Fitch Rates New York State's $325MM GO Bonds 'AA+'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'AA+' rating to $325,385,000 in State of New York general obligation (GO) bonds, as follows:

--$139,470,000 series 2015A tax-exempt bonds;

--$5,645,000 series 2015B taxable bonds;

--$180,270,000 series 2015C tax-exempt refunding bonds.

The par amounts are subject to change pending final sale. The bonds are expected to sell via competitive sale on March 10, 2015.

The Rating Outlook is Stable.

SECURITY

GO bonds are backed by the full faith and credit of the state of New York.

KEY RATING DRIVERS

SUSTAINABLE BUDGETING PRACTICES: The rating reflects the improved fiscal management practices of recent years that have resulted in timely and more sustainable budget-making. Notable recurring actions were taken to close budget gaps in the downturn, and the state has limited spending growth in the recovery.

WEALTHY ECONOMY LINKED TO FINANCIAL SERVICES: New York's economy is broad, with substantial wealth and resources. The financial activities sector is significant to the state's economy and finances, although it is prone to above-average cyclicality.

STRONG FINANCIAL PLANNING AND REPORTING: The state stays abreast of changing conditions through comprehensive quarterly updates of a four-year financial plan.

MODERATE LIABILITY BURDEN: New York's debt burden is above average but in the moderate range, and the debt burden has declined in recent years. Pensions are well funded, with the unfunded liability below the state median. The combined burden of debt and pensions matches the national median.

RATING SENSITIVITIES

CONTINUED CAREFUL BUDGET MANAGEMENT: The 'AA+' rating assumes the state's continued commitment to constrained formula funding of key spending items and realistic forecasting of revenues. Ongoing proactive financial management is critical given the state's limited reserve funding position.

CREDIT PROFILE

New York's GO bond rating reflects the state's strengthened fiscal management of recent years and Fitch's expectation that the state will continue to adhere to these practices going forward. The state has implemented a wide range of beneficial changes to its budgeting, including on-time budget enactment, consensus revenue forecasting and expenditure growth curbs while avoiding significant reliance on one-time resources. In Fitch's view, these changes have resulted in more sustainable budgeting measures compared to earlier fiscal practices, in which the state relied on nonrecurring actions to cover persistent structural pressures and recession-driven revenue cyclicality.

Recent fiscal management improvements remain untested by a severe recessionary event, but, in Fitch's view, the state is in a materially improved position to address future economic and revenue cyclicality. Fitch believes that, with proactive budget management, New York continues to have a margin of flexibility to respond to unforeseen economic and revenue weakness beyond the level provided by its modest reserve balances.

The state's substantial wealth and resources and broad economy remain ongoing credit strengths. The rating continues to recognize 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, and the combined burden of debt and pensions matches the median for U.S. states rated by Fitch.

IMPROVED FINANCIAL MANAGEMENT

The state's credit has been strengthened by significant improvements in financial management in recent years, including notable efforts over the last four enacted budgets to address longstanding expenditure growth concerns. Although New York's financial position was strained during the recession, its approach to budgeting has become more sustainable 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, lowering the cumulative four-year budget gap projected at the time to $10 billion, from $63 billion. Notably, it included a framework for ongoing expenditure control that has informed subsequent enacted budgets, including 2% annual growth in state operations and formula mechanisms for Medicaid and school aid, the two largest drivers of state spending.

Fitch believes that continuing to meet cost control targets for Medicaid and school aid will remain significant challenges despite some noteworthy successes to date. Medicaid and school aid formula increases are expected to result in growth of about 4% per year. For Medicaid, targets have proved achievable and the administration has been granted powers that strengthen the ability to remain on budget. For school aid, the state provided additional funding above what the calculation would have dictated in fiscal 2014 and 2015, noting comparatively low levels of growth in the basis for the personal income-linked spending growth formula. Proposed school aid funding again exceeds the formula level in fiscal 2016, as discussed below.

FISCAL 2015 BENEFITTING FROM SETTLEMENTS

The fiscal 2015 budget as adopted addressed a fiscal 2015 budget gap estimated at $1.7 billion and covered a tax reduction package with a first-year impact of $725 million. Including enacted policy actions, the four-year gap estimate was lowered to $7.5 billion, from $11.5 billion. The state's own presentation assumed that an additional $10.4 billion in out-year actions would be taken to maintain the 2% state operating funds spending growth benchmark, resulting in small surpluses through the fiscal 2018 financial plan period. The tax reduction package noted earlier included temporary personal income tax (PIT) credits targeting filers in communities outside New York City that maintain a 2% property tax cap, as well as permanent tax changes affecting business and estate taxes, among other changes. The cumulative estimated impact through fiscal 2018 totaled $4.1 billion.

Fiscal 2015 year-to-date performance has been well above enacted budget expectations. Monetary settlements with financial institutions have provided a significant fiscal windfall to the state, with a total of almost $5.7 billion now forecast, compared to $275 million in the original budget. The governor's amended executive budget for fiscal 2016, released in early March, proposes directing the windfall to one-time needs, including for infrastructure ($3.1 billion), upstate economic development grants ($1.5 billion), and to help cover a potential future disallowance of certain past federal Medicaid reimbursements ($850 million). In Fitch's view the state's proposed approach to applying the unexpected settlement funds is consistent with the stronger fiscal management approach taken by the state in recent years.

Year-to-date tax receipts have exceeded previous forecasts given the state's recent solid economic performance. General fund tax receipts through December 2014 are more than $1.6 billion higher than forecast in the enacted budget, led by personal income and business tax gains. Despite the strong year-to-date performance, the state slightly reduced its expectation for fiscal 2015 revenue over-performance in the governor's amended executive budget given less rapidly growing personal income tax collections noted in January. Fiscal 2015 ends on March 31.

All funds tax receipts growth is expected to be 1.2% in fiscal 2015, ahead of the 0.7% growth rate assumed at budget enactment. With higher general fund receipts totaling $323 million and $200 million in lower planned spending, the amended executive budget forecasts a year-end operating surplus of $525 million, which would be directed to augment the rainy day reserves ($315 million) and prepay fiscal 2016 debt service ($210 million). Including the additional deposit, the state forecasts a combined balance in the rainy day and tax stabilization reserves at nearly $1.8 billion at fiscal year-end, a high level compared to past state experience but relatively low considering the state's history of revenue volatility.

PROPOSED BUDGET CONTINUES RECENT PRACTICES

For fiscal 2016, the state assumes all funds taxes rising by $3.9 billion (5.6% from the prior year). Total general fund receipts are forecast to decline by $2.6 billion (3.8% from the prior year), reflecting the impact of one-time settlement funds received during fiscal 2015. General fund disbursements excluding transfers are budgeted to increase by $2.5 billion (4.6% from the prior year), while overall state operating funds rise by $1.6 billion (1.7%), below the 2% spending benchmark in place since fiscal 2012. The amended executive budget proposal incorporates policy changes to close a fiscal 2016 budget gap estimated at $1.8 billion as of the state's November 2014 forecast. Gap-closing measures include $1.4 billion in trims to spending growth in local assistance, including education, school tax relief and Medicaid; the proposal also funds about $186 million in new initiatives. Overall state Medicaid disbursements are assumed to grow at 3.6%, consistent with the global Medicaid cap noted above. By contrast, school aid rises 4.8% (school year basis), above the formula level in place since 2012, conditioned on a range of education reforms.

The financial plan forecast for the fiscal 2017-2019 period assumes continued adherence to the 2% state operating spending growth benchmark, a level which would require identifying future state actions growing from $1.9 billion in fiscal 2017 to nearly $5.5 billion in fiscal 2019. A portion of the resulting forecast surpluses would be used to fund income-based real property tax credits and reductions to business income taxes.

VOLATILE FINANCE SECTOR ANCHORS WEALTHY ECONOMY

New York's economy is characterized by strong wealth levels and considerable breadth, although there is volatility inherent in the important financial services industry. In contrast to previous downturns, the state's employment decline in the recession was notably 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, and, although state gains lagged the nation's in 2012 and 2013, New York exceeded its pre-recession employment peak in 2012, well ahead of the nation.

The December 2014 year-over-year employment gain of 1.2% for New York was well under the 2.3% U.S. growth rate. The state's current forecast anticipates employment growth of 1.7% in fiscal 2015 and 1.4% in fiscal 2016. The state's unemployment rate was below the nation's during the recession; however, with labor force growth, the state's unemployment has exceeded the nation's since 2012. Most recently, December 2014 unemployment was 5.8% in New York, compared to 5.6% nationally.

Measured on a per capita basis, New York's per capita personal income was 122% of the nation's in 2013, ranking it fourth among the states.

ABOVE AVERAGE DEBT AND STRONG PENSIONS

New York's state net tax-supported debt is above average but still in the moderate range at 5.1% of personal income as of March 31, 2014, about twice the median for U.S. states rated by Fitch. 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 within the budget division and approval by the public authorities control board is required for many of these bond issues.

Funding of two major statewide pension systems, covering general employees and police and fire employees, has benefitted from historically strong contribution practices. An optional contribution deferral mechanism authorized in 2010 and used by the state several times since temporarily lowered the state's contributions in return for higher forecast contributions as deferrals are repaid. Reported pension funded ratios as of the systems' March 31, 2014 annual report have been sound, at 88.5% for the employees' system and 89.5% for the uniformed employees' system. Using Fitch's more conservative 7% return assumption (compared to the 7.5% level assumed by the plans) would lower the funded ratios to a still sound 83.9% and 84.9%, respectively. As calculated by Fitch in its 2014 state pension report, the burden of net tax-supported debt and adjusted unfunded pension obligations attributable to the state measures 6.1% of personal income, on par with the U.S. state median.

Additional information is available at 'www.fitchratings.com'.

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

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

U.S. State Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=980919

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Contacts

Fitch Ratings
Primary Analyst
Douglas Offerman
Senior Director
+1-212-908-0889
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Laura Porter
Managing Director
+1-212-908-0575
or
Committee Chairperson
Marcy Block
Senior Director
+1-212-908-0239
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Douglas Offerman
Senior Director
+1-212-908-0889
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Laura Porter
Managing Director
+1-212-908-0575
or
Committee Chairperson
Marcy Block
Senior Director
+1-212-908-0239
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com