moderate use of non-recurring measures, due in part to aggressive budgeting. However, the county reported a budgetary surplus of $41.5 million in its defined primary operating funds for fiscal 2012 (year-end Dec. 31). The results include $9.7 million in unanticipated costs representing the county's 10% portion of Superstorm Sandy related expenditures. The primary components that added to the budgetary surplus were higher sales tax revenues of $22 million, lower debt service costs and the sale of property. The county achieved a budgetary savings of approximately $150 million in labor costs through a combination of layoffs, restructuring of operations, and labor concessions. Total headcount of 7,331 at the end of June 2013 represents over a 20% decrease since 2009.
Fitch views positively that the county has slightly under-budgeted sales tax revenue (which makes up 40% of major tax-supported fund revenue) for the past four years and the structural deficit related to the primary operating funds has been reduced for the third consecutive year from $251.6 million in 2009 to a still sizable $115.6 million in 2012.
For 2012 on an audited GAAP basis the operating funds (general and police district) reported a $27.5 million surplus after transfers, increasing the combined fund balance to $111.4 million or 4.3% of spending. The reserve level continues to be weak with an unrestricted (sum of committed, assigned and unassigned) fund balance of negative $30.9 million or a negative 1.2% of combined spending, improved from negative $36.7 million the prior year.
POSITIVE MOMENTUM CONTINUES YEAR TO DATE
The county adopted a 2013 balanced budget which includes $2.8 billion of appropriations (excluding transfers) to support the major operating funds. The budget includes sales tax receipts 4% higher than 2012 actual receipts, which Fitch considers reasonable given potential pickup from Sandy rebuilding. Positively, through May, sales tax receipts are 11.2% higher than comparable prior year receipts.
The county reports monthly on its financial position and actual results relative to the budget. As of the most recent report, covering the period January-May 2013, the county projects a $12 million operating surplus on a budgetary basis for 2013 primarily due to higher than anticipated health insurance savings, which should result in another year of cumulative deficit reduction.
FINANCIAL PRESSURES WILL CONTINUE
Fitch recognizes the strides the county has made in decreasing the structural deficit but remains concerned. The gap between recurring revenues and recurring expenses is still significant and is expected to increase through fiscal 2016. The county's 2013-2016 multi-year financial plan, updated as of June 28, 2013, projects budget gaps of $35.4 million in 2014, $84.9 million in 2015 and $83.9 million in 2016, respectively 1.1%, 2.5% and 2.4% of spending. These gaps are a reduction from the original plan, approved by NIFA, which totaled $61.9 million, $99.4 million, and $114.9 million in 2014 through 2016. The gaps are manageable relative to the size of the county's operating funds budget, but troubling due to the county's existing precarious fund balance position.
The county plans to implement gap-closing measures to produce savings and/or generate offsetting revenues; however, Fitch is concerned that some of the measures are of a non-recurring nature and may not be realistic given that one or more may require state legislation, action by the county legislature, or approval from NIFA.
Adding to the county's financial pressure are two court decisions related to the wage freeze and tax cert refunds that have gone against the county subject to appeal (see below), exposing the county to potential significant liabilities. Fitch believes an adverse decision on appeals for either or both cases would make it more difficult to achieve structural balance in the near-to-medium term.
WAGE FREEZE LITIGATION
In 2011 NIFA implemented a wage freeze that is now in effect until March 2014. Three labor unions filed suit to reverse the wage freeze. In February 2013, the U.S. District Court for the Eastern District of New York issued an opinion granting the union's summary judgment which would nullify NIFA's imposition of the wage freeze. The judge stayed his decision pending the results of NIFA's and the county's appeal.
The county estimates that if the decision is not reversed on appeal, its retroactive liability would be approximately $230 million through fiscal 2013 including costs such as payroll taxes, pension contributions, etc.
The county believes that fiscal 2013 cash flow should not be affected, which Fitch views as reasonable given the likelihood of a lengthy appeals process. However, the projected updated budget gap of $35.4 million for fiscal 2014 would substantially increase if NIFA loses its appeal and the county is required to repay approximately $230 million of wage savings achieved through 2013 as well as budget savings that continues to accrue. The county anticipates financing any adverse settlement to repay the $230 million of back wages, although the county legislature and NIFA approval would be required.
