Fitch Rates Erie County Fiscal Stability Authority, NY's Sales Tax & State Aid Secured Bonds 'AA+'

NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns the following ratings to the Erie County Fiscal Stability Authority, New York's (ECFSA) bonds:

--$28,750,000 sales tax and state aid secured bonds, series 2011A, 'AA+';

--$22,325,000 sales tax and state aid secured bonds, series 2011B, 'AA+';

--$86,845,000 sales tax and state aid secured bonds, series 2011C, 'AA+'.

The bonds are scheduled for negotiated sale on July 27, 2011.

Proceeds will be used to provide funds for the capital needs of Erie County and to refund a portion of the county's outstanding bonds.

In addition, Fitch affirms the following ECFSA ratings:

--$152,355,000 sales tax and state aid secured bonds, series 2010A;

--$45,590,000 sales tax and state aid secured bonds, series 2010B;

--$42,055,000 sales tax and state aid secured bonds, series 2010C.

Fitch has also withdrawn the implied 'AA+' long-term rating on the ECFSA's sales tax & state aid secured bonds. The rating is withdrawn due to the assignments of an 'AA+' rating on the authority's actual long-term bonds.

The Rating Outlook is Stable.

KEY RATING DRIVERS:

--ECFSA is a bankruptcy-remote, statutorily defined issuer.

--The tight bond structure includes a first perfected security interest in Erie County's local sales tax revenue, statutorily defined minimum debt service coverage and maximum outstanding debt limits.

--Debt service coverage levels are strong.

--The pledged sales tax revenue is economically sensitive and derived from a below-average economic base.

SECURITY:

The bonds are secured by a pledge of ECFSA's right title and interest in revenues of the authority which consist of the county's local sales tax revenues, state aid revenues paid to the authority, and other aid, rents, fees and charges of the authority.

CREDIT PROFILE:

ECFSA is a bankruptcy-remote issuer. The bond structure grants a first perfected security interest in Erie's County's 4.75% local sales tax less the 0.65% currently required to be paid to cities and school districts. The state collects sales tax revenues and distributes them to the state comptroller, who then pays the revenues directly to the bond trustee. The county receives residual revenues only after the payment of ECFSA's debt service and operating requirements. The bonds are also secured by state aid revenues which have been negligible over the last few years.

ECFSA was created under the Erie County Fiscal Stability Authority Act (the Act) as a public benefit corporation by the state of New York in 2005 to provide a debt funding vehicle and financial control and oversight of the county. The Act allows ECFSA to issue debt for county purposes up to $700 million in bonds and $250 million in cash flow notes with all debt maturing by 2039. The additional bonds test for senior debt is strong, requiring 3.0 times (x) coverage of maximum annual debt service (MADS) from sales tax revenues alone.

Pledged sales tax revenue has grown steadily providing healthy debt service coverage and strong bondholder protection. Sales tax revenues were up 2.3% in 2010 and increased by an additional 3.8% in the first four months of 2011 from the same period in 2010. Coverage of MADS by 2010 revenue was 12.1x. Coverage on pro forma MADS ($49.6 million in 2015) provides 7.7x coverage based on 2010 revenues.

Potential threats to current strong debt service coverage are declines in county sales tax revenue and alterations of the tax structure by the state or county. Fitch believes the former is mitigated by the strength and diversity of the county's tax base, and while pledged revenues are economically sensitive, the magnitude of the deterioration that would need to occur to have a significant impact on debt service coverage is highly unlikely. While the county and state both have the unilateral ability to alter the tax structure, Fitch believes that the risk is mitigated by state and county non-impairment clauses; specifically, the county covenants to maintain a local sales tax rate of at least 3% through 2039. In addition, any change in local tax law cannot result in coverage below 2.0x MADS on all outstanding authority bonds. On a pro forma basis, 2010 collections of only the 3% local sales tax provided 2.9x coverage of MADS.

Erie County (rated 'A' with a Stable Outlook by Fitch) is located in Western New York bounded by Lake Erie on the west and Canada to the north. The county includes Buffalo (rated 'A+' with a Stable Outlook by Fitch), the state's second largest city by population. The county has experienced chronic population declines over the past several decades, including a 4.3% decline over the past decade to a current level of 909,000.

Employment opportunities in the service sector have increased and strong health care and higher education, including Kaleida Health, Catholic Health Systems and State University at Buffalo, have had a stabilizing effect on the county's economy. The university is the largest and most comprehensive component of the State University system with more than 28,000 students and approximately 10,000 employees. The county's unemployment rate, measured at 7.4% in April 2011, remains below the state and national rates of 7.6% and 8.7%, respectively. Consistent with the upstate New York region, income levels in the county remain below average as evidenced by 2009 median household income of $46,609 which equals 84% and 91% of state and national levels, respectively.

The current bond issue proceeds will be used to provide funds for the capital needs of Erie County and to refund a portion (approximately $29 million) of the county's outstanding bonds. The county's capital needs are modest at $20-$30 million annually, so Fitch does not anticipate sizable additional issuance by the ECFSA. Amortization is rapid with 76% of debt paid off in 10 years, so new debt will likely have a minimal effect on MADS coverage.

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

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, Zillow.com, National Association of Realtors, Underwriter and Bond Counsel.

Applicable Criteria and Related Research:

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

--'U.S. Local Government Tax-Supported Rating Criteria', dated Oct. 8, 2010.

For information on Build America Bonds, visit www.fitchratings.com/BABs.

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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