Fitch Rates Syracuse, NY's GOs 'A'; Outlook Stable

NEW YORK--()--Fitch Ratings assigns an 'A' rating to the following Syracuse, NY (the city) limited tax general obligation (LTGO) bonds:

--$13.2 million public improvement (serial) bonds, series 2016A;

The bonds are expected to price via competitive sale the week of June 8. Proceeds will be used to finance various capital projects.

In addition, Fitch affirms the following city ratings:

--$215.6 million outstanding general obligation bonds at 'A';

--Issuer Default Rating (IDR) at 'A'.

The Rating Outlook is Stable.

SECURITY

The bonds are general obligations of the city of Syracuse payable from its full faith and credit, 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 by a 60% vote of the city legislature.

KEY RATING DRIVERS

The 'A' rating is driven by the city's satisfactory reserves relative to revenue volatility and budget flexibility, moderate long-term liability burden, and limited prospects for economic and revenue growth. State support has aided revenue growth and maintenance sizable general fund reserves, although recent financial results have yielded operating deficits. Carrying costs for debt and pension are expected to remain manageable, and the city has the independent legal ability to increase tax revenues above the state tax cap in any one year with 60% approval of the common council.

Economic Resource Base

The City of Syracuse, located in Onondaga County in north-central New York, is the fifth largest city in the state. The local economy is diverse and serves as a regional center for commercial and financial activities anchored by a major research university and health institutions and serving as the economic engine for the region. Major employers include State University of New York (SUNY) Upstate Medical University with almost 8,000 employees, Syracuse University (6,504), Wegmans (4,100), and St. Joseph's Medical Center (3,142). Economic growth has been sluggish, as indicated by the city's flat assessed valuations and a trend of declining employment.

Revenue Framework: 'a' factor assessment

Fitch expects the city's natural pace of revenue growth will be at or below the level of inflation. General fund revenue growth over the past 10 years has exceeded the level of inflation and U.S. economic performance, primarily driven by state aid which included non-recurring revenue enhancements to stabilize operations during the most recent downturn. A supermajority of the city's common council can override the state limit on levy growth of the lower of CPI or 2%.

Expenditure Framework: 'a' factor assessment

Expenditure growth has outpaced revenue growth, which has led to recent and expected general fund deficits. The city has demonstrated its ability to manage expenditure growth to outperform budgeted expectations and reduce, but not eliminate, budget gaps. Carrying costs are expected to remain manageable given limited future borrowing plans and full actuarially-based payments to well-funded pension plans.

Long-Term Liability Burden: 'aa' factor assessment

City debt and pension liabilities are moderate with overall pension and debt liabilities 11.7% of personal income. However, the city's other post-retirement employee benefits (OPEB) liability is significant at 19% of personal income.

Operating Performance: 'a' factor assessment

Fitch expects the city to display sound financial resilience in the event of a moderate economic decline. Reserves are sizable despite drawdowns during the recovery, but revenues have shown a notable level of volatility, and Fitch believes the city would be challenged to fully utilize its solid gap-closing capacity.

RATING SENSITIVITIES

The rating is sensitive to the city's ability to maintain adequate general fund balance levels throughout economic cycles.

CREDIT PROFILE

The city benefits from ongoing economic development including the redevelopment of the downtown and waterfront areas. Income levels are below average, likely in part due to a large student population associated with Syracuse University. Per capita personal income is 48% of the state and 59% of the U.S. The city unemployment rate of 5.7% as of March 2016 is above the state and national rates of 4.6% and 4.7%, respectively, and employment levels have declined nearly every year since the last downturn began.

Revenue Framework

The 'a' assessment is based on the city's reliance on state aid, slow natural revenue growth and legal ability to increase the property tax levy above the state cap. Fitch believes prospects for growth at or above inflation are dependent on increased state aid, which is subject to state policy actions and not assured.

The natural rate of locally-generate revenue growth has been slower than the rate of inflation over the past 10 years; however, with the inclusion of state and federal aid it exceeded the rate of inflation and U.S. economic output. Intergovernmental aid and sales taxes accounted for similar amounts of general fund fiscal 2015 revenues, at 35% and 36%, respectively. Property taxes accounted for another 16.5%. Sales tax collections are vulnerable to economic cyclicality and were below budget in fiscal 2015 in part due to low energy prices. The city has not exceeded the property tax cap and flat property tax revenues reflect lack of AV growth. The city anticipates a slight increase in property tax revenue due to a modest increase in assessed value in fiscal 2017.

