Fitch rates New York City, NY's GOs 'AA'; outlook stable

Reuters

NEW YORK, October 07 (Fitch) Fitch Ratings assigns an 'AA' rating to the

following New York City general obligation (GO) bonds fiscal 2014, series D:

-- Approximately $100,000,000 subseries D-4 (adjustable rate bonds);

-- Approximately $75,000,000 subseries D-5 (adjustable rate bonds).

Fitch also assigns an 'AA' rating to bank bonds associated with the following

adjustable rate bonds:

-- Approximately $225,000,000 fiscal 2014 series D, subseries D-3;

-- Approximately $100,000,000 fiscal 2014 series D, subseries D-4;

-- Approximately $75,000,000 fiscal 2014 series D, subseries D-5;

-- Approximately $50,535,000 fiscal 2006 series H subseries H-1;

-- Approximately $50,530,000 fiscal 2006 series H subseries H-2.

The subseries D-3 bonds will be supported by a standby bond purchase agreement

(SBPA) with JPMorgan Chase Bank, N.A. The subseries D-4 bonds will be supported

by an irrevocable letter of credit issued by TD Bank, N.A. The subseries D-5

bonds will be supported by an irrevocable letter of credit issued PNC Bank, N.A.

The fiscal 2006 series H subseries H-1 and H-2 bonds will be supported by an

SBPA to be issued by JPMorgan Chase Bank, N.A. The SBPA will replace an

irrevocable letter of credit currently provided by Dexia Credit Local, effective

Oct. 16, 2013.

Fitch expects to issue ratings on the subseries D-3 bonds, the series 2006H

subseries H-1 and H-2 bonds, and credit-enhanced ratings on the Subseries D-4

and D-5 bonds, closer to closing.

Based on a review of the terms governing bank bonds specified in the SBPA

(subseries D-3 and series 2006H), and the reimbursement agreements (subseries

D-4 and D-5), it is Fitch's opinion that the incremental risk associated with

bank bonds does not have a material impact on the city's long-term credit

rating.

In addition, Fitch affirms the 'AA' rating for the city's approximately $41.6

billion in outstanding GO bonds.

The Rating Outlook is Stable.

The bonds are expected to close on Oct. 16. Proceeds will be used for capital

projects.

SECURITY

The bonds are general obligations of the city secured by a pledge of the city's

full faith and credit and the levy by the city of ad valorem taxes, without

limit as to rate or amount, on all real property within the city subject to

taxation. The city is not subject to New York State's property tax cap.

KEY RATING DRIVERS

SOLID ECONOMIC UNDERPINNINGS: The city has a broad economic base and serves a

unique role as a national and international center for commerce, culture, and

tourism. Recession-related job declines have been well under comparable national

averages and job recovery has been strong, although the unemployment rate

remains elevated.

HIGHLY EFFECTIVE BUDGET MANAGEMENT: The city's sound approach to budget

development features reasonable revenue and expenditure forecasting, effective

budget monitoring, and effective actions to eliminate projected deficits.

Currently forecasted budget gaps over the next four years are below historical

norms, but notable risks to the forecast continue given the number and magnitude

of variables involved.

LABOR SETTLEMENTS UNCERTAIN: Fitch believes one of the biggest near-term risks

to continued financial stability is the resolution of long-expired labor

contracts. The city's financial plan includes no allowance for retroactive

payments although some contracts have been expired since 2009, and minimal

funding for collective bargaining agreements going forward.

HIGH & GROWING LONG TERM LIABILITIES: Fitch anticipates a continued high debt

burden given the city's significant capital commitments and future tax-supported

issuance plans. Post-employment liabilities are also sizable.

REVENUE CYCLICALITY: Economically sensitive revenues, including personal income,

business, and sales tax, comprise a major share of the city's budget and are

highly vulnerable to variability in the financial services industry. Recent

performance shows moderate revenue growth following a modest recessionary

decline in fiscal 2009.

RATING SENSITIVITIES

BUDGET GAPS: Fitch believes the city will be increasingly challenged to close

current year budget gaps with mostly recurring measures. Notable growth in the

magnitude of out-year imbalances could lead to negative rating action.

