NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AAA' rating to the following Onondaga County, NY general obligation (GO) bonds:
--$26.5 million general obligation (serial) bonds, 2016.
The bonds will finance various capital purposes. The bonds are scheduled to sell through competitive bid on June 16, 2016.
Fitch also has affirmed Onondaga County's Issuer Default Rating (IDR) and GO bond rating at 'AAA'. The affirmation affects $362 million of GO bonds currently outstanding.
The Rating Outlook is Stable.
SECURITY
The full faith and credit and ad valorem taxing power of Onondaga County supports payment of debt service on the GO bonds, subject to the 2011 state statute limiting property tax increases to the lesser of 2% or the rate of inflation (the 2011 tax cap law). The cap can be overridden annually by a 60% vote of the county legislature.
KEY RATING DRIVERS
The 'AAA' rating reflects the county's underlying economic and demographic stability, conservative budget management and a low long-term liability burden. The county's demonstrated gap-closing capacity during prior downturns and strong independent ability to raise revenues further underpin the rating.
Economic Resource Base
Onondaga County is located near the geographic center of New York State, approximately midway between the cities of Albany and Buffalo. The City of Syracuse (GOs rated 'A'/Outlook Stable by Fitch) serves as the county seat and the economic center for the region. The county's population is notable for its stability across many decades; the estimated population was 468,463 in 2015, which is almost unchanged from its 1970 population. In this respect, Onondaga County stands in a stark contrast to many other upstate New York communities that have experienced substantial population losses in that time period. County unemployment levels tend to be below state and national averages. The county benefits from a stable employment base that is bolstered by a significant healthcare and higher education presence.
Revenue Framework: 'aa' factor assessment
County revenue growth has tended to be sluggish, rising at below the rate of inflation. The county's independent legal ability to raise property tax and fee revenues is considerable. The county legislature can override the tax levy cap with a 60% majority and increase fines and fees at will.
Expenditure Framework: 'aa' factor assessment
Expenditures have been growing more slowly than revenues since 2010 due to a combination of mandate relief at the state level and shrinkage in the county's work force. Management control over most expenditure items is strong despite a state statutory framework that is generally favorable to labor. Fixed carrying costs accounted for a modest 13% of expenditures in 2015.
Long-Term Liability Burden: 'aaa' factor assessment
Onondaga's long-term liability burden is exceedingly modest compared to the size of the economic base. The overall debt burden plus unfunded pension liabilities together equal 6% of resident personal income, putting the county well inside of Fitch's 'aaa' assessment range for this rating factor.
Operating Performance: 'aaa' factor assessment
Fitch believes Onondaga County's budgetary resiliency to be exceptionally strong based on our scenario analysis review and the county's performance during the most recent recession, which was more severe than the scenario contemplated by Fitch. While an economic downturn could place considerable stress on sales tax revenues, management has closed budget gaps equal in size to the gaps posited by our scenario. Reserves could sustain a short-term blow, but we believe restoration of financial flexibility would be rapid. The county's operating results during the present economic expansion have been positive; two recent draws on general fund reserves were caused by planned transfers out to fund capital. The county has continued to fund 100% of annual pension costs and has not pulled back on spending connected with its capital improvement plans.
RATING SENSITIVITIES
Conservative Management, Low Liabilities: The rating of Onondaga County is sensitive to changes to the county's fiscal management practices, which are notable for their conservatism, as well as to sustained declines in fiscal reserves and budgetary flexibility. The rating would also be sensitive to a large build-up in the long-term liability burden, which is presently low.
CREDIT PROFILE
Onondaga County's economy is marked by both stability and variety. As manufacturing has shrunk as a share of employment, healthcare and higher education (i.e. 'eds and meds') have steadily expanded to balance out the decline in manufacturing. Scientific and technical jobs related to government and medical research have also expanded as a share of total employment in recent years. The creation of technology incubators tied to the universities has helped to establish high tech and biomedical science as vibrant niches in the local economy. These sub-sectors could take on a larger and more dynamic role in coming decades. Upstate University Health System is the county's largest employer at over 9,000. Syracuse University, the St. Joseph's Hospital Health Center, Wegman's Food Markets, National Grid and Lockheed Martin are among the county's other major employers.
As the economy has rebalanced since the 1990s, the workforce has shrunk, albeit modestly and at a gradual pace, to 236,898 in 2015 from 249,470 in 2000. The slow pace of this shrinkage and the presence of major institutional anchors such as Syracuse University have ensured that the unemployment rate has remained below state and national averages. The county and the City of Syracuse remain a major focus of upstate economic development initiatives by New York's state government. The county has received more than $1 billion in state economic development funding in the past five years.