The city has the legal ability to increase the tax levy above the cap with a 60% vote by the common council.

Expenditure Framework

Expenditure growth remains a challenge for the city as evidenced by the general fund deficits in fiscal 2014 and 2015 and an expected $4.6 million general fund deficit in fiscal 2016. In fiscal 2017, the city appropriated $12.1 million of general fund balance to balance the general fund budget; however, management anticipates significant salary reductions due to employee attrition. Fitch believes the city is vulnerable to continued expenditure growth in excess of revenues. Employment contracts are subject to binding arbitration, and a firefighter's contract, previously expired since 2014, was recently settled with 2% annual increases and a $1.1 million (0.5% of spending) retroactive payment. All other contracts expired in 2015, and the city expects them to be settled shortly.

Carrying costs for debt and pension account for 19.8% of general fund expenditures. The city has not taken advantage of a state program that offered municipalities the opportunity to defer increases in pension required pension payments. The city's pension payments are expected to decrease in the next two years, but OPEB costs will likely increase.

Long-Term Liability Burden

The long-term liability burden including debt and pensions is moderate at 11.7% of personal income.

Pension benefits are offered through participation in two cost-sharing multiple employer state systems, the New York State Local Employees' Retirement System (NYSERS) and the New York State Policemen's and Firemen's Retirement System (NYSPFRS). As of March 31, 2015, the plans had strong net assets to liability ratios with NYSERS 97.9% and 99% for NYSPFRS. Assuming a more conservative 7% return, NYSERS and NYSPFRS are 92.8% and 93.8% funded, respectively.

The city (including the school district, a component unit) has a significant $752 million unfunded OPEB liability (18.5% of personal income) which is funded on a pay as you go basis. The city's portion of the OPEB liability ($323 million in fiscal 2015) was significantly higher in 2013 at $933 million; however, management was able to reduce liability by eliminating the supplemental insurance subsidy for 1,600 Medicare-eligible retirees. To further reduce this liability, the city is attempting to negotiate increased health care contributions from employees.

Operating Performance

Fitch believes the city has satisfactory reserves to offset its above-average revenue volatility and continue to provide core services in the event of a moderate economic decline. The city would likely draw on reserves and reduce spending rather than exceeding the property tax cap but would maintain an adequate reserve safety margin for the rating. The strong general fund balance was aided by a one-time $20.9 million 'spin-up' payment, which accelerated state aid in fiscal 2013 from budgeted fiscal 2014 state aid appropriations. The available fund balance grew to 31.4% of general fund expenditures in fiscal 2013.

In fiscal 2014 and 2015, available fund balance declined but remained strong at 24.3% of expenditures at the close of fiscal 2015. Based on estimated fiscal 2016 results, the city will utilize $4.6 million in general fund balance, which is expected to bring available general fund balance to approximately 22% of expenditures. These results are better than the budgeted $9.2 million use of general fund balance and consistent with budget to actual performance in recent years. The unbudgeted retroactive payment for the firefighter's contract is offset by a similar expected decline in pension costs.

The fiscal 2017 budget assumes a $12.1 million fund balance appropriation and includes budgeted sales tax growth at less than one percent from the fiscal 2016 budget and no property tax levy increase. Several labor contracts are currently under negotiation, and there is potential for additional salary increases and retroactive payments that could pressure general fund operations. Management acknowledges this potential but also expects salary savings from a large number of public safety staff retirements. Fitch expects the city to reduce the budget gap in fiscal 2017, as is consistent with prior results. However, challenges remain given ongoing expenditure pressures.

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

In addition to the sources of information identified in Fitch's 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/creditdesk/reports/report_frame.cfm?rpt_id=879478

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1005439

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Contacts

Fitch Ratings
Primary Analyst
Shannon McCue, +1-212-908-0593
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Michael D'Arcy, 1-212-908-0662
Director
or
Committee Chairperson
Amy Laskey, +1-212-908-0568
Managing Director
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Shannon McCue, +1-212-908-0593
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Michael D'Arcy, 1-212-908-0662
Director
or
Committee Chairperson
Amy Laskey, +1-212-908-0568
Managing Director
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com