Fitch Rates Suffolk County, NY's GO Bonds 'A' & Tax Anticipation Notes 'F1'; Outlook Stable

NEW YORK--()--Fitch Ratings assigns the following ratings to Suffolk County, NY's (the county) bonds and notes:

--$52,540,000 public improvement serial bonds, 2014 series B at 'A';

--$100,000,000 tax anticipation notes (TANs), 2014 (series III) at 'F1'.

The bonds and notes are expected to be sold through competitive sale on Oct. 7.

The bonds are being issued to fund various capital projects. The TANs are being issued to provide cash flow in anticipation of collection of taxes on assessments levied, or to be levied by the county for 2014 or any of the four preceding years.

In addition, Fitch affirms the following ratings:

--Approximately $1.4 billion of outstanding general obligation bonds at 'A';

--$85,000,000 in outstanding revenue anticipation notes (RANs) at 'F1';

--$36,110,066 in outstanding bond anticipation notes (BANs) at 'F1'.

The Rating Outlook on the bonds is Stable.

SECURITY

The bonds and notes are general obligations of the county with a pledge of its faith and credit and ad valorem tax, subject to the 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

CHALLENGED BUT IMPROVING FINANCIAL PROFILE: The county reported a significant improvement in financial performance in 2013. However, the county's financial profile continues to be challenged by a large but declining negative general fund reserve position (GAAP basis), high reliance on cash flow borrowing, and limited financial flexibility.

SHORT-TERM MARKET RELIANCE; NARROW COVERAGE: Market access remains critical given the county's high reliance on cash flow borrowing. Projected coverage by revenues expected to be received by the 2015 note repayment date provide adequate but narrow coverage.

STRONG ECONOMIC CHARACTERISTICS: The county benefits from a broad and wealthy economy and tax base characterized by below average unemployment rates and high wealth levels.

MANAGEABLE LONG-TERM LIABILITIES: The sizable and wealthy tax base results in a manageable debt burden, and debt amortization is above average. Capital needs are moderate and state pension plans are well funded.

RATING SENSITIVITIES

POSITIVE FINANCIAL PERFORMANCE: The county's ability to sustain budgetary balance, build reserves to adequate levels with largely recurring measures, and continue reducing short-term borrowing would be positive credit considerations.

CREDIT PROFILE

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 the largest of any county in the state outside of New York City. Between 2000 and 2010, county population increased by 5.2%. The growth rate from 2010 to 2013 was a modest 0.4% and a slow rate of growth is expected to continue into the near future.

IMPROVING FINANCIAL RESULTS

On an audited GAAP basis the county reported a general fund balance of negative $193.8 million for 2013, a $131.4 million improvement from year-end 2012. Budgetary improvement yielded $185 million, the largest due from savings from the reduction in the county's workforce. Higher than estimated property tax revenues, an increase in social services related aid, higher than expected revenues from the traffic and parking violations agency, and higher than budgeted interest and penalties on property taxes were also factors. For 2013, sales tax revenues were up 6.8% from 2012. This increase is higher than the 3% increase in 2012 and is the highest growth rate since 2004. While the county has reduced its reliance on one-shot transactions, the sale/leaseback of the H. Lee Dennison building for $60 million (net) did contribute to the improvement in the general fund balance. The unrestricted general fund balance totaled a negative $243.9 million or negative 8.9% of general fund spending compared to negative $401.7 million or negative 14.3% of spending at Dec. 31, 2012.

Government restructuring has yielded expenditure reductions and some new sources of recurring revenues. The most significant measure was the amortization of $60.7 million of the 2013 pension payment, which provided relief in 2013 but increases costs in later years. Other sizeable 2013 measures that Fitch considers to be more structural in nature included a property tax increase in the police district that provided additional revenue of $12.4 million and $20 million in annual savings from the embargo of county department funds as a result of the declaration of a second fiscal emergency in 2013.

On a budgetary basis, current estimates project a combined (general fund and police district) 2014 year-end fund balance of $31.9 million comparable to the $30.6 million at Dec. 31, 2013. Fitch believes this is reasonable given the continuation of economic improvement and cost control measures.

2015 RECOMMENDED OPERATING BUDGET

The $3.4 billion (total operating expenditures and other financing uses) 2015 budget represents a decrease in spending of less than 1% from the 2014 budget. The 2015 budget assumes sales tax growth of 4.75% from estimated 2014 sales tax revenues. To date, sales tax revenues are 2.7% higher than those realized during the same time period last year. The growth rate is slower than anticipated with management citing inclement weather during the first quarter of 2014 as a primary reason and is currently estimating an $11.2 million shortfall. To meet sales tax projections included in the 2015 Recommended Operating Budget, a 2.82% sales tax growth rate will be required for the remainder of 2014.

Initiatives that balance the 2015 budget include recurring revenues and savings along with a lesser reliance on non-recurring revenue items. As in 2014, the largest measure is the amortization of the 2015 pension payment totaling $59.8 million. Positively, this amount is a decrease from previous years and about $20 million less than the county is permitted to amortize.

For the third consecutive year, the county executive is expected to declare a fiscal emergency which will provide savings of approximately $10 million during 2015. Also for the third year in a row, the budget includes a police district property tax increase which will generate about $12 million in recurring revenue. Additional recurring revenue will be provided by the implementation of speed cameras near schools, which Fitch believes is conservatively budgeted at $2.5 million. Also, the state has granted the county permission to operate 1,000 video lottery terminals. Due to prolonged vendor negotiations the terminals have not yet commenced operations and no revenues have been budgeted in 2015.

The county also expects to continue to realize savings from the reduction of its workforce. Since Jan. 1, 2012, the county's workforce has shrunk by over 1,100 employees generating projected annual savings of $101 million. Also, due to continued strict position control and monitoring of overtime, the county expects to realize an additional combined $30 million of savings in 2014 and 2015.

The budget does not contemplate the use of funds from the tax stabilization reserve fund. However, it includes the transfer of $22.5 million from the assessment stabilization reserve fund (ASRF); $32.8 million was transferred in 2014. 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. Funding from 1/4 percent of the county's sales tax revenues are deposited in the county water protection fund with 25% transferred to the ASRF. The ASRF fund balance prior to transfers to the debt service reserve fund, contribution reserve fund and reservation for permitted sewer projects was $153.3 million as of Dec. 31, 2013.

In order to settle a lawsuit filed in March 2014 by two environmental groups seeking to disallow such transfers from the ASRF, a referendum has been placed on the November 2014 ballot which will authorize the county to borrow from the ASRF through 2017 to provide tax relief. All amounts borrowed from the ASRF would be repaid by the county by 2029, with payments commencing in 2018. If the resolution does not pass the county has financial flexibility in the budget (could increase the size of the pension amortization). The use of reserve funds, while not ideal, provides the county with flexibility and a lower cost of funding.

SMALL IMPROVEMENT IN LIQUIDITY

The county has historically issued annual cash flow notes in anticipation of receipt of delinquent and current property taxes (DTANs and TANs, respectively). However, due to limited financial flexibility and a narrowing cash position in 2012 and 2013 the amount of these borrowings increased and revenue anticipation notes (RANs) were issued.

The county issued $625 million in cash flow notes in 2013, growing from $600 million in 2012 and $520 million in 2011. Cash flow borrowing in 2013 was a high 19.2% of 2013 budgetary expenses. Positively, the county is estimating a decrease to $595 million in cash flow borrowing for 2014 and the RAN issue in April 2015 is projected at $75 million, a reduction of $10 million from April 2014. Additionally, in 2015, TANs will be paid off a month earlier than in 2014 and reserve fund cash flows have improved from a low of $50 million to $73 million. The trend is positive, but Fitch expects the county's heavy reliance on cash flow borrowings to continue for the next several years.

NARROW CASH FLOW COVERAGE FOR NOTE REPAYMENT

Cash flow provides narrow coverage of 1.4x on the notes at maturity in September 2015. With consideration of borrowable balances, coverage improves to 2.0x. Fitch believes the county's cash flow projections are reasonable; actual coverage for 2014 repayments was better than projected (1.43x vs. projection of 1.06x).

STRONG SOCIOECONOMIC CHARACTERISTICS

The county benefits from a broad, diverse economy and well above-average economic indicators, including solid income levels (per capita income in 2012 was 131% of the nation) and high per capita market value ($171,000). The county's unemployment rate remains lower than the rates for New York State and the nation. In July 2014 the county's unemployment rate was 5.5% compared to 6.8% and 6.5% for the state and nation, respectively. Year-over-year unemployment was down from 6.6% in July 2013, due to a decline in the labor force (-1.2%) and no employment growth.

MANAGEABLE LONG-TERM LIABILIITES

The county's debt ratios at $3,949 per capita and 2.3% of market value are moderate, with the latter reflecting the wealthy tax base. Debt service represents a modest 5% of total government fund spending.

Debt ratios should remain stable given manageable capital needs and rapid amortization (69% of principal is retired within 10 years). The county usually issues debt on a semi-annual basis to finance its ongoing capital program. The county plans on issuing approximately $70 million of general obligation bonds during the spring of 2015 for various general capital purposes.

The county participates in well-funded New York State pension plans. As of March 31, 2013, the state and local employees' plan and the state and local police and fire plan had funded ratios of 87% and 88%, respectively. Using Fitch's more conservative 7% discount rate assumption the plans' funding levels would still be sound at an estimated 82% and 83%, respectively.

County pension payments in 2013 made up a moderate share (4.4%) of government fund spending. The county has taken advantage of the ability granted by the state to amortize most of the increase in annual pension payments for 2012 and 2013 over 10 years and for 2014 over 12 years. The 2015 proposed budget reduces the amount of amortization to $60 million out of a possible $80 million. This amortization option provides some near-term budget relief but will make future year budgeting for these payments more challenging.

The moderate pension liability is somewhat offset by a high unfunded actuarial accrued liability for other post-employment benefits (OPEB) at $5 billion as of Dec. 31, 2013, or 2% of market value. Carrying costs for debt service, pension and OPEB equaled a moderate 14.5% of 2013 total government fund spending, with the county's amortization of part of the pension payment somewhat offsetting rapid debt repayment.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, CoreLogic Case-Shiller Index, IHS Global Insight, National Association of Realtors.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=890294

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Contacts

Fitch Ratings
Primary Analyst
Karen Wagner, +1 212-908-0230
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Arlene Bohner, +1 212-908-0554
Senior Director
or
Committee Chairperson
Amy Laskey, +1 212-908-0568
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Karen Wagner, +1 212-908-0230
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Arlene Bohner, +1 212-908-0554
Senior Director
or
Committee Chairperson
Amy Laskey, +1 212-908-0568
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com