Revenue Framework
Onondaga County's major general fund revenue sources consisted of the county share of state sales tax (48.1%), property taxes (20.8%), federal grants (12.5%) and state aid (11.9%) in fiscal 2015, which was broadly in line with earlier fiscal years. Revenue growth has tended to be sluggish, with the exception of a large one-time increase in 2006 related to a state-mandated recognition of gross sales tax receipts on the revenue statement. Adjusted for this accounting-driven increase, general fund revenues show a 10-year compound annual growth rate (CAGR) just above 0.5% - well below the rate of inflation.
Sales tax receipts have shown moderate, albeit healthy growth since 2011, although the implementation of a 10-year sales tax-sharing formula adopted by the county legislature, which became fully effective in fiscal 2013, has been the main driver of this growth. By contrast, property tax receipts were $10 million below their 2011 level in 2015. The decline in property taxes as a share of operations has been by design: the administration's rationale in entering into the sales tax-sharing agreement was to provide property tax relief to residents. State and federal aid have been stable. Taken together, these factors yield a relatively slow-growth revenue pattern for the county.
When the county's current tax-sharing formula ends in 2020, the county's portion of retained sales taxes could potentially decline based on if, and how, the formula is revised. The post-2014 drop in gasoline prices has already started to percolate into audited revenue numbers for FY2015; sales tax receipts came in $9 million below budget. State and federal aid is unlikely to become more generous in the interim. This will link revenue growth more strongly to property tax revenues than it has been in a decade. The county has set its millage rates lower as assessed values rebounded following the recession, but could re-think this approach if growth in other revenue sources is constrained.
The county's independent legal ability to raise revenues is essentially unlimited, however, as it applies to property taxes, as well as fines, fees and service charges that are levied by ordinance. New York municipalities have operated under a 2% annual property tax levy cap since 2011; however, the cap may be overridden by a 60% majority of a municipality's elected body. Where the sales tax is concerned, the county legislature has the ability to institute sales taxes up to a 3% rate independently, and may authorize higher rates with the additional approval of the state legislature every two years. Onondaga County's sales tax has been levied at a 4% rate since 2004. In 2015, the state legislature reauthorized the additional 1% rate above the 3% threshold through Nov. 30, 2017.
Expenditure Framework
Like other counties in New York State, Onondaga County provides police, fire, sanitation, drinking water and wastewater services to residents in collaboration with local government units such as cities, towns and villages. It is also responsible for the maintenance of public parks, roads and recreational facilities, and provides local funding for mandated social programs, including Medicaid. The county supports Onondaga Community College both financially and logistically.
Service delivery requires a sizable workforce. In 2016, this consists of 3,268 full-time employees, excluding employees of the college. Fitch regards the county's control over expenditures as solid in light of practical constraints and New York State's statutory framework for public employees. Positively, costs have grown more slowly than revenues since 2011 and, in fact, have declined by 1% since 2012.
Onondaga County's spending growth pattern has more or less mirrored its revenue growth pattern since 2011, rising and falling in tandem with revenues and growing below the rate of inflation. Whereas the county's five-year revenue CAGR was +0.3% from fiscal 2011 to fiscal 2015, its five-year expenditure CAGR was -0.09%. The state's efforts to maintain full pension funding and slow the growth of healthcare expenditures through mechanisms, such as its cap on Medicaid expenses, have had a beneficial effect on local governments, as have other initiatives to provide relief from unfunded mandates. Furthermore, the county's decision to sell its former nursing home and to move its Medicare eligible retirees and their dependents to a Medicare Advantage Plan as of August 2013 has lowered its annual other post-employment benefits (OPEB) cost and reduced its overall OPEB liability by $235 million (24%) between 2013 and 2014. The county's workforce has shrunk by 23% since 2006 (general fund-supported positions by about 12%) and relations with bargaining units are largely positive, which has assisted in the crafting of labor agreements that include modest annual pay increases and increased employee contributions for healthcare and pensions.
