NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'F1' rating to the following Suffolk County, NY offering:
--$410 million tax anticipation notes for 2017.
Fitch also has affirmed the following ratings:
--the county's Issuer Default Rating (IDR) at 'A-';
--$1.5 billion in outstanding general obligation (GO) debt at 'A-';
--$19 million bond anticipation notes, series 2016A at 'F1';
--$100 million tax anticipation notes, series 2016 I at 'F1';
--$45 million revenue anticipation notes, series 2016 at 'F1'.
The Rating Outlook is Stable
The tax anticipation notes (TANs) are being issued in anticipation of the collection of real property taxes or assessment levies by the county for 2017. The notes expected to sell via competition on Dec. 8, 2016 and will mature on July 26, 2017.
SECURITY
The notes 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 (the tax cap law). This limit can be overridden annually by a 60% vote of the county legislature.
KEY RATING DRIVERS
The IDR and the GO ratings reflect the county's lack of available reserves following a history of using them to fund operations. Fitch assesses the county's financial resilience as limited due to ongoing spending demands and flat natural revenue growth. The long-term liability burden is low and carrying costs for debt service, pension contributions and OPEB are moderate. Other positive credit features include the county's legal ability to increase revenues from a wealthy and diverse tax base and adequate ability to adjust budgetary spending.
The Short-term 'F1' rating for the TANs is mapped to the county's 'A-' IDR, and reflects satisfactory note repayment coverage. Cash flow is projected to provide adequate coverage of 1.3x on the current TAN issue at maturity on July 26, 2017. In addition, coverage is improved to 1.6x when alternative liquidity is included. Fitch believes the cash projections are reasonable based on historical trends of adequate cash flow coverage for repayment.
Economic Resource Base
Suffolk is among the wealthiest counties in the state and nation, benefiting from its proximity to New York City and a well-educated work force. The county encompasses the eastern two-thirds of Long Island including the Hamptons and Fire Island. The county's population of approximately 1.5 million is one the largest of any county in the state outside of New York City.
Revenue Framework: 'a' factor assessment
The county has significant independent legal ability to increases revenues. However, Fitch believes general revenue growth will remain below the rate of inflation as it has over the last decade.
Expenditure Framework: 'a' factor assessment
The county has demonstrated its ability to control expenditures including consolidating departments, negotiating labor union concessions, and reducing its workforce. The natural pace of expenditure growth is expected to remain well above expected revenue growth given weak revenue performance and the demands of contractual workforce spending.
Long-Term Liability Burden: 'aaa' factor assessment
Long-term liabilities, including both debt and unfunded pension liabilities, are a low burden on the resource base. The New York State pensions are well funded but the county's OPEB liability is considerable and the county has taken only minimal steps to control its growth.
Operating Performance: 'bbb' factor assessment
The county lacks reserves to address fiscal pressures in the event of a moderate economic downturn scenario. Fitch believes that county would be challenged to maintain current service levels without raising revenues.
RATING SENSITIVITIES
Long-term Rating: Short-term debt ratings are related to those of long-term obligations; a lowering of the city's GO rating below 'A-' would result in a downgrade in the county's short-term TAN and RAN ratings.
Satisfactory Cash Flow Coverage: The Short-Term 'F1' rating is also sensitive to Fitch's expectations for satisfactory cash coverage at the time of repayment. Declines in expected note repayment coverage could have a negative impact on the county's short-term debt ratings.
Minimal Reserve Balances: An inability to maintain at least minimal reserves could lead to further rating deterioration. Evidence of the ability to accumulate at least a modest cushion without increasing dependence on one-shots would be positive.
CREDIT PROFILE
The county benefits from a diverse economy in close proximity to New York City. Income levels are above average with 2015 per capita personal income of 123% of the nation. Full market value at $275 billion for 2017 is up about 1.5% from 2016 and market value per capita of $180,000 is strong. The county is home to Brookhaven National Laboratory (employing about 3,150), an atomic energy research facility which is expected to expand; and Stony Brook University's Technology Incubator including two centers for Advanced Technology. Fitch expects the property tax base to grow at a moderate pace given significant economic development activity including targeted programs to grow the technology industry and ongoing transportation improvements that are expected to create jobs and attract new residents.
The county's unemployment rate has historically trended below the state and national rates. The labor force has grown since 2011, with growth strengthening in recent years.
Revenue Framework
The county's revenue growth has trended below U.S. economic output and the rate of inflation over the past 10 years.
The majority of the county operating revenues come from sales tax collections (45%) and property taxes (24%). Overall, revenue growth has been lagging the rate of inflation due to slow growth in sales tax collections and in property valuations.
New York State law requires property tax revenue increases be limited to the lesser of CPI or 2% annually, unless a supermajority of the local governing body vote for a larger increase. The ability to override the cap provides substantial independent legal flexibility to raise revenues for the county. Any increase in the sales tax rate would require state approval.
In addition, the county legislature has demonstrated its ability to increase existing revenue streams or implement new ones. For example, expanded traffic and parking violation fees were adopted in 2014, and the 2017 recommended budget includes an increase in mortgage administration and real property tax map verification fees as well as increases in driver responsibility fees, vendor registration and parking fees. The county has capacity to implement new fees for services and fines for parks and recreation, and consumer affairs, and could increase the energy use tax from the present level of 2.5% to 4.0% (which is estimated to yield $33 million).
Expenditure Framework
Public safety, economic assistance and health services are the county's main spending items, including state mandates such as the county-funded health and social service programs. New York State also requires counties to provide local funding for mandated Medicaid services, although the state now covers all annual spending increases.
The pace of spending growth absent policy actions is likely to be well above the level of expected revenue growth given contractual labor cost increases as well as state-mandated programs. The county's conversion of county health centers to federally qualified centers and sale of its nursing home will have a lasting but modest effect on the pace of future county operating costs.
