Fitch Rates Suffolk County, NY's GO Refunding Bonds 'A'; Outlook Stable

NEW YORK--()--Fitch Ratings assigns an 'A' rating to the following Suffolk County, NY (the county) bonds:

--$24,135,000 refunding serial bonds, 2015 series A;

--$60,720,000 refunding serial bonds, 2015 series B.

The bonds are expected to be sold through competitive sale on Feb. 19.

The bonds are being issued to refund outstanding bonds of the county's 2006 series A and 2006 series B bonds for cash flow savings.

The Rating Outlook is Stable.

SECURITY

The bonds 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 leading Fitch to revise its outlook on the county's long-term general obligation bonds to Stable from Negative in March 2014. However, the county's financial profile continues to be challenged by a large but declining negative general fund reserve position (GAAP basis) and limited financial flexibility.

SHORT-TERM MARKET RELIANCE: Market access remains critical given the county's high reliance on cash flow borrowing.

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 a total of 5.2%. The total 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 IN 2013

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. The unrestricted general fund balance totaled a negative $243.9 million or negative 11.2% of general fund spending compared to negative $401.7 million or negative 14.3% of spending at Dec. 31, 2012. 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.

SALES TAX SHORTFALL PROJECTED FOR 2014

On a budgetary basis, current estimates project about break-even operations, for a combined (general fund and police district) 2014 year-end fund balance of $31.2 million, comparable to the $30.6 million at Dec. 31, 2013. Sales tax revenues for 2014 were budgeted to increase by 2.8% but are now anticipated to have increased only 1.3% which would equate to a $20 million shortfall. As of Jan. 10, 2015, the county had received 25 out of the 27 distributions to be recorded in 2014. To meet sales tax projections contained in the 2014 adopted budget, a 38.3% sales tax growth rate would be required for the remainder of the 2014 distributions, which Fitch considers highly unlikely. The sales tax shortfall was offset by 2014 payroll expenses that were down by $7 million, interest and tax revenues that were $2 million higher than projected, and savings of $13 million generated by the 2014 declaration of fiscal emergency.

2015 ADOPTED OPERATING BUDGET

Due to the projected sales tax shortfall, earlier this year the county executive declared a fourth consecutive fiscal emergency, allowing the county's budget office to embargo up to 10% of available appropriations, and is anticipated to generate savings of approximately $20 million. 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. However, the 2015 budget assumes sales tax growth of 4.87% from estimated 2014 sales tax revenues, which Fitch considers somewhat aggressive.

Initiatives that balance the 2015 budget include recurring revenues and savings along with a lesser reliance on non-recurring revenue items. Recurring measures include, for the third consecutive year, a police district property tax increase.

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.

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. A referendum was approved on the November 2014 ballot that authorizes the county to borrow from the ASRF through 2017 to provide tax relief. All amounts borrowed from the ASRF will be repaid by the county by 2029, with payments commencing in 2018. Fitch believes while the use of reserve funds is not ideal, it provides the county with flexibility and a lower cost of funding than bonded debt.

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. Reflecting improved liquidity, the county's cash flow borrowing in 2014 decreased to $595 million and the RAN issue in April 2015 is projected at $55 million, a reduction of $30 million from April 2014. Additionally, in 2015, TANs will be paid off a month earlier than in 2014. The trend is positive, but Fitch expects the county's heavy reliance on cash flow borrowings to continue for the next several years.

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 2013 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 November 2014 the county's unemployment rate was 4.8% compared to 5.8% and 5.5% for the state and nation, respectively. Year-over-year unemployment was down from 5.5% in November 2013, due to a decline in the labor force (1.9%) outpacing a decline in employment growth (1.2%).

MANAGEABLE LONG-TERM LIABILIITES

The county's debt ratios at $4,208 per capita and 2.4% of market value are high to 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 (72% 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 $50 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 adopted 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=979454

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Contacts

Fitch Ratings
Primary Analyst
Karen Wagner
Director
+1-212-908-0230
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Arlene Bohner
Senior Director
+1-212-908-0554
or
Committee Chairperson
Karen Krop
Senior Director
+1-212-908-0661
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Karen Wagner
Director
+1-212-908-0230
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Arlene Bohner
Senior Director
+1-212-908-0554
or
Committee Chairperson
Karen Krop
Senior Director
+1-212-908-0661
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com