TAX CERT LITIGATION
In 2010 the county passed legislation that eliminates its responsibility for making tax cert payments to towns, special districts, and all but one of the school districts, passing on a portion of the cost of tax refunds to local municipalities in accordance with general state law. This legislation, effective in 2014, would significantly reduce the county's liability but was challenged by a number of the underlying jurisdictions.
The county's position was upheld in the Nassau County Supreme Court but overturned in February 2013 by the New York State Appellate Court. The State Court of Appeals will likely hear oral arguments in October with a decision probable by the end of the year. The county estimates that, in the event the decision is not reversed on appeal, the amount of its liability for paying the refunds would be approximately $60 million annually. Fitch believes the county could manage the $60 million but recognizes that a loss by the county would create yet another road block in its path towards overall fiscal balance.
The county's ability to fund the total accumulated tax liability, which is estimated at approximately $335 million at Dec. 31, 2012 and is not part of the suit, is of some concern to Fitch. The county planned, with NIFA's approval, to issue approximately $305 million in tax cert bonds through fiscal 2014 to cover the liability but the county legislature did not provide the requisite two-thirds majority.
The administration and county legislature recently reached an agreement to issue $75 million in bonds for tax certs, $40 million of which is included in the current bond issue. The remaining $35 million is expected to be approved by the legislature in September 2013. In addition, the county has represented it will be utilizing $20 million of operating revenue to fund tax cert payments, bringing the total amount allocated for tax certs to $95 million. The county administration continues to negotiate with its legislature, but it is unclear whether bonding for the remaining tax certs will be accomplished. Failure of the county legislature to approve additional financing could result in significant unbudgeted operating expenditures accrued in fiscal 2013. The county is in discussions with the state to explore alternate tax cert financing options.
RELIANCE ON SHORT-TERM BORROWING
The county generally issues short-term revenue anticipation notes (RANs) and tax anticipation notes (TANs) around May/June and November/December of each fiscal period in order to fund operations in anticipation of sales and property tax receipts, respectively, and maintain a cash balance sufficient to help repay maturing notes. Note borrowing in 2012 equaled $476 million or a somewhat elevated 16% of receipts ($20 million was to account for timing differences with respect to Superstorm Sandy). The county expects to issue a slightly lower $448 million in cash flow notes in 2013.
The county's cash flows along with proceeds of outstanding notes generally provide substantial coverage for notes with funds for their repayment fully set aside comfortably in advance of maturity. The 2013 series A and B RANs mature at the end of March ($155 million) and April ($55 million) 2014, respectively. Coverage on the repayment dates is strong at 2.9x in March and 4.0x in April. With consideration of borrowable balances in non-major funds, coverage is an even stronger 3.3x and 5.0x in March and April, respectively.
TANs issued last December are due in September and October 2013, with respective projected coverage of 2.9x and 3.5x when borrowable resources are considered.
STRONG SOCIOECONOMIC CHARACTERISTICS
The county benefits from a broad, diverse economy and well above-average economic indicators, including solid income levels (per capita income in 2011 was 152% of the U.S.) and high per capita market value ($162,000) despite recent tax base declines.
The county's unemployment rate remains lower than the rates for New York State and the nation. In May 2013, the county's unemployment rate was 6.0% compared to 7.4% and 7.3% for the state and nation, respectively. From May 2012 to May 2013, employment and labor force numbers were positive-trending, posting 1.7% and 0.6% increases, respectively, higher than both state and nation growth rates.
The effects of the economic downturn were milder here than in some areas; employment and home price declines to date have been relatively moderate. In addition, sales tax revenue, the county's largest source of general government funding, has been increasing.
MANAGEABLE DEBT BURDEN
Debt ratios are increasing but still manageable at $4,111 per capita and 2.9% of full market value. However, these statistics are likely somewhat understated as they exclude debt issued by school districts (not available). For 2012, debt service represented a moderate 12.3% of total government fund spending.
