Fitch Ratings assigns an 'AA-' rating to the following State of New York general obligation (GO) bonds:
--$211,280,000 series 2010A tax-exempt bonds;
--$51,310,000 series 2010B taxable bonds;
--$185,655,000 series 2010C federally taxable - build America bonds.
The bonds are expected to sell via competitive bid on Feb. 25, 2010.
In addition, Fitch affirms the 'AA-' rating on the following:
--$3.1 billion in outstanding New York State GO bonds.
The Rating Outlook is Stable.
RATING RATIONALE:
--New York'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, although this credit strength is offset by the state's historical reliance on nonrecurring measures rather than sustainable budget solutions to address revenue weakening in downturns. The state's current financial position is strained.
--New York's debt burden is above average but still in the moderate range.
KEY RATING DRIVERS:
--The Stable Outlook reflects the expectation that the state will continue to act to address budget shortfalls in an environment of weak revenue performance and slow expected recovery. New York is projected to face significant outyear budget gaps as federal stimulus and temporary tax increase monies roll off.
--Any meaningful change to the shape of the financial services industry would have significant implications for the state's economy and finances.
SECURITY:
Full faith and credit of the state of New York.
CREDIT SUMMARY:
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 current financial position is strained. Revenue estimates for the current fiscal year, which ends on March 31, have been revised downward repeatedly, most recently with the 21-day amendments to the executive budget proposal released on Feb. 9, 2010. The downward revisions primarily have reflected reduced expectations for the personal income tax; revenues associated with financial services sector compensation have proven particularly difficult to estimate. Medicaid spending above budget expectations has added to the state's budget pressures.
In December 2009, the governor and legislature agreed to a package of measures to close a portion of a $3.2 billion gap identified at the time of the October 2009 midyear financial plan update and planned to resolve the remaining $500 million gap as part of the fiscal 2011 budget. With subsequent forecast revisions, the fiscal 2010 shortfall to be rolled into fiscal 2011 has increased to $1.4 billion, resulting in an aggregate gap of $8.2 billion to be addressed in the fiscal 2011 budget. The executive budget proposal closes this gap primarily through recurring spending control and, to a lesser degree, revenue actions, reducing outyear gap forecasts considerably. One-time actions are limited, although nonrecurring federal stimulus funds are significant to the overall budget. Proposed spending control includes a politically challenging cut to school aid. The executive budget also incorporates a $485 million reserve for financial uncertainties.
The projected fiscal 2011 shortfall would be $4.4 billion higher if not for federal stimulus funds expected under current law. New York, which spends a larger than average amount on Medicaid, garnered particular benefit from the increase in the federal Medicaid matching percentage included in the federal stimulus package. The governor's gap-closing proposal includes a yet-to-be-approved six-month extension of extraordinary federal Medicaid (FMAP) assistance that is currently scheduled to expire on Dec. 31, 2010, for an additional benefit of $1.1 billion in each of fiscals 2011 and 2012. The fiscal 2012 shortfall is estimated at $5.4 billion, reflecting the phase-out of federal stimulus monies. The gap rises to $10.7 billion in fiscal 2013 with the expiration of both stimulus funds and a temporary personal income tax increase.
As revenues have underperformed estimates this year, the state has taken proactive measures to ensure cash adequacy, moving scheduled payments to later in the year while still meeting statutory payment deadlines and, in December 2009, delaying $750 million in aid payments beyond their statutory payment deadlines. Although these monies were fully repaid in January 2010, the action is reflective of the state's tight finances. Continued focus on cash management measures will be necessary. The state plans to roll the $1.4 billion fiscal 2010 deficit into fiscal 2011 through a delay in payment of tax refunds and various local aid payments that are not statutorily required to be made in the fiscal year ending March 31; all such delayed payments are assumed to be repaid by June 2010.
About 20% of state tax revenue has come from the financial services sector and, as would be expected, the current downturn has been particularly troublesome for New York's finances. The state took positive steps to identify and address projected budget gaps over the course of fiscal 2009 as revenue forecasts were reduced steeply and out-year gap estimates rose sharply. The enacted budget for fiscal 2010 closed gaps estimated at $2.2 billion for fiscal 2009 and $17.9 billion for fiscal 2010, with these estimates including program expansions in current law that would have resulted in spending growth of a high 12.8%. Balance was achieved through spending control; a temporary personal income tax rate increase that raised the top rate to 8.97% from 6.85% for tax years 2009 through 2011, estimated to generate $3.9 billion, as well as other revenue actions ($5.4 billion in total); $6.1 billion in federal stimulus monies; and $2 billion in other one-time resources. No deficit financing was employed.
On July 30, 2009, the state released the first quarterly update to the fiscal 2010 financial plan. Revenue estimates for fiscal 2010 were lowered by $2 billion, primarily due to reduced expectations for personal income tax ($1.1 billion) and sales tax ($409 million) receipts. In the midyear update to the plan, released on Oct. 30, 2009, revenue estimates were lowered again by about $1 billion, reflecting further reduced expectations for personal income tax revenue. In the revised third-quarter update to the financial plan, released earlier this month, the expectation for personal income tax receipts was reduced by another $1 billion as compared to the midyear update. The revised financial plan assumes a base tax decline of 10.8% for fiscal 2010, following a 3% decline in fiscal 2009, and then forecasts 3.5% base tax growth in the coming fiscal year. The performance of volatile personal income tax revenues remains a risk.
New York's economy, whose decline has lagged that of the U.S. in the current recession, is still experiencing considerably lower employment losses than the nation. Nonfarm employment was down 1.9% in December 2009, year-over-year, compared to a 3.0% drop for the U.S., and state unemployment for the month was 9.0%, 90% of the U.S. level. The state forecasts nonfarm employment down 2.9% in 2009 and 0.6% in 2010. The financial activities sector accounts for about 8% of jobs and more than 20% of earnings in the state, compared with 6% and 9% for the nation. This has made New York vulnerable to economic cyclicality, particularly given the prominence of personal income tax receipts in the state's revenue structure. The state's personal income per capita is the fourth highest among the states, at 121% of the U.S. average. Personal income performance has been meaningfully weaker than that of the nation in the downturn. The state forecasts a personal income drop of 4.0% in 2009. Quarterly personal income was down year-over-year 5.7%, 2.7%, and 2.4%, respectively, in the first three quarters of 2009, a much sharper drop than seen on the national level.
New York's net tax-supported debt is above average but still in the moderate range at 5.2% 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.
Applicable criteria available on Fitch's website at 'www.fitchratings.com' include:
--'Tax-Supported Rating Criteria' (Dec. 21, 2009);
--'U.S. State Government Tax-Supported Rating Criteria', (Dec. 28, 2009).
Considerations for Taxable/Build America Bonds Investors
The following sector credit profile is provided as background for investors new to the municipal market.
State General Obligation Bonds:
The general obligation full faith and credit pledge is the broadest security a U.S. state government can provide to the repayment of its long-term borrowing, and therefore is the best indicator of its overall credit quality. State ratings generally fall within the two highest rating categories of 'AAA' or 'AA', with a few outliers. The top tier ratings reflect states' inherent strengths: states generally have broad economic and tax base resources and all possess sovereign powers under a federal government system, with substantial, although varying, control over revenue raising and spending. Given these inherent strengths, in only a few instances have economic concentration and long-term structural decline or the inability or unwillingness to address large financial challenges led to ratings below the 'AA' category. For additional information on State ratings, see U.S. State Government Tax- Supported Rating Criteria, dated Dec. 28, 2009.
Additional information is available at 'www.fitchratings.com'.
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