NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'F1' rating to the following revenue anticipation notes (RANs) of Nassau County, NY (the county):
--$155 million RANs, 2013 series A;
--$55 million RANs, 2013 series B.
The RANs are expected to be sold through negotiation on June 20. The RANs are being issued in anticipation of the receipt by the county of net allocable sales taxes for the county's fiscal year commencing Jan. 1, 2013 and ending Dec. 31, 2013.
In addition, Fitch has taken the following rating actions:
--Approximately $1.5 billion in outstanding general obligation (GO) bonds downgraded to 'A' from 'A+';
--Approximately $259 million in outstanding Nassau Health Care Corporation (NCHCC) county guaranteed bonds downgraded to 'A' from 'A+';
--Approximately $13.1 million in outstanding Nassau Regional Off-Track Betting Corporation (NROTBC) revenue bonds series 2005 downgraded to 'A-' from 'A'.
The Rating Outlook for all long-term debt is Negative.
In addition, Fitch affirms the following short-term ratings:
--Approximately $240 million in outstanding tax anticipation notes at 'F1';
--Approximately $188 million in outstanding bond anticipation notes at 'F1'.
The notes, GO bonds, and NCHCC bonds are secured by the county's faith and credit and taxing power, subject to a 2011 state statute limiting property tax increases to the lesser of 2% or an inflation factor (tax cap law). This limit can be overridden annually by a 60% vote of the county legislature.
The NROTBC bonds are backed by the county's covenant under a support agreement with the NROTBC to make loans to NROTBC equal to debt service on the bonds from legally available funds of the county appropriated for such purpose. The county commits to transfer funds to the trustee to pay debt service not later than 15 days prior to any debt service payment date. The obligations of the county under the support agreement are unconditional and irrevocable, and the support agreement is not subject to cancellation or termination.
KEY RATING DRIVERS
BOND DOWNGRADE CONSIDERATIONS: The GO rating downgrade to 'A' from 'A+' reflects the county's lack of significant progress in reducing its accumulated deficit reserve position. This in combination with other indications of limited financial flexibility including dependence on positive resolution of litigation, use of non-recurring measures, and long-term labor contracts will continue to challenge the county's ability to achieve structural balance.
NEGATIVE OUTLOOK REMAINS: The county is exposed to potential significant liabilities related to tax refund and wage freeze litigation, both of which have recently been decided against the county. An adverse decision on appeal for either or both cases would further stress the county's already limited financial flexibility.
WEAK INTERGOVERNMENTAL RELATIONSHIPS: Absent improvement in the county administration's interactions with either its legislative body or NIFA, Fitch believes the ability to implement programs to improve fiscal stability will continue to be impaired.
SHORT-TERM MARKET RELIANCE: Low liquidity remains a concern, as does the county's reliance on short-term market access to fund operations in anticipation of sales tax receipts and for note repayment. Coverage from operating cash and cash balances is projected to equal 2.8x for the series A RANs and 3.8x for the series B RANs.
STRONG ECONOMIC INDICATORS: The county benefits from a broad and wealthy economic base characterized by above-average wealth and income levels.
MANAGEABLE DEBT BURDEN: The sizable and wealthy tax base results in a manageable debt burden with above average amortization and moderate capital needs.
CONTINUED COST-CUTTING MEASURES ESSENTIAL: Management's ability to continue to reduce costs, of which labor is by far the largest, is essential to near-term budget balance and rating stability.
OUTCOME OF LITIGATION: A favorable outcome to pending litigation in conjunction with the alleviation of fixed costs burden could stabilize the rating at the current level.
The county is located on Long Island, approximately 15 miles east of Manhattan. The population of about 1.3 million has remained fairly steady, growing by 1.1% since 2000.
SMALL BUDGET SURPLUS PROJECTED IN 2012
Financial margins have been slim for many years even with consistent moderate use of non-recurring measures, due in part to aggressive budgeting.
Fitch views positively that the county has accurately budgeted sales tax revenue (which makes up 40% of major tax-supported fund revenue) for the past three years. For fiscal 2012 the county is currently projecting a budgetary surplus of approximately $45 million, slightly ahead of earlier projections, and that sales tax revenue is approximately $22 million ahead of budget.
The year-end projection noted above assumes the local share of Superstorm Sandy costs are assumed by the State. Sandy expenses have reached the threshold whereby the county will receive 90% federal reimbursement. If the state does not reimburse the local 10% share, the county's maximum exposure would be a modest $12 million.