Debt ratios should remain stable given manageable capital needs and above-average amortization, with 71% (including debt issued by the NIFA) retired in 10 years, contributing to the above-average debt service burden.
WELL-FUNDED STATE PENSION PLANS
The county participates in New York State pension plans which are well-funded with the state and local employees' plan at 90% and the state and local police and fire plan at 92% as of March 31, 2012. Using Fitch's more conservative 7% discount rate assumption, the plans' funding levels would still be sound at an estimated 86% and 87%, respectively.
County pension payments in 2012 made up a moderate share (4.8%) of spending. The county has taken advantage of the ability granted by the state to amortize most of the increase in annual pension payments over 10 years. This amortization option provides some near-term budget relief but will make future-year budgeting for these payments more challenging.
The moderate pension liability is somewhat offset by a high unfunded actuarial accrued liability for other post-employment benefits (OPEB) at $4.8 billion as of Dec. 31, 2012 or 2.5% of market value. Fitch expects this amount to increase as the county plans to continue to fund its OPEB liability on a pay-go basis. In Fitch's view there appear to be many legal obstacles to altering existing labor contracts. The county has not received concessions on health care; most employees do not contribute at all to the cost of coverage.
Carrying costs for debt service, pension and OPEB pay-go equaled a manageable 21.6% of 2012 total government fund spending, with the county's amortization of part of the pension payment somewhat offsetting rapid debt repayment.
NIFA OVERSIGHT PROVIDES ADVANTAGES AS WELL AS HURDLES
In January 2011, NIFA imposed a control period under its enabling legislation. NIFA has maintained an oversight role over the county since 2000. The ability to break existing contracts is beyond NIFA's control-period powers. Upon declaration of a fiscal crisis NIFA has the ability to impose a wage freeze if it determines that such freeze is necessary to maintain a balanced budget. However, as discussed above, this ability is the subject of litigation.
Fitch believes NIFA's oversight has had some positive effects on the county's financial operations, such as instilling increased budgeting discipline and imposing the wage freeze, but NIFA's oversight has also added a layer of complexity to decision-making.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, and National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=798192
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.
--$127,500,000 general improvement bonds, 2013 series B.
The bonds are expected to be sold through competitive bid on August 8.
The bonds are being issued to finance capital projects, tax certiorari payments, environmental projects, and judgments and settlements.
In addition, Fitch affirms the following ratings:
--Approximately $1.5 billion in outstanding GO bonds at 'A';
--Approximately $259 million in outstanding Nassau Health Care Corporation (NCHCC) county guaranteed bonds at 'A';
--Approximately $13.1 million in outstanding Nassau Regional Off-Track Betting Corporation (NROTBC) revenue bonds series 2005 at 'A-'.
The Rating Outlook for all long-term debt is Negative.
SECURITY
The GO bonds, and NCHCC bonds are secured by the county's faith and credit and taxing power, subject to a 2011 state statute limiting property tax increases to the lesser of 2% or an inflation factor (tax cap law). This limit can be overridden annually by a 60% vote of the county legislature.
The NROTBC bonds are backed by the county's covenant under a support agreement with the NROTBC to make loans to NROTBC equal to debt service on the bonds from legally available funds of the county as appropriated for such purpose. The county commits to transfer funds to the trustee to pay debt service not later than 15 days prior to any debt service payment date. The obligations of the county under the support agreement are unconditional and irrevocable, and the support agreement is not subject to cancellation or termination.
KEY RATING DRIVERS
NEGATIVE OUTLOOK CONSIDERATIONS: The county is exposed to potential significant liabilities related to tax refund and wage freeze litigation, both of which have recently been decided against the county subject to appeal. An adverse decision on appeal for either or both cases would further stress the county's already limited financial flexibility.
LIMITED FINANCIAL FLEXIBILITY: The county's lack of financial flexibility is evidenced by limited reserves, high dependence on economically sensitive sales tax revenue, use of non-recurring measures, and long-term labor contracts that will continue to challenge the county's ability to achieve structural balance.
