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Fitch Rates Westchester County, NY's LTGO Bonds 'AAA'; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'AAA' rating to the following Westchester County, NY bonds:

--$51.19 million limited tax general obligation (LTGO) bonds, 2012 series B;
--$12.44 million LTGO bonds, 2012 series C.

The bonds are scheduled to be sold via competitive sale the week of Oct. 15. Proceeds will be used to finance various capital improvement projects.

In addition, Fitch affirms the following ratings:

--$604 million county unlimited tax general obligation (ULTGO) bonds at 'AAA';
--$220 million county LTGO bonds at 'AAA';
--$67.4 million Dormitory Authority of the State of New York (DASNY) court facilities lease revenue bonds, series 2006 A and B at 'AA+'.

The Rating Outlook is Stable.

SECURITY

The LTGO bonds are secured by the county's full faith and credit and unlimited 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 board.

The county has pledged its full faith and credit and unlimited taxing power for debt service on outstanding GO bonds issued prior to 2011. No exemption is made under the tax cap law for debt service on outstanding GO debt; however, the constitutionality of this provision has not been tested.

The DASNY lease revenue bonds are special obligations of the authority secured by basic rent payments by the county under a lease agreement; the payments are subject to appropriation.

KEY RATING DRIVERS

STRONG SOCIOECONOMIC FUNDAMENTALS: The county maintains a diverse economic base and benefits from a wealthy tax base and population.

FISCAL DISCIPLINE: Financial management has been strong historically, evidenced by conservative budgeting and a demonstrated willingness to reduce expenditures to close budget gaps. The county's 2011 fund balance draw was much smaller than expected. The 2012 budget is balanced, though it benefits from the planned amortization of a portion of the annual pension payment.

MODEST DEBT LEVELS: Debt levels are affordable given the county's wealthy tax base, and future capital needs appear manageable.

HIGH FIXED-COST BURDEN: Increased costs - including pensions and labor - are a challenge for the county as it attempts to reverse a trend of five straight years of fund balance declines. However, the current-year budget is balanced and pension plans are well funded.

LABOR PROGRESS: After years of labor strife, the county recently reached agreements with three of eight unions that included the first employee health care contributions.

TAX LEVY LIMIT: The LTGO bonds are rated on parity with outstanding ULTGO debt, since the county may exceed the tax cap in any one year with 60% approval of the governing board.

DASNY RATIONALE: The DASNY bonds are special obligations of the authority, secured by basic rent payments made by the county under a lease agreement between the county and the authority. The county payments are subject to annual appropriation.

CREDIT PROFILE

WEALTHY NEW YORK SUBURB

Westchester County, located immediately north of New York City, is one of the nation's most affluent counties. The county's wealthy tax base benefits from the strong regional economy, and high resident income levels rank well above state and national averages. While unemployment increased during the recent economic downturn, the county's July 2012 unemployment rate of 7.6% compares favorably to the regional, state and national averages.

The county has a diverse tax base that combines wealthy residential areas, several major retail developments, and numerous corporate headquarters, including IBM and Pepsi. The county's largest employers are reportedly stable, and recent growth in biotech as well as additions to the county's extensive retail base (such as the expansive Ridge Hill shopping complex) are diversifying the economic profile. Assessed valuations have been down each year since 2008 but are expected to stabilize.

IMPROVING FINANCES

Similar to all New York counties, Westchester County continues to contend with a heavy mandated cost burden, including Medicaid, health insurance, and pension payments. However, the state's assumption of Medicaid costs that exceed 3% annual growth limits the county's exposure; the phased-in state takeover of all growth in the coming years will provide additional financial benefit.

A large operating deficit of $21.4 million in 2009 brought the unreserved general fund balance down to $145 million (a still strong 8.2% of expenditures). The 2010 results showed a much smaller deficit, resulting in an unreserved general fund balance of $141 million. Improved 2010 results were keyed by a 7.2% increase in sales tax revenues and active expense management, particularly a reduction of 465 jobs with minimal backfilling.

