NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA-' rating to the following Suffolk County, NY (the County) public improvement serial bonds:
--$76,075,000 2011 series B.
The bonds are expected to sell via competitive sale on Oct. 19, 2011.
In addition, Fitch affirms the following ratings:
--Outstanding general obligation public improvement bonds at 'AA-'and outstanding tax anticipation notes at 'F1+'.
The Rating Outlook is Stable.
SECURITY
The bonds are general obligations of Suffolk County with a
pledge of the faith and credit of the county for the payment of debt
service. Unless paid from other sources, the bonds are payable from ad
valorem taxes that may be levied upon all taxable real property within
the county, subject to certain statutory limitations.
KEY RATING DRIVERS
Weakening Financial Flexibility: The county's
overall financial flexibility and cushion have weakened, reflected in a
significantly lower general fund balance and a reduction in the tax
stabilization reserve fund (TSRF), increasing the credit risk associated
with the county's high reliance on economically sensitive sales tax
revenue.
Increasing Fixed Costs: While management has historically demonstrated a willingness and ability to reign in expenditure growth and address long-term budget stability, rising fixed expenditures related to employee benefits will continue to challenge the county's ability to achieve budgetary balance and restore adequate reserve levels in the near term.
Favorable Socioeconomic Indicators: The county benefits from a diverse
and stable economy with strong economic indicators including
unemployment rates that remain well below state and national averages, a
growing population and high wealth levels. Additionally, economic
development and expansion projects have continued at a strong pace
despite recessionary pressures.
Low Debt Burden: Debt ratios are
low and should remain so given continued projected growth in the tax
base, manageable future capital needs and above-average debt
amortization.
WHAT COULD TRIGGER A RATING ACTION
Further Deterioration of
Reserves: The county's ability to stabilize financial operations and
prevent a further decline in reserves beyond current expectations will
be key to maintaining the existing rating level.
Credit Profile
Encompassing the eastern two-thirds of Long Island,
the county benefits from its proximity to New York City, as well as its
own broad employment base and positive socioeconomic indicators. As of
the 2010 Census, the county's population totaled 1.5 million, an
increase of 5.2% since 2000. The economy is stable and diverse and home
to numerous corporate and regional headquarters. Unemployment rates have
historically been below state and national levels. In August 2011 the
county recorded an unemployment rate of 7.1%, compared to state and
national rates of 7.7%
and 9.1%, respectively. Despite the
recession, economic development has continued at a relatively strong
pace, with several major development and expansion projects in various
stages of completion. The county is very wealthy, with median household
income and per capita income well above state and national averages.
The county's tax base has grown significantly since the beginning of the decade and continues to grow, albeit at a slower rate of 2.6% in 2010. The tax base is diverse with the top 10 taxpayers comprising a small 5% of market value. Total property tax collections in 2010 remained strong and in line with prior year collection rates at about 99%.
Finances
In 2010, the county's financial position continued to
deteriorate as the county used reserves to offset lower than budgeted
revenues. Despite a 8.2% increase in general fund sales and use tax
revenues and continued expenditure reductions, the county's high and
growing fixed costs and reliance on nonrecurring revenue sources have
weakened its financial cushion. On a GAAP basis, the unreserved general
fund balance totaled a negative $150 million, or negative 6.7% of
spending. When the TSRF balance of $89 million is added, results
improved to a negative 2.7% of spending. In 2010, the TSRF was drawn by
$9.6 million to offset costs associated with a retirement incentive
program and decreased from $127 million in 2008.
The negative fund balance position of the county is mitigated to some extent by the impact of GASB 48, which requires the county to defer the approximately $206 million in proceeds received in 2008 from its tobacco settlement. If the county had not been obligated under GASB 48, 2010 unreserved fund balance would have been $39 million before consideration of the TSRF.
For 2011 the county projects an operating shortfall of $69.5 million as a result of lower property taxes, the postponement of the sale of the county nursing home, the state's non-approval of additional red light cameras, increased pension costs, and higher social service and snow removal expenses. Additionally, while sales tax revenues are up 2.5% through August versus 2010, the county will need over 4% growth for the rest of the year to make budget. There are no property tax increases, furlough days, or layoffs, except those positions related to the closure of the John J. Foley Skilled Nursing Facility, proposed in the current budget.
