Fitch Rates Nassau County, NY's TANs 'F1'

Fitch Ratings has assigned an 'F1' rating to the following Nassau County, NY (the county) notes:

--$260 million tax anticipation notes (TANs), comprised of $20 million series A, $170 million series B, and $70 million series C.

The notes are expected to be sold through negotiation on Dec. 6 and are being issued in anticipation of property tax receipts to be received in 2013.

In addition, Fitch affirms the following ratings:

--$1.4 billion in outstanding general obligation (GO) bonds at 'A+';

--$259 million in outstanding Nassau Health Care Corporation (NCHCC) county guaranteed bonds at 'A+';

--$13.1 million in outstanding Nassau Regional Off-Track Betting Corporation (NROTBC) revenue bonds series 2005 at 'A';

--$34 million in outstanding notes at 'F1'.

The Rating Outlook for all long-term debt is Negative.

SECURITY

The notes and outstanding series 2012 GO bonds are secured by the county's faith and credit and taxing power, subject to a 2011 state statute limiting property tax increases to the lesser of 2% or an inflation factor (tax cap law). This limit can be overridden by a 60% vote of the county legislature.

The NCHCC bonds are supported by the unconditional and absolute guarantee of the county.

The NROTBC bonds are supported by the county's agreement not to adopt a budget without including an appropriation for payment of loans that equal debt service on the bonds. Under a support agreement between the county and the NROTBC, the county commits to transfer funds to pay debt service to the trustee not later than 15 days prior to any debt service payment; these loans will be repaid promptly by NROTBC.

KEY RATING DRIVERS

LIMITED FINANCIAL FLEXIBILITY: The county's lack of financial flexibility is evidenced by high dependence on economically sensitive sales tax revenue, consistent use of non-recurring measures to close budget gaps, depletion of reserves, and long-term labor contracts.

TAX REFUND LIABILITY: Fitch views positively management's efforts to reduce the county's liability for tax certificates to its underlying jurisdictions. If upheld on appeal, this change should reduce spending and debt needs. The county remains responsible for sizable liabilities through 2014, although the inability to continue its historical practice of using bond proceeds to fund tax refunds places additional pressure on cost cutting.

FINANCIAL OVERSIGHT: Since the Nassau County Interim Finance Authority (NIFA) imposed a control period in January 2011, decision-making is somewhat more cumbersome than in prior periods, although Fitch believes NIFA's oversight also provides some benefits.

STRONG ECONOMIC INDICATORS: The county benefits from a broad and wealthy economic base with high wealth levels.

MODERATE DEBT BURDEN: The sizable and wealthy tax base results in a manageable debt burden with above average amortization. Capital needs are moderate.

SOUND CASH FLOW COVERAGE: Projected coverage by revenues expected to be received by the 2013 repayment dates and significant levels of borrowable funds provide for strong coverage.

RELIANCE ON SHORT-TERM BORROWING: This year's cash flow borrowing is an increase of $20 million over last year due to clean-up costs related to Hurricane Sandy. Market access is extremely important given the county's reliance on additional borrowing for repayment of outstanding cash flow notes.

WHAT COULD TRIGGER A RATING CHANGE

CONTINUED COST-CUTTING MEASURES ESSENTIAL: Management's ability to continue to reduce costs, especially labor, is essential to near-term budget balance and rating stability.

INABILITY TO REDUCE DEFICIT: The county's inability to materially offset the 2011 deficit via a combination of cost reductions and positive 2012 results would likely result in a downgrade.

TAX CERT LITIGATION: An inability by the county to produce a viable plan to cover increased operating expenses in the event tax cert litigation is settled unfavorably will likely cause downward rating pressure.

WEAK INTERGOVERNMENTAL RELATIONSHIPS: Absent improvement in the county administration's interactions with either its legislative body or NIFA, Fitch believes the ability to implement programs to improve fiscal stability will continue to be impaired.

CREDIT PROFILE

With a population of approximately 1.4 million people, the county is located on Long Island, approximately 15 miles east of Manhattan.

CONSTRAINED FINANCIAL OPERATIONS

Financial margins have been slim for many years but have narrowed recently, even with consistent moderate use of non-recurring measures. The drops in reserves are due in part to aggressive budgeting, including historical overestimation of sales tax revenue which makes up 38% of major tax-supported fund revenue. On the positive side, sales tax revenue was on budget in 2011 (the county's fiscal year coincides with a calendar year).

