Fitch Rates New York City, NY's GOs 'AA'; Outlook Stable
NEW YORK -- October 18, 2012
Fitch Ratings assigns an 'AA' rating to the following New York City general
obligation (GO) bonds:
--Approximately $325,000,000 GO bonds, fiscal 2013 series A, (adjustable rate
bonds) consisting of:
--Approximately $100,000,000 subseries A-2;
--Approximately $100,000,000 subseries A-3;
--Approximately $75,000,000 subseries A-4;
--Approximately $50,000,000 subseries A-5.
The bonds are expected to be sold via negotiation for closing on or about Oct.
At this time, Fitch assigns an 'AA' rating to bank bonds associated with the
above-listed bonds. The subseries A-2 and A-3 bonds will be supported by an
irrevocable letter of credit issued by Mizuho Corporate Bank, Ltd. The
subseries A-4 and A-5 bonds will be supported by an irrevocable letter of
credit issued by Sumitomo Mutsui Banking Corp. Based on a review of the terms
governing bank bonds specified in the reimbursement agreements, it is Fitch's
opinion that the incremental risk associated with bank bonds does not have a
material impact on the city's long-term credit rating.
Fitch will assign long- and short-term credit-enhanced ratings to the bonds
prior to closing.
In addition, Fitch affirms its 'AA' rating on the city's $42 billion in
outstanding GO bonds.
The Rating Outlook is Stable.
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
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 and consistently generate operating surpluses through
periods of economic stress, constrained state aid, and rising spending
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 within historical norms.
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 is trending upward. 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
LARGE FIXED-COST PRESSURE: Mandated costs including pension, employee
benefits, and medical assistance (including Medicaid), along with debt service
consume a large share of general fund resources, limiting future budgetary
EXPECTATION FOR CONTINUED BUDGET BALANCE
The city funds adopted budget (excluding federal, state, and other restricted
sources) for fiscal 2013 totals $48.9 billion, an increase of $1.5 billion or
3.2% from the fiscal 2012 forecast. Growth in spending is related to
non-controllable costs, most notably debt service and employee pension and
benefits. The budget includes neither retroactive payments for most expired
contracts not yet settled nor salary increases for fiscal 2013.A modest
reserve for collective bargaining assumes increases of 1.25% per year
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 38%
of budgeted fiscal 2013 city funds, followed by personal income tax at 17% and
sales tax at 12%. Intergovernmental sources are primarily for education and
social services programs, and make up 29% of budgeted fiscal 2013 all-funds
revenues of $68.5 billion. Combined taxes make up 64% of total revenue.
The out-year gap estimates included in the city's financial plan for fiscal
2012-2016 are sizeable at $2.5 billion for fiscal 2014, $3.1 billion for
fiscal 2015, and $3.1 billion for fiscal 2016, but reduced somewhat from the
fiscal 2013 executive budget released in May 2012 and manageable by historical
standards. Given the city's long history of eliminating gaps by the time the
budget is proposed, Fitch believes the city's ability to further reduce and
eventually close currently-forecast gaps is strong.
Factors that Fitch believes may pressure the city's credit profile include the
high cost of employee pension and benefits, labor settlement costs above
amounts reserved, and a weakened revenue environment, particularly as it
pertains to Wall Street profits. Fitch's expectation for continued rating
stability is supported by the city's consistently demonstrated ability and
resolve to close similarly sized shortfalls in years past.
GAP-CLOSING PROGRAMS ACHIEVE SIGNIFICANT RECURRING SAVINGS
A key element in the city's credit stability is its demonstrated willingness
to address budget gaps with primarily recurring solutions, either in the form
of increased revenue or reduced agency spending. Most recently, on Sept. 14,
2012, city agencies were directed to submit spending reduction programs for
discretionary city-funded spending in fiscal 2013 and 2014. The cuts, ranging
from 1.6% to 8%, depending on agency and fiscal year, are designed to yield
savings of $2 billion through the end of fiscal 2014.
These reductions are in addition to a $1 billion gap-closing program announced
in November 2011. The measures included in this program for fiscal 2013
include $229 million from debt service savings, $50 million in police overtime
savings, and $301 million from the department of education related to enhanced
Medicaid procedures ($50 million), use of state building aid for GO debt
service ($100 million), and a reduction in contractual spending for special
education ($54 million). The budget does not include layoffs to teachers or
ESTIMATED FISCAL 2012 OPERATING MARGIN REMAINS SOLID, BUT NARROWED
As prior year surpluses cannot be appropriated in future fiscal periods, the
city routinely uses operating surpluses to cover spending in the subsequent
budget year by prepaying debt service and subsidies and other such actions.
The city is forecasting for fiscal 2012 that $2.4 billion, or 5% of projected
city fund spending of $48.8 billion, will be available for prepayments in
fiscal 2013. This amount is somewhat below the fiscal 2011 surplus used for
fiscal 2012 prepayments of $3.7 billion. The fiscal 2011 figure is more in
line with surplus levels over the past several years. The reduced funds
generated in fiscal 2012 reflects a lower amount by which actual tax receipts
exceed projections than in past years, although receipts are still ahead of
ONE-TIME MEASURES EMPLOYED IN FISCAL 2013
A limited amount of one-time resources help compensate for the decline in the
forecasted operating surplus available at year-end to pre-pay fiscal 2013
expenses. The fiscal 2013 executive budget included $1 billion from the sale
of taxi medallions. This amount has been reduced to $635 million in fiscal
2013 and may decline further given a recent state court ruling that the
legislation authorizing the sale of additional medallions was
unconstitutional. The city has filed an appeal but expects receipts from this
source to be $200 million less than projected, even if the appeal is
successful. The financial plan includes $365 million and $460 million in taxi
medallion revenue in fiscal 2014 and 2015, respectively.
Another non-recurring resource 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.
Together, the sale of taxi medallions and trust fund transfer represent a
modest 2% of total fiscal 2013 spending.
LONG-TERM SPENDING PRESSURES
Debt service will consume $5.7 billion or 11.1% of the fiscal 2013 city funds
budget. Debt service is forecast to increase to an above average $7.2 billion
or 12.6% of city funds by fiscal 2016, but a more moderate 9.7% of total funds
spending. Fitch views positively the city's ability to achieve sizable savings
from debt refinancing during the prevailing low interest rate environment.
A more notable concern is the cost of pension and other employee benefits
which total $8.1 billion and $8.4 billion, respectively, in the fiscal 2013
budget for the upcoming fiscal year. The rapid escalation in pension costs
(from $1.5 billion in fiscal 2002) is projected to level off thru fiscal 2016;
however, during this period employee benefits will continue to rise an
additional $1.8 billion. Fiscal 2013 pension and employee benefits consume a
very high 28% of city funds, limiting budget flexibility and the ability to
fund other essential programs.
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 for the 'AA' rating. Fitch-calculated net
tax-supported debt including Transitional Finance Authority (TFA) future tax
secured bonds equals approximately 15.7% of 2009 personal income, $7,832 per
capita, and 8.4% of the five-year average of full value. The city's capital
commitments are extensive, totaling $32.5 billion through fiscal 2016,
including $6.9 billion for self-supporting water and sewer projects and $8.4
billion for education. Tax-supported issuance plans during fiscal 2013-2016
include $8.9 billion of city GOs and $10.6 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 $10.7 billion in outstanding
variable-rate debt or 15.9% of net 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 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
50.5 million visitors in 2011, above the record of 48.8 million visitors set
in 2010. Another area of recent strength is the commercial real estate market.
According to Cushman and Wakefield, the city recorded 30.1 million square feet
of leasing activity in 2011, the highest volume since 2000, although the city
reports this activity has recently slowed. The city's economic profile also
benefits from its strong wealth, with per capita income 130% of the national
The city's economy (and operating budget) is strongly linked to the financial
sector, which accounts for approximately 12% of total employment but 31% of
earnings. According to the New York State Department of Labor (NYSDOL),
financial activities employment in the city declined 0.3% in the 12 months
ended September 2012, although total jobs rose 2.5%. The high-earning
securities and commodities component of the sector shed 3,100 jobs or 1.8%
during the year. 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
The city's employment base expanded by a modest 0.2% in 2011, less than the
0.6% growth for the U.S., although the magnitude of the city's job losses
during the prior two years was less. Using NYSDOL data, unemployment on a
seasonally adjusted basis was still high at 9.5% in September 2012 but down
from 9.9% in August, although up from 9.1% in September 2011, reflecting an
increase in the labor force as the number of employed residents remained
fairly flat. This is in contrast to the national trend; U.S. unemployment was
down to 7.8% in September 2012 from 8.2% in August and from 9% in September
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 is
among the weakest of the 20 metropolitan statistical areas (MSAs) in its
survey. It was one of only three MSAs, along with Cleveland and Detroit, to
post weaker annual performance in July 2012 than in the prior month, and was
among the four MSAs that saw an annual decline. New residential permits are
increasing but still far below pre-recession levels. This data may not be
representative of the city's activity given the large number of rental units.
The city's 2011 Housing and Vacancy Survey indicates that rental units
comprise 65% of the city's 3.4 million housing units. Since 2008, the number
of rental units has increased 1% while owner units have declined 3%. About 8%
of total units are vacant.
Several of the sectors experiencing solid growth, including retail, health
care and social assistance, transportation, and leisure and hospitality, are
generally associated with lower wages. This may mute growth in economically
sensitive revenues, which account for about one-half of budgeted fiscal 2013
city funds revenue.
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
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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