NEW YORK--()--Fitch Ratings assigns an 'AA' rating to the following New York City general obligation bonds:
--Approximately $825,000,000 general obligation (GO) bonds, fiscal 2013 series A, B, and C, consisting of:
--Approximately $525,000,000 tax-exempt bonds, subseries A-1
--Approximately $260,000,000 tax-exempt bonds, series B
--Approximately $40,000,000 tax-exempt bonds, series C
Approximately $63,595,000 GO bonds consisting of:
--Approximately $25,000,000 fiscal 1994 series A, subseries A-5
--Approximately $8,300,000 fiscal 1994 series H, subseries H-6
In addition, Fitch affirms its 'AA' rating on the city's $40.9 billion in outstanding GO bonds.
The Rating Outlook is Stable.
The fiscal 2013 bonds are expected to be sold via negotiation on Oct. 2. The series 1994 bonds are expected to be converted to fixed-rate mode from daily-rate mode (series A, subseries A-5) and weekly-rate mode (series H, subseries H-6) on Oct. 23.
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. The city is not subject to New York State's property tax cap.
KEY RATING DRIVERS
HIGHLY EFFECTIVE BUDGET MANAGEMENT: The city's sound approach to budget development features conservative revenue and expenditure forecasting and effective budget monitoring. Management is thus able to react quickly to changing conditions and consistently generate operating surpluses through periods of economic stress, constrained state aid, and rising spending pressures.
CONSISTENT RESOLUTION TO OUT-YEAR GAPS: Fitch expects the city's long history of effectively eliminating annual budget deficits to continue. Currently forecasted gaps are within historical norms.
SOLID ECONOMIC UNDERPINNINGS: The city has a broad economic base and serves a unique role as a national and international center for commerce, culture, and tourism. Recession-related job declines have been well under comparable national averages although the unemployment rate is trending upward. Income levels are high.
REVENUE CYCLICALITY: Economically sensitive revenues, including personal income, business, and sales tax, comprise a major share of the city's budget and are highly vulnerable to variability in the financial services industry.
HIGH DEBT LEVELS: Fitch anticipates a continued high debt burden given the city's significant capital commitments and future tax-supported issuance plans.
LARGE FIXED-COST PRESSURE: Mandated costs including pension, employee benefits, and medical assistance (including Medicaid), along with debt service consume a large share of general fund resources, limiting future budgetary flexibility.
EXPECTATION FOR CONTINUED BUDGET BALANCE
The city funds adopted budget (excluding federal, state, and other restricted sources) for fiscal 2013 totals $48.9 billion, an increase of $1.5 billion or 3.2% from the fiscal 2012 forecast. Growth in spending is related to non-controllable costs, most notably debt service and employee pension and benefits. The budget includes neither retroactive payments for most expired contracts not yet settled nor salary increases for fiscal 2013. A modest reserve for collective bargaining assumes increases of 1.25% per year thereafter.
Fitch believes that the city's revenue estimates, based on a highly detailed and frequently-reviewed analysis, are reasonable. The city benefits from a diversity of revenue sources. The property tax is the largest source, at 38% of budgeted fiscal 2013 city funds, followed by personal income tax at 17% and sales tax at 12%. Intergovernmental sources are primarily for education and social services programs, and make up 29% of budgeted fiscal 2013 all-funds revenues of $68.5 billion. Combined taxes make up 64% of total revenue.
The out-year gap estimates included in the city's financial plan for fiscal 2012-2016 are sizeable at $2.5 billion for fiscal 2014, $3.1 billion for fiscal 2015, and $3.1 billion for fiscal 2016 but reduced somewhat from the fiscal 2013 executive budget released in May 2012 and manageable by historical standards. Given the city's long history of eliminating gaps by the time the budget is proposed, Fitch believes the city's ability to further reduce and eventually close currently-forecast gaps is strong.