The fiscal 2012 budget closed an identified $310 million gap achieving approximately $150 million in labor savings through a combination of layoffs, restructuring of operations, and labor concessions. Headcount of 7,359 at the end of 2012 was down another 0.5% compared to budget and is reduced by 19.4% since 2009.
Fiscal 2012 results will only modestly improve the county's reserve position. Entering fiscal 2012 the operating funds had a combined balance of $83.9 million or 3.5% of spending and an unrestricted fund balance of negative $46.7 million or a negative 1.7% of combined spending.
EARLY FISCAL 2013 RESULTS INDICATE MODEST IMPROVEMENT
The county adopted a 2013 balanced budget which includes $2.8 billion of appropriations (excluding transfers) to support the major operating funds. The budget includes sales tax growth of 3.7%, which Fitch considers reasonable given current 2012 projected receipts and potential pickup from Sandy rebuilding.
The county reports monthly on its financial position and actual results relative to the budget. As of the most recent report, covering the period January-April 2013, the county projects a $10.7 million surplus on a budgetary basis for 2013 primarily due to lower than anticipated health insurance savings and a lower number of caseloads and children in early/special education.
FINANCIAL PRESSURES WILL CONTINUE
While Fitch recognizes the strides the county has made in decreasing the structural deficit, the deficit is still significant and is expected to increase through fiscal 2016.The county's 2013-2016 multi-year financial plan, which was approved by NIFA, projects budget gaps of $61.9 million in fiscal 2014, $99.4 million in fiscal 2015 and $114.9 million in fiscal 2016. The gaps are relatively manageable relative to the size of the county's operating funds budget, but concerning due to the county's existing precarious fund balance position.
The county plans to implement gap-closing measures to produce savings and/or generate offsetting revenues however Fitch is concerned that some of the measures are of a non-recurring nature and may not be realistic given that one or more may require state legislation, action by the county legislature, or approval from NIFA.
Adding to the county's financial pressure are two court decisions related to the wage freeze and tax cert refunds that have gone against the county (see below), exposing it to potential significant liabilities. Fitch believes an adverse decision on appeals for either or both cases would make it more difficult to achieve structural balance in the near to medium term.
WAGE FREEZE LITIGATION
In 2011 NIFA implemented a wage freeze that is now in effect through 2013. Three labor unions filed suit to reverse the wage freeze. In February 2013, the U.S. District Court for the Eastern District of New York issued an opinion granting the unions summary judgment which would nullify NIFA's imposition of the wage freeze. The judge stayed his decision pending the results of NIFA's and the county's appeal.
The county estimates that if the decision is not reversed on appeal, the amount of its retroactive liability would be approximately $230 million through fiscal 2013 including costs such as payroll taxes, pension contributions, etc.
The county believes that fiscal year 2013 cash flow should not be affected, which Fitch views as reasonable given the likelihood of a lengthy appeals process. However, the projected budget gap of $61.9 million for fiscal 2014 would substantially increase if NIFA loses its appeal and the county is required to repay approximately $230 million of wage savings achieved through 2013 as well as budget savings that continues to accrue. The county anticipates financing any adverse settlement to repay the $230 million of back wages. The county legislature and NIFA approval would be required.
TAX CERT LITIGATION
In 2010 the county passed legislation that eliminates its responsibility for making tax cert payments to towns, special districts, and all but one of the school districts, passing on a portion of the cost of tax refunds to local municipalities in accordance with general state law. This legislation, effective in 2014, would significantly reduce the county's liability but was challenged by a number of the underlying jurisdictions. The county's position was upheld in the Nassau Supreme Court but appealed. In February 2013 the New York State Appellate Court overturned the Supreme Court ruling. The State Court of Appeals will likely hear oral arguments in September with a decision probable by the end of the year.
The county's ability to fund the total accumulated tax liability, which is estimated at approximately $300 million at Dec. 31, 2012 and is not part of the suit, is of some concern to Fitch. The county planned and NIFA agreed to let the county issue approximately $305 million in tax cert bonds through fiscal 2014 to cover the liability. However, the county legislature did not provide the requisite two-thirds majority. The county administration continues to negotiate with its legislature, but it is unclear whether bonding for the tax certs will be accomplished. Failure of the county legislature to pass the financing by two-thirds vote could result in significant unbudgeted operating expenditures being accrued in fiscal 2013. The county is in discussions with the State to explore options to finance tax certs.
