Fitch Ratings has affirmed the underlying or unenhanced rating of approximately $3.1 billion outstanding New York general obligation (GO) bonds at 'AA-'. The Rating Outlook is Stable.
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.
Strong financial planning and reporting practices, including quarterly financial plan updates, allow the state to stay abreast of changing conditions. Based on downwardly revised revenue estimates in the midyear financial plan update released on Oct. 30, 2009, the state must now address a $3.2 billion budget gap for the current fiscal year, which ends on March 31, and a projected $6.8 billion shortfall for the coming fiscal year. In addition, 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. More aggressive cash management measures will be necessary in the absence of timely action to address the current-year gap, with December and March projected to be tight months for cash. The Stable Outlook reflects the expectation that the state will be able to address the budget shortfall in a manner consistent with the current rating level. The performance of volatile personal income tax revenues as well as the extent of actual financial services industry losses, and the ultimate shape that the industry takes, remain major uncertainties.
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. 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 ($6.5 billion in total, including $1.7 billion from the elimination of a middle class property tax relief rebate check program); 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 $2 billion, primarily due to reduced expectations for personal income tax ($1.1 billion) and sales tax ($409 million) receipts. With this and other modest revisions, the budget gap for the year was estimated at $2.1 billion. 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. The revised financial plan assumes a base tax decline of 11% for fiscal 2010, following a 3% decline in fiscal 2009. Given the uncertainty in the economic and revenue outlook, downside risk remains.
The governor has presented a plan to close the now $3.2 billion current-year gap that includes a combination of administrative measures and actions that require legislative and other approvals. Proposals include $1.3 billion in local aid cuts and $500 million in state agency cuts, as well as the use of Battery Park City Authority revenues ($300 million) and the sale of the video lottery terminal franchise at the Aqueduct racetrack ($200 million). About 25% of the proposals can be implemented by the governor without further approvals. A special legislative session has been called for Nov. 10, 2009 to focus on gap-closing measures.
Out-year gap estimates have been increased with the October 2009 financial plan update, reflecting both the downward revision to the revenue estimates and increases in the disbursement forecast. The fiscal 2011 shortfall is estimated at $6.8 billion, and the gap projection rises significantly in fiscal 2012 when federal stimulus monies are no longer available and again in 2013 when the temporary personal income tax increase expires. New York, which spends a large amount on Medicaid, garnered particular benefit from the increase in the federal Medicaid matching percentage included in the federal stimulus package. The executive budget proposal for fiscal 2011 is expected in mid-January 2010.
New York's economy, whose decline has lagged that of the U.S. in the current recession, is still performing considerably better than the nation. Nonfarm employment was down 2.7% in September 2009, year-over-year, compared to a 4.2% drop for the U.S., and state unemployment for the month was 8.9%, 91% of the U.S. level. The state forecasts nonfarm employment down 2.3% in 2009 and 0.5% 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. The state forecasts a personal income drop of 2.8% in 2009. Quarterly personal income was down year-over-year 4.9% and 5%, respectively, in the first two 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.
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