Fitch Rates New York City's $308MM GOs 'AA-'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA-' rating to New York City's (the city) $308 million general obligation (GO) bonds fiscal 2009 series G, consisting of the following:

--$300 million subseries G-1 tax-exempt bonds;

--$8 million subseries G-2 taxable bonds.

The bonds are scheduled to be sold the week of Dec. 8, 2008 through negotiation. In addition, Fitch has affirmed at 'AA-' the city's approximately $33 billion in outstanding GO bonds, including the unenhanced long-term rating on the fiscal 1995 series F, subseries F-2 variable rate demand bonds. The $19 million fiscal 1995 subseries F-2 bonds are expected to be converted into fixed-rate mode without credit support on or about Jan. 2, 2009 and thereafter will carry the city's long-term GO credit rating. The Rating Outlook is Stable.

The city's credit strength is based on the breadth of the economy, high income levels, and exceptional budget management and controls, including a consistently demonstrated ability and resolve to close budget gaps. Offsetting factors include economic and revenue vulnerability to the troubled financial services industry and to the real estate market as well as high and rising levels of debt. Although Fitch believes that the city has reacted quickly to the current downturn, revising revenue forecasts and taking steps to maintain balance and reduce outyear budget gaps, the extent of actual financial services industry losses and real estate declines remains a major uncertainty going forward.

The city has responded to the current financial market disruptions proactively, consistent with recent practice. On Nov. 5, 2008, the mayor released the November modification to the financial plan. The modification reduced revenue estimates for fiscal 2009 and beyond, with projections of fiscal 2009 tax revenues down $285 million and fiscal 2010 lowered by $1.3 billion, reflecting lowered expectations for all major taxes. The mayor's proposed gap-closing plan includes reducing headcount and rescinding the scheduled current-year 7% property tax cut and $400 property tax rebate. Prior to the forecast revision, the mayor had called for across-the-board agency cuts of 2.5% for this fiscal year and 5% for fiscal 2010, for savings of $500 million in fiscal 2009 and $1 billion in fiscal 2010. The November 2008 revenue estimates assume that personal income, business, sales, and real estate transaction-related tax revenues all will drop in fiscal 2009 and that, except for bank taxes, fiscal 2010 will see additional declines. The city reports that November 2008 collections from the economically sensitive taxes were about $130 million below forecast, after giving effect to extraordinary adjustments.

The city rolled about $4.6 billion in fiscal 2008 surplus into fiscal 2009 (with about $460 million of that rolled into fiscal 2010 and $350 million into fiscal 2011) and applied an additional $2 billion to pay debt service due in fiscal 2010. The mayor's November 2008 plan would result in an additional $991 million in fiscal 2009 to be used to prepay fiscal 2010 expenses, reducing the projected gap in that year to $1.3 billion. Major risks to the financial plan include uncertainty regarding financial sector profits and bonuses and exposure to state aid cuts.

The city possesses inherent strength in the scope of its unique economy and its singular identity as a major tourist destination and an international center for numerous industries. The city's personal income per capita is 127% of the national average. Economic dependence on Wall Street remains, with financial activities accounting for about 12% of jobs and more than 30% of earnings. After an employment drop of 5% between 2000 and 2003, much more severe than the national decline of 1.4%, the city enjoyed strong job growth through 2007. Non-farm employment in the city rose 2.1% in 2007, well above the 1.1% national increase. Although growth has continued this year, the pace of growth has steadily declined. Non-farm employment rose 0.2% in October 2008, compared to a decline of 0.9% for the nation. Financial activities employment in the city dropped 2.8% in October, reflecting Wall Street layoffs. The city forecasts 147,000 private sector job losses in the current downturn with 31,000 occurring in the securities sector. The city's unemployment rate as of October 2008 was 5.7%, 88% of the U.S. level.

Debt levels remain high, with net tax-supported debt of about $51 billion, 13.2% of 2006 personal income, 7.2% of the five-year average of full value, and $6,122 per capita. Pensions are well funded. The city has created a trust to begin to offset its $63.3 billion retiree health care benefits (OPEB) liability (as of June 30, 2008). Deposits to the trust are irrevocable. Essentially all pay-as-you-go (PAYGO) funding of retiree health care flows through the trust. In addition to the PAYGO amount, the city deposited $1 billion into the trust in fiscal 2006 and an additional $1.5 billion in fiscal 2007. Since monies in the trust can be used at any time to pay the annual costs of retiree benefits, the $2.5 billion in the trust provides a possible budget relief valve in financially strained times; the November 2008 financial plan modification assumes use of $1.1 billion of the $2.5 billion, primarily in fiscal years 2011 and 2012.

Fitch issued an exposure draft on July 31, 2008 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'.) At this time, Fitch is deferring its final determination on municipal recalibration. Fitch will continue to monitor market and credit conditions, and plans to revisit the recalibration in the first quarter of 2009.

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