LONG-TERM LIABILITIES: An increase in the city's long-term liabilities could

negatively affect the rating. Fitch believes the most likely avenue to control

this growth is through retiree healthcare benefits, although pressure to control

wage and salary costs may make this difficult.

CREDIT PROFILE

EXPECTATION FOR CONTINUED BUDGET BALANCE

Fitch views positively the city's tight monitoring and control of revenues and

expenses, including monthly reporting and three full budget updates annually.

Fiscal year-end results generally show modest, positive variation from budget.

The adopted budget for fiscal 2014 totals $70 billion, 3.4% below estimated

fiscal 2013 spending. The drop incorporates prepayment of $2.8 billion in fiscal

2014 debt service and other expenses in fiscal 2013. It also reflects $1.5

billion spending in fiscal 2013 to repair damage from Hurricane Sandy and

related federal reimbursement. Timing of both spending and reimbursement for

these repairs is somewhat uncertain, but Fitch believes that at least the large

majority of, if not all, costs will ultimately be reimbursed.

The city's inability to carry a fund balance somewhat limits financial

flexibility. Management has offset this constraint by using operating surpluses

to prepay debt service and other expenses in subsequent years. Prior to the

economic downturn, with several consecutive years of operating surpluses the

city had accumulated a surplus of $8 billion to roll forward. Since fiscal 2009,

however, annual operating deficits have eroded the amounts available for future

years' budgets.

Fitch believes the size of the recent operating deficits is manageable (1% - 2%

of spending) but would view negatively the elimination of the accumulated

cushion. The current forecast for fiscal 2013 indicates the tide has shifted to

the positive, ending with about a $360 million operating surplus, an improvement

from the $270 million deficit anticipated when the executive budget was proposed

in May. Fitch expects the city to retain a modicum of accumulated surplus and

continue the practice of prepaying out-year expenses.

DOWNWARD TREND IN OUT-YEAR GAPS

Somewhat offsetting Fitch's concern about recent operating deficits is the

moderating trend in projected gaps in the out-years of the financial plan. The

fiscal 2012 executive budget showed gaps of $4.8 billion-$5.3 billion, or 6%-7%

of the budget, in each of the out-years of the plan (fiscal 2013-2015). In

contrast, the adopted budget for fiscal 2014 shows gaps of $1.4 billion-$2

billion or 2%-3% (fiscal 2015-2017).

The improvement in out-year gaps is a result of both a modestly increased

revenue forecast and the city's continual efforts to control spending and

enhance revenue through its programs to eliminate the gap (PEGs). Since 2008,

these programs have resulted in gap reduction of $6.3 billion in fiscal 2013 and

$6.6 billion in fiscal 2014. The most recent PEG, first announced in November

2012, reduces the fiscal 2013 and 2014 gaps by $537 million and $1 billion,

respectively.

The program calls for headcount reductions of 1,324 or a modest 0.05% of overall

headcount in fiscal 2014, nearly all through attrition. In addition to headcount

reductions, a moderate amount of the PEG represents revenue assumptions or cost

savings that are not within the city's control and therefore uncertain. However,

Fitch anticipates that savings not realized in the items presented will be

replaced with other reductions or revenue enhancements, and that those actions

will largely be of a recurring nature.

HIGHLY DETAILED ESTIMATES OF DIVERSE REVENUE MIX; RISKS REMAIN

The city benefits from a diversity of revenue sources. Fitch believes that the

city's revenue estimates, based on a highly detailed and frequently-reviewed

analysis, are reasonable.

The property tax is the largest source, at 26% of forecasted fiscal 2013 funds,

followed by personal income tax at 13% and sales tax at 8%. Intergovernmental

sources are primarily for education and social services programs, and make up

28% of forecasted fiscal 2013 revenue. Combined taxes make up 63% of total

revenue. The city appears to have a moderate amount of room to increase the

property tax levy under the cap.

A recent State Court of Appeals ruling upholding the legislation authorizing the

sale of additional taxi medallions will allow the city to proceed with the sale

of 400 medallions in fiscal 2014, anticipated to yield $300 million. Sale of

additional medallions requires state administrative approval. The financial plan

assumes an additional $1.2 billion in revenue for such sales through fiscal

2017.

Areas of revenue risk beyond tax forecast variations include reimbursements for

Hurricane Sandy-related costs; state revenue shortfalls that could result in

reduced aid to municipalities including New York City; and federal actions that

could result in reduced funding to the city. A teacher evaluation plan

implemented in June that allows the city to receive $1.5 billion in state and

federal aid will likely be subject to review by a new administration following

this November's mayoral election.

Management estimates the gross cost to public sector facilities from Hurricane

Sandy to be $4.5 billion, of which $1.5 billion will come from the operating

budget and the rest from reimbursable capital spending. The damage cost estimate

does not include the cost of enhancements for future damage mitigation.

The mayor recently presented a report analyzing climate risks to the city that

proposes $20 billion in funding for protection of the city's assets from the

impact of climate change. About one-half of this amount is already included in

the city's 10-year capital strategy or federal relief already appropriated by

Congress and allocated to the city. A portion of the remainder may come from

funds appropriated by Congress but not yet allocated to the city.

MODERATE USE OF NON-RECURRING MEASURES

The city uses a limited amount of one-time resources to balance its annual

operating budget, including the sale of taxi medallions and the transfer of the

remaining $1 billion from a trust established for retiree healthcare costs. The

city transferred out $82 million in fiscal 2010, $395 million in fiscal 2011,

$672 million in fiscal 2012, and $1 billion in fiscal 2013, to help cover the

cost of annual retiree benefits.

LONGER-TERM SPENDING PRESSURES

One of the biggest budgetary uncertainties is the potential cost of expired

labor contracts. The budget includes neither retroactive payments nor salary

increases for fiscal 2013. A modest reserve for collective bargaining assumes

increases of 1.25% per year. Fitch is concerned that the resolution of expired

contracts, likely sometime next year, might result in sizable spending pressures

going forward.

Debt service consumes $6.2 billion or 9% of the fiscal 2014 budget. Debt service

is forecast to increase to $7.7 billion or 9.8% of total spending by fiscal

2017. Fitch recognizes the city's conservative budgeting of debt service expense

and views positively the city's ability to achieve sizable interest rate savings

from debt refinancing over the last several years. Fitch does not view the

reduction in the subsidy for federal tax credit bonds such as Build America

Bonds as a risk for the city, as the financial exposure is minimal.

A more notable concern is the cost of pension and other employee benefits which

total $8.3 billion and $8.9 billion, respectively, in the fiscal 2014 budget.

The city projects that rapid escalation in pension costs (from $1.5 billion in

fiscal 2002) should moderate through fiscal 2017 as market losses from the last

recession are fully smoothed in. However, Fitch believes cost pressures

associated with pensions will continue given the low funded ratios, ranging from

48% to 62% using a standard actuarial method, and large unfunded liability. The

city uses an expected investment return rate of 7%. Fitch would be concerned if

pension payments increased more than anticipated or unfunded liabilities grew

measurably.

The city projects other employee benefits will rise an additional $2.4 billion

over the next four years. About $2.2 billion of the fiscal 2014 employee benefit

costs are for other post-employment benefits (OPEB). Fiscal 2013 pension and

OPEB costs consume 14.1% of total funds.

The city's ability to achieve pension reform or to negotiate pensions with

organized labor is dependent on state legislative approval. The state

legislature has passed pension reform that introduces a new tier for new

employees featuring a higher retirement age and increased worker contributions

among other changes. The new tier will not yield immediate savings but would

provide much needed long-term relief estimated by the city at approximately $21

billion over the next 30 years.

HIGH AND RISING DEBT IS A CREDIT CONCERN

Debt metrics remain high. Fitch-calculated net tax-supported debt including

Transitional Finance Authority (TFA) future tax secured bonds grew an average

7.4% per year over the last five years and equals approximately $8,928 per

capita, and 9.1% of fiscal 2013 full value. Carrying costs for debt service,

pensions and OPEB rose to 22.3% of spending in fiscal 2013, which Fitch

considers to be on the high end of the moderate range.

