NEW YORK--()--Fitch Ratings assigns an 'AAA' rating to the following New York City Transitional Finance Authority (TFA) subordinate fixed rate future tax secured bonds:
Approximately $750,000,000 fiscal 2013 series F bonds, consisting of:
--Approximately $650,000,000 tax-exempt bonds subseries F-1;
--Approximately $100,000,000 of taxable qualified school construction bonds subseries F-2;
--Approximately $229,000,000 tax-exempt bonds series G;
--Approximately $21,000,000 of taxable bonds series H.
Fitch affirms its ratings on the following outstanding TFA future tax-secured bonds:
--$2.3 billion senior bonds;
--$18.1 billion subordinate bonds;
--$1.3 billion recovery subordinate bonds.
The Rating Outlook is Stable.
The bonds are scheduled to sell on March 20; taxable qualified school construction bonds competitively and the others through negotiation.
Series F-1 bond proceeds will be used to fund general city capital projects. Series F-2 proceeds will fund construction, rehabilitation, and repair of schools, including furniture, equipment, and land purchases. Series G and H bond proceeds will redeem, at or prior to maturity, currently outstanding future tax secured bonds.
The bonds are payable from revenues derived from a personal income tax (PIT) and a sales and use tax imposed by the city, as authorized by the state. Payment of the PIT and sales tax revenue to the TFA is not subject to city or state appropriation.
Sales tax revenues will be available for the payment of bonds if PIT revenues are projected to be insufficient to provide at least 150% of the maximum annual debt service (MADS) on the TFA's outstanding bonds.
Senior bonds are subject to a $330 million limit on quarterly debt service. Additional bonds may be issued as senior bonds if tax revenues for the 12 consecutive calendar months preceding authorization are at least 3x the amount of annual senior debt service or $1.32 billion.
The subordinate additional bonds test (ABT) requires that tax revenues for the most recent fiscal year are at least 3x the sum of $1.32 billion plus projected subordinate debt service.
KEY RATING DRIVERS
STRONG LEGAL FRAMEWORK: The bankruptcy-remote, statutorily defined nature of the issuer and a bond structure involving a first perfected security interest in the PIT and sales tax revenues are key credit strengths. Payment of the PIT and sales tax revenue to the TFA is not subject to city or state appropriation. Statutory covenants prohibit action that would impair bondholders.
TAX-RATE RISK LOW: The state can unilaterally modify or repeal tax law as it relates to the PIT or sales tax and could risk default by exercising this right in an extreme city fiscal crisis scenario. Fitch believes that the risk of this is negligible.
STATUTORY CASH FLOW PROVISIONS: The PIT and sales tax are imposed by the city pursuant to state statute and collected by the state. Revenues from the PIT (and the sales tax, if required) flow directly from the state comptroller to the TFA trustee and are not subject to state or city appropriation. The city receives residual revenues only after advance quarterly funding of debt service.
ROBUST COVERAGE: Although senior bonds have a first claim on statutory revenues, Fitch does not make a rating distinction between the liens due to the high coverage levels. Debt service coverage on all future tax secured (FTS) bonds from fiscal 2012 audited revenue was 9.2x. Even with sizable debt issuance plans over the next four years, pro forma MADS coverage is expected to remain strong.
SOLID ECONOMIC UNDERPINNINGS: Statutory revenues are derived from a broad economic base with high income levels, benefiting from the city's unique role as a national and international center for commerce and culture. The city's per capita personal income is 133% of the national average.
DEPENDENCE ON WALL STREET: Financial activities account for about 12% of jobs and 30% of earnings. Recession-related job declines were well under comparable national averages. Overall employment has since shown solid growth although weakness in financial services employment is evident. The city's unemployment rate is above average, which may negatively affect future pledged revenue growth.
STRONG LEGAL FRAMEWORK PROTECTS BOND REPAYMENT
The 'AAA' rating is based on the very strong legal structure which insulates bondholders from any operating risk of New York City (GO bonds rated 'AA' by Fitch). The rating reflects the bankruptcy-remote, statutorily defined nature of the issuer, the bond structure involving a first perfected security interest in revenues that are not subject to appropriation, statutory covenants prohibiting action that would impair bondholders, New York State as collection agent, and the existence of two separately levied cash flow streams (the statutory revenues).
PIT and sales tax revenues are imposed by the city and collected by the state. Revenues from the PIT as well as the sales tax, if required, flow directly from the state comptroller to the TFA trustee, and are not subject to state or city appropriation. The city receives residual revenues only after advance quarterly funding of debt service.
The state is able to unilaterally modify or repeal tax law as it relates to the PIT or sales tax and could risk default by exercising this right in an extreme city fiscal crisis scenario; however, Fitch believes that the risk of this is negligible.
PLEDGED REVENUES EXHIBIT STABILITY DESPITE SOME VARIATION
The PIT consists of a base rate and a 14% surcharge. The PIT rate has changed over time, most recently with a base rate increase in 2010. Both the base rate increase and the 14% surcharge, originally imposed in 2002, are set to expire on Jan. 1, 2015 unless extended with state approval. Failure to approve continuation of both the current base rate and the 14% surcharge could result in significant declines of pledged revenue.
TFA estimates indicate that annual FTS revenue at the minimum base rate with no surcharge would decline by $5.8 billion by fiscal 2016. This level would still provide about 3x coverage assuming additional debt is issued on the current schedule and no change to the sales tax rate. Fitch believes this is an extreme scenario given the importance of this source to the city's budget and the consistent reauthorization of both a base rate above the minimum authorized and the 14% surcharge.
The PIT comprised 58% of fiscal 2012 FTS revenue. Since fiscal 2003, both PIT and sales tax revenue have declined in only one fiscal year. The significant 16.5% FTS decline in fiscal 2009 was due in part to an adjustment for prior-year PIT overpayments, and in part to the recession. Revenue increased in fiscal 2010 by 3.3%, aided by a PIT base rate increase for high-income payers that became effective in September 2010 for the full 2010 tax year. Fiscal 2011 included a full fiscal year of collections at the higher rate, as well as the retroactive collection of withholding tax payments for tax year 2010. As a result FTS revenue increased by 11.9%. Growth in fiscal 2012 was slightly below projections but sound at 4.7%.
STRONG COVERAGE EXPECTED EVEN WITH FUTURE DEBT ISSUANCE
Projected tax revenue for fiscal 2013 is 5.6% above fiscal 2012 levels. This strong growth reflects in part the expected acceleration of realized capital gains in anticipation of federal tax law changes. Debt service coverage on all FTS bonds from fiscal 2012 projected revenue was 9.2x. Combined with sizable debt issuance plans, projected coverage is expected to remain high at a minimum of 6.4x through fiscal 2017 using the TFA's projected annual pledged revenue growth assumptions, or 5.2x assuming no growth from audited fiscal 2012 pledged revenue.
Not included in coverage figures are BAB and QSCB subsidies, which are not pledged as security for the bonds. The reduction in subsidies resulting from federal sequestration has a minimal impact on revenue available for debt service.
The city in its preliminary fiscal 2014 budget anticipates a 1.9% increase in the average wage rate and a slight increase in securities sector bonus payouts, resulting in flat personal income tax revenue. Continued recovery in employment, wages, and other income is forecast to result in annual personal income tax growth of 4.8% in fiscal 2015-2017.
The preliminary budget assumes continued strong visitor-related spending and moderate economic growth will yield sales tax growth of 4.5% in fiscal 2014. This growth rate recognizes the temporary slow-down in spending following hurricane Sandy. In fiscal 2015-2017, annual sales tax growth is forecast at 3.7%.
Coverage projections assume the issuance of approximately $10.4 billion in additional FTS bonds in fiscal 2013-2017, in accordance with the city's capital improvement. Coverage is projected to well exceed the subordinate additional bonds test that requires that historical statutory revenues cover at least 3x the full $1.32 billion maximum allowable senior debt service plus projected subordinate debt service.
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 September 2011 the number of private sector jobs that existed prior to the recession. The city's tourism sector is performing exceptionally well. The city attracted a record 52 million visitors in 2012, the third record year in a row.
The city's economic profile also benefits from its strong wealth, with per capita income 133% of the national average. However, the well above-average individual poverty rate of 20.1% in 2011, compared to 15.2% for the U.S., indicates significant income disparity.
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 fell 0.2% in 2012. The high-earning securities and commodities component of the sector showed similar trends in 2012 after adding roughly 500 jobs or 0.3%.
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 overall employment base shows consistent year-over-year improvement in 2012 and towards the end of the year began to exceed the growth in the labor force. The estimated average unemployment rate of 9.2% for 2012 is below the 2010 rate but above the 9% rate posted in 2011. The December 2012 rate of 8.8% is below the December 2011 rate and remained above the state (8.2%) and federal (7.6%) rates.
At 0.9%, year-over-year resident employment growth was slightly above the state's but well below the nation's. 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 pledged revenues.
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.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria