Fitch Rates Rochester, NY's GOs 'A+'; Outlook Stable
NEW YORK -- January 28, 2013
Fitch Ratings assigns an 'A+' rating to the following Rochester, NY (the city)
limited tax general obligation (LTGO) bonds:
--$29.15 serial bonds - 2013, series I;
--$67.47 million serial bonds - 2013, series II.
The bonds are expected to price via competitive sale the week of Jan. 28.
Proceeds will be used to finance various capital projects.
In addition, Fitch affirms approximately $116 million of the city's
outstanding LTGO bonds at 'A+'.
The Rating Outlook is Stable.
The current issue is a general obligation of the city for which the city has
pledged its full 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 city council.
WEAK SOCIOECONOMIC PROFILE: Wealth levels are well below average, driven by a
notably high poverty rate and persistently high unemployment. In addition, the
recent bankruptcy filing of one of the city's largest employers will likely
constrain any future employment growth.
SATISFACTORY RESERVES: General fund reserves, combined with available
liquidity in other governmental funds, provide ample operating flexibility.
DIVERSIFIED REVENUE STREAM: The city's general fund relies on a diverse mix of
revenues, including property taxes, sales taxes and state aid.
SIZEABLE FIXED-COST BURDEN: Pