NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns the following ratings to Nassau County, NY (the county):
--$168,895,000,000 general improvement bonds, 2015 series B at 'A';
--$41,000,000 bond anticipation notes (BANs), 2015 series C at 'F1', and;
--$180,000,000 revenue anticipation notes (RANs), 2015 series A at 'F1'.
The bonds are expected to be sold through competition and the BANs and RANs via negotiation on May 20, 2015.
The bonds are being issued to fund various public purposes, including capital projects, employee separation payments, Superstorm Sandy assessment relief and tax certiorari payments.
The BANs are being issued to finance various sewer system improvements.
The RANs will be issued in anticipation of receipt by the county of net allocable sales taxes for the county's fiscal year commencing Jan. 1, 2015 and ending Dec. 31, 2015.
In addition, Fitch affirms the following ratings:
--Approximately $1.8 billion in outstanding general obligation (GO) bonds at 'A';
--Approximately $243 million in outstanding Nassau Health Care Corporation (NCHCC) county-guaranteed bonds at 'A', and;
--Approximately $13.1 million in outstanding Nassau Regional Off-Track Betting Corporation (NROTBC) revenue bonds series 2005 at 'A-'.
The Rating Outlook on the bonds is Stable.
SECURITY
The GO bonds, BANs, RANs, and NCHCC bonds carry 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 as appropriated for such purpose. The county has committed 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
LIMITED FINANCIAL FLEXIBILITY: The primary driver of the 'A' rating is Fitch's expectation that the county's financial flexibility will remain limited, evidenced by weak reserves and a high dependence on economically sensitive sales tax revenues.
SHORT-TERM MARKET RELIANCE; SOUND COVERAGE: Low liquidity and the county's reliance on short-term market access for note repayment and operations is a key concern. However, note coverage from projected 2016 revenues, borrowables and note proceeds is strong, note par has declined slightly over the last few years and the county continues to have strong market access.
STRONG ECONOMIC FUNDAMENTALS: The county maintains a diverse economy and tax base, and has a population with high income levels.
MANAGEABLE LONG-TERM LIABILITIES: The sizable and wealthy tax base supports a manageable debt burden with above-average amortization. Capital needs are moderate and state pension plans are well funded.
IMPROVED RELATIONSHIP WITH NIFA: An improved working relationship with the Nassau County Interim Finance Authority (NIFA) has led to the negotiation, approval and implementation of several important revenue enhancing and expenditure reduction initiatives. NIFA's power as an oversight board remains a credit positive, providing some limits to downside risk.
RATING SENSITIVITIES
PROGRESS TOWARDS DEFICIT REDUCTION: The 'A' rating and Stable Outlook incorporate Fitch's expectation that the county will resume modest progress in sustainable deficit reduction to maintain a stable, albeit tightly balanced, financial profile. The rating is sensitive to a shift in these fundamentals.
CREDIT PROFILE
The county is located on Long Island, approximately 15 miles east of Manhattan. The population of approximately 1.3 million has remained fairly steady since 2000.
WEAK PERFORMANCE IN 2014 LED BY SALES TAX DECLINE
Unaudited GAAP basis show a deficit of $21.5 million (less than 1% of spending) over the five operating funds (general, police headquarters, police district, fire prevention and debt service) compared to a $48.6 million surplus in the year prior. The NIFA results, which are more restrictive than GAAP, reported a deficit of $158.2 million compared to a $78.6 million deficit in 2013.
Sales tax revenues make up approximately 38% of major tax-supported fund revenues. In 2014, sales tax revenues were weak - $66.4 million lower, or 5.8% below budget, than the prior year. This was the first year since 2009 that year-over-year sales tax revenues declined. Fitch believes the decline is reflective of the up-tick in spending in 2013 related to Superstorm Sandy rebuilding and poor weather in the early part of the year.
CORRECTIVE ACTIONS TO ADDRESS 2015 BUDGET GAP
The 2015 adopted budget of $2.98 billion ($1.8 billion general fund) is 6.4% above the 2014 adopted budget. The budget maintains headcount at 7,395 (actual headcount for first quarter was 7,210). The budget includes sales tax revenue growth of 4.4% from projected 2014 actual results. For the first quarter of 2015, sales tax revenue was up 3% from last year's first quarter. The county has assumed a more conservative 2% growth for the remainder of the year, which results in a projected sales tax budget gap of $30 million.
The budget includes new or increased recurring revenues led by a 3.4% increase ($31 million annually) in property taxes estimated to bring property taxes to 28% of total revenues. The minority caucus in the county legislature has commenced litigation to have the property tax hike declared void claiming certain alleged irregularities in the legislative process. Management considers the allegations to be completely without merit, but presents concerns to Fitch about the practical ability to raise revenue as needed and the level of cooperation between branches of government.
The county is projecting a $24.6 million deficit in 2015, prior to corrective actions. Large unfavorable variances include the above-mentioned sales tax shortfall and the loss of approximately $40 million following the County Legislature's repeal of controversial school speed camera legislation. Lower revenues are offset in part by a decline in Medicaid costs and elimination of a $13 million subsidy to the Nassau Health Care Corporation.
Management reports that it has numerous options to close the gap including receipt of $13.1 million in community development block grant funding of FEMA expenses, savings in debt service payments and higher than anticipated tax map verification revenue. If all of these measures come to fruition the county would record a surplus of $7.5 million for 2015. Fitch expects close to break-even results for 2015, but these measures do little for long-term budget balance.
OUT-YEAR GAPS REMAIN; SLOW DEFICIT REDUCTION EXPECTED
The county's NIFA-approved Multi-Year Financial Plan (2015-2018) projects budget gaps over the major operating funds of $18.3 million in 2016; $36.8 million in 2017, and $66.2 million in 2018 or 0.54%, 1.1%, 1.9% of spending, respectively.
Fitch believes the projected gaps are manageable relative to the size of the county's operating funds budget but remains skeptical about the county's ability to implement ongoing gap-closing measures and produce breakeven to positive operations. Some of the measures are of a non-recurring nature and may not be realistic given that one or more will require state legislation, action by the county legislature, or approval from NIFA. The 'A' rating and Stable Outlook largely reflects Fitch's expectation of a resumption of slow and steady reduction in GAAP and NIFA deficits and county and NIFA projections for manageable deficits going forward.
DECLINING CASH-FLOW BORROWINGS
The county generally issues short-term RANs and TANs around May/June and November/December of each year. Proceeds fund operations in anticipation of sales and property tax receipts and maintenance of cash balances sufficient to repay maturing notes.
Note par has declined over the past few years. Note borrowing in 2012 equaled $476 million or a somewhat elevated 16% of operating fund receipts ($20 million was to account for timing differences with respect to Superstorm Sandy). For 2013, borrowings totaled $433 million (14.1% of receipts) and note par for 2014 declined further to $398 million (13.2% of receipts). Projected note issuance for 2015 is $380 million but will be reevaluated and potentially downsized, depending on the timing of FEMA reimbursements.
Fitch notes the positive decline in cash flow borrowing and strong market access but remains concerned about the county's dependence on short-term funding, particularly as the borrowings overlap each other requiring additional issuance to repay outstanding notes from tax-supported operating funds.
SOUND NOTE REPAYMENT COVERAGE
The county's cash flows along with proceeds of outstanding notes generally provide substantial coverage for notes with funds for their repayment fully set aside comfortably in advance of maturity. The current RAN issue matures March 15, 2016. Coverage is sound at 2.9x and increases to 3.2x with consideration of borrowable balances in non-major funds.
PROPERTY TAX REFUND REFORM
Fitch views as a credit positive state legislation enacted last year that structurally reforms property tax refunds. The creation of a Disputed Assessment Fund, effective for the 2017 tax roll, will be funded by commercial property owners who challenge their assessments, and will eliminate the county's need to borrow for future property tax refunds.
Fitch believes the resolution to property tax refund relieves the county of a substantial obstruction in its path towards long-term fiscal balance and liquidity improvement. The county issued $125 million of bonds in 2014, and the County Legislature has agreed to the plan to issue $60 million of bonds in each of the years 2015 (included in the current bond issue) through 2017 to reduce the $305 million accumulated tax refund liability. Such borrowings are subject to NIFA approval.
STRONG SOCIOECONOMIC CHARACTERISTICS
The county benefits from a broad, diverse economy and well above-average economic indicators, including $151,000 market value per capita and solid income levels with 2013 per capita income and medium household income at 151% and 184%, respectively, of the U.S.
The county's unemployment rate remains lower than the rates for New York State and the nation. For February 2015, the county's unemployment rate was 4.8% compared to 6.4% and 5.8% for the state and nation, respectively. The year-over-year decline in unemployment (from 5.6% in February 2014) is attributable to the decline in the labor force (1%), outpacing the decline (0.2%) in employment.
INCREASING BUT MANAGEABLE DEBT LEVELS
The county's debt ratios continue to increase but are still manageable in relation to its wealthy tax base. Overall debt totals are moderate at $3,724 per capita and 2.5% of market value. However, Fitch believes the statistics are understated as they exclude debt issued by school districts.
Debt ratios should remain fairly stable given manageable capital needs and above-average amortization with 66% (including debt issued by the NIFA) retired in ten years.
WELL-FUNDED STATE PENSION PLANS
The county participates in the well-funded New York State pension plans. At 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%) of 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. 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 $4.6 billion or 2.2% of market value as of Dec. 31, 2013. Carrying costs for debt service, pension and OPEB pay-go equaled a high 21.6% of 2013 total governmental fund spending, with the county's amortization of part of the pension payment somewhat offsetting above-average debt repayment.
IMPROVED RELATIONSHIP WITH NIFA
Fitch believes NIFA's oversight has had some positive effects on the county's financial operations, such as instilling increased budgeting discipline. Fitch takes comfort that despite losing its wage freeze power through fiscal 2017 on settled contracts, NIFA provides an added layer of oversight and has the power to assure budgetary balance.
Through an improved working relationship, several important initiatives have been successfully negotiated and approved including the creation of the Disputed Assessment Fund, new labor contracts with moderate increases and an agreement with United Water to manage the county's water and sewer facilities.
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-ShillerIndex, 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
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=984522
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