Fitch Ratings has assigned an 'AA-' rating to Suffolk County, New York's (the county) approximately $87.9 million public improvement serial bonds - 2008 series B (bonds) and an 'F1+' to the county's $85 million tax anticipation notes 2008 (series II) (TANs). The bonds and TANs are general obligations (GOs) of the county, payable from an unlimited ad valorem tax pledge. The bonds and TANs are scheduled to be sold via competitive sale on Oct. 28, 2008. Bond proceeds will be used to fund capital improvements of the county. Fitch has also affirmed the county's outstanding $959.5 million GO bonds at 'AA-'. The Rating Outlook is Positive.
The 'AA-' rating reflects the county's broad and diverse economic base which continues to expand, low debt levels with manageable future capital needs, and its strong financial management and sound budgetary practices which have enabled the county to successfully contain expenditure growth and accumulate reserves. The continued ability to contain expenditure growth and maintain financial strength could lead to an upgrade of the rating. Credit risks include a high fixed-cost base which will continue to pressure the county's operating position in the coming years. However, the county has prudently accumulated reserves across several governmental funds to mitigate this condition.
The 'F1+' rating on the TANs reflects the satisfactory coverage of TAN repayment and the adequate level of borrowable funds. The county issues TANs at this time every year to offset deficiencies in property tax collections. While the repayment structure does not require a set-aside, a separate restricted bank account will be established into which delinquent tax collections for such years will be deposited prior to the September 2009 repayment. The 2009 projections of delinquent tax receipts and accumulated balances by September across the major funds cover TAN principal at a solid 1.22 times (x), but coverage increases to a strong 2.67x when the tax stabilization reserve fund (TSRF) is included.
Encompassing the eastern two-thirds of Long Island, Suffolk County's population grew 6% since the 2000 census to an estimated 1.5 million in 2007. The county's economy benefits from its proximity to the New York City metropolitan area as well as its own broad employment base that includes higher education and health care, defense, retail, and technology, with numerous corporate and regional headquarters located in the county. The county's unemployment rate remains low at 5.3% in August 2008 and remains below the state and national levels at 5.6% and 6.1%, respectively. Income levels are slightly above those of the state but considerably above the national average. The large and diverse tax base is growing, with full valuation for fiscal 2008 showing a 1% increase from fiscal 2007. Market value is a high $207,238 per capita. The county continues to benefit from several large new development projects in the county as well as its thriving tourism sector.
Strong financial management has helped contribute to relatively stable operations despite ongoing pressure from a high social service burden. The county had a net deficit in fiscal 2007 of $47.7 million which resulted in an unreserved general fund balance of $121.6 million, which, when added to the county's $123.4 million TSRF, brings the unreserved fund balance to a favorable 11.2% of total expenditures and transfers out . For fiscal 2006, the county's unreserved fund balance on a combined basis for the general fund and TSRF was $268.6 million, or 12.7% of total expenditures and transfers out. The TSRF ended fiscal 2007 above the legislatively mandated minimum of $120 million. The county projects that for fiscal 2008, the TSRF will increase to $130.8 million providing the county with an increase in total unreserved fund balance.
The county's sales tax revenue in 2007 increased 3.12% over actual 2006 and was slightly above budget for the year. Another two-year extension of the sales tax was approved by the New York State Legislature. The county's 2008 adopted budget represents a modest 1.6% increase over the adopted 2007 budget. In its 2008 adopted budget, the county projected sales tax revenue to grow at 2.25%, and while the county reported growth of 3.8% year-over-year for the first quarter 2008, collections year to date are up less than anticipated at 1.38%. As a result, the county has lowered its growth estimate to 1% and have begun to take the additional cost saving measures to address a potential shortfall of sales tax revenue. In addition, the county has successfully closed on the sale of its HMO, generating the $18 million anticipated as revenue in its 2008 budget as well as additional annual revenues of $3.5 million for the life of the contract.
In early 2008, the county projected a substantial shortfall of approximately $130 million for fiscal year 2009 and enacted a county mitigation plan to address the shortfall. Many measures have been implemented to close approximately $125 million of the projected gap and include the elimination of vacant positions, an increase of mortgage recording fees as allowed by the state, as well as an increase in other county fees, the suspension of county pay-go and other cost saving measures. In addition, the county securitized a portion of its tobacco settlement receipts received under the Master Settlement Agreement through the Suffolk Tobacco Asset Securitization Corporation, using the proceeds to defease approximately $185 million in outstanding general obligation bonds of the county over the next five years. An Early Retirement Incentive program saw participation by 186 employees.
Debt ratios are low and should remain so given the county's growing tax base, manageable capital needs, and rapid principal amortization. Overall net debt is $3,077 per capita and 1.5% of market value. The county's three-year proposed capital improvement program (CIP) 2009-2011 totals a manageable $479.8 million, lower by approximately $90 million from the county's prior year CIP. The county has completed its actuarial study to determine its long-term liability for other post employment benefits (OPEB). The unfunded actuarial accrued liability is $3.9 billion and county officials reported in its 2007 audited financial statements an ARC in the amount of $386.7 million in order to be compliant and on schedule with Governmental Accounting Standards Board Statement 45. The county expects to fund its liability on a pay-go basis. Its net OPEB obligation is estimated at $303.93 million.
Fitch issued an exposure draft on July 31, 2008 proposing a recalibration of tax-supported and water/sewer revenue bond ratings which, if adopted, may result in an upward revision of this rating (see Fitch research 'Exposure Draft: Reassessment of the Municipal Ratings Framework'.) At this time, Fitch is deferring its final determination on municipal recalibration. Fitch will continue to monitor market and credit conditions, and plans to revisit the recalibration in the first quarter of 2009.
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