The county budgeted a $41 million deficit in 2011, led by a 2% reduction in the tax levy. The mid-year estimated deficit was reduced to $21 million, and the county actually finished the year with a smaller $8.5 million deficit. This improvement resulted in an unrestricted fund balance (the sum of committed, assigned and unassigned per GASB 54) of $137.6 million or 7.8% of expenditures.

Social service expenses during the year were $45 million below budget due to a reduction in case loads. This gain was offset somewhat by underperformance in the sales tax, which increased by 2% - below the budgeted 3%. The county did not exercise its option to amortize approximately $18 million of its 2011 pension cost and fully funded the annual required contribution (ARC).

The county's 2012 budget is balanced with no fund balance draw. It includes a flat tax levy and assumes 2.6% growth in sales tax revenues; through August 2012, sales tax receipts are slightly below budget. The budget also includes the permitted amortization of $30 million of annual pension costs. Management reports they expect final 2012 results to be in line with the original budget. Preliminary plans for 2013 include a balanced budget and no increase in the tax levy.

LABOR PROGRESS

Labor costs continue to be significant for the county. The county is currently in negotiations with several unions, including its largest, the CSEA, which has 3,175 members (about 2/3 of all county employees) and whose contract expired at the end of 2011. CSEA members currently do not contribute to health care costs, and 2012 layoffs were in response to an assumption of no change in this position. The county has prudently accrued for several other outstanding union contracts that are expired and in arbitration.

On a positive note, the county recently settled contracts with three unions totaling over 900 employees, or about 20% of its workforce. All three agreements are retroactive to 2009, extend until 2015 and include modest wage increases. The three agreements were the county's first contracts that include employee contributions for health care, which are expected to generate significant savings for the county through the term of the contracts.

MANAGEABLE DEBT BURDEN

The county's debt levels are manageable in relation to its wealthy tax base; market value per capita is high at $162,000 despite recent market value declines. Overall debt (including cities, towns, villages and school districts) totals an above-average $4,404 per capita, but a more modest 2.7% of market value given the strong tax base. Maximum annual debt service constitutes a manageable 7% of expenditures, and debt amortization is rapid with 76% of principal retired in 10 years. The county has a thorough, charter-mandated five-year capital planning process.

WELL-FUNDED PENSIONS

The county contributes to the state's defined benefit retirement systems. Payments have been consistently increasing and the 2011 payment, less $21 million for an early retirement incentive, equaled about 4% of general fund expenditures. Management decided to pay the county's full ARC in 2011 rather than exercise an option to amortize $18 million of the payment. The county has budgeted the amortization of approximately $24 million of the $73 million 2012 ARC payment. The funding of the state's pension is strong 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 86% and 87%, respectively.

The unfunded actuarial accrued liability for other post- employment benefits (OPEB) is $2.4 billion, or 1.5% of market value. The county's OPEB ARC amount was $201 million in 2011 with the county contributing $54 million on a pay-as-you-go basis annually.

ELIMINATION OF WCHCC GUARANTEE

Fitch previously recognized as a credit positive the limitation of the county's financial exposure to the Westchester County Health Care Corporation (WCHCC; not rated by Fitch); this was accomplished by the execution in 2010 of a cooperation agreement by the county and WCHCC which limited the credit support provided by the county to the WCHCC. A subsequent restructuring of the WCHCC's outstanding debt and pay-down of commercial paper relieved the county's obligation to the center with the elimination of the county guaranty of the WCHCC's bonds.

Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

In addition to the sources of information identified in the 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, Zillow.com, National Association of Realtors, and Bond Counsel.

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

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Fitch Ratings
Primary Analyst:
Eric Friedman, +1-212-908-9181
Director
Fitch, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst:
Karen Wagner, +1-212-908-0230
Director
or
Committee Chairperson:
Steve Murray, +1-512-215-3729
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings

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