WEAK INTERGOVERNMENTAL RELATIONSHIPS: Absent improvement in the county administration's interactions with either its legislative minority or NIFA, Fitch believes the ability to implement programs to improve fiscal stability will continue to be impaired.
SHORT-TERM MARKET RELIANCE: Low liquidity remains a concern, as does the county's reliance on short-term market access to fund operations in anticipation of sales tax receipts and for note repayment. Coverage from operating cash and cash balances is substantial at roughly 3x.
STRONG ECONOMIC INDICATORS: The county benefits from a broad and wealthy economic base characterized by above-average wealth and income levels.
MANAGEABLE DEBT BURDEN: The sizable and wealthy tax base results in a manageable debt burden with above-average amortization and moderate capital needs.
RATING SENSITIVITIES
CONTINUED COST-CUTTING MEASURES ESSENTIAL: Management's ability to continue to reduce costs, of which labor is by far the largest, is essential to near-term budget balance and rating stability.
OUTCOME OF LITIGATION: A favorable outcome to pending litigation in conjunction with the alleviation of fixed-costs burden could stabilize the rating at the current level.
CREDIT PROFILE
The county is located on Long Island, approximately 15 miles east of Manhattan. The population of about 1.3 million has remained fairly steady, growing by 1.1% since 2000.
OPERATING SURPLUS ACHIEVED; CUMULATIVE DEFICIT REDUCED
Financial margins have been slim for many years even with consistent moderate use of non-recurring measures, due in part to aggressive budgeting. However, the county reported a budgetary surplus of $41.5 million in its defined primary operating funds for fiscal 2012 (year-end Dec. 31). The results include $9.7 million in unanticipated costs representing the county's 10% portion of Superstorm Sandy related expenditures. The primary components that added to the budgetary surplus were higher sales tax revenues of $22 million, lower debt service costs and the sale of property. The county achieved a budgetary savings of approximately $150 million in labor costs through a combination of layoffs, restructuring of operations, and labor concessions. Total headcount of 7,331 at the end of June 2013 represents over a 20% decrease since 2009.
Fitch views positively that the county has slightly under-budgeted sales tax revenue (which makes up 40% of major tax-supported fund revenue) for the past four years and the structural deficit related to the primary operating funds has been reduced for the third consecutive year from $251.6 million in 2009 to a still sizable $115.6 million in 2012.
For 2012 on an audited GAAP basis the operating funds (general and police district) reported a $27.5 million surplus after transfers, increasing the combined fund balance to $111.4 million or 4.3% of spending. The reserve level continues to be weak with an unrestricted (sum of committed, assigned and unassigned) fund balance of negative $30.9 million or a negative 1.2% of combined spending, improved from negative $36.7 million the prior year.
POSITIVE MOMENTUM CONTINUES YEAR TO DATE
The county adopted a 2013 balanced budget which includes $2.8 billion of appropriations (excluding transfers) to support the major operating funds. The budget includes sales tax receipts 4% higher than 2012 actual receipts, which Fitch considers reasonable given potential pickup from Sandy rebuilding. Positively, through May, sales tax receipts are 11.2% higher than comparable prior year receipts.
The county reports monthly on its financial position and actual results relative to the budget. As of the most recent report, covering the period January-May 2013, the county projects a $12 million operating surplus on a budgetary basis for 2013 primarily due to higher than anticipated health insurance savings, which should result in another year of cumulative deficit reduction.
FINANCIAL PRESSURES WILL CONTINUE
Fitch recognizes the strides the county has made in decreasing the structural deficit but remains concerned. The gap between recurring revenues and recurring expenses is still significant and is expected to increase through fiscal 2016. The county's 2013-2016 multi-year financial plan, updated as of June 28, 2013, projects budget gaps of $35.4 million in 2014, $84.9 million in 2015 and $83.9 million in 2016, respectively 1.1%, 2.5% and 2.4% of spending. These gaps are a reduction from the original plan, approved by NIFA, which totaled $61.9 million, $99.4 million, and $114.9 million in 2014 through 2016. The gaps are manageable relative to the size of the county's operating funds budget, but troubling due to the county's existing precarious fund balance position.
