Fitch Ratings has assigned an 'AA' rating to the following Empire State Development Corporation (ESDC) state personal income tax (PIT) revenue bonds (general purpose):
--$594 million series 2011A;
--$162 million series 2011B (federally taxable).
The bonds are expected to sell via competitive bid on Dec. 13, 2011. Par amounts are subject to change.
In addition, Fitch affirms the 'AA' rating on $23.4 billion in outstanding PIT bonds issued by various state agencies.
The Rating Outlook is Positive.
SECURITY
The bonds are secured by financing agreement payments to be made by the State of New York, subject to legislative appropriation. Payments are derived from 25% of the state's PIT receipts.
KEY RATING DRIVERS
STRONG STRUCTURE ELIMINATES RISK OF NON-APPROPRIATION: Bond payments require annual state legislative appropriation; however, in the event of non-appropriation the state would be unable to receive PIT revenue deposited in the revenue bond tax fund, up to the greater of 25% of annual PIT receipts or $6 billion. Fitch believes that this structural feature effectively eliminates the risk of non-appropriation.
PIT IS THE STATE'S MAJOR REVENUE SOURCE: The PIT makes up about 60% of state tax receipts historically, and the additional bonds test is adequate to offset volatility in the revenue stream.
GENERAL CREDIT QUALITY OF NEW YORK STATE: Due to the strengths noted above, the rating on the PIT bonds is equal to that assigned by Fitch to New York's GO debt. New York's 'AA' GO rating reflects a wealthy economy linked to financial services, the state's moderate debt burden and well-funded pensions, and strong financial planning and reporting practices. The Positive Outlook is based on actions in recent budgets to identify sustainable solutions to significant budgetary challenges, a notable change from the historical tendency to rely on nonrecurring measures to address weakening in the state's volatile revenue system during downturns.
WHAT COULD TRIGGER A RATING ACTION
Changes in New York State's GO rating, to which this rating is linked.
CREDIT PROFILE
Underlying the 'AA' rating on the PIT bonds is the importance of the PIT to state finances (historically about 60% of tax receipts), the set-aside of PIT revenues 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 GO debt despite the appropriation requirement.
The PIT revenue stream responds quickly to changing economic conditions. A temporary rate increase included in the state's fiscal 2010 enacted budget bolstered the PIT revenue stream; however, the fiscal 2010 revenue forecast was reduced repeatedly and PIT receipts for the year declined 5.7% from fiscal 2009 levels. Although fiscal 2011 revenues were below budget expectations, they rose 4.2% over the prior year. Recent performance has been solid, although in the midyear update to its financial plan released on Nov. 14 the state reduced expectations for the current and coming fiscal years. The state now forecasts fiscal 2012 PIT receipts up 7.4%, year over year. Positively, debt service coverage remained strong throughout the downturn.
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 monies 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 monies in excess of debt service.
The state repeatedly lowered the forecast for PIT revenues over the course of fiscal 2009, and revenues came in at $36.8 billion, basically flat to fiscal 2008. Even with the temporary PIT rate increase, which established two new brackets and a top rate of 8.97% as compared to the prior 6.85%, fiscal 2010 revenues fell to $34.8 billion, a 5.7% decline from fiscal 2009, reflecting a large decline in state personal income. Although the state's revenue forecast was reduced over the course of the year, fiscal year 2011 revenues rose 4.2%, to $36.2 billion. The new tax rates are in effect for tax years 2009 through 2011 and have a significant positive effect on state revenues through fiscal 2012.
The PIT revenue stream has shown strength in the current fiscal year through October, with 3% growth in personal income withholding revenue and particular strength in personal income tax estimated payments (largely related to settlement of 2010 liabilities). However, the state's outlook has weakened. The current forecast, reduced earlier this month in the midyear financial plan update, assumes PIT receipt growth of 7.4% in fiscal 2012, which ends on March 31. Fitch believes that given the economic sensitivity of the state's revenues and the uncertainty in the economic environment there is clear downside risk to the forecast, although debt service coverage continued to be substantial even with deterioration in revenue performance in the recession and Fitch expects it to remain so.
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 about 4.3x after this sale. PIT bonds are the primary financing vehicle for the state and substantial additional issuance is expected in the coming years. The current state financial plan assumes that there will be $28 billion of PIT bonds outstanding by fiscal 2015, with coverage of 3.7x.
For more information on the state's general credit, see Fitch's press release 'Fitch Rates New York State's $317MM GO Bonds 'AA'; Outlook Positive' dated Nov. 30, 2011, available on the Fitch web site at 'www.fitchratings.com'.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's 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' (Aug. 15, 2011);
--'U.S. State Government Tax-Supported Rating Criteria' (Aug. 15, 2011).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898
U.S. State Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648897
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