Fitch Affirms DASNY's Upstate Community Colleges Revs 'A+' Underlying

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the underlying 'A+' rating on outstanding Dormitory Authority of the State of New York (DASNY) upstate community colleges revenue bonds, including $54,080,000 series 2005C bonds that are scheduled to be remarketed the week of September 1 with a letter of credit issued by Depfa Bank. The Rating Outlook is Positive.

The 'A+' underlying rating is based on the credit quality of the State of New York (general obligations rated 'AA-' with a Positive Outlook by Fitch), as bonds are secured by annual legislative appropriations under state education law. Appropriation risk is minimal given the central role this type of debt plays in the state's overall debt structure and the state's long history of making payments on such obligations.

The upstate community colleges bonding program provides for the financing of the state's 50% share of capital costs for its 30 community colleges that operate under the aegis of the State University of New York (SUNY). Bonds have been issued for the upstate community colleges program under several resolutions; although the lien on state appropriations varies by resolution, the state makes one appropriation for the upstate community colleges program.

New York's 'AA-' GO rating recognizes the state's substantial wealth and resources and broad economy, somewhat tempered by uneven performance across the state. Although the pace of employment growth has slowed, the state is outperforming the nation. Nonfarm employment rose 0.3% in July compared to a decline of 0.1% for the U.S., and the state's unemployment rate of 5.2% was 91% of the U.S. rate. New York's net tax-supported debt levels have been relatively stable as a percentage of personal income and are expected to remain above average but still in the moderate range; pensions are well funded.

In the first-quarter update to its financial plan, released on July 30th, the state meaningfully reduced forecasts of tax revenues. The new forecasts identified a $630 million general fund shortfall for the current fiscal year and increased the fiscal 2010 gap estimate by $1.3 billion, to $6.4 billion (including a $310 million Health Care Reform Act [HCRA] shortfall). The revisions were a response to developments since the enacted budget and highlight the importance of the cyclical financial services industry to state revenues. The current-year shortfall was largely attributable to lowered performance of and expectations for business (particularly bank) taxes and, to a lesser extent, sales and use taxes; the outyear estimates for all major tax sources were reduced.

Although Fitch recognizes the significant uncertainty associated with the declining economic and financial environment, the state is taking proactive steps to address the projected budget gaps. The governor has announced specific agency savings targets to resolve the identified $630 million fiscal 2009 shortfall and on August 20 the governor and legislature, in special session, agreed to measures that will provide more than $400 million in fiscal 2009 savings and an additional $600 million in fiscal 2010 savings. This hedges against the possibility of additional shortfalls this year and begins to address the fiscal 2010 gap, which is now reduced to $5.4 billion. Future credit direction will depend on the severity and duration of the downturn and the state's success in achieving sustainable budget solutions. The next quarterly update to the financial plan is scheduled for October 2008.

Fitch issued an exposure draft on July 31 proposing a recalibration of tax-supported and water/sewer revenue bond ratings which, if adopted, may result in an upward revision of this rating (see Fitch research 'Exposure Draft: Reassessment of the Municipal Ratings Framework').

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