Fitch Rates New York City's $600MM GO Bonds 'AA'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a rating of 'AA' to the following New York City general obligation (GO) bonds:

--$515,000,000 tax-exempt, fiscal 2012, subseries A-1;

--$85,000,000 taxable bonds, fiscal 2012, subseries A-2.

The tax-exempt bonds will be sold by negotiation, and the taxable bonds will be sold by competitive bid on July 20. Both series of bonds are expected to close on August 9. Proceeds will be used for capital purposes and the payment of certain cost of issuance.

Fitch also affirms approximately $41.6 billion in outstanding GO bonds at 'AA'.

The Rating Outlook is Stable.

RATING RATIONALE:

--New York City's advanced, effective budget monitoring and management and conservative revenue forecasting have allowed the city to react quickly to changing conditions and consistently generate operating surpluses before discretionary transfers;

--The city has an extended history of effectively eliminating sizable out-year budget gaps, mitigating risk to the inability to maintain a rainy day reserve;

--The city has a broad economic base and a unique role as a national and international center for commerce and culture. Income levels are high;

--Key revenue streams are closely linked to the cyclical financial services industry and the real estate market;

--The city's debt levels are expected to remain high despite recent action to reduce future borrowing;

--Annual personnel costs, particularly pension contributions, are expected to consume an increasingly large share of general fund resources.

KEY RATING DRIVERS:

--Continued sound and timely budgetary actions that address out-year budget gaps;

--The ability to alleviate rising spending pressures, particularly pension and other fringe benefit costs.

SECURITY:

The bonds are general obligations of the city secured by a pledge of the city's full faith and credit, and the levy by the city of ad valorem taxes, without limit as to rate or amount, on all real property within the city subject to taxation.

CREDIT SUMMARY:

The city's credit strengths include a sound approach to budget management and proven ability to generate surplus operating results through periods of economic stress, constrained state aid, and rising spending pressures, most notably for pensions and other employee related benefits. The city is expected to close fiscal 2011 ahead of the projected balanced budget with an available surplus of $3.7 billion (calculated before discretionary transfers and subsidies).

The fiscal 2011 available surplus increased by approximately $500 million from the May forecast due to a combination of increased tax revenues and expenditure savings largely related to debt service and additional federal Medicaid participation. Prior year surpluses cannot be appropriated in future fiscal periods, but are routinely used to cover spending in the subsequent budget year by prepaying debt service and subsidies and other such actions. Prior year surpluses have ranged from $2.9 billion to $4.7 billion from fiscal years 2006 to 2010. The city charter requires the city maintain a general reserve equal to at least $100 million; the city forecasts maintenance of a $300 million general reserve (only 0.6% of the fiscal 2012 city funds budget) from fiscal years 2012 through 2015 to provide for uncontrollable expenses and revenue shortfalls.

The adopted fiscal 2012 budget totals $65.9 billion (the city funds budget, excluding federal, state, and other restricted aid is $46.5 billion). The budget closes an estimated gap which had grown to $4.5 billion from $2.4 billion in the November 2010 financial plan. The increase in the gap was attributed to $1 billion in additional agency costs (which include public safety overtime and snow removal) and a $1.2 billion reduction in local assistance funding from the state replaced with city funds. A key uncertainty in the city's credit profile is the level of future state and federal funding. State and federal funds represent 27% of the fiscal 2012 executive budget compared to 36% in fiscal 2002. The city is forecasting relatively flat state and federal funding through fiscal 2015, although downside risk remains.

To balance the fiscal 2012 budget the city prepays $3.7 billion in fiscal 2012 expenses from the operating surplus generated in fiscal 2011. In addition, the fiscal 2012 budget incorporates $1.08 billion of agency reductions - the tenth round of gap closing programs implemented since 2008, which have resulted in more than $5 billion in annually recurring savings. The fiscal 2012 budget process restored $155 million of gap closing measures, including a net increase of $61 million for the Department of Education that retains positions previously planned for elimination. Out-year budget gaps remain sizeable despite the notable reduction in spending achieved through implementation of the gap closing programs, at approximately $4.6 billion in fiscal 2013, $4.8 billion in fiscal 2014, and $4.9 billion in fiscal 2015. The city's consistently demonstrated ability and resolve to close budget gaps supports Fitch's expectation of continued rating stability.

Spending pressures are led by pension and other fringe benefit costs, which are projected to increase by $1.8 billion in fiscal 2012 from the current fiscal year plus an additional $2 billion through fiscal 2015. Pensions are adequately funded, but represent an increasingly large claim on revenues. The pension contribution of $8.4 billion for fiscal 2012 compares to $7 billion in fiscal 2011 and $1.5 billion in fiscal 2002. The financial plan includes an annual reserve of $1 billion in each of fiscal years 2012 through 2015 to address changes in actuarial methods and assumptions presently under review by the city actuary. The city consistently funds 100% of the actuarially required pension contribution.

