Fitch Ratings assigns an 'AA-' rating to approximately $650 million Dormitory Authority of the State of New York (DASNY) state personal income tax (PIT) revenue bonds, consisting of series 2008B (Education) new money bonds and series 2008C (Education) and series 2008C (Economic Development and Housing, Federally Taxable) refunding bonds. The bonds are expected to sell through negotiation the week of November 10. Fitch also affirms the 'AA-' rating of approximately $11.7 billion outstanding PIT revenue bonds issued by New York state agencies. The Rating Outlook is Stable.
Underlying the long-term 'AA-' rating on the PIT bonds is the importance of the PIT to state finances (about 60% of tax receipts), the ample portion of PIT set aside for debt service, the trapping of funds if appropriation is not made, and the 2 times (x) additional bonds test (ABT). Due to these strengths, the rating on PIT bonds is equal to that assigned to New York's general obligation (GO) debt.
Although payment of debt service on PIT bonds is subject to appropriation, each month an amount equal to 25% of estimated available PIT revenue (i.e., receipts after refunds) is deposited into the revenue bond tax fund from the withholding portion of the tax. After retention of 125% of financing agreement payments for PIT bonds due in the succeeding month, excess moneys are transferred to the state's general fund. Should amounts in the revenue bond tax fund be insufficient, the state comptroller is required to transfer from the general fund without the need for further appropriation. If no appropriation is made, deposits to the revenue bond tax fund are trapped and cannot be used (except for GO debt, if necessary), depriving the state of the moneys in excess of debt service.
PIT revenue available for debt service, as defined in statute, rose from $30.6 billion in fiscal 2007 to $36.6 billion in fiscal 2008. This reflects legislative action that, effective April 1, 2007, eliminated the prior deduction of deposits to the school tax relief fund in the definition of available PIT receipts for bond purposes. This action was taken in conjunction with an expansion of the state property tax relief program. The change increased the amount of PIT receipts flowing to the revenue bond tax fund, out of which debt service is paid and based on which the ABT is calculated. Based on the midyear update to the state's financial plan, which was released on Oct. 28, 2008, fiscal 2009 revenues are projected at $36.9 billion, falling to $35.5 billion in fiscal 2010. The midyear update substantially reduced PIT revenue forecasts for all years of the financial plan.
For additional parity bonds to be issued, historical revenue bond tax fund receipts must cover future maximum annual debt service (MADS) on all PIT bonds by at least 2x. MADS coverage under this test is now about 8.5x. PIT bonds are the primary financing vehicle for the state and substantial additional issuance is expected in the coming years.
New York's 'AA-' GO rating reflects the state's substantial wealth and resources and broad economy, recognizing concerns, now heightened, 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.
About 20% of state tax revenue comes from the financial services sector and, as would be expected, the deteriorating economic and financial environment has been particularly troublesome for New York. Although the state consistently has taken proactive positive steps to address projected budget gaps over the course of fiscal 2009, revenue forecasts have been reduced steeply, most recently in the midyear update to the financial plan. In the update the state lowered expectations for all major revenue sources, with particularly large revisions to expectations for PIT and business tax revenues. The state is now forecasting 45,000 financial sector layoffs and financial sector bonus declines of 43% in fiscal 2009, which ends March 31, and 21% in fiscal 2010. The base tax growth projection is -1.3% in fiscal 2009 and -1.1% in fiscal 2010, following growth of 6% in fiscal 2008 and almost 13% in fiscal 2007.
Largely due to the revenue forecast revisions, in the midyear update the state identified a $1.5 billion budget shortfall for fiscal 2009 and almost doubled the fiscal 2010 gap estimate as compared to the July first quarter update. The new fiscal 2010 gap estimate of $12.5 billion is high by any standard, although it assumes state operating funds budget growth of 9.1% based on program expansions and restorations in current law that are unlikely to be implemented. The fiscal 2009 state operating funds budget is 4.3% above the prior year.
The governor has called a special legislative session for November 18 with the goal of achieving $2 billion in recurring savings to close the fiscal 2009 gap and begin to address the fiscal 2010 problem. This follows significant savings measures already taken this year, including through executive action and an August special session. The governor also has announced plans for an early release of the fiscal 2010 executive budget in mid-December. Fitch will continue to monitor the state's efforts to achieve sustainable solutions to the difficult budget challenges as well as the economic and revenue trends for the state.
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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