NEW YORK--()--Fitch Ratings has assigned an 'AA' rating to the following State of New York general obligation (GO) bonds:
--$326,095,000 series 2013A tax-exempt bonds;
--$47,970,000 series 2013B taxable bonds;
--$174,060,000 series 2013C tax-exempt refunding bonds.
The bonds are expected to sell via competitive bids on March 7, 2013.
In addition, Fitch affirms the 'AA' ratings on outstanding state GO bonds as well as state personal income tax (PIT) revenue bonds issued by various state authorities, the rating on which is equal to that assigned to New York's GO debt.
GO bonds are backed by the full faith and credit of the state of New York.
KEY RATING DRIVERS
WEALTHY ECONOMY LINKED TO FINANCIAL SERVICES: New York's economy is broad, with substantial wealth and resources, although the health of the state's economy and finances is closely linked to the financial activities sector.
STRONG FINANCIAL PLANNING AND REPORTING: The state stays abreast of changing conditions through comprehensive quarterly updates of a four-year financial plan.
MODERATE DEBT BURDEN AND WELL-FUNDED PENSIONS: New York's debt burden is above average but still in the moderate range, and pensions are well funded.
INCREASING FOCUS ON SUSTAINABLE BUDGETS: The Positive Outlook reflects actions in recent budgets to identify sustainable solutions to significant budgetary challenges. This is a notable change from the historical tendency to rely on nonrecurring measures to address weakening in the state's volatile revenue streams during downturns.
Future credit direction will be linked to the state's demonstration of a sustainable ongoing fiscal plan in the context of continued uncertainty in the operating environment, due to factors such as economic and financial market performance and developments at the federal level.
New York's 'AA' GO rating is based on the state's substantial wealth and resources and broad economy. The rating also recognizes the outsized role that the financial activities sector plays in the state's economy and revenue system. State net tax-supported debt levels have been relatively stable as a percentage of personal income. Fitch expects the state's debt levels to remain above average but still in the moderate range. Pensions are well funded.
Fitch has recognized significant positive changes in financial management in recent years. Although New York's financial position was strained during the recession, its approach to budgeting has become more proactive and focused on structural solutions than was the case in the past. The fiscal 2012 budget addressed a large budget shortfall primarily through aggressive spending control and policy reform; the state ended the year in line with revised forecasts. The enacted budget for the current fiscal 2013 was consistent with the fiscal plan laid out with the fiscal 2012 budget and, despite deterioration in revenue expectations throughout the year the state has maintained fiscal balance without need of extraordinary action. The proposed budget for the coming fiscal 2014, which begins on April 1, maintains the ongoing expenditure control mechanisms that were established with the fiscal 2012 budget for Medicaid and school aid, the two largest drivers of state spending.
A temporary income tax rate increase on the highest earners, which is currently scheduled to expire after tax year 2014, significantly reduced the projected budget gap to be addressed for fiscal 2013 to a comparatively manageable $2 billion and moderated outyear gap forecasts. Although the forecast gap for fiscal 2014 has increased from $950 million to $1.35 billion over the course of this fiscal year, this is still well below historical levels. Assuming enactment of the fiscal 2014 executive budget proposals, the forecast gap is $2.1 billion in fiscal 2015 and $3.6 billion in fiscal 2016 as the temporary high earners tax rate is scheduled to roll off. These numbers compare to the gap of $10 billion addressed for fiscal 2012, although it should be noted that the current forecasts incorporate ongoing cost control in Medicaid and school aid, while fiscal 2012 and earlier forecasts assumed sharp spending increases based on then-current law.
In addition to risks in the external operating environment, Fitch believes that the biggest current challenges for the state are continuing to meet cost control targets in the areas of Medicaid and school aid. Since fiscal 2012 spending increases in these areas have been linked to formulas that are expected to result in growth of about 4% per year going forward. For Medicaid, the administration has been granted powers that strengthen the ability to remain on budget and targets have proved achievable to date. For school aid, the governor has proposed limited additional funding above what the calculation would dictate in his proposed budget for fiscal 2014, noting fiscal challenges at the local level and comparatively low levels of growth in the basis for the growth formula, personal income.
Fitch believes that the sustainability of local aid funding in general is an area to watch. The state enacted a property tax levy cap for local governments in the summer of 2011 that constrains local operations. To reduce the burden of Medicaid on local governments, the fiscal 2013 enacted budget included a state takeover of growth in Medicaid spending, phased in through 2015, as well as the takeover of local administration of the program. Further efforts to ease the strain on the local level have been proposed as part of the governor's fiscal 2014 budget.
The state's current forecast assumes base tax receipt growth of 5.1% for both fiscal 2013 and fiscal 2014. This follows 7.3% growth in fiscal 2012, 2.9% growth in 2011 and a 12.3% decline in fiscal 2010. Downside risk to the economic and revenue forecast remains given the economic sensitivity of the state's revenues and the uncertainty in the economic environment. The state has seen increased revenues reflecting acceleration of income into calendar 2012 that took place in anticipation of federal tax increases.
New York's employment decline in the recession was less severe than that of the nation. Through the downturn, the state's employment experienced only one year of decline, 2.7% in 2009, compared to a 5.6% drop for the U.S. between 2007 and 2010. Growth in 2011 was ahead of the U.S. pace, 1.4% for New York vs. 1.1% for the nation. December 2012 year-over-year gains of 1.3% for New York are below the U.S., although the state has regained employment lost in the recession. The state's current forecast anticipates employment growth of 1.4% in 2012 and 1.2% in 2013 and 2014. Unemployment has been below that of the nation; however, with labor force growth, the state's unemployment rate is now reported above the U.S. rate at 8.2% in December 2012 compared to 7.8% for the U.S.
New York's personal income per capita was the fourth highest among the states in 2011, at 123% of the U.S. average. The financial activities sector accounts for about 8% of jobs and 21% of earnings in the state, compared with 6% and 9% for the nation. This has made New York vulnerable to economic cyclicality, particularly given the prominence of personal income tax receipts in the state's revenue structure. Population growth in New York is among the slowest of the states.
DEBT AND OTHER LONG-TERM LIABILITIES
New York's state net tax-supported debt is above average but still in the moderate range at 5.6% of personal income. Most of New York's debt has been issued by state public authorities and secured by appropriations (only about 6% are GOs). While this results in a diffuse debt structure, there is strong centralization and oversight in the budget division; and approval by the public authorities control board is required for many of these bond issues. Pension funding has been sound, and on a combined basis the burden of net tax-supported debt and adjusted unfunded pension obligations is 6.6% of personal income, in line with the median for U.S. states rated by Fitch.
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 report 'Tax-Supported Rating Criteria', this action was additionally informed by information from IHS Global Insight.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. State Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research
Tax-Supported Rating Criteria
U.S. State Government Tax-Supported Rating Criteria