Fitch Rates DASNY's $829MM SUNY Ed Facils Bonds 'AA-'; Outlook Positive

Fitch Ratings has assigned an 'AA-' rating to the following Dormitory Authority of the State of New York (DASNY) bonds:

--$829 million third general resolution revenue bonds (state university educational facilities issue), series 2012A.

The bonds, which are being issued for refunding purposes, are expected to sell via negotiation the week of Feb. 13, 2012.

In addition, Fitch affirms the 'AA-' rating on state appropriation-supported bonds issued by various state agencies.

The Rating Outlook is Positive.

SECURITY

The bonds are special obligations of the authority, payable from annual state appropriations to the state university construction fund educational facilities payment account, which is held jointly by the state commissioner of taxation and finance and the state comptroller.

KEY RATING DRIVERS

APPROPRIATION SECURITY: Bond payments require annual state legislative appropriation, resulting in a rating one notch below New York's 'AA' general obligation (GO) rating. The risk of non-appropriation is mitigated by the prominent role such debt plays in the state's overall debt structure (only 7% of state debt is GO) and the long record of state support of the State University of New York (SUNY).

WEALTHY ECONOMY LINKED TO FINANCIAL SERVICES: New York's economy is broad, with substantial wealth and resources, although the health of the state's economy and finances is closely linked to the cyclical financial services industry.

MODERATE DEBT BURDEN AND WELL-FUNDED PENSIONS: New York's debt burden is above average but still in the moderate range, and pensions are well funded.

STRONG FINANCIAL PLANNING AND REPORTING: The state stays abreast of changing conditions through comprehensive quarterly updates of a four-year financial plan.

INCREASING FOCUS ON SUSTAINABLE BUDGETS: The Positive Outlook on the state's GO and related debt reflects actions in recent budgets to identify sustainable solutions to significant budgetary challenges, a notable change from the historical tendency to rely on nonrecurring measures to address weakening in the state's volatile revenue streams during downturns.

WHAT COULD TRIGGER A RATING ACTION

The rating on the bonds is linked to changes in New York State's GO rating.

TRIGGER FOR UPGRADE: Achieving near-term spending targets and implementing a sustainable ongoing funding plan for Medicaid and schools while addressing reduced revenue expectations.

TRIGGER FOR OUTLOOK REVISION TO STABLE: Significant deterioration in economic and revenue expectations and/or a reliance on nonrecurring items for budget balancing.

CREDIT PROFILE

The 'AA-' rating is based on the credit quality of the state of New York (GO bonds rated 'AA' with a Positive Outlook by Fitch). The bonds are special obligations of DASNY and are general obligations of the state university construction fund, for which the only source of revenues is annual state appropriations subject to legislative approval under the state education law. Fitch believes that appropriation risk is minimal given the central role appropriation-secured debt plays in the state's debt structure and a strong record of state support for education. Additional liquidity for debt service is provided by provisions to intercept operating funds appropriated by the state for the SUNY system.

The series 2012A bonds are issued under a 2002 resolution (the third general resolution). Bonds from each of three resolutions are essentially on parity, as insufficient appropriations are to be distributed on a pro rata basis, unless an appropriation is resolution-specific. Unlike the 1989 and 1999 resolutions, the 2002 resolution does not provide for debt service reserve funding. This is not a rating factor given the appropriation-based security for and timing provisions of the bonds.

New York State has outstanding bonds backed by a wide variety of state appropriation structures. DASNY took over this state university financing program from the Housing Finance Agency in 1989. Prior to issuance of the 2012A bonds, a total of $793 million bonds are outstanding under the 1989 resolution, $21 million under the 1999 resolution, and $1.2 billion under the 2002 resolution. The state no longer issues such debt for new money purposes, as capital funding now relies on the personal income tax (PIT) bond credit (rated 'AA' with a Positive Outlook).

State appropriations are paid directly to the state university construction fund educational facilities payment account held jointly by the state commissioner of taxation and finance and the state comptroller, and the fund remits directly to the trustee. DASNY has pledged its rights to these revenues to the trustee for the benefit of bondholders. The state payments are made in two installments - by Sept. 15 and not later than three business days prior to April 10. (The April 10 payment is appropriated in the prior state budget, insulating against late budget adoption.) Fund payments to the trustee are due on Oct. 10 and April 10, more than one month in advance of debt service payments.

If the state does not appropriate or provide for the full annual payment, the act provides for the state comptroller to make these payments from moneys appropriated by the state for SUNY operating expenses. For fiscal 2012, $965 million of direct state funds were appropriated, with a total of $2.3 billion in combined SUNY and state funds appropriated and available.

New York's 'AA' GO rating is based on the state's substantial wealth and resources and broad economy, and also recognizes the outsized role that the financial services industry plays in the state's economy and revenue system. State net tax-supported debt levels have been relatively stable as a percentage of personal income (currently 5.7%), and debt is expected to remain above average but still in the moderate range. Pensions are well funded.

Although New York's financial position was strained during the recession, its approach to budgeting became more proactive and focused on structural solutions than was the case in the past. The enacted budget for the current fiscal year, with its focus on recurring actions to resolve gaps and ongoing expenditure control mechanisms for Medicaid and school aid, is a credit positive, particularly given the magnitude of the shortfall that the state confronted for the year as federal stimulus funds phased out. (New York, which spends a larger than average amount on Medicaid, garnered particular benefit from the increase in the federal Medicaid matching percentage included in the federal stimulus package, which expired on June 30, 2011.)

Fitch's focus for the credit now is the state's ability to achieve its spending control goals, and whether they are sustainable in an environment of reduced revenue expectations. The state reports that fiscal 2012 spending is within budget projections, and the governor's proposed budget for fiscal 2013, which begins on April 1, continues the funding plan for Medicaid and school aid laid out last year. Following a December 2011 legislative special session that extended a temporary increase in the income tax rate for high earners, the current fiscal year is balanced and the gap to be addressed for the coming fiscal year reduced from $3.5 billion to $2 billion. The governor proposes to address that shortfall through additional recurring spending control actions.

If enacted, the proposed budget would reduce the outyear gap forecast to a manageable $715 million in fiscal 2014, rising to $3 billion in fiscal 2015 and $3.7 billion in fiscal 2016 when the benefits of the temporary high-earners tax end. These forecasts factor in successful cost control in Medicaid and school funding, both of which are assumed to grow at a rate of about 4% a year. In contrast, the projected gaps of $9.2 billion and $10 billion that were addressed in the budgets for fiscal 2011 and fiscal 2012, respectively, assumed sharp spending increases based on then-current law. Given the economic sensitivity of the state's revenues and the uncertainty in the economic environment, downside risk to the economic and revenue forecast remains.

For more information on the state's general credit, see Fitch's press release 'Fitch Rates New York State's $317MM GO Bonds 'AA'; Outlook Positive' dated Nov. 30, 2011, available on the Fitch web site at 'www.fitchratings.com'.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

In addition to the sources of information identified in Fitch's report 'Tax-Supported Rating Criteria', this action was additionally informed by information from IHS Global Insight and the underwriters.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 15, 2011);

--'U.S. State Government Tax-Supported Rating Criteria' (Aug. 15, 2011).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898

U.S. State Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648897

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.