The city's capital commitments are extensive, totaling $42.5 billion for fiscal

2013-2017, including $9 billion for self-supporting water and sewer projects and

$10.6 billion for education. Tax-supported issuance plans during fiscal

2013-2017 include $11.5 billion of city GOs and $13.6 billion of TFA future

tax-secured bonds.

The city and related issuers have approximately $11.1 billion in outstanding

variable-rate debt or 16% of tax-supported debt. Fitch considers this exposure

to be manageable given the hedge provided by the city's substantial short-term

assets and its sophisticated management, diversity of liquidity providers, and

strong demonstrated access to the capital markets.

ECONOMY HAS INHERENT STRENGTHS BUT NOT WITHOUT CHALLENGES

Fitch considers the city's unique economic profile, which centers on its

singular identity as an international center for numerous industries and major

tourist destination, to be a credit strength. The character of the New York City

economy has contributed to its relative employment stability during the

recession and ability to regain by March 2012 the number of private sector jobs

that existed prior to the recession. The city's tourism sector is performing

exceptionally well, attracting a record 52 million visitors in 2012, the third

record year in a row.

The city's economic profile also benefits from good wealth levels; although

census data indicates that per capita and median household income are similar to

the U.S. average, market value per capita is over $100,000. However, the

above-average individual poverty rate of 19.4% in 2011, compared to 14.3% for

the U.S., indicates significant income disparity.

The city's economy (and operating budget) is strongly linked to the financial

sector, which accounts for approximately 12% of total employment but 30% of

earnings. Financial activities employment rose only 0.7% in 2012. The

high-earning securities and commodities component of the sector showed similar

trends in 2012 after adding roughly 500 jobs or 0.3%.

Tightening financial reforms and regulation, reduced bank profits, evidence of a

shift in bonus and compensation practices away from cash, uncertain economic

recovery, and concerns in Europe are among several factors that figure to weigh

on financial sector prospects over the near-to-intermediate term.

The city's resident employment base increased by 1% in 2012, above the state's

slight 0.4% growth but behind the U.S. at 1.9%. The unemployment rate increased

to an average of 9.3% in 2012 from 9% in 2011. Recent data are more encouraging

-- the August 2013 rate of 8.7% compares favorably to the August 2012 rate of

9.4%, and the improvement was due to strong employment growth of 2.5%. However,

the most recent rate is still a full percentage point above the U.S. average.

The city anticipates a large 14.9% increase in personal income tax revenue in

fiscal 2013, largely due to recognition of capital gains prompted by federal tax

law changes. Following this increase, fiscal 2014 personal income tax revenue is

forecast to decline 10.6%, which would bring revenues to 2.7% above the fiscal

2012 level.

The city assumes continued strong visitor-related spending and moderate economic

growth will yield sales tax growth of 3.4% in fiscal 2014, after 5.2% growth in

fiscal 2013. The latter recognizes the temporary slow-down, and then

acceleration, in spending following Hurricane Sandy.

The market value of real estate grew by a healthy 4.5% in fiscal 2013 and is

projected to grow another 6.9% in fiscal 2014. Despite recent weakness in the

commercial market, growth is driven by office and commercial properties (class

4) and to a lesser extent by multi-family homes (class 2).

Residential real estate continues to struggle in the region. The most recent

release of the S&P/Case-Shiller Index of single-family home prices indicates

that New York's performance remains among the weakest of the 20 metropolitan

statistical areas (MSAs) in its survey. Given a dearth of single-family homes

within the city, however, the CoreLogic Case-Shiller condo index may be a more

relevant indication of trends. This index shows a much more moderate decline

from peak to trough, and a stronger recovery. Prices have grown by 13.2% and

7.1% for condos and single-family homes, respectively, from the trough in 2012.

Contact:

Primary Analyst

Amy Laskey

Managing Director

+1-212-908-0568

Fitch Ratings, Inc.

One State Street Plaza

New York, NY 10004

Secondary Analyst

Karen Wagner

Director

+1-212-908-230

Committee Chairperson

Jessalynn Moro

Managing Director

+1-212-908-0608

Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email:

elizabeth.fogerty@fitchratings.com.

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, CoreLogic Case-Shiller Home Price Index, and Insight.

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