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