NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'A+' rating to the following Suffolk County, NY (the county) bonds:
--$64,030,000 general obligation (LTGO) public improvement serial bonds-2012 series B.
The bonds are scheduled to be sold via competitive sale on October 18. Proceeds will be used to finance various capital improvement projects.
In addition, Fitch affirms the following ratings:
--Approximately $1.4 billion outstanding general obligation public improvement bonds (limited and unlimited) at 'A+';
--$105,000,000 outstanding tax anticipation notes (TANS) at 'F1'.
The Rating Outlook for all bonds is Negative.
SECURITY
The LTGO bonds are secured by the county's full faith and credit and ad valorem tax, subject to the 2011 state statute limiting property tax increases to the lesser of 2% or an inflation factor (the tax cap law). This limit can be overridden annually by a 60% vote of the county legislature.
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.
KEY RATING DRIVERS
STRUCTURAL IMBALANCE DIMINISHES FINANCIAL FLEXIBILITY: Persistent operating deficits due primarily to over-estimation of sales tax revenues, the use of non-recurring revenues and increased fixed costs have led to significantly reduced reserve levels and structural imbalance resulting in the county declaring a fiscal emergency in March 2012.
INCREASED CASH FLOW BORROWING: Limited financial flexibility and a narrowing cash position have increased the county's reliance on short-term cash flow borrowings. Fitch expects this trend of reliance on cash flow borrowing to continue for the foreseeable future as indicated by the county's forecast.
AGGRESSIVE SALES TAX ESTIMATES: Historically, the county's projections of sales tax, the largest general fund revenue component, have been aggressive leaving the county more vulnerable to shortfalls in this economically sensitive revenue source.
BUDGET MITIGATION MEASURES ADOPTED: County management has prudently implemented a number of cost saving and revenue generating initiatives over the last several months. These initiatives, combined with a pending sale of the county nursing home and the expected ratification of a new police contract, show the willingness and ability of management to provide the initial framework to address the county's significant budget deficit.
STRONG SOCIOECONOMIC FUNDAMENTALS: The county maintains a diverse economy and benefits from a wealthy tax base and population.
MANAGEABLE DEBT BURDEN: The sizeable tax base results in a manageable debt burden with above average amortization that Fitch believes can comfortably accommodate anticipated moderate capital needs.
TAX LEVY LIMIT CREDIT NEUTRAL: The 2012 series B bonds are rated on parity with outstanding GO debt since the county may exceed the tax cap in any one year with 60% approval of the county legislature.
WHAT COULD TRIGGER A RATING ACTION
INABILITY TO ACHIEVE LONG-TERM STRUCTURAL BALANCE: The county's inability to fully execute its budget mitigation plan and restore long-term structural balance will be challenging. Lack of measurable progress in the medium term would likely result in a rating downgrade.
CREDIT PROFILE
PERSISTENT STRUCTURAL IMBALANCE REDUCES FINANCIAL FLEXIBILITY
The county's financial condition has deteriorated significantly over the last few years, due in large part to the consistent overestimation of sales tax revenue, which comprises 47% of major tax-supported fund revenue, use of non-recurring revenue items, and high and increasing fixed costs.
For 2011 (year-end Dec. 31) the county recorded a GAAP operating deficit of $140 million (5.4% of spending) of the consolidated general and police district funds ($125.3 million deficit in the general fund). The unrestricted (the sum of committed, assigned, and unassigned under GASB 54) general fund balance totalled a negative $265.2 million ($318.3 million on a combined basis), or a large negative 12.3% of spending.
Further reducing financial flexibility and to help close budget gaps, the county continued to draw down its Tax Stabilization Reserve Fund (TSRF) in 2011 by $40.1 million, reducing the balance to $48.9 million from a high of $127 million in 2008. Additionally, the county has increased its reliance on capital market access for liquidity needs to relieve cash flow pressures, a trend Fitch considers troubling and highlights the county's fiscal stress.
CASH FLOW PRESSURE LEADS TO INCREASED SHORT-TERM BORROWING
The county has historically issued annual cash flow notes in anticipation of receipt of delinquent and current property taxes (DTANs and TANs, respectively). However, the amount of the borrowings has increased over the last few years from $310 million in 2006 to $420 million in 2011(which would have been $520 million but $100 million was postponed to January 2012 from December 2011). Reflecting a strained cash position and limited financial flexibility, in May of 2012, the county issued $85 million of revenue anticipation notes (RANs) for the first time in over two decades.
The county anticipates issuing $400 million of TANs in December 2012, and $70 million of RANS in May 2013. Cash flow borrowing for 2012 will total $690 million including the January TAN issuance. Adjusting the January issuance cash flow borrowing into 2011, 2012 borrowing would still be 13% higher than in 2011. Fitch remains concerned about the county's increased dependence on short-term borrowing, which represents a high 27% of estimated 2012 expenditures, and expects the county's reliance on cash flow borrowings to continue for the foreseeable future.
BUDGET MITIGATION PLAN BEING IMPLEMENTED IN STAGES
Fitch believes the progress to date in reducing the budget deficit demonstrates an improvement in county elected officials' willingness to address fiscal problems cooperatively. However, Fitch remains concerned that many of the measures to date, and those included in the 2013 recommended operating budget, are non-recurring and that the ability to restore structural long-term balance and improve financial flexibility will continue to be challenging.
In March 2012 an independent task force formed by the county reported an estimated budget deficit for 2011 through 2013 of $530 million. The county budget review office has revised that number down to $428 million to reflect current data and trends, which were not available to the task force at the time of its findings.
