Fitch Rates New York City, NY's GOs 'AA'; Outlook Stable
Fitch Ratings assigns an 'AA' rating to the following New York City general obligation (GO) bonds:
--Approximately $850,000,000 GO bonds, fiscal 2013 series F, consisting of:
--Approximately $500,000,000 tax-exempt bonds, subseries F-1;
--Approximately $100,000,000 taxable bonds, subseries F-2;
--Approximately $20,000,000 tax-exempt bonds, series G;
--Approximately $230,000,000 tax-exempt bonds, series H.
In addition, Fitch affirms its 'AA' rating on the city's $41 billion in outstanding GO bonds including the following subseries of bonds converting modes as described below.
Converting from variable rate to fixed rate:
--Approximately $12,500,000, 1995 subseries B-5;
--Approximately $21,000,000, 1995 subseries B-7;
--Approximately $70,220,000, 2004 subseries H-6 and H-8.
Converting from variable rate to index rate:
--Approximately $100,000,000 subseries J-4;
--Approximately $74,060,000 subseries J-7;
--Approximately $74,060,000 subseries J-8.
The Rating Outlook is Stable.
The 2013 bonds are expected to be sold via negotiation on Feb. 25. Concurrently with the sale, the city will convert the above-named bonds.
The bonds are general obligations of the city secured by a pledge of the city's full faith and credit and the levy by the city of ad valorem taxes, without limit as to rate or amount, on all real property within the city subject to taxation. The city is not subject to New York State's property tax cap.
KEY RATING DRIVERS
HIGHLY EFFECTIVE BUDGET MANAGEMENT: The city's sound approach to budget development features conservative revenue and expenditure forecasting and effective budget monitoring. Management is thus able to react quickly to changing conditions through periods of economic stress, constrained state aid, and rising spending pressures.
CONSISTENT RESOLUTION TO OUT-YEAR GAPS: Fitch expects the city's long history of effectively eliminating annual budget deficits to continue. Currently forecasted gaps are well within historical norms, but notable risks to the forecast continue given the number and magnitude of variables involved.
SOLID ECONOMIC UNDERPINNINGS: The city has a broad economic base and serves a unique role as a national and international center for commerce, culture, and tourism. Recession-related job declines have been well under comparable national averages although the unemployment rate remains elevated. Income levels are high.
REVENUE CYCLICALITY: Economically sensitive revenues, including personal income, business, and sales tax, comprise a major share of the city's budget and are highly vulnerable to variability in the financial services industry.
HIGH DEBT LEVELS: Fitch anticipates a continued high debt burden given the city's significant capital commitments and future tax-supported issuance plans. Post-employment liabilities are also sizable.
BUDGET GAPS: An inability to close current year budget gaps with mostly recurring measures, or notable growth in the magnitude of out-year imbalances, could lead to negative rating action.
LONG-TERM LIABILITIES: A change in the city's long-term liability profile could affect the rating. Given the above average burden of debt and post-employment benefits, Fitch believes positive rating movement is unlikely in the near to medium term.
EXPECTATION FOR CONTINUED BUDGET BALANCE
The preliminary budget for fiscal 2014 (released in January 2013) totals $70.1 billion, slightly below the revised estimate for fiscal 2013 spending. The drop is due largely to a decline in categorical federal grants. Fiscal 2013 revenue and spending are now each forecast to be about 2% higher than in the November 2012 forecast. The out-year revenue forecast (fiscal 2014-2016) remains similar to the November presentation, with expenses down slightly, yielding somewhat reduced out-year gaps.
Fitch views positively the city's tight monitoring and control of revenues and expenses, including monthly reporting and three full budget updates annually. Fiscal year-end results generally show modest variation from budget.
The city's inability to carry a fund balance somewhat limits financial flexibility. Management has offset this constraint by using operating surpluses to prepay debt service and other expenses in subsequent years. Prior to the economic downturn, with several consecutive years of operating surpluses the city had accumulated a surplus of $8 billion to roll forward. Since fiscal 2009, however, annual operating deficits have eroded the amounts available for future years' budgets.
Fitch believes the size of the recent operating deficits is manageable (1%-2% of spending) but would view negatively the elimination of this cushion. The current forecast assumes fiscal 2013 will end with a $1.3 billion operating deficit (1.9% of spending), which will be funded with a portion of the $2.4 billion in surplus rolled forward from fiscal 2012. The remaining $1.1 billion will be carried into, and spent in, fiscal 2014.
Consistent with most recent fiscal years, Fitch believes that this is a somewhat conservative forecast. For example, the fiscal 2012 preliminary budget assumed the accumulated surplus would be depleted by the end of that fiscal year. Fitch expects the city to eliminate if not reverse the annual deficits and retain a modicum of accumulated surplus.
