Fitch Rates Suffolk County, NY's Revenue Anticipation Notes and Bond Anticipation Notes 'F1'

NEW YORK--()--Fitch Ratings assigns the following ratings to Suffolk County, NY (the county) notes:

--$55,000,000 revenue anticipation notes (RANs), 2015, at 'F1';

--$27,748,054 bond anticipation notes (BANs), 2015 series A at 'F1'.

The RANs and BANs are expected to be sold through competitive sale on April 9.

The RANs are being issued in anticipation of the receipt of certain revenues expected to be received by the county for the 2015 fiscal year from state and federal aid.

The BAN proceeds will be used to redeem 2014 series A BANs. The BANs were originally issued in 2013 to finance the cost of an arbitration award in favor of the Suffolk County Corrections Officers Association.

SECURITY

The notes are general obligations of the county with a pledge of its 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 annually by a 60% vote of the county legislature.

KEY RATING DRIVERS

MAPPING TO SHORT-TERM: As per Fitch criteria, the short-term debt rating of 'F1' is mapped to the county's long-term rating of 'A'.

IMPROVING LIQUIDITY; ADEQUATE COVERAGE: County liquidity has improved with the RAN issue representing a $30 million decrease from the 2014 issue; an additional $10 million decrease is projected in 2016. Projected coverage by revenues expected to be received by the 2016 RAN repayment date provide adequate coverage.

CHALLENGED BUT IMPROVING FINANCIAL PROFILE: The county reported a significant improvement in financial performance in 2013 leading Fitch to revise its outlook on the county's long-term general obligation bonds to Stable from Negative in March 2014. However, the county's financial profile continues to be challenged by a large but declining negative general fund reserve position (GAAP basis) and limited financial flexibility.

STRONG ECONOMIC PROFILE: The county benefits from a broad and wealthy economy and tax base characterized by below average unemployment rates and high wealth levels.

MANAGEABLE LONG-TERM LIABILITIES: The sizable and wealthy tax base results in a manageable debt burden, and debt amortization is above average. Capital needs are moderate and state pension plans are well funded.

RATING SENSITIVITIES

POSITIVE FINANCIAL PERFORMANCE: The county's ability to sustain budgetary balance, build reserves to adequate levels with largely recurring measures, and continue reducing short-term borrowing would be positive credit considerations.

CREDIT PROFILE

Suffolk is among the wealthiest counties in the state and nation, benefiting from its proximity to New York City and a well-educated work force. The county encompasses the eastern two-thirds of Long Island including the Hamptons and Fire Island. The county's population of approximately 1.5 million is the largest of any county in the state outside of New York City. Between 2000 and 2010, county population increased by a total of 5.2%. The total growth rate from 2010 to 2013 was a modest 0.4% and a slow rate of growth is expected to continue into the near future.

IMPROVING LIQUIDITY; ADEQUATE COVERAGE

The county has historically issued annual cash flow notes in anticipation of receipt of delinquent and current property taxes (DTANs and TANs, respectively). However, due to limited financial flexibility and a narrowing cash position in 2012 and 2013 the amount of these borrowings increased and revenue anticipation notes (RANs) were issued.

The county issued $625 million in cash flow notes in 2013, growing from $600 million in 2012 and $510 million in 2011. Cash flow borrowing in 2013 was a high 19.2% of 2013 budgetary expenses. Reflecting improved liquidity, the county's cash flow borrowing in 2014 decreased to $595 million and this RAN issue is a $30 million reduction from the April 2014 issue. The RAN issue for 2016 is projected to decline another $10 million to $45 million. Additionally, in 2015, TANs will be paid off a month earlier than in 2014. The trend is positive, but Fitch expects the county's reliance on cash flow borrowings to continue for the next several years.

Cash flow provides adequate coverage of 1.8x on the RANs at maturity in March 2016. Fitch believes the county's cash flow projections are reasonable; actual coverage for 2015 repayment was slightly better than projected (1.3x vs. a projection of 1.2x).

IMPROVING FINANCIAL RESULTS IN 2013

On an audited GAAP basis the county reported a general fund balance of negative $193.8 million for 2013, a $131.4 million improvement from year-end 2012. The unrestricted general fund balance totaled a negative $243.9 million or negative 11.2% of general fund spending compared to negative $401.7 million or negative 14.3% of spending at Dec. 31, 2012. For 2013, sales tax revenues were up 6.8% from 2012. This increase is higher than the 3% increase in 2012 and is the highest growth rate since 2004.

SALES TAX SHORTFALL IN 2014

On a budgetary basis, current estimates project about break-even operations, for a combined (general fund and police district) 2014 year-end fund balance of $31.2 million, comparable to $30.6 million at Dec. 31, 2013. Sales tax revenues for 2014 were budgeted to increase by 2.8% but are now anticipated to have increased only 1.4% which would equate to a $19 million shortfall. The sales tax shortfall was offset by 2014 payroll expenses that were down by $7 million, interest and tax revenues that were $2 million higher than projected, and savings of $13 million generated by the 2014 declaration of fiscal emergency.

2015 ADOPTED OPERATING BUDGET

Due to the projected sales tax shortfall, earlier this year the county executive declared a fourth consecutive fiscal emergency, allowing the county's budget office to embargo up to 10% of available appropriations, and is anticipated to generate savings of approximately $20 million. The $3.4 billion (total operating expenditures and other financing uses) 2015 budget represents a decrease in spending of less than 1% from the 2014 budget. However, the 2015 budget assumes sales tax growth of 4.87% from estimated 2014 sales tax revenues, which Fitch considers somewhat aggressive.

Initiatives that balance the 2015 budget include recurring revenues and savings along with a lesser reliance on non-recurring revenue items. Recurring measures include, for the third consecutive year, a police district property tax increase.

As in 2014, the largest measure is the amortization of the 2015 pension payment totaling $59.8 million. Positively, this amount is a decrease from previous years and about $20 million less than the county is permitted to amortize.

The budget does not contemplate the use of funds from the tax stabilization reserve fund. However, it includes the transfer of $22.5 million from the assessment stabilization reserve fund (ASRF); $32.8 million was transferred in 2014. A referendum was approved on the November 2014 ballot which authorizes the county to borrow from the ASRF through 2017 to provide tax relief. All amounts borrowed from the ASRF will be repaid by the county by 2029, with payments commencing in 2018. Fitch believes the use of reserve funds is not ideal, but it provides the county with flexibility and a lower cost of funding than bonded debt.

STRONG SOCIOECONOMIC CHARACTERISTICS

The county benefits from a broad, diverse economy and well above-average economic indicators, including solid income levels (per capita income in 2013 was 131% of the nation) and high per capita market value ($171,000). The county's unemployment rate remains lower than the rates for New York State and the nation. In December 2014 the county's unemployment rate was 4.6% compared to 5.7% and 5.4% for the state and nation, respectively. Year-over-year unemployment was down from 5.4% in December 2013, due to a decline in the labor force (1.9%) outpacing a decline in employment growth (1.1%).

MANAGEABLE LONG-TERM LIABILITIES

The county's debt ratios at $4,099 per capita and 2.4% of market value are in the moderate range, with the latter reflecting the wealthy tax base. Debt service represents a modest 5% of total government fund spending.

Debt ratios should remain stable given manageable capital needs and rapid amortization (72.3% of principal is retired within 10 years). The county usually issues debt on a semi-annual basis to finance its ongoing capital program. The county plans on issuing approximately $60 million of general obligation bonds during the spring of 2015 for various general capital purposes.

The county participates in well-funded New York State pension plans. As of March 31, 2014, the state and local employees' plan and the state and local police and fire plan had funded ratios of 88% and 89%, respectively. Using Fitch's more conservative 7% discount rate assumption the plans' funding levels would still be sound at an estimated 84% and 85%, respectively.

County pension payments in 2013 made up a moderate share (4.4%) of government fund spending. The county has taken advantage of the ability granted by the state to amortize most of the increase in annual pension payments for 2012 and 2013 over 10 years and for 2014 over 12 years. The 2015 adopted budget reduces the amount of amortization to $60 million out of a possible $80 million. This amortization option provides some near-term budget relief but will make future year budgeting for these payments more challenging.

The moderate pension liability is somewhat offset by a high unfunded actuarial accrued liability for other post-employment benefits (OPEB) at $5 billion as of Dec. 31, 2013, or 2% of market value. Carrying costs for debt service, pension and OPEB equaled a moderate 14.5% of 2013 total government fund spending, with the county's amortization of part of the pension payment somewhat offsetting rapid debt repayment.

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, 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);

--'Rating U.S. Public Finance Short-Term Debt' (Dec. 9, 2013).

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

Rating U.S. Public Finance Short-Term Debt

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=846969

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=981826

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Contacts

Fitch Ratings
Primary Analyst
Karen Wagner, +1-212-908-0230
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Arlene Bohner, +1-212-908-0554
Senior Director
or
Committee Chairperson
Karen Krop, +1-212-908-0661
Senior Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Karen Wagner, +1-212-908-0230
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Arlene Bohner, +1-212-908-0554
Senior Director
or
Committee Chairperson
Karen Krop, +1-212-908-0661
Senior Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com