NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A' rating to the following Syracuse, NY (the city) limited tax general obligation (LTGO) bonds:
--$8.6 million public improvement (serial) bonds series 2015A;
--$1.5 million public improvement (serial) bonds series 2015B.
The bonds are expected to price via competitive sale the week of June 8. Proceeds will be used to finance various capital projects.
The Rating Outlook is Stable.
SECURITY
The current issue and the city's general obligation bonds issued beginning in 2011 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 GO debt outstanding prior to the law's effective date; 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.
INCREASED RESERVES PROVIDE CUSHION: The city has augmented its fund balance through one-time and recurring revenues to a level at which it can sustain deficits projected over the next few years.
RISKS REMAIN: Limited flexibility for further revenue enhancements and expenditure cuts remains a risk 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, though both are showing improvement from reduced required pension contributions and a benefit plan shift for some retirees.
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 based on its history of outperforming projections. Should the city be unsuccessful and sustain 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 better monetize the activity of these tax-exempt organizations. Several of the tax-exempts have signed nominal 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 near Onondaga Lake. Assessed value levels have been stable.
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's unemployment rate was 6.3% in March 2015, above the state (5.8%) and national (5.6%) averages but down from past highs, though the decline largely reflects a reduction in the city's labor force, rather than employment growth. The 2010 census data showed some stabilization in the city's population over the past decade, arresting a multi-decade trend in population decline.
DEFICITS IN 2014 AND GOING FORWARD
After surpluses in fiscal 2012 and 2013 (fiscal year ending June 30) the city's fiscal 2014 budget assumed an $18 million draw, equal to 8.6% of spending. The budget assumed flat property tax revenues, a 3.4% increase in sales tax revenues, and a $3 million increase in pension costs. The city finished the year with a $3.6 million deficit, benefitting from savings on staffing and pension costs below budget. Sales tax revenue was slightly below budget. The deficit lowered the city's unrestricted fund balance to $69 million or a solid 29.1% of expenditures.
The city budgeted for a $20 million deficit for fiscal 2015 and is currently expected to finish with a $17.6 million deficit. The benefits of close management of personnel costs, pension savings and growth in parking revenues were offset by retroactive payments from an arbitration agreement with firefighters and the payment of a $1.5 million judgment. This deficit would reduce unrestricted fund balance to approximately $51 million or 22% of expenditures.
The fiscal 2016 budget includes a smaller $9.2 million use of fund balance, down from a projection of $19 million a year ago. State aid is expected to be flat, sales tax revenues will be up $2.7 million (3.4%) and pension and debt service costs will be down. The property tax rate will remain flat.
Projected annual deficits are for $19.6 million in 2017 and $22.6 million in 2018, or 9.5% of fiscal 2014 actual spending. The city has a strong history of outperforming budgeted projections but may be challenged to do so in the future. The city does not have a formal fund balance policy. Actual performance near the deficit levels projected would exhaust much of the city's remaining fund balances, causing downward pressure on the rating.
PENSION AND OPEB COSTS CREATE PRESSURES
The city faces elevated fixed costs in the form of pension and OPEB payments. Pension benefits are offered through participation in 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, 2014, ERS is well-funded at 89%, or an estimated 84% assuming a 7% return, while PFRS is 90% funded or an estimated 85% assuming a 7% return.
Pension payments have made up a high percentage of expenditures in recent years. The payments for fiscal 2014 for ERS and PFRS were down slightly from fiscal 2013, with further declines projected going forward, so pensions are expected to be less of a pressure for the city. The state has offered municipalities the opportunity to amortize part of their payments, but the city has not done so.
The city's fiscal 2014 OPEB payment was $19 million. The payment reflects about 29% of the actuarially required contribution. As of July 1, 2013, the city's unfunded OPEB liability was $567 million, or a very high 12.5% of market value. This liability is down from $933 million a year prior, as the city was able to transition 1,600 Medicare-eligible retirees to a fully insured plan. To further reduce this liability, the city is attempting to negotiate increased health care contributions from employees, which would help mitigate the OPEB burden but still likely to leave the city with a large liability.
ABOVE-AVERAGE DEBT BURDEN
The city's overall debt burden including overlapping debt is high at 7.9% of market value due primarily to weak real estate values. Debt appears more manageable on a per capita basis at $2,484, and amortizes rapidly with 81% of principal retired in 10 years. The city has limited additional borrowing needs. Total carrying costs for debt, pensions and OPEB are a moderate 17% of governmental 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
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985887
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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