Factors that Fitch believes may pressure the city's credit profile include the high cost of employee pension and benefits, labor settlement costs above amounts reserved, and a weakened revenue environment, particularly as it pertains to Wall Street profits. Fitch's expectation for continued rating stability is supported by the city's consistently demonstrated ability and resolve to close similarly sized shortfalls in years past.
GAP-CLOSING PROGRAMS ACHIEVE SIGNIFICANT RECURRING SAVINGS
A key element in the city's credit stability is its demonstrated willingness to address budget gaps with primarily recurring solutions, either in the form of increased revenue or reduced agency spending. Most recently, on Sept. 14, 2012, city agencies were directed to submit spending reduction programs for discretionary city-funded spending in fiscal 2013 and 2014. The cuts, ranging from 1.6% to 8%, depending on agency and fiscal year, are designed to yield savings of $2 billion through the end of fiscal 2014.
These reductions are in addition to a $1 billion gap-closing program announced in November 2011. The measures included in this program for fiscal 2013 include $229 million from debt service savings, $50 million in police overtime savings, and $301 million from the department of education related to enhanced Medicaid procedures ($50 million), use of state building aid for GO debt service ($100 million), and a reduction in contractual spending for special education ($54 million). The budget does not include layoffs to teachers or uniformed personnel.
ESTIMATED FISCAL 2012 OPERATING MARGIN REMAINS SOLID, BUT NARROWED
As prior year surpluses cannot be appropriated in future fiscal periods, the city routinely uses operating surpluses to cover spending in the subsequent budget year by prepaying debt service and subsidies and other such actions.
The city is forecasting for fiscal 2012 that $2.4 billion, or 4.5% of projected city fund spending of $48.8 billion, will be available for prepayments in fiscal 2013. This amount is somewhat below the fiscal 2011 surplus used for fiscal 2012 prepayments of $3.7 billion. The fiscal 2011 figure is more in line with surplus levels over the past several years. The reduced funds generated in fiscal 2012 reflects a lower amount by which actual tax receipts exceed projections than in past years, although receipts are still ahead of budget.
ONE-TIME MEASURES EMPLOYED IN FISCAL 2013
A limited amount of one-time resources help compensate for the decline in the forecasted operating surplus available at year-end to pre-pay fiscal 2013 expenses. The fiscal 2013 executive budget included $1 billion from the sale of taxi medallions. This amount has been reduced to $635 million in fiscal 2013 and may decline further given a recent state court ruling that the legislation authorizing the sale of additional medallions was unconstitutional. The city has filed an appeal but expects receipts from this source to be $200 million less than projected, even if the appeal is successful. The financial plan includes $365 million and $460 million in taxi medallion revenue in fiscal 2014 and 2015, respectively.
Another non-recurring resource is the transfer of $1 billion from a trust established for retiree healthcare costs. The trust has a current balance of approximately $2 billion following transfers out of $395 million in fiscal 2011 and $672 million in fiscal 2012 to help cover the cost of annual retiree benefits. The city plans to transfer the remaining $1 billion in fiscal 2014. Together, the sale of taxi medallions and trust fund transfer represent a modest 2% of total fiscal 2013 spending.
LONG-TERM SPENDING PRESSURES
Debt service will consume $5.7 billion or 11.1% of the fiscal 2013 city funds budget. Debt service is forecast to increase to an above average $7.2 billion or 12.6% of city funds by fiscal 2016, but a more moderate 9.7% of total funds spending. Fitch views positively the city's ability to achieve sizable savings from debt refinancing during the prevailing low interest rate environment.
A more notable concern is the cost of pension and other employee benefits which total $8.1 billion and $8.4 billion, respectively, in the fiscal 2013 budget for the upcoming fiscal year. The rapid escalation in pension costs (from $1.5 billion in fiscal 2002) is projected to level off thru fiscal 2016; however, during this period employee benefits will continue to rise an additional $1.8 billion. Fiscal 2013 pension and employee benefits consume a very high 28% of city funds, limiting budget flexibility and the ability to fund other essential programs.
The city's ability to achieve pension reform or to negotiate pensions with organized labor is dependent on state legislation. The state legislature has passed pension reform that introduces a new tier for new employees featuring a higher retirement age and increased worker contributions among other changes. The new tier will not yield immediate savings but would provide much needed long-term relief estimated by the city at approximately $21 billion over the next 30 years.
ELEVATED DEBT WITH MANAGEABLE VARIABLE-RATE EXPOSURE
Debt metrics remain high for the 'AA' rating. Fitch-calculated net tax-supported debt including Transitional Finance Authority (TFA) future tax secured bonds equals approximately 15.7% of 2009 personal income, $7,832 per capita, and 8.4% of the five-year average of full value. The city's capital commitments are extensive, totaling $37.6 billion through fiscal 2016, including $8.6 billion for self-supporting water and sewer projects and $10.4 billion for education. Tax-supported issuance plans during fiscal 2013-2016 include $8.9 billion of city GOs and $10.6 billion of TFA future tax secured bonds. Forecasted debt issuance is similar to the amount of outstanding principal scheduled to amortize during the same period.
The city and related issuers have approximately $10.7 billion in outstanding variable-rate debt or 15.9% of net tax-supported debt. Fitch considers this exposure to be manageable given the hedge provided by the city's substantial short-term assets and the city's sophisticated management, diversity of liquidity providers, and strong access to the capital markets.
ECONOMY HAS INHERENT STRENGTHS BUT IS NOT WITHOUT CHALLENGES
Fitch considers the city's unique economic profile, which centers on its singular identity as an international center for numerous industries and major tourist destination, to be a credit strength. The character of the New York City economy has contributed to its relative employment stability during the recession and ability to regain by March 2012 the number of private sector jobs that existed prior to the recession.
The city's tourism sector is performing exceptionally well. The city attracted 50.5 million visitors in 2011, above the record of 48.8 million visitors set in 2010. Another area of recent strength is the commercial real estate market. According to Cushman and Wakefield, the city recorded 30.1 million square. feet of leasing activity in 2011, the highest volume since 2000, although the city reports this activity has recently slowed. The city's economic profile also benefits from its strong wealth, with per capita income 123% of the national average.
The city's economy (and operating budget) is strongly linked to the financial sector, which accounts for approximately 12% of total employment but 30% of earnings. Financial activities employment rose only 0.1% in 2011. The high-earning securities and commodities component of the sector shed 1,900 jobs or 1.1% during the year. Tightening financial reforms and regulation, reduced bank profits, evidence of a shift in bonus and compensation practices away from cash, uncertain economic recovery, and concerns in Europe are among several factors that figure to weigh on financial sector prospects over the near-to-intermediate term.
The city's employment base expanded by a modest 0.2% in 2011, less than the 0.6% growth for the U.S., although the magnitude of the city's job losses during the prior two years was less. However, unemployment was up to 10.2% in July 2012 from 9.3% in July 2011, due to a faster increase in the labor force than employment. This is in contrast to the national trend; U.S. unemployment was down to 8.6% in July 2012 from 9.3% in July 2011.
Residential real estate continues to struggle. The most recent release of the S&P/Case-Shiller Index of home prices indicates that New York's performance is among the weakest of the 20 metropolitan statistical areas (MSAs) in its survey. It was one of only three MSAs, along with Cleveland and Detroit, to post weaker annual performance in July 2012 than in the prior month, and was among the four MSAs that saw an annual decline. New residential permits are increasing but still far below pre-recession levels. This data may not be representative of the city's activity given the large number of rental units. The city's 2011 Housing and Vacancy Survey indicates that rental units comprise 65% of the city's 3.4 million housing units. Since 2008 the number of rental units has increased 1% while owner units have declined 3%. About 8% of total units are vacant.
Several of the sectors experiencing solid growth, including retail, health care and social assistance, transportation, and leisure and hospitality, are generally associated with lower wages. This may mute growth in economically sensitive revenues, which account for about one-half of budgeted fiscal 2013 city funds revenue.
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, National Association of Realtors, and Property and Portfolio Research.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 15, 2011);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 15, 2011).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria