Fitch Rates Syracuse, NY's GOs 'A'; Outlook Stable

NEW YORK--()--Fitch Ratings assigns an 'A' rating to the following Syracuse, NY (the city) limited tax general obligation (LTGO) bonds:

--$8,335,000 general obligation (serial) bonds, series 2014A.

The bonds are expected to price via competitive sale the week of February 10. Proceeds will be used to finance a legal judgment.

In addition, Fitch affirms the 'A' rating on approximately $101.7 million of outstanding LTGO bonds and approximately $158.8 million of outstanding unlimited tax general obligation (ULTGO) bonds.

The Rating Outlook is Stable.

SECURITY

The current issue and the series 2013A&B, 2012, and 2011A&B bonds are general obligations of the city for which the city has pledged its full faith and credit and ad valorem tax, subject to the 2011 state statute limiting property tax increases to the lesser of 2% or an inflation factor (the tax cap law). This limit can be overridden by a 60% vote of the city legislature.

The city has pledged its full faith and credit and unlimited taxing power for debt service on outstanding GO bonds issued prior to these bonds. No exemption is made under the tax cap law for debt service on outstanding GO debt; however, the constitutionality of this provision has not been tested.

KEY RATING DRIVERS

REGIONAL ECONOMIC DRIVER: The city's economy is substantial and diverse, anchored by a major research university and health institutions and serving as the economic engine for the region. The city is currently benefiting from economic development activity.

FINANCES STABILIZE; RISKS REMAIN: The city has augmented its fund balance through one-time and recurring revenues to a level at which the city can sustain moderate deficits as projected over the next few years; however, little room for further revenue enhancements and expenditure cuts remain risks for the city's long-term financial profile.

BELOW-AVERAGE ECONOMIC PROFILE: Syracuse's extremely low wealth indicators, high poverty rate, and elevated unemployment statistics are somewhat tempered by the city's stable housing market.

LONG-TERM LIABILITIES CHALLENGE BUDGET: Large pension and other post-employment benefits (OPEB) payments place pressure on recurring spending.

TAX LEVY LIMIT: The bonds are rated on par with outstanding ULTGO debt, since the city may exceed the state tax cap in any one year with 60% approval of the common council.

RATING SENSITIVITIES

FALLING RESERVES: Fitch assumes the city will be able to reduce out-year budget gaps to a large degree. Should the city be unsuccessful, thus sustaining material operating deficits, there could be downward rating pressure. Upward movement is unlikely in the near term given operating pressures, including those posed by long-term liabilities, and weak economic indicators.

CREDIT PROFILE

Syracuse is New York's fifth largest city and encompasses a 26-square-mile area located in Onondaga County in north central New York.

REGIONAL ECONOMIC ENGINE

The city serves as the economic center for the region and is anchored by higher education, healthcare and business services. Major employers include State University of New York (SUNY) Upstate Medical University with almost 8,000 employees, Syracuse University (6,504), Wegmans (4,100), and St. Joseph's Medical Center (3,142).

About 50% of the city's property is tax-exempt, and the city is looking for ways to continue growing investments by the tax-exempts in the community and better monetize this activity. Several of the tax-exempts have signed service agreements with the city, highlighted by Syracuse University, which pays $1 million a year.

The city is experiencing a degree of urban revitalization, including the opening of a third wing at Destiny USA, a large shopping mall on the edge of downtown; residential redevelopment efforts; and a $350 million mixed-use project. Syracuse University recently announced its intention to build a new stadium in the city, an evolving situation that Fitch will continue to monitor for potential effects on the local economy.

BELOW-AVERAGE ECONOMIC PROFILE

Economic indicators are depressed with per capita income levels at 59% of the state average and individual poverty rates more than double the state and national mean. The city unemployment rate was a high 7.7% in November 2013, above the state (6.9%) and national (6.6%) averages but down from past highs. The 2010 census data show some stabilization in the city's population over the past decade, arresting a multi-decade trend in population decline.

RECENT SURPLUSES REVERSE TREND OF DEFICITS

The city experienced a structural imbalance which led to general fund balance draws from fiscal 2009 through fiscal 2011 (year end June 30). The city generated a moderate surplus in fiscal 2012 and a strong surplus in 2013 (unaudited), though the fiscal 2013 surplus largely results from an accelerated state aid payment. Going forward, the city projects sizeable deficits, though actual results have consistently exceeded expectations. The inability of the city to continue outperforming its projections will put downward pressure on the rating.