County management has implemented a staged Budget Mitigation Plan (the plan) to address the deficit which includes a number of cost saving strategies and revenue generating initiatives.
Under stage 1 of the plan the county is projecting a combined savings of $117.2 million for 2012 and 2013. By far the most significant measure is the amortization of $60.7 million of the 2013 pension payment, which would provide relief that year but increase costs in later years. Other sizeable measures, which Fitch considers to be more structural in nature, include: $25 million in savings from the embargo of department funds, and the doubling of red light cameras, which was approved by the state, with estimated revenues of $12 million in 2013. Additionally, since Jan. 2012, the county has 658 fewer employees with 373 employees off the payroll since June 30. Year-to-date overtime is down approximately $9 million from the same period last year as a result of new policies and operational efficiencies.
Stage 2 mitigation measures include the settlement of the PBA contract, sale of the county-owned Foley Nursing Facility, and union health care concessions.
The county has negotiated an 8-year contract (prior contract expired Dec. 31, 2010) with the police union, which was approved by the county legislature on Oct. 9, 2012, and is expected to be ratified by the union in October. The contract is the first in over two decades that was not settled through binding arbitration. Terms of the contract include no retroactive pay for 2011 and 2012 and no percent increases until June 1, 2013; saving the county an estimated $43.7 million in retroactive salaries in 2013. Pay increases from mid-2013 through 2018 average about 3.5% annually, roughly the same as the last arbitration award. However, the new contract appears to provide the county with a more affordable police force in future years through the freezing of starting salaries and the entire 2013 -2018 pay scale for new officers, requiring additional steps to reach the top pay grade, and requiring new officers to contribute 15% to health care costs. Additionally, all new county employees will be required to contribute 15% to their health care costs and the county will save about $17 million from a new pharmaceutical agreement.
The county has reached an agreement with a private operator to sell the county-owned, financially pressured Foley Nursing Facility. The sale was approved by the legislature and it is expected to close on Dec. 31, 2012. The sale will generate one-time net proceeds of $12.3 million with the county estimating recurring annual budgetary savings of more than $8 million. The county anticipates that the savings realized in 2013 will offset a projected operating loss of $10.1 million in 2012 in the Foley Nursing Facility fund. It is estimated that stage 2 measures will result in additional cost savings of $73 million. The remaining shortfall of approximately $238 million is addressed in stage 3 included in the 2013 recommended operating budget (FY13 budget).
2013 RECOMMENDED BUDGET ADDRESSES REMAINING GAP
The county executive submitted the FY13 budget to the county legislature on September 21. The legislature must adopt or amend the FY13 budget by November 10 with the county executive having until November 21 to veto or modify the budget.
The FY13 budget is balanced and includes a 4.86% increase in operating revenues and other financing sources over the 2012 adopted budget with a modest 1% increase in spending. Sales tax revenue growth of 3.75% over estimated 2012 sales tax revenues appear reasonable. For 2012, the county is forecasting a 3.85% growth in sales tax. To date, sales tax receipts are only 3.7% above 2011 receipts but do not include the historically strong third quarter sales.
Major budget initiatives that address the remaining shortfall include a mixture of structural initiatives as well as $70 million in revenues from the sale-lease back of various county-owned facilities. The county proposes a police district property tax increase within the levy limit, providing revenue of approximately $12.4 million in 2013; continued savings of $64.1 million from 2012 staff reductions, and; the five-year financing of $35.6 million to fund the correction officer's arbitration award. The budget prudently does not contemplate the use of any additional funds from the TSRF, projecting a 2013 year-end balance of $49.2 million.
STRONG SOCIOECONOMIC INDICATORS
Suffolk County, encompassing the eastern two-thirds of Long Island, benefits from its proximity to New York City, as well as its own diverse employment base. Well above-average economic indicators include high income levels (per capita personal income in 2010 was 131% of the nations) and high per capita market value ($180,000). Unemployment rates (7.4% for 2011) have historically been below state and national levels. The 2010 U.S. Census recorded the county's population at approximately 1.5 million, an increase of 5.2% since 2000. The economy is stable and diverse and home to numerous corporate and regional headquarters.
The county's tax base continues to grow, albeit at a slower rate than in previous years. The tax base is diverse with the top 10 taxpayers comprising a low 1.36% of assessed value. Total property tax collections remain strong, averaging 98% in fiscal 2010 and 2011.
MANAGEABLE DEBT AND LONG-TERM LIABILITIES
The county's debt ratios at $3,516 per capita and 2.0% of market value are moderate, reflecting the wealthy tax base. Debt amortization is above-average with 64% retired in 10 years and debt service represents a manageable 5.2% of major fund spending.
Debt ratios should remain stable given the modestly growing tax base and manageable capital needs. In addition, to the current issue, the county plans on issuing approximately $60 million of general obligation bonds during the spring of 2013 for various capital projects. The June 2012 adopted three-year capital improvement program (CIP) for 2013 - 2015 totals $515.2 million.
The county participates in New York State's well-funded pension funds. Payments make up a moderate share of the operating budget (10.3% of budgeted 2012 general fund and police district fund spending) but are expected to increase, even with the ability granted by the state to amortize most of the increase in annual pension payments over ten years. This option, which the county has taken, provides some near-term budget relief but will make future year budgeting for these payments more challenging.
As of Dec. 31, 2011, the unfunded actuarial accrued liability for other post-employment benefits (OPEB) was $4.4 billion, or a moderate 1.6% of market value. This amount is expected to increase, as the county plans to continue to fund its OPEB liability on a pay-go basis and officials have no plans to alter benefits.
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 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, 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
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