The county has taken steps to offset the 2011 shortfall by cutting countywide expenses by 10% in February 2011, reducing contracts related to healthcare centers to offset state reductions, delaying hiring the new police class, and continued adherence to a strict hiring policy. In addition to these expense reductions, the county budgeted the use of non-recurring revenues including a transfer from the TSRF. The TSRF is projected to decrease from $89 million to $48.3 million at the end of 2011. Approximately $12 million of the drawdown will be used to pay for costs related to Hurricane Irene. A pending resolution mandates that the TSRF must be replenished with federal and state funds that the county may receive as reimbursement for the expenses related to Hurricane Irene. Therefore the TSRF is expected to total $58.5 million at the end of 2012.
The 2012 Recommended Budget includes revenues of $1.2 billion from sales tax, a $46.3 million, or 3.95% increase over 2011 estimated revenues. Historically, the county's projections of sales tax revenues have been aggressive and Fitch believes the county remains vulnerable to shortfalls in this revenue source. For 2012, the county estimates that it will save approximately $100 million from consolidation of healthcare operations and by cutting services, a positive ruling on outside residents attending community colleges, amortizing $45 million of the 2012 pension payment, and savings from increased employee contributions for healthcare premiums. The 2012 Recommended Budget includes layoffs of 464 employees throughout county departments, exclusive of the employees at the county nursing home. Officials estimate this downsizing will result in recurring budgetary savings estimated at $31.6 million in 2012 and $37.3 million in 2013, including fringe benefits. According to management, if the county unions agree to concessions that result in employee health care contributions and yield equivalent savings, employees will not be laid off.
Management expects that the county nursing home will be closed by Dec. 31, 2011. Bids on a request for proposal (RFP) are due by mid-October with the license projected to sell for $2.5 million and the building and equipment for approximately $30 million. Additionally, notification has been sent to 225 nursing home employees that they may be laid off as early as Nov. 15, 2011. However, if the nursing home does not close, a transfer of $12.6 million in 2012 from the general fund will be required to address the cumulative deficits of operating the facility and leaving it open after Dec. 31, 2011.
While Fitch expects the county to continue to reduce expenditures, the county's financial flexibility has been significantly reduced as a result of the use of TSRF reserves and will remain vulnerable to volatility in sales tax receipts. The county's ability to restore structural balance and prevent a further decline in the financial cushion provided by the TSRF will be key to maintaining the rating at the current level.
Debt
The county's overall debt burden is low at $3,444 per capita
or 1.9% of market value and should remain low given the county's growing
tax base, manageable capital needs, and above-average principal
amortization. Debt service represents a manageable 5.8% of general fund
spending. The county plans to issue $390 million in tax anticipation
notes (TANs) in December 2011. Total TAN borrowing represents a high 29%
of total general fund revenues. The three-year capital improvement
program (CIP) 2012-2014 totals $418 million, down $155 million from the
prior CIP. Debt amortization is above average with 67% of principal
retired within 10 years.
The county's annual required contribution to the state's retirement system increased significantly in 2010, totaling $136 million or 6.6% of total expenditures, up from $94.4 million, or 4.8% in 2009. As a result of state legislation, the county was able to amortize $19 million of the $136 million payment over 10 years, reducing the payment to $117 million but increasing future years' costs. The estimated pension payment in 2011 (payable Feb. 1, 2012) is $185.2 million, an increase of 36% over the prior year. Included in the 2011 payment is $2.5 million representing the first of 10 payments associated with amortizing a portion of the 2010 pension obligation and $3.8 million representing the first of five payments associated with the cost of the 2010 early retirement incentive. The county plans to amortize $45.7 million of the 2011 payment, which would lower the total estimated payment to $139.5 million. As of Dec. 31, 2010, the unfunded actuarial accrued liability for other post employment benefits (OPEB) was $3.9 billion, or a modest 1.4% of market value. This amount is expected to increase, as the county plans to continue to fund its OPEB liability on a pay-go basis.
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, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com and, National Association of Realtors,
Applicable Criteria and Related Research:
'Tax-Supported Rating
Criteria', dated Aug. 15, 2011;
'U.S. Local Government
Tax-Supported Rating Criteria', dated 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.
Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648842
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