The county plans to implement gap-closing measures to produce savings and/or generate offsetting revenues; however, Fitch is concerned that some of the measures are of a non-recurring nature and may not be realistic given that one or more may require state legislation, action by the county legislature, or approval from NIFA.
Adding to the county's financial pressure are two court decisions related to the wage freeze and tax cert refunds that have gone against the county subject to appeal (see below), exposing the county to potential significant liabilities. Fitch believes an adverse decision on appeals for either or both cases would make it more difficult to achieve structural balance in the near-to-medium term.
WAGE FREEZE LITIGATION
In 2011 NIFA implemented a wage freeze that is now in effect until March 2014. Three labor unions filed suit to reverse the wage freeze. In February 2013, the U.S. District Court for the Eastern District of New York issued an opinion granting the union's summary judgment which would nullify NIFA's imposition of the wage freeze. The judge stayed his decision pending the results of NIFA's and the county's appeal.
The county estimates that if the decision is not reversed on appeal, its retroactive liability would be approximately $230 million through fiscal 2013 including costs such as payroll taxes, pension contributions, etc.
The county believes that fiscal 2013 cash flow should not be affected, which Fitch views as reasonable given the likelihood of a lengthy appeals process. However, the projected updated budget gap of $35.4 million for fiscal 2014 would substantially increase if NIFA loses its appeal and the county is required to repay approximately $230 million of wage savings achieved through 2013 as well as budget savings that continues to accrue. The county anticipates financing any adverse settlement to repay the $230 million of back wages, although the county legislature and NIFA approval would be required.
TAX CERT LITIGATION
In 2010 the county passed legislation that eliminates its responsibility for making tax cert payments to towns, special districts, and all but one of the school districts, passing on a portion of the cost of tax refunds to local municipalities in accordance with general state law. This legislation, effective in 2014, would significantly reduce the county's liability but was challenged by a number of the underlying jurisdictions.
The county's position was upheld in the Nassau County Supreme Court but overturned in February 2013 by the New York State Appellate Court. The State Court of Appeals will likely hear oral arguments in October with a decision probable by the end of the year. The county estimates that, in the event the decision is not reversed on appeal, the amount of its liability for paying the refunds would be approximately $60 million annually. Fitch believes the county could manage the $60 million but recognizes that a loss by the county would create yet another road block in its path towards overall fiscal balance.
The county's ability to fund the total accumulated tax liability, which is estimated at approximately $335 million at Dec. 31, 2012 and is not part of the suit, is of some concern to Fitch. The county planned, with NIFA's approval, to issue approximately $305 million in tax cert bonds through fiscal 2014 to cover the liability but the county legislature did not provide the requisite two-thirds majority.
The administration and county legislature recently reached an agreement to issue $75 million in bonds for tax certs, $40 million of which is included in the current bond issue. The remaining $35 million is expected to be approved by the legislature in September 2013. In addition, the county has represented it will be utilizing $20 million of operating revenue to fund tax cert payments, bringing the total amount allocated for tax certs to $95 million. The county administration continues to negotiate with its legislature, but it is unclear whether bonding for the remaining tax certs will be accomplished. Failure of the county legislature to approve additional financing could result in significant unbudgeted operating expenditures accrued in fiscal 2013. The county is in discussions with the state to explore alternate tax cert financing options.
RELIANCE ON SHORT-TERM BORROWING
The county generally issues short-term revenue anticipation notes (RANs) and tax anticipation notes (TANs) around May/June and November/December of each fiscal period in order to fund operations in anticipation of sales and property tax receipts, respectively, and maintain a cash balance sufficient to help repay maturing notes. Note borrowing in 2012 equaled $476 million or a somewhat elevated 16% of receipts ($20 million was to account for timing differences with respect to Superstorm Sandy). The county expects to issue a slightly lower $448 million in cash flow notes in 2013.