The county is both deferring some pension costs and repaying prior deferrals that were authorized by the state. In the near term annual pension requirements should be fairly level. Over time pension payments are likely to increase, but the rolling off of prior deferrals should keep annual increases moderate for some time.
The county's carrying costs for debt, pension and OPEB costs accounted for about 16% of 2015 general fund expenditures. Over 95% of the county workforce is represented by collective bargaining units. The collective bargaining framework in New York makes adjustments to personnel spending challenging. Despite this impediment, the county had 1,292 (13%) fewer employees in 2016 than it did in 2012. The majority of the reduction occurred in 2012, resulting from a layoff of over 400 employees, attrition and early retirements.
The county generally settles long-term labor contracts with fairly generous terms for its employees given slow revenue growth. The largest labor contract is with the Association of Municipal Employees, which covers about half of the county's employees and expires at the end of 2016. The expiring contract included 'no layoff' provisions which were negotiated after the large layoff in 2012, although new employees were required to pay a portion of health care costs. As new contracts are settled management has the ability re-negotiate this provision, which would reduce the constraints in the coming years.
The county executive has the ability to issue executive orders to declare a fiscal emergency or a notice of funding deficiency which grants significant emergency fiscal powers to embargo various department unspent discretionary appropriations to be held in reserves, but there is no ability to adjust contractual labor spending. On Aug. 2, 2016, the county issued a funding emergency and embargoed $19 million in unspent, non-encumbered discretionary budgeted appropriations.
Long-Term Liability Burden
Debt and unfunded pension liabilities are a low burden on resources, accounting for approximately 7% of county personal income. Direct debt amortization is rapid with 76% of principal paid within 10 years.
The county participates in well-funded New York State pension plans. As of March 31, 2015, the employees' and police and fire plans had a combined ratio of net assets to liabilities of 93% using Fitch's more conservative 7% discount rate assumption. The county has taken advantage of the ability granted by the state to amortize most of the increase in annual pension payments since 2012 for near-term budget relief. The amortization balance of $333 million including interest must be paid within 12 years. Fitch believes that future pension payments will remain manageable given the strength of the state plans' funded positions.
Fitch has some concerns about the unfunded actuarial accrued liability for other post-employment benefits (OPEB) of $4.9 billion as of Dec. 31, 2015, or a sizable 5% of personal income. The county continues to fund its 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.
Operating Performance
In the event of a moderate economic downturn, Fitch believes that county would be challenged to maintain current service levels without raising revenues given the lack of reserves and just adequate spending flexibility. Long-term rating stability will depend on minimizing the structural budget gap and the accumulation of at least minimal reserves.
The county has continued its efforts to reduce budget gaps with recurring revenues and cost reductions, although actual performance has resulted in operating deficits in most recent years. Headcount has been reduced significantly since 2012. All county health centers will have been converted to federally qualified centers in 2016; the county nursing home facility has been closed. However, sales tax revenues are typically over-estimated and union contracts have been settled with increases that exceed likely revenue growth and some contain no-layoff clauses.
Current fiscal 2016 operating results indicate a $78 million revenue shortfall driven primarily by under-performing sales tax collections, estimated to be 2.9% below budgeted estimates. Officials expect to minimize the budget shortfall through a mitigation plan expected to generate $95 million in expenditure savings and revenue enhancements. The plan is expected to increase general fund reserves at year end; however, the plan included an additional $60 million transfer from the Assessment Stabilization Reserve Fund (ASRF), an increase over the $28 million transfer originally included in the adopted budget. The mitigation plan also included $18.8 million in embargoed appropriations authorized by the county executive through a Notice of Funding Deficiency, which gives management the power to reduce discretionary spending and conserves cash. The sale of the county nursing home was completed in November which provided approximately $12.9 million in unbudgeted revenues.
The county has reduced its reliance on one-time revenues in recent years. The 2017 budget includes two one-shots including amortizing a net $35.2 million in annual pension costs, which is the maximum allowable amount, and delaying a $26.7 million expenditure for termination pay required under current public safety labor contracts. The 2017 budget assumes a 2% increase in sales taxes; however, Fitch believes this projection is overly optimistic based on recent trends. The county projects sales tax collections to increase by approximately 1.2% for 2016. Fitch believes the 2017 recommended budget is more conservative than prior budgets given the elimination of transfers from the ASRF, planned expenditure reductions and more moderate revenue growth assumptions; however, the budget does not fully address the larger structural imbalance.
In order to manage cash flow needs the county issues short-term revenue anticipation notes (RANs) annually and TANs twice each year. The RANs fund operations in anticipation of state and federal aid, and the TANs fund current and delinquent property tax collections. The county has a long history of issuing TANs in advance of property tax collections. Cash flow coverage has generally exceeded budgeted projections over the past three years. For 2017, total note issuance is expected to remain at $555 million (16.3% of budgetary expenses), which is consistent with the 2016 short-term par issuance.
In addition to cash flow borrowing, under a referendum approved on the November 2014 ballot the county received authorization to borrow from the ASRF through 2017 to provide budgetary relief. The ASRF provides funding to the county's sewer funds for stabilization of sewer rates and fees in addition to infrastructure and capital improvements within the sewer districts. Funds from 0.25% of the county's sales tax revenues are deposited in the county water protection fund with 25% transferred to the ASRF. The current ASRF estimated cash balance is $55 million and the county has no plans to borrow from the ASRF in 2017. All amounts borrowed from the ASRF must be repaid by 2029, with payments commencing in 2018. The ASRF repayments would require a 5% minimum annual payback of outstanding amounts borrowed.
Additional information is available at 'www.fitchratings.com'.
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)
https://www.fitchratings.com/site/re/879478
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