NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns the following ratings to Erie County, NY (the county) general obligation (GO) bonds:
--$28,360,000 general obligation bonds consisting of $25,160,000 public improvement serial bonds series 2014A and $3,200,000 sewer district bonds series 2014B at 'A'.
The bonds are expected to sell via negotiation on Oct. 23. Proceeds of the bonds will be used to fund capital improvements in the county.
In addition, Fitch affirms the following ratings:
--Approximately $83.4 million outstanding public improvement bonds series 2005A, 2005B, 2005D-1, 2005D-2, 2006A, 2006B and 2012A at 'A'.
The Rating Outlook is revised to Positive from Stable.
SECURITY
The series 2014A, 2014B and 2012A bonds are general obligations of the county and contain a pledge of its faith and credit and ad valorem tax, subject to the 2011 state statue limiting property tax increases to lesser of 2% or an inflation factor (the tax cap law). This limit can be overridden annually by a 60% vote of the county's governing body.
The county has pledged its full faith and credit and unlimited taxing power for debt service on series 2005A, 2005B, 2005D-1, 2005D-2, 2006A and 2006B. 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
POSITIVE OUTLOOK: The Positive Outlook recognizes the county's fiscal discipline, resulting in a trend of positive operations and stable and adequate reserve levels.
DIVERSE/STABLE ECONOMIC PROFILE: The county's economy has transitioned from a primarily manufacturing employment base to one supported by a mix of government, healthcare, and higher education, providing stability and growth potential.
CONSISTENT TAX BASE GROWTH: The tax base is diverse and has experienced consistent growth over the past several years. Active development in both the private and public sectors bode well for continued growth and stability.
CONSTRAINED FINANCIAL OPERATIONS: Finances remain constrained by a high fixed-cost burden and reliance on intergovernmental and economically sensitive sales tax revenues. However, prudent financial management has improved reserves to adequate levels.
WEAK LIQUIDITY POSITION: A narrow cash position and large levels of receivables have led to high and increased cash flow borrowing.
MANAGEABLE LONG-TERM LIABILITIES: The above-average debt burden is somewhat offset by modest future borrowing needs, above-average debt amortization, and reasonable pension costs.
RATING SENSITIVITIES
ONGOING STRUCTURAL BALANCE: The Positive Outlook reflects Fitch's expectation that the county will maintain balanced operations and adequate reserve levels.
CASH FLOW BORROWING: The rating is sensitive to the county's level of cash flow borrowing for liquidity needs. An increase in cash flow borrowing above current levels would be viewed negatively by Fitch.
CREDIT PROFILE
The county is located in western New York state and includes the city of Buffalo (GOs rated 'A+'; Stable Outlook), the second most populous city in the state.
Declining population trends experienced during most of the past decade appear to have leveled off in recent years. The 2010 U.S. Census recorded a population of 919,040, a 3.3% decline since 2000. Since 2000 population has remained relatively stable. Wealth indices, including market value per capita of $51,000, are below the national and state benchmarks, consistent with the upstate New York region.
DIVERSE/STABLE ECONOMY WITH GROWTH POTENTIAL
The county is an upstate New York industrial and commercial center. Major components of the employment base include government, education and health services, which lend stability. Leading employers include the state and federal governments, Kaleida Health and the University of Buffalo, part of the State University of New York system.
The county's economy stabilized in 2010 after experiencing several years of job losses due to the recession. Unemployment rates exceeded 8% in 2009 and 2010 but have since moderated and remain below both the state and national levels. For July 2014 the county recorded an unemployment rate of 5.3% compared to state and national rates of 6.7% and 6.5%, respectively. The rate is lower than the 7.5% recorded in July 2013 due to a higher decline (1.4%) in the labor force than employment (decline of 0.2%). Typical of upstate New York areas, wealth indices are below the state and national averages but poverty rates are in line with state and national levels.
Economic development is strong with a number of public and private sector projects in various stages of construction. Fitch believes these projects, in conjunction with the state's multi-year commitment to the region to provide $1 billion of economic development incentives, should reverse or at least stem the trend in job losses.
CONSISTENT TAX BASE GROWTH
Taxable assessed value growth has been consistent with valuations increasing in each of the past ten years. Average annual tax base growth over the past five years was 4.1% including a 1.8% increase in fiscal 2014. The county's four year plan through 2017 projects assessment growth to average 2% annually, which Fitch believes is reasonable given current and planned investments in the county.
The tax base, which is nearly 75% residential, benefits from a relatively stable housing sector which did not experience the price fluctuations during the recession seen in other parts of the nation. The tax base is diverse with the ten top taxpayers representing a moderate 8.8% of taxable value. County property tax rates have not increased since fiscal 2009 and there are no plans to raise them at least through fiscal 2015. Property tax collections remain stable, with total collections averaging 98% over the past three years.
STABLE OPERATIONS RESULT IN ADEQUATE RESERVES
Financial operations have shown consistent improvement since the early and mid-2000s, when successive operating deficits resulted in a negative unreserved general fund balance.
The state created the Erie County Fiscal Stability Authority (ECFSA - Fitch rated 'AA+') in 2005 to oversee and reform county finances to achieve structural balance. On Nov. 3, 2006, the ECFSA shifted from an advisory board to a hard control board in response to the county's projected out-year structural imbalances. After instituting workforce reductions and other reforms and approving the county's multi-year budget plan, ECFSA reverted back to an advisory role in 2009. Under an advisory role, ECFSA provides among other things, consultation and review of the county budget, review and comments on proposed debt issues, and audits the county's financial plan. ECFSA will continue in existence until December 31, 2039, the final maturity of all ECFSA notes and bonds.
Recent positive budgetary variances have been the result of higher property tax revenues and lower expenses, the latter partly due to aggressive vacancy control actions.
For 2013, the unrestricted general fund balance totaled $109.9 million or an adequate 8.1% of general fund spending, comparable to $110.6 million or 8.3% in 2012. Reserve levels are well in excess of the county's 5% policy.
Positively, in July 2014, the county reached agreement with CSEA, which represents the county's white collar workforce and largest block of employees. In exchange for 2% wage increases for 2014 and 2015 and 2.5% for 2016 and a $400 signing bonus, the members agreed to significant health insurance and work concessions. These concessions are expected to generate significant savings for the county.
CONSTRAINED FINANCIAL FLEXIBILITY/NARROW LIQUIDITY
The county's finances remain burdened with significant social service spending, which accounted for approximately 45% of general fund expenditures in 2013. Additionally, the county is required to make annual payments in perpetuity in operating support to the Erie County Medical Center Corporation (ECMCC), a private benefit corporation established in 2004. Starting in 2015, and for the next 14 years, the annual payment will be $18.2 million.
The county is also responsible for the local matching share of federal Medicaid payments to ECMCC. For the past few years these payments have been larger than expected. In 2013 the total payment, including the $16.2 million, was $22 million and is projected to be at least $31 million in 2014. Management expects the payments to slowly decrease starting in 2015 due to the implementation of the Affordable Care Act. Fitch believes there may be some risks to that assumption, as the full impact of ACA is not yet known.
Also hindering financial flexibility is the county's narrow liquidity. The county reports high levels of receivables and utilizes annual cash flow borrowing to cover its expenditures. Annual cash flow borrowing has increased from $65 million in 2009 through 2011 to $110 million in 2012 and 2013(8.1% of general fund revenues and transfers in). The county issues revenue anticipation notes (RANs) in August/September which ECFSA purchases with the proceeds from the issuance of mirror bond anticipation notes. Funds for repayment of the RANs are set aside by the county each month starting in February with sufficient funds accumulated to pay at the June 30th maturity.
Fitch's concern regarding the county's marginal liquidity are magnified given the county's reliance upon federal and state assistance, which is susceptible to reductions and unpredictable payment schedules, and economically sensitive sales tax revenues.
USE OF FUND BALANCE IN 2014; FUTURE DEFICITS PROJECTED
The 2014 general fund budget totals $1.4 billion, $15.5 million or 1.1% higher than the 2013 budget. The county has budgeted for a modest $7.4 million general fund balance drawdown while maintaining a reserve balance above 5%. The budget assumes a 3.4% increase in sales tax revenues above actual 2013 receipts. Sales tax revenue through August is positive and above budget with annual growth of 3.63% over 2013. No property tax increase has been budgeted but a $4.4 million increase is projected due to assessment growth. With the recent increases in the county's property and tax bases and conservative budgeting practices, Fitch believes these assumptions are reasonable.
The county prepares a four-year financial plan which is reviewed by ECFSA. The latest ECFSA approved plan projects a cumulative budget deficit of approximately $16 million for 2015-2017. Fitch expects management's continued prudent financial practices including strong oversight of expenses, will address future out-year budget gaps.
MANAGEABLE LONG-TERM LIABILITIES
The overall debt burden is high at 7.1% of market value. Direct debt includes the county's guarantee of about $90 million of ECMCC 2004 bonds and $90 million of a 2011 ECMCC facilities loan for construction of a new nursing home. Both facilities' debt service payments continue to be paid from gross receipts of ECMCC. Debt is rapidly amortized with nearly 79% retired within ten years. The county's debt plans are manageable with a modest $30 million of GO bonds planned annually over the next several years to meet capital needs.
The county participates in the New York State and Local Employees Retirement System (ERS), a cost-sharing multiple-employer defined benefit pension plan. As of March 31, 2013, ERS was funded at 87%, or about 83% assuming Fitch's conservative 7% return. The county contributes the full amount of its actuarially required contribution annually, equal to approximately 5.1% of government fund spending in 2013. The county has not participated in the pension smoothing option provided by the state, which Fitch views positively.
The county will continue to fund its OPEB liability on a pay-as-you-go basis as there is no authority under present state law to establish a trust account or reserve fund for this liability. As of December 31, 2013, the county's OPEB liability totalled $838.7 million or a sizable 1.7% of market value. Total carrying costs, inclusive of debt service, pension and OPEB costs, equalled a modest 10.8% of spending in 2013.
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, CoreLogic Case-Shiller Index, IHS Global Insight, Zillow.com 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
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=895314
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