Onondaga County benefits from a relatively flexible cost structure, as fixed carrying costs for debt service, pensions and OPEB contributions were a very modest 12.9% in fiscal 2015 (Dec. 31 year-end), and have been trending in the 11% to 13% range since 2010. Of the total, debt service accounted for 6.8%, required pension contributions 3.6% and actual OPEB pay-go contributions 2.5%. Pass-through social service costs related to Medicaid and other state and federally-mandated social service programs accounted for 54% of general fund expenditures in fiscal 2015. Public safety costs constituted about 20% of spending; the remaining appropriations relate to parks and all other general government operations.
While the county operates within a relatively restrictive state legal framework for collective bargaining, management reports that relations with its seven bargaining units are largely constructive. Of these, by far the largest is the Civil Service Employees Association, which accounts for 2,322, or 71% of the workforce. Management's ability to adjust the size of the workforce during economic downturns is strong, but management must typically wait for contracts to expire before adjusting wages and benefits. Most wage and step increases have been in line with inflation, and the bargaining units have agreed to increase employee benefit contributions as part of prior contract negotiations.
Long-Term Liability Burden
Onondaga County has $615 million of long-term debt outstanding as of June 7, 2016, consisting of $362 million of GO bonds and $244 million of self-supporting State Revolving Fund loans for environmental purposes related to Lake Onondaga. Included among the county's $615 million of long-term debt are $103 million of self-supporting water and sewer bonds issued under the county's GO security. The long-term liability burden, calculated by Fitch as unfunded employee pension liabilities and total (i.e. direct and overlapping) debt outstanding as a percent of personal income, is low at 6.2% of county residents' personal income. U.S. state and local governments with long-term liabilities calculated at less than 10% of personal income fall within Fitch's 'aaa' metric for this measure. The bulk of the county's debt burden ($1 billion of nearly $1.7 billion) consists of the overlapping debt of cities, villages and school districts located within the county. The county's total pension liability equals $1.4 billion, with an unfunded actuarial accrued liability of $29 million under Fitch's assumptions, which include a 7% annual rate of return on assets.
New York State's pension systems are well funded. Local governments in the state have been given the option of paying less than their full annual pension contributions in any given fiscal year in order to assist them in balancing their budgets. The state requires local governments to amortize any such underpayments gradually over future fiscal years. Onondaga County has never availed itself of this option, which Fitch regards as an additional positive in favor of its strong long-term liability assessment. Fitch believes the county's long-term liability burden will remain modest for the foreseeable future. While the county's OPEB liability is comparatively sizable, it is still a modest burden on resources and the county has taken steps to control the size of this liability; Fitch expects OPEB as a share of personal income will decline in the future.
Operating Performance
Fitch believes Onondaga County's financial resilience in a downturn would be strong, with fiscal operations and reserves placed under modest short-term stress, but likely to recover quickly assuming the county acts, as it has in the past, to cut expenditures using modest service and headcount reductions while boosting revenues with short-term measures such as tax lien sales. Fitch's scenario analysis contemplates general fund reserves going negative in the third year following an economic downturn in the absence of actions by management. We believe it is most unlikely that this negative outcome would materialize in practice, however. Rather, we expect a modest decline in reserves would allow the county to maintain sufficient fiscal flexibility, though perhaps slightly below its historical 10% to 13% of revenues range. As a result, we view the county's financial resilience as robust enough place it in the highest reserve margin category.
The county's track record of rebuilding and/or maintaining fiscal reserves during periods of economic recovery is exceptionally positive. In the past seven fiscal years, the county has achieved consistent operating surpluses that have kept general fund reserves above its officially targeted level of 10% of revenues. Draws on reserves in fiscal 2013 and 2014 were planned deliberately and resulted from transfers out of the county's general fund and into its capital improvement fund to pay for essential repairs to county infrastructure. Management has not shied away from pursuing needed capital improvements even during periods of economic contraction, and, as noted above, has remained fully current on annual pension contributions without ever taking advantage of pension deferrals / amortization permitted by the state.
The county concluded fiscal 2015 (Dec. 31 year-end) with $2.8 million general fund surplus driven by reduced education and Medicaid spending and a slight uptick in federal reimbursements. The adopted fiscal 2016 budget grew by $21 million, or 1.6%, from the modified fiscal 2015 budget. Management reports that a $4.4 million gap has opened in fiscal 2016 due to underperforming sales taxes driven by lower gasoline prices and costs related to a recent contract settlement. Management is instituting a variety of cost-cutting measures across departments that include delaying some new hires and shifting funds between departments; they believe 2016 is likely to conclude with balanced operations and general fund reserves nearly equal to fiscal 2015 year-end.
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In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.
Applicable Criteria
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
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