NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a rating of 'AAA' to the county's $36.7 million general obligation (GO) bond sale. The Rating Outlook is Stable.
The county's $36.7 million General Obligation Refunding (Serials) Bonds, 2016 are scheduled to price on the morning of Oct. 25, 2016 via negotiated sale. Proceeds will be used to refund portions of the county's 2009, series A and 2011 GO bonds for net present value savings. Bonds of the present issue have a final maturity of March 1, 2030.
The full faith and credit and ad valorem taxing power of Onondaga County supports payment of debt service on the county's series 2016 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 an exceptionally modest 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 New York and Buffalo. The City of Syracuse (GOs rated 'A'/Stable Outlook) 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 of 468,973. In this respect, Onondaga County stands in a stark contrast to many other upstate New York communities that have experienced substantial population losses since the early 1970s. 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. SUNY 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 major employers.
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 12.9% 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 5.7% 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 the county's performance during the last recession, which was more severe than the stress scenario contemplated by Fitch. While an economic downturn could stress sales tax revenues, management has closed budget gaps equal in size to the gaps likely to occur as the result of a moderate recession. Reserves could sustain short-term strain, but Fitch believes restoration of financial flexibility would be rapid. Operating results during the present economic expansion have been positive; two recent draws on reserves were caused by planned transfers to fund capital. The county has continued to fund 100% of annual actuarially-based pension costs and has not deferred necessary capital spending.
Onondaga County's rating is sensitive to changes in revenue growth patterns that might augur stronger revenue growth going forward and to shifts in the absolute level of general fund reserves, as well as to changes to the county's fiscal management practices, which are notably conservative.
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. 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 SUNY Syracuse 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 received more than $500 million in state grant funding in the past five years.
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 (Dec. 31 year-end), which was broadly in line with earlier fiscal years. Sales tax receipts have demonstrated moderate, albeit healthy, growth since 2011, with some modest underperformance in fiscals 2015 and 2016 connected to the drop in gasoline prices. By contrast, growth in property tax revenues has been sluggish. In addition, because of policy actions taken by the county to provide tax relief to residents, property tax receipts were $10 million below their 2011 level in 2015. State and federal aid have been stable. Taken together, these factors have yielded a relatively slow-growth revenue pattern for the county. The initiative to raise property tax revenues lies with the county, and its elected leaders have considerable legal and political flexibility to do so. With a vote of 60% of the county legislature, the county may override New York's 2% annual property tax levy cap.
Growth prospects for revenues continue to be slow-to-sluggish with a 10-year historical CAGR just above 0.5% -- well below the rate of inflation. When the county's tax-sharing agreement with the City of Syracuse ends in 2021, sales taxes stand to lose some of their growth momentum, and the recent drop in gas prices has already started to percolate into audited revenue numbers for 2015. State and federal aid is unlikely to become more generous between 2016 and 2021. Less robust sales tax performance (including the potential for a decline) will link county general fund revenue growth more strongly to property tax revenues than it has been since before 2008. Fortunately, the county has ample flexibility to raise property tax millage rates, and collections are exceptionally strong at over 97%.
The county's independent legal ability to raise revenues is essentially unlimited as it applies to property taxes and fines, fees and service charges that are levied by ordinance. New York municipalities have operated under a 2% annual property tax levy growth 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 July 2015, the state legislature reauthorized the additional 1% rate above the 3% threshold through November 30, 2017.
Like other counties in New York State, Onondaga County provides police, fire, sanitation and drinking 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 moderate-to-adequate 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, moving in tandem with revenues and growing below the rate of inflation. Whereas the county's five-year revenue CAGR was -0.3% from 2011 to 2015, its five-year expenditure CAGR was -0.08%. The state's efforts to maintain full pension funding and slow the growth of healthcare expenditures through its cap on Medicaid expenses have had a beneficial effect on local governments, as have initiatives to provide relief from unfunded mandates. The county's decision to move Medicare eligible retirees and dependents to a Medicare Advantage Plan in August 2013 has lowered annual OPEB costs and reduced the OPEB liability by $973.2 million (62%) between 2013 and 2014. Its workforce has shrunk by 23% since 2006 (general fund supported positions have been reduced by 11.8%) and relations with bargaining units are largely positive, which has made possible the crafting of labor agreements that include modest annual pay increases and greater 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 moderate 12.9% in 2015, and have been trending in the 11% to 13% range since 2010. Of the total, debt service accounted for 6.8%, required pension contributions 3.5% 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 41.6% of general fund expenditures in fiscal 2015. Public safety costs constituted 20.8% of spending, and local social service and community college funding accounted for 6.1% and 6.9% of the total. The remainder of appropriations relate to county roads, parks and water/wastewater services.
While the county operates within a relatively restrictive state legal framework for collective bargaining, management reports that relations with its seven bargaining units are 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 and to furlough employees during economic downturns is strong, but management typically must wait for contracts to expire before adjusting wages and benefits. Expired labor contract terms remain in force as per New York State's Triborough Amendment until new contracts are finalized.
The only labor contract subject to binding arbitration is the county's contract with the Onondaga County Sheriff's Police Association (OCSPA); however, arbitration has seldom occurred in practice. Most wage and step increases have been in line with inflation, and Onondaga County's bargaining units have agreed to increase employee benefit contributions as part of the negotiation of prior contracts. The county legislature may impose 0% salary increases for a single fiscal year if a labor contract is expired by a majority vote of the legislators. It has taken such action infrequently in the past.
Long-Term Liability Burden
Onondaga County will have $631 million of long-term debt outstanding as of Oct. 25, 2016, consisting of $388 million of GO bonds and $243 million of self-supporting State Revolving Fund loans for environmental purposes relating to Lake Onondaga. The total debt figure includes $103 million of self-supporting water and sewer debt. 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 exceptionally modest at 5.7% of the personal income of county residents. US 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.
New York State's local governments have been given the option of paying less than their full annual actuarially-required 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 long-term liability burden will remain modest for the foreseeable future. While the county's OPEB liability is large, it has taken steps to control the size of the liability. Fitch expects OPEB as a share of personal income will decline in the future.
Fitch believes Onondaga County's financial resilience in a downturn would be strong, with fiscal operations and reserves placed under short-term stress, but likely to recover quickly assuming the county acts - as it has in the past - to cut expenditures by means of modest service and headcount reductions, while boosting revenues using short-term measures such as tax lien sales. Fitch's scenario analysis model contemplates general fund reserves going negative in the third year following a modest economic downturn in the absence of policy actions. Fitch believes it is most unlikely that such an outcome would materialize in practice, however. Rather, Fitch expects the county to maintain sufficient fiscal flexibility despite a model decline in reserves to a level slightly below their historic range of 10% to 13% of expenditures. As a result, Fitch views the county's financial resilience as robust enough to 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 positive. In the past seven fiscal years, the county has achieved consistent operating surpluses that have kept general fund reserves above their officially targeted level of 10% of expenditures. Draws on reserves in 2013 and 2014 were planned 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 has remained fully current on annual pension contributions, without ever taking advantage of pension deferrals/amortization permitted by the state. The 2015 fiscal year ended with a $2.8 million general fund operating surplus that increased available general fund balance to $83.8 million, equal to 12.8% of expenditures.
The 2016 budget grew by $22 million, or 1.6%, over the prior year and was balanced without a property tax levy increase, but included the planned use of $3 million of reserves. Management estimates that 2016 will conclude with a modest operating deficit in the $5 million to $8 million range and an equal drawdown of general fund balance, bringing available reserves to approximately $76 million, equal to about 11.5% of expenditures. Two percent pay raises associated with a labor contract settlement, above-budget healthcare costs and lower-than-budgeted sales tax revenues are the main drivers of the anticipated 2016 deficit. The 2017 budget grew by $25 million, or less than 1%, over the prior fiscal year. The budget is balanced with $5.4 million of fund balances, $3.5 million of reserves generated by a recent tobacco bond refunding, and a slender $1.4 million property tax levy increase.
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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.
Relevant Disclosure: The date of the last relevant rating committee for Onondaga County took place on June 13, 2016.
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
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