The county's cash flows along with proceeds of outstanding notes generally provide substantial coverage for notes with funds for their repayment fully set aside comfortably in advance of maturity. The 2013 series A and B RANs mature at the end of March ($155 million) and April ($55 million) 2014, respectively. Coverage on the repayment dates is strong at 2.9x in March and 4.0x in April. With consideration of borrowable balances in non-major funds, coverage is an even stronger 3.3x and 5.0x in March and April, respectively.
TANs issued last December are due in September and October 2013, with respective projected coverage of 2.9x and 3.5x when borrowable resources are considered.
STRONG SOCIOECONOMIC CHARACTERISTICS
The county benefits from a broad, diverse economy and well above-average economic indicators, including solid income levels (per capita income in 2011 was 152% of the U.S.) and high per capita market value ($162,000) despite recent tax base declines.
The county's unemployment rate remains lower than the rates for New York State and the nation. In May 2013, the county's unemployment rate was 6.0% compared to 7.4% and 7.3% for the state and nation, respectively. From May 2012 to May 2013, employment and labor force numbers were positive-trending, posting 1.7% and 0.6% increases, respectively, higher than both state and nation growth rates.
The effects of the economic downturn were milder here than in some areas; employment and home price declines to date have been relatively moderate. In addition, sales tax revenue, the county's largest source of general government funding, has been increasing.
MANAGEABLE DEBT BURDEN
Debt ratios are increasing but still manageable at $4,111 per capita and 2.9% of full market value. However, these statistics are likely somewhat understated as they exclude debt issued by school districts (not available). For 2012, debt service represented a moderate 12.3% of total government fund spending.
Debt ratios should remain stable given manageable capital needs and above-average amortization, with 71% (including debt issued by the NIFA) retired in 10 years, contributing to the above-average debt service burden.
WELL-FUNDED STATE PENSION PLANS
The county participates in New York State pension plans which are well-funded with the state and local employees' plan at 90% and the state and local police and fire plan at 92% as of March 31, 2012. Using Fitch's more conservative 7% discount rate assumption, the plans' funding levels would still be sound at an estimated 86% and 87%, respectively.
County pension payments in 2012 made up a moderate share (4.8%) of spending. The county has taken advantage of the ability granted by the state to amortize most of the increase in annual pension payments over 10 years. This amortization option provides some near-term budget relief but will make future-year budgeting for these payments more challenging.
The moderate pension liability is somewhat offset by a high unfunded actuarial accrued liability for other post-employment benefits (OPEB) at $4.8 billion as of Dec. 31, 2012 or 2.5% of market value. Fitch expects this amount to increase as the county plans to continue to fund its OPEB liability on a pay-go basis. In Fitch's view there appear to be many legal obstacles to altering existing labor contracts. The county has not received concessions on health care; most employees do not contribute at all to the cost of coverage.
Carrying costs for debt service, pension and OPEB pay-go equaled a manageable 21.6% of 2012 total government fund spending, with the county's amortization of part of the pension payment somewhat offsetting rapid debt repayment.
NIFA OVERSIGHT PROVIDES ADVANTAGES AS WELL AS HURDLES
In January 2011, NIFA imposed a control period under its enabling legislation. NIFA has maintained an oversight role over the county since 2000. The ability to break existing contracts is beyond NIFA's control-period powers. Upon declaration of a fiscal crisis NIFA has the ability to impose a wage freeze if it determines that such freeze is necessary to maintain a balanced budget. However, as discussed above, this ability is the subject of litigation.
Fitch believes NIFA's oversight has had some positive effects on the county's financial operations, such as instilling increased budgeting discipline and imposing the wage freeze, but NIFA's oversight has also added a layer of complexity to decision-making.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, and National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=798192
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.
Contacts
Fitch Ratings
Primary Analyst:
Karen Wagner, +1-212-908-0230
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst:
Amy R. Laskey, +1-212 908-0568
Managing Director
or
Committee Chairperson:
Mike Rinaldi, +1-212-908-0833
Senior Director
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com
Primary Analyst:
Karen Wagner, +1-212-908-0230
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst:
Amy R. Laskey, +1-212 908-0568
Managing Director
or
Committee Chairperson:
Mike Rinaldi, +1-212-908-0833
Senior Director
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com
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