The financial plan also incorporates relatively modest savings from pension reform beginning in fiscal 2014. The city is proposing a variety of pension reforms that it projects will save $1 billion by fiscal 2019. The city's ability to achieve pension reform, and the ability to negotiate pensions with organized labor, is dependent on state legislation. Additional non-controllable expense pressures stem from the city-funded portion of medical assistance payments (including Medicaid), which will increase by nearly $1.4 billion in fiscal 2012 to $6.2 billion and reach $6.6 billion by fiscal 2015 because of the expiration of the Federal Medical Assistance Percentages (FMAP) match.

The fiscal 2012 budget projects a 4.3% increase in total city funds revenue to $46.5 billion. The financial plan reflects a more moderate 3.1% rate of growth for fiscal years 2013 through 2015. The city's revenue assumptions are based on a forecast of key economic indicators for the New York City economy which are more conservative in nature relative to the national economic forecast. The city's primary revenue sources have generally performed well but are highly vulnerable to volatility in the financial services industry and real estate market. Non-property tax revenues, which include personal income taxes, business taxes, and sales taxes, are forecast to increase by 6.2% in fiscal 2012. The non-property tax revenue projection is based on moderate growth in withholding collections due to continued employment gains and an increase in wage rates, continued strength in equities and the commercial real estate market resulting in an increase in capital gains, reduced but still high NYSE member firm profits, and an improvement in consumer sentiment and consumption, aided by a thriving domestic and international tourism sector.

The fiscal 2012 budget projects real property tax revenues to grow by 4.5% to $17.6 billion or 38% of total city funds revenue. Real estate tax revenues generally lend stability to the city's revenue base, attributed in part to the five-year phase-in of changes in the assessed value of most properties as required under state law. The city prudently projects more modest rates of growth in the out-years of its financial forecast to account for continued housing market strain, and the potential for a rising long-term interest rate environment and continuation of tight lending standards.

Debt levels remain high. Following issuance, net tax-supported debt (including Transitional Finance Authority [TFA] future tax secured bonds) will equal approximately 14.6% of 2008 personal income, $7,763 per capita, and 8.3% of the five-year average of full value. In addition, fiscal 2012 debt service of $5.8 billion will consume 12.5% of the city funds budget, rising to $7.3 billion or 14.3% in fiscal 2015. Debt levels are expected to remain elevated, based on the amortization schedule of outstanding debt and additional tax-supported issuance plans which include $9.9 billion of city GOs and $9.9 billion of TFA future tax secured bonds through fiscal 2015. The city has repeatedly reduced the size of its capital program in recognition of the need to reduce its rising debt service payments. The 2012-2021 capital program is reduced by $4 billion or 10%, which the city estimates will save $713 million in forecasted debt service cost during the period.

Fitch considers the city's variable-rate exposure to be a manageable level. Including related entities, the city reports $10.4 billion in variable-rate exposure, which is equal to 16% of total debt outstanding. Synthetic fixed-rate debt accounts for a relatively small portion of the city's total variable-rate exposure. Short-term assets in the city's general fund, which have averaged $4.9 billion over the prior 10-year period, serve as a natural hedge against the city's floating-rate exposure. Strong access to the capital markets has enabled the city to effectively manage the need to renew or replace bank liquidity facility agreements as well as privately place index floating-rate bonds that do not require liquidity support.

The city's liability with respect to retiree health care benefits (other post-employment benefit; OPEB) was $75 billion in fiscal 2010. The city projects its OPEB liability to increase to $84.5 billion in fiscal 2012. The city deposited a total of $2.5 billion into a trust in fiscal years 2006 and 2007 to offset this large and increasing liability. Essentially all pay-as-you-go (PAYGO) funding of retiree health care flows through the trust. Since monies in the trust can be used at any time to pay the annual costs of retiree benefits, this provides a possible budget relief valve in financially strained times. The city transferred $82 million from the trust in fiscal 2010, $395 million in fiscal 2011, and $672 million in fiscal 2012. No additional use of the trust is projected in fiscal years 2013 through 2015. The city projects interest earnings will maintain a balance in the trust of approximately $2 billion, despite the planned expenditures through fiscal 2012. The city's PAYGO contribution to OPEB in fiscal 2010 totaled $1.6 billion or 14.3% of the $11 billion actuarially determined annual OPEB cost.

The city possesses inherent strength in the scope of its unique economy and its singular identity as a major tourist destination (the city attracted a record 48.7 million visitors in 2010) and an international center for numerous industries. The city's personal income per capita is 130% of the national average. Economic dependence on Wall Street remains, with financial activities accounting for about 12% of jobs and 30% of earnings. After an employment drop of 5% between 2000 and 2003, much more severe than the national decline of 1.4%, the city enjoyed job growth through August 2008. Recession-related job declines accelerated thereafter, although declines have been well under comparable national averages and have since abated. The city's employment was down 2.7% in 2009, compared to the nation's 4.4% loss for the year. Since peaking at 10.4% in January 2010 the city's job base has expanded by 3.2%, lowering the unemployment rate to 8.6% in May 2011, which compares favorably to the national rate of 9.1%.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, IHS Global Insight, and Property and Portfolio Research.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 16, 2010);

--'U.S. Local Government Tax-Supported Rating Criteria' (Oct. 08, 2010).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564566

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