DOWNWARD TREND IN OUT-YEAR GAPS
Somewhat offsetting Fitch's concern about recurring operating deficits is the moderating trend in projected gaps in the out-years of the financial plan. The fiscal 2012 preliminary plan showed gaps of $4.8 billion-$5 billion, or 6%-7% of the budget, in each of the out-years of the plan (fiscal 2013-2015). The just-released preliminary fiscal 2014 plan shows gaps of $1.9 billion-$2.4 billion or 2%-3% (fiscal 2015-2017).
The improvement in out-year gaps is a result both of a modestly increased revenue forecast and the city's continual efforts to control spending and enhance revenue through its programs to eliminate the gap (PEGs). Since 2008, these programs have resulted in gap reduction of $6.3 billion in fiscal 2013 and $6.6 billion in fiscal 2014. The most recent PEG, first announced in November 2012, reduces the fiscal 2013 and 2014 gaps by $540 million and $1 billion, respectively.
The program calls for headcount reductions of 706 in fiscal 2013 and 1,338 in fiscal 2014, nearly all through attrition. The reductions are modest relative to the city's overall headcount of more than 255,000. In addition to headcount reductions, a moderate amount of the PEG represents revenue assumptions or cost savings that are not within the city's control and therefore uncertain. However, Fitch anticipates that savings not realized in the items presented will be replaced with other reductions or revenue enhancements, and that those actions will largely be of a recurring nature.
HIGHLY DETAILED ESTIMATES OF DIVERSE REVENUE MIX; RISKS REMAIN
Fitch believes that the city's revenue estimates, based on a highly detailed and frequently-reviewed analysis, are reasonable. The city benefits from a diversity of revenue sources. The property tax is the largest source, at 26% of forecasted fiscal 2013 funds, followed by personal income tax at 12% and sales tax at 9%. Intergovernmental sources are primarily for education and social services programs, and make up 28% of forecasted fiscal 2013 revenue. Combined taxes make up 63% of total revenue.
In addition to tax forecast variations, areas of revenue risk include proceeds from the sale of taxi medallions, which total $1.5 billion over the plan period; $1.7 billion in state and federal aid related to agreement on a teacher evaluation plan, reimbursements for Hurricane Sandy-related costs; state revenue shortfalls that could result in reduced aid to municipalities including New York City; and federal actions that could result in reduced funding to the city.
Management estimates the gross cost to public sector facilities from Hurricane Sandy to be $4.5 billion, of which $1.4 billion will come from the operating budget and the rest from bond proceeds. The entire amount is assumed to be eligible for reimbursement, primarily from the federal government. The estimate does not include the cost of enhancements for future damage mitigation.
MODERATE USE OF NON-RECURRING MEASURES
A limited amount of one-time resources help compensate for the decline in the forecasted operating surplus available at year-end to pre-pay expenses. The fiscal 2014 preliminary budget includes $600 million from the sale of taxi medallions. This amount is in question given a state court ruling that the legislation authorizing the sale of additional medallions was unconstitutional. The city has filed an appeal and assumes the matter will be resolved in its favor in fiscal 2014. The financial plan includes $860 million in additional funds from new taxi medallions through fiscal 2017.
Another non-recurring resource in fiscal 2013 is the transfer of $1 billion from a trust established for retiree healthcare costs. The trust has a current balance of approximately $2 billion following transfers out of $395 million in fiscal 2011 and $672 million in fiscal 2012 to help cover the cost of annual retiree benefits. The city plans to transfer the remaining $1 billion in fiscal 2014.
LONGER-TERM SPENDING PRESSURES
The budget includes neither retroactive payments for most expired labor contracts not yet settled nor salary increases for fiscal 2013. A modest reserve for collective bargaining assumes increases of 1.25% per year thereafter. Fitch believes the resolution of expired contracts, which appears unlikely in the current fiscal year, might result in spending pressures going forward.
Debt service will consume $6 billion or 8.4% of the revised fiscal 2013 budget. Debt service is forecast to increase to $7.7 billion or 9.8% of total spending by fiscal 2017. Fitch recognizes the city's conservative budgeting of debt service expense and views positively the city's ability to achieve sizable interest rate savings from debt refinancing over the last several years.
Fitch does not view the possible reduction in the subsidy for federal tax credit bonds such as Build America Bonds as a risk for the city. The city estimates its exposure at $11.5 million which would be spread between fiscal 2013 and 2014.
A more notable concern is the cost of pension and other employee benefits which total $8.1 billion and $8.5 billion, respectively, in the current fiscal 2013 budget. The rapid escalation in pension costs (from $1.5 billion in fiscal 2002) is projected to moderate through fiscal 2017 despite changes in actuarial assumptions including a drop in the expected investment return rate to 7% from 8% and actual investment returns for fiscal 2012 of only 1.4%.