The city beat its $226 million 2012 general fund budget and added $8.4 million to total fund balance, compared to a budgeted $13 million deficit. The budget included no property tax increase or layoffs and a 9% increase in health care costs. Positive results were driven by vacant but funded positions, property taxes exceeding budget by $3.6 million, or 10.6%, from collections of past due amounts, sales taxes exceeding budget by $3.3 million (4.4%), and increased payments from tax-exempts in the city.

The city did not repay outstanding revenue anticipation notes (RANs) until shortly after the end of the fiscal year, so the audited unrestricted fund balance is down $15.5 million to $23.7 million (10.8% of expenditures) as funds were restricted for this payment. With the payment of the RANs and the release of the restrictions on these funds, the revised unrestricted fund balance would be approximately $47.6 million (21.7% of expenditures).

The city's unaudited 2013 results show a $25 million operating surplus after transfers, equal to 10.8% of spending and largely a result of a one-time $20.9 million 'spin-up' payment from the state. The spin-up is the acceleration of a March 2014 payment from the state to June 2013, so the city benefits from the payment in fiscal 2013 while the state is unaffected as the payment remains within its 2014 fiscal year.

The fiscal 2013 surplus will result in a $72.9 million total fund balance (31.6% of 2013 budgeted spending). Positive state highway aid and sales and property tax performance as well as conservative budgeting of staffing allowed the city to outperform its 2013 operating budget, which was break-even with the inclusion of the spin-up payment.

DEFICITS FORECASTED FOR 2014 AND BEYOND

The city's year-to-date fiscal 2014 performance is in an operating deficit position, consistent with the budgeted $18 million draw, equal to 8.6% of spending. The budget assumes no spin-up payment, flat property tax revenues, a 3.4% increase in sales tax revenues, and a $3 million increase in pension costs.

The city is projecting deficits of $18 million in 2015, a deficit which grows to $22.6 million in 2018 or 9.7% of 2013 actual spending. The city has a strong history of outperforming budgeted projections but may be challenged to do so in the future. Police and fire contracts remain open since 2010 and 2012, respectively, and could be a pressure point. Actual performance near the deficit levels projected would exhaust all of the city's remaining fund balances, which would cause downward pressure on the rating.

PENSION AND OPEB COSTS CREATE PRESSURES

The city is facing growing fixed costs in the form of pension and OPEB payments. The city's pensions are part of two cost-sharing multiple employer state systems, the New York State Local Employees' Retirement System (ERS) and the New York State Policemen's and Firemen's Retirement System (PFRS). As of March 31, 2012, ERS is well-funded at 90%, or 86% assuming a 7% return, while PFRS is 92% funded or 87% assuming a 7% return.

The city's general fund pension payments represent an increasing pressure from prior years, at $12.7% of spending in fiscal 2013 and 13.6% in fiscal 2014. The city projects a 13.9% payment in 2015, after which the city expects pension payments to decline moderately. The state has offered municipalities the opportunity to amortize part of their payments, but the city does not plan to do so.

The city's fiscal 2013 OPEB payment was $21 million or 9.5% of general fund spending. The payment reflects about 29% of the actuarially required contribution. As of July 1, 2011, the city's unfunded OPEB liability was $891 million, or a high 20% of market value. The city is attempting to negotiate increased health care contributions from employees, which would help mitigate the OPEB burden but still likely leave the city with a large liability.

ABOVE-AVERAGE DEBT BURDEN

The city's overall debt burden including overlapping debt is high at 8.8% of market value due primarily to weak real estate values. Debt appears more manageable on a per capita basis at $2,750, and amortizes rapidly with 71% of principal retired in 10 years. The city has limited additional borrowing needs. Total carrying costs for debt, pensions and OPEB are a moderate 18% of government fund expenses.

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, 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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=819214

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Contacts

Fitch Ratings
Primary Analyst
Eric Friedman, +1-212-908-9181
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Stephen Friday, +1-212-908-0384
Analyst
or
Committee Chairperson
Amy Laskey, +1-212-908-0568
Managing Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Eric Friedman, +1-212-908-9181
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Stephen Friday, +1-212-908-0384
Analyst
or
Committee Chairperson
Amy Laskey, +1-212-908-0568
Managing Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com