RELIANCE ON SHORT-TERM BORROWING
The county generally issues short-term RANs and TANs around May/June and November/December of each fiscal period in order to fund operations in anticipation of sales tax receipts and maintain a cash balance sufficient to help repay maturing notes. Note borrowing in 2012 equaled $480 million or a somewhat elevated 16% of receipts ($20 million was to account for timing differences with respect to Superstorm Sandy). The county expects to issue a slightly lower $450 million in cash flow notes in 2013.
The county's cash flows generally provide coverage for cash flow notes with funds for their repayment fully set aside comfortably in advance of maturity. The 2013 series A and B RANs mature at the end of March ($155 million) and April ($55 million) 2014, respectively. Coverage on the repayment dates is strong at 2.8 times (x) in March and 3.8x in April. With consideration of borrowable balances in non-major funds, coverage is an even stronger 3.2x and 4.8x in March and April, respectively.
Tax anticipation notes issued last December are due in September and October 2013, with projected coverage of 2.7x and 3.3x when borrowable resources are considered.
STRONG SOCIOECONOMIC CHARACTERISTICS
The county benefits from broad, diverse economy and well above-average economic indicators, including solid income levels (per capita income in 2011 was 152% of the nation's) and high per capita market value ($162,000) despite recent tax base declines.
The county's unemployment rate remains lower than the rates for New York State and the nation. In March 2013, the county's unemployment rate was 6.4% compared to 8.1% and 7.6% for the state and nation, respectively. From March 2012 to March 2013, employment and labor force numbers were positive-trending, posting 1.1% and 0.5% increases, respectively, higher than both state and nation growth rates.
The effects of the economic downturn were milder here than in some areas; employment and home price declines to date have been relatively moderate. In addition, sales tax revenue, the county's largest source of general government funding, has been increasing.
MANAGEABLE DEBT BURDEN
Debt ratios are moderate with overall debt per capita at $3,742 and debt to market value at 2.7%. However, these statistics are likely somewhat understated as they exclude debt issued by school districts (not available). Debt service represents an above-average 17.4% of total government fund spending.
Debt ratios should remain stable given manageable capital needs and above-average amortization with 71% (including debt issued by the NIFA) retired in 10 years, contributing to the above-average debt service burden.
WELL-FUNDED STATE PENSION PLANS
The county participates in New York State pension plans which are well-funded with the state and local employees' plan at 90% and the state and local police and fire plan at 92% as of March 31, 2012. Using Fitch's more conservative 7% discount rate assumption, the plans' funding levels would still be sound at an estimated 86% and 87%, respectively.
County pension payments in 2011 made up a moderate share (3.7%) of spending. The county has taken advantage of the ability granted by the state to amortize most of the increase in annual pension payments over 10 years. This amortization option provides some near-term budget relief but will make future year budgeting for these payments more challenging.
While the 2014 pension contribution will be higher it will be the final year that employer contribution rates will reflect the market loss of 2008-2009, with costs expected to decrease going forward. This reduction will somewhat offset the added expense of the amortization.
The county's unfunded actuarial accrued liability for other post-employment benefits (OPEB) was a high $4.6 billion as of Dec. 31, 2011 or 2.4% of market value. Fitch expects this amount to increase as the county plans to continue to fund its OPEB liability on a pay-go basis. In Fitch's view there appear to be many legal obstacles to altering existing labor contracts. The county has not received concessions on health care; most employees do not contribute at all to the cost of coverage.
Carrying costs for debt service, pension and OPEB pay-go equaled a manageable 21% of 2011 total government fund spending, with the county's amortization of part of the pension payment somewhat offsetting rapid debt repayment.
NIFA OVERSIGHT BRINGS BOTH ADVANTAGES AND HURDLES
In January 2011 NIFA imposed a control period under its enabling legislation. NIFA has maintained an oversight role over the county since 2000. The ability to break existing contracts is beyond NIFA's control period powers. Upon declaration of a fiscal crisis NIFA has the ability to impose a wage freeze if it determines that such freeze is necessary to maintain a balanced budget. However, as discussed above, this ability is the subject of litigation.
Fitch believes NIFA's oversight has had some positive effects on the county's financial operations, such as instilling increased budgeting discipline and imposing the wage freeze. But NIFA's oversight also has added a layer of complexity to decision-making.
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, and National Association of Realtors.
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