NEW YORK, Nov 12, 2010 (BUSINESS WIRE) -- Fitch Ratings assigns an 'AA' rating to the following New York Local Government Assistance Corporation (LGAC) bonds: --$202,550,000 series 2010B refunding bonds (subordinate lien).
The bonds are being issued for refunding purposes.
In addition, Fitch affirms the 'AA' rating on approximately $3.4 billion of outstanding LGAC senior and subordinate lien bonds, including the underlying rating on the series 2003A-4V bonds for which liquidity is being substituted and insurance removed.
Fitch does not make a rating distinction between the senior and subordinate liens due to the strong coverage and impoundment provisions.
The Rating Outlook is Stable.
RATING RATIONALE: --The designated source of payment, a portion of the state sales tax, is broad-based and provides generous coverage of debt service.
--Although bond payments require annual legislative appropriation, there are strong protective provisions for insufficient funding and non-appropriation.
Fitch believes that these features effectively eliminate the risk of non-appropriation.
--The state's economy is broad, with substantial wealth and resources, although the health of the state's economy and finances is closely linked to the cyclical financial services industry.
--Strong financial planning and reporting practices, including quarterly financial plan updates, allow the state to stay abreast of changing conditions.
This credit strength is offset by the state's historical tendency to rely on nonrecurring measures rather than sustainable budget solutions to address revenue weakening in downturns.
--New York's debt burden is above average but still in the moderate range, and pensions are well funded.
KEY RATING DRIVERS: --Changes in New York State's general obligation (GO) rating, to which this rating is linked.
--The state's GO rating will be driven by its continued ability to address budget shortfalls and protect its cash position.
---Further driving the state's rating would be any meaningful change to the shape of the financial services industry, which would have significant implications for the state's economy and finances.
SECURITY: LGAC's bonds are general obligations of the corporation, payable, subject to annual state legislative appropriation, from the yield of one cent of the four-cent state sales and use tax required by statute to be deposited in the local government assistance tax fund.
CREDIT SUMMARY: The strength of the state's incentive to appropriate for the LGAC bonds results in a rating equal to that assigned to New York's GO debt despite the appropriation requirement for payment of debt service. In the event of non-appropriation, the state would be unable to receive revenues held by the LGAC tax fund, which receives one cent of the state's sales tax and contributes more than $2 billion to the state general fund. Security strengths include the broad sales tax base, the consistently high level of coverage (about 6.3 times (x) maximum annual debt service based on fiscal 2010 revenues), and the structural protections in place. Fitch does not make a rating distinction between the senior and subordinate liens due to the strong impoundment provisions and coverage.
LGAC was created in 1990 as a means of financing $4.7 billion of the state's accrued general fund deficit, replacing the annual spring borrowing for local aid payments. The entire $4.7 billion authorization has been issued and additional debt can only be issued for refunding purposes.
New York's 'AA' GO rating is based on the state's substantial wealth and resources and broad economy, and also recognizes concerns regarding the outsized role that the financial services industry plays in the state's economy and revenue system. State net tax-supported debt levels have been relatively stable as a percentage of personal income and are expected to remain above average but still in the moderate range. Pensions are well funded.
The state's financial position has been strained. Revenue estimates for fiscal 2010, which ended on March 31, were revised downward repeatedly over the course of the year, primarily reflecting reduced expectations for the personal income tax. Despite gap-closing measures taken, fiscal 2010 ended with a deficit of $1.65 billion that was carried over to fiscal 2011. The budget for fiscal 2011 was not finalized until early August, more than four months into the fiscal year, although the debt service appropriation bill was passed before the start of the fiscal year. A fiscal 2011 gap of about $9.2 billion including the carried-over fiscal 2010 deficit ($8.5 billion after factoring in budget measures taken in December 2009) was addressed through spending control, particularly in the area of local aid, temporary and permanent revenue actions, including a suspension of the sales tax exemption for clothing and a cigarette tax increase to $4.35 per pack, and limited one-time measures. Deficit financing was not part of the gap-closing plan; however, the budget includes a substantial amount of federal stimulus funds. New York, which spends a larger than average amount on Medicaid, garners particular benefit from the increase in the federal Medicaid matching percentage included in the federal stimulus package.
In contrast to prior downturns, recovery is expected to be slow, and the state is projected to confront significant outyear budget gaps as federal stimulus and temporary tax increase monies roll off. Earlier this month, the state reduced its revenue forecast and increased expenditure expectations. The current fiscal year (which ends on March 31, 2011) is now reported to have a $315 million shortfall to be addressed. The fiscal 2012 shortfall estimate has increased to $9 billion from $8.2 billion, with the large gap reflecting the phase-out of federal stimulus monies. The gap forecast for fiscal 2013 is now $14.6 billion, with the expiration of both stimulus funds and the temporary personal income tax rate increase. Fitch believes that downside risk to the forecast remains.
With steep revenue declines, the state's cash position has been strained. The state has taken proactive measures to ensure cash adequacy, and continued focus on cash management measures will be necessary. The LGAC bonds are protected from the cash flow issues by the flow of funds.
New York's employment decline in the recession was less severe than that of the nation. Nonfarm employment did not start to fall, year-over-year, until November 2008 and was down 2.7% in 2009 compared to a 4.3% drop for the U.S. In September 2010, jobs in New York were flat to the prior year while national figures were up 0.2% year-over-year. Unemployment remains below that of the nation in September 2010, at 8.3%, 86% of the U.S. level. Personal income performance has been meaningfully weaker than that of the nation, down 3.1% in 2009, almost double the national loss and the fourth worst of the states. The state's personal income per capita was the sixth highest among the states in 2009, at 117% of the U.S. average.
New York's net tax-supported debt is above average but still in the moderate range at 5.6% of personal income. Most of New York's debt has been issued by state public authorities and secured by appropriations; only about 7% is GO.
While this results in a diffuse debt structure, there is strong centralization and oversight in the budget division, and approval by the public authorities control board is required for many of these bond issues.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in the report 'Tax-Supported Rating Criteria', this action was additionally informed by information from IHS Global Insight.
Applicable Criteria and Related Research: --'Tax-Supported Rating Criteria', dated Aug. 16, 2010; --'U.S. State Government Tax-Supported Rating Criteria', dated Oct. 8, 2010.
For information on Build America Bonds, visit 'www.fitchratings.com/BABs'.
Applicable Criteria and Related Research: Tax-Supported Rating Criteria http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605 U.S. State Government Tax-Supported Rating Criteria http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564546 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS.
SOURCE: Fitch Ratings CONTACT: Fitch, Inc. Primary Analyst Laura Porter, +1-212-908-0575 Managing Director One State Street Plaza New York, NY 10004 or Secondary Analyst Douglas Offerman, +1-212-908-0889 Senior Director or Committee Chairperson Ken Weinstein, +1-212-908-0571 Senior Director or Media Relations Cindy Stoller, +1-212-908-0526 email@example.com Copyright Business Wire 2010 -0- KEYWORD: United States
New York INDUSTRY KEYWORD: Professional Services
Finance SUBJECT CODE: Bond/Stock Rating