During this period employee benefits are projected to continue to rise an additional $2.3 billion. About $2.1 billion of the fiscal 2013 employee benefit costs are for other post-employment benefits (OPEB). Fiscal 2013 pension and OPEB costs consume 14.6% of total funds. Adding debt service, carrying costs rise to 23% of spending, which Fitch considers to be on the high end of the moderate range.
The city's ability to achieve pension reform or to negotiate pensions with organized labor is dependent on state legislation. The state legislature has passed pension reform that introduces a new tier for new employees featuring a higher retirement age and increased worker contributions among other changes. The new tier will not yield immediate savings but would provide much needed long-term relief estimated by the city at approximately $21 billion over the next 30 years.
ELEVATED DEBT WITH MANAGEABLE VARIABLE-RATE EXPOSURE
Debt metrics remain high. Fitch-calculated net tax-supported debt including Transitional Finance Authority (TFA) future tax secured bonds equals approximately $8,026 per capita, and 8.1% of the five-year average of full value. The city's capital commitments are extensive, totaling $36 billion through fiscal 2016, including $7.8 billion for self-supporting water and sewer projects and $9 billion for education.
Tax-supported issuance plans during fiscal 2013-2017 include $11.2 billion of city GOs and $13.4 billion of TFA future tax secured bonds. Forecasted debt issuance is similar to the amount of outstanding principal scheduled to amortize during the same period.
The city and related issuers have approximately $11.1 billion in outstanding variable-rate debt or 16% of tax-supported debt. Fitch considers this exposure to be manageable given the hedge provided by the city's substantial short-term assets and the city's sophisticated management, diversity of liquidity providers, and strong demonstrated access to the capital markets.
ECONOMY HAS INHERENT STRENGTHS BUT IS NOT WITHOUT CHALLENGES
Fitch considers the city's unique economic profile, which centers on its singular identity as an international center for numerous industries and major tourist destination, to be a credit strength. The character of the New York City economy has contributed to its relative employment stability during the recession and ability to regain by March 2012 the number of private sector jobs that existed prior to the recession. The city's tourism sector is performing exceptionally well. The city attracted a record 52 million visitors in 2012, the third record year in a row.
The city's economic profile also benefits from its strong wealth, with per capita income 133% of the national average. However, the well above-average individual poverty rate of 20.1% in 2011, compared to 15.2% for the U.S., indicates significant income disparity.
The city's economy (and operating budget) is strongly linked to the financial sector, which accounts for approximately 12% of total employment but 30% of earnings. Financial activities employment rose only 0.7% in 2012. The high-earning securities and commodities component of the sector showed similar trends in 2012 after adding roughly 500 jobs or 0.3%.
Tightening financial reforms and regulation, reduced bank profits, evidence of a shift in bonus and compensation practices away from cash, uncertain economic recovery, and concerns in Europe are among several factors that figure to weigh on financial sector prospects over the near-to-intermediate term.
The city's overall employment base shows consistent year-over-year improvement in 2012. The estimated average unemployment rate of 9.5% for 2012 is equal to the 2010 rate but above the 9% rate posted in 2011. The December 2012 rate of 8.8% is equal to the December 2011 rate and remained above the state (8.2%) and federal (7.6%) rates. At 0.9%, year-over-year resident employment growth was slightly above the state's but well below the nation's.
The city anticipates a 1.9% increase in the average wage rate in fiscal 2013, and a slight decline in securities sector bonus payouts, resulting in flat personal income tax revenue. The city assumes continued strong visitor-related spending and moderate economic growth will yield sales tax growth of 4.5% in fiscal 2014. This growth rate recognizes the temporary slow-down in spending following hurricane Sandy.
The market value of real estate grew by 4.3% based on the tentative roll. Despite recent weakness in the commercial market, growth is driven by office and commercial properties (class 4) and to a lesser extent multi-family homes (class 2). The city anticipates a moderate adjustment in the final roll for damage related to hurricane Sandy, and expects market value to grow moderately in the out-years.
Residential real estate continues to struggle. The most recent release of the S&P/Case-Shiller Index of home prices indicates that New York's performance remains among the weakest of the 20 metropolitan statistical areas (MSAs) in its survey. It was the only MSA to post an annual decline in November 2012. Given a dearth of single family homes, the S&P/Case-Shiller condo index may be a better indication of trends within the city. This index shows a 7.3% year-over-year increase in condo prices in November 2012.
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 Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, National Association of Realtors, and Property and Portfolio Research.
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
U.S. Local Government Tax-Supported Rating Criteria
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