The county ended 2011 with a budgetary deficit of $50.4 million in its primary operating funds. The deficit is comprised of a $53.6 million deficit in the general fund, offset slightly by a $3.2 million surplus in the police district fund. The deficit resulted primarily from an unbudgeted $43.1 million expense incurred for tax cert refunds.

The 2011 shortfalls were primarily from the state's inaction on red light camera expansion and lower than budgeted fees on existing red light cameras ($33.8 million) and reduced state aid ($38.5 million). The higher expenses and lower revenues were partially offset by $70.3 million of budgeted contingencies. Positively, the structural deficit related to the primary operating funds was reduced for the second consecutive year from $137.6 million in 2010 to $127.6 million in 2011, a 7.3% improvement.

For 2011 on an audited GAAP-basis the county recorded an operating deficit after transfers of $85.3 million. The operating funds had a combined balance of $83.9 million or 3.5% of spending. The unrestricted fund balance (sum of committed, assigned and unassigned under GASB 54) totaled a negative $46.7 million or a negative 1.7% of combined spending.

Weaker financial position in 2011 was not unexpected given the expectation of an ability to issue tax certificate bonds. This forced the county to make additional spending cuts which should result in reduced budget deficits and improved financial margins in the near-term.

COUNTY PROJECTS CLOSE OF 2012 BUDGET GAP

The county's adopted 2012 budget for its major tax supported funds totals $2.8 billion. The 2012 budget closed an identified $310 million gap and assumed $150 million in labor savings through a combination of layoffs, restructuring of operations, and labor concessions. Headcount has been reduced by 452 positions since the end of 2011. Among the restructurings in the budget was the mid-year closing of two of the county's eight police precincts. The county legislature approved the closing of these two precincts and an additional two, which the county estimates will yield $20 million in annual savings. The county also entered into a public-private partnership for bus transportation that management reports will save $33 million annually.

The county now reports monthly, rather than quarterly, on its financial position and actual results relative to the budget. As of the most recent report, covering the period January-October 2012, spending on salaries, wages, and fees is 8.2% over budget. However, other items are ahead of budget, most notably benefits (due to health insurance costs below budget), sales tax revenue, and debt service (given low interest rates and the non-issuance in borrowing for tax certs). Through October 2012, sales tax receipts are up 5% from prior year actuals.

As of October, the county projects an $11.2 million budget gap for the year. Officials expect to fill this gap with the close out of capital projects, cancellation of health and human services contracts, correctional center overtime management, and savings on long-term disability retirements for correction officers. If these corrective actions come to fruition, the county projects a $9.2 million budget surplus. This result would do little to reduce the accumulated unrestricted deficit from 2011 and may result in downgrade rating action.

2013 BUDGET AND MULTI-YEAR FINANCIAL PLAN

The county legislature adopted the county executive's proposed 2013 budget on Nov. 20, 2012. The budget was balanced and includes $2.8 billion of appropriations (excluding transfers) to support the major operating funds. The budget includes sales tax growth of 3.7%, which Fitch considers reasonable given current 2012 projected receipts. NIFA approved the budget and the county's 2013 - 2016 multi-year financial plan on November 29.

The county's 2013 - 2016 multi-year financial plan projects budget gaps of $61.9 million in 2014, $99.4 million in 2015 and $114.9 million in 2016. The county plans to implement gap-closing measures to produce savings and/or generate offsetting revenues. Fitch is concerned that some of the measures are of a non-recurring nature and may not be realistic given that one or more may require state legislation, action by the county legislature, or approval from NIFA.

TAX CERT BONDS NOT APPROVED BY COUNTY LEGISLATURE

The county has passed legislation that eliminates its responsibility for making property tax refund payments (tax certs) to towns, special districts, and school districts. This legislation, effective in 2014, would significantly reduce the county's liability but was challenged by a number of the underlying jurisdictions. The county's position was upheld in the Nassau Supreme Court but the case is now at the appellate level.

The county planned - and NIFA agreed - to let the county issue approximately $305 million in tax cert bonds through 2014. However, the county legislature rejected the county's request for 2011 and 2012 and instead approved $41 million in cuts to fund the tax certs. The county continues to negotiate with its legislature, but it is unclear whether bonding for the remaining $305 million of tax certs will be accomplished. Additionally, the county did not receive approval from the state legislature to use authorized GO capacity for tax certs. Management is considering other options including structured settlements to private investors.

After 2014 the county has committed to NIFA that it will end the financing of tax certs expenses. If the above-mentioned litigation is upheld costs should decline significantly over time, as county taxes represent only about 17% of the average total tax bill. Fitch would view this change positively, as it would reduce both current expenditures and bonding needs.

NIFA REJECTS PUBLIC-PRIVATE PARTNERSHIP OF SEWER SYSTEM

NIFA has rejected the financial advisor contract for a public-private partnership for the operation of the county's sewer system. The partnership was to extend for a 50-year period in return for payments from the concessionaire. Management planned to use the bulk of the proceeds for debt retirement and a liquidity reserve. The county expects to continue to pursue NIFA's approval, without which additional gap-closing measures will be needed in 2014.

NIFA OVERSIGHT PROVIDES ADVANTAGES AS WELL AS HURDLES

In January 2011, NIFA, which had maintained an oversight role over the county since 2000, imposed a control period as required under NIFA's enabling legislation. During the control period, which will last as long as the deficit or one of several other criteria applies, NIFA has the authority to approve or reject contracts and other obligations (including debt issuance) and maintains closer control over budgeting and management practices, although day-to-day operations continue to reside with the county.

The ability to break existing contracts is beyond NIFA's control period powers. However, upon declaration of a fiscal crisis NIFA has the ability to impose a wage freeze if it determines that such freeze is necessary to maintain a balanced budget. Earlier in 2012 NIFA approved a wage freeze for the second year. The county estimates annual savings to be about $30 million, although three labor unions have filed suit to reverse the wage freeze.

Fitch believes NIFA's oversight has had some positive effects on the county's financial operations, such as instilling increased budgeting discipline and imposing the wage freeze. But NIFA's oversight also has added a layer of complexity to decision-making.

STRONG SOCIOECONOMIC CHARACTERISTICS

The county has a broad, diverse economy and well above-average economic indicators, including high income levels (per capita income in 2010 was 151% of the nation's), well below-average unemployment (6.7% for 2011), and high per capita market value ($162,000) despite recent tax base declines.

As a fully built-out county, new development has been limited, although some redevelopment is in the planning stages. The effects of the economic downturn were milder here than in some areas; employment and home price declines to date have been relatively moderate. In addition, sales tax revenue, the county's largest source of general government funding, has been relatively stable.

MODERATE DEBT LEVEL

Debt ratios are moderate despite the county's practice of bonding out tax refund payments. Such bonding constitutes about one-third of outstanding net tax-supported debt. Overall debt per capita is above average at $3,805 while debt to market value is below average at about 2.3%. However, these statistics are likely somewhat understated as they exclude debt issued by school districts. The county's direct debt (including debt issued by the NIFA) amortizes rapidly at 69% in ten years.

WELL-FUNDED STATE PENSION PLANS

The county participates in New York State pension funds which are well-funded. Payments now make up a relatively small share of the operating budget (4.2% of budgeted 2012 major fund spending) but are expected to increase, even with the ability granted by the state to amortize most of the increase in annual pension payments over 10 years. This amortization option, which the county has taken, provides some near-term budget relief but will make future year budgeting for these payments more challenging. County management does not anticipate that recent state legislation to reduce long-term pension liabilities will have much if any near- or medium-term impact on the county's required payments.

SOUND NOTE REPAYMENT COVERAGE BUT CONCERNS ABOUT RELIANCE ON PROCEEDS

The county's cash flows provide coverage for cash flow notes with funds for their repayment fully set aside comfortably in advance of maturity. The series 2012 TANs (with the exception of $20 million) mature at the end of September ($170 million) and October ($70 million) 2013. Coverage on the repayments is sound at 2.2 times (x) in September and 2.1x in October. With consideration of borrowable balances in non-major funds, coverage increases to 2.7x and 3.2x in September and October, respectively.

Revenue anticipation notes ($220 million) issued in June and $20 million of the current TAN issue are due in March and April 2013, with projected coverage of about 3.7x and 4.3x when borrowable resources are considered. Total cash flow borrowing in 2012 is $20 million more than last year as a result of Hurricane Sandy clean-up costs. The county expects to receive at least 87.5% reimbursement from a combination of FEMA, state and federal funds, but hopes for 100% reimbursement. The county received 100% reimbursement for the 2011 Irene storm. Fitch remains concerned about the county's elevated dependence on short-term borrowing, particularly as the borrowings overlap each other and cross fiscal years. The current borrowing equals 20% of projected disbursements (net of note repayments) for 2012 or 2013.

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 Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, and National Association of Realtors.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

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