Fitch Upgrades Erie County, New York's GO Bonds to 'A+'; Outlook Revised to Stable

NEW YORK--()--Fitch Ratings assigns the following ratings to Erie County, NY (the county) general obligation (GO) bonds:

--$34,615,540 public improvement serial bonds, series 2015A, at 'A+';

--$25,000,000 refunding serial bonds, series 2015B at 'A+';

--$2,490,517 sewer district serial bonds, series 2015C at 'A+'.

The bonds are expected to sell via negotiation on Sept. 29. Proceeds of the bonds will be used to fund capital improvements in the county and to refund a portion of the series 2005D-1 and series 2005D-2 bonds.

In addition, Fitch upgrades the following ratings:

--Approximately $83.4 million outstanding public improvement bonds, series 2005A, 2005B, 2005D-1, 2005D-2, 2006A, 2006B, 2012A, 2014A and 2014B to 'A+' from 'A'.

The Rating Outlook is revised to Stable from Positive.

SECURITY

The series 2015A, 2015B, 2015C, 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

RATING UPGRADE: The higher rating recognizes the county's improved 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, which should help reverse population and job losses.

CONSTRAINED FINANCIAL OPERATIONS: Finances remain constrained by high intergovernmental receivables, reliance on economically sensitive sales tax revenues and narrow liquidity. However, prudent financial management has improved reserves to adequate levels.

MANAGEABLE LONG-TERM LIABILITIES: Debt levels are expected to remain manageable given modest future borrowing needs and above-average debt amortization. State pension plans are well funded with employer contribution rates expected to decrease in 2016-2017.

RATING SENSITIVITIES

ONGOING STRUCTURAL BALANCE: The rating reflects Fitch's expectation that structural balance will continue and adequate reserve levels will be maintained. Increasing reserve levels over time could lead to a further upgrade.

INCREASE IN 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. Conversely, an improvement could help support an upgrade over time.

CREDIT PROFILE

The county is located in western New York state and includes the city of Buffalo (GOs rated 'A+'; Outlook Stable by Fitch), 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 2010 population has remained fairly stable, increasing slightly every year through 2014.

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 is stabilizing after experiencing several years of job losses due to the national recession. Unemployment rates exceeded 8% in 2009 through 2012 but have moderated. For June 2015 the county recorded an unemployment rate of 5.2%, slightly below both the state and national rates of 5.5%. Wealth indices are below the state but comparable to national averages. 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 10 years. Average annual tax base growth over the past five years was 2.4% including a 5.9% increase in 2015. The county's four year plan through 2018 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 10 top taxpayers representing a moderate 6.8% of taxable value. County property tax rates have not increased since 2009 and there are no plans to raise them at least through 2016. Property tax collections, which comprise approximately 24% of general fund revenues, remain stable, with total collections averaging 98% over the past three years.

ERIE COUNTY FISCAL STABILITY AUTHORITY (ECFSA)

The state created the ECFSA (rated 'AA+'; Outlook Stable) in 2005 to oversee and reform county finances to achieve structural balance. The ECFSA has been in an advisory role since 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 the final maturity of all ECFSA notes and bonds, currently scheduled for Dec. 31, 2039.

IMPROVEMENT IN FINANCIAL POSITION

Financial operations have shown consistent improvement since the early and mid-2000s, when successive operating deficits resulted in a negative unreserved general fund balance.

For 2014 (year-end Dec. 31), the unrestricted general fund balance totaled $118.8 million or an adequate 8.4% of general fund spending, compared to $109.9 million or 8.1% in 2013. Reserve levels are in excess of the county's 5% policy.

The 2015 general fund budget totals $1.4 billion, relatively unchanged from the 2014 budget. The county has budgeted for a modest $8 million general fund balance drawdown while maintaining a reserve balance above 5%. The budget assumes a 3.6% increase in sales tax revenue above actual 2014 receipts, which Fitch believes is somewhat aggressive. Sales tax revenues through June 2015 are $4.3 million short of budget although numbers for July 2015 show sales tax revenues up 4.29% over July 2014. Management projects year-end sales tax revenues could be about $8 million under budget, due in part to a decrease in Canadian shoppers and lower gasoline prices. The county reports that the negative variance is being offset and addressed by other positive variances including vacancy control and lower than expected social service expenses.

The 2016 budget is currently in development. It will be submitted to the County Legislature on Oct. 15, 2015 and is required to be adopted by the legislature by Dec. 1, 2015.

The county prepares a four-year financial plan which is reviewed by ECFSA. The latest ECFSA-approved plan projects a modest cumulative budget deficit of approximately $10.4 million for 2015-2018. The county has identified gap closing measures including spending reduction, fund holdbacks and revenue adjustments. Fitch expects management's continued prudent financial practices, including strong oversight of expenses, will adequately address future out-year budget gaps.

HIGH RECEIVABLES/NARROW LIQUIDITY

Constraining financial flexibility is the county's narrow liquidity. The county reports high levels of state receivables related to social services and utilizes annual cash flow borrowing to cover its expenditures. Despite improved reserves, annual cash flow borrowing has increased from $65 million in 2009 through 2011 to $110 million in 2012 through 2014 (7.8% of general fund revenues and transfers in). In July 2015, the county legislature approved the issuance of up to $110 million in revenue anticipation notes (RANs) for 2015. Because of stronger cash flow than expected year-to-date, issuance of RANs has been pushed back to October or November from September. 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 30 maturity.

An agreement between the county and the Erie County Medical Center Corporation (ECMCC), a private benefit corporation established in 2004, requires the county to provide an annual operating subsidy or to make certain Medicaid-related disproportionate share and upper payment limit payments, whichever is higher. Under the agreement, which can be re-negotiated, for 2015 and 2016 and for the following 12 years the county is legally required to make an annual payment of at least $18.2 million. The projected payment for 2015 is $18.7 million or a modest 1.3% of spending.

MANAGEABLE LONG-TERM LIABILITIES

Debt ratios are mixed with moderate debt per capita of $3,668 and above average debt to full value of 6.9%. Direct debt includes the county's guarantee of about $87.5 million of ECMCC 2004 bonds and $78.6 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 89% retired within 10 years. The county's debt plans are manageable with a modest $30 million-$35 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, 2014, ERS was funded at 90.2%, or about 85.5% assuming Fitch's conservative 7% return. The New York State Comptroller recently announced that employer contribution rates will decrease for state fiscal year 2016-2017 from 18.2% of payroll to 15.5% and the assumed rate of return will be lowered from 7.5% to 7%. The county consistently contributes the full amount of its actuarially required contribution annually and has not participated in the pension smoothing option provided by the state.

The county continues to fund its other post-employment benefits (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 Dec. 31, 2014, the county's OPEB liability totalled $682.8 million or a sizable 1.4% of market value. Total carrying costs, inclusive of debt service, pension and OPEB costs, equalled a moderate 10.9% of total government fund spending in 2014.

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

Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to fewer than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by Jan. 20, 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from CreditScope, IHS Global Insight, and Zillow Group.

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

Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=990887

Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=990887

Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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:
Eric Friedman, +1-212-908-9181
Director
or
Committee Chairperson:
Amy Laskey, +1-212-908-0568
Managing Director
or
Media Relations:
Sandro Scenga, +1-212-908-0278
New York
sandro.scenga@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:
Eric Friedman, +1-212-908-9181
Director
or
Committee Chairperson:
Amy Laskey, +1-212-908-0568
Managing Director
or
Media Relations:
Sandro Scenga, +1-212-908-0278
New York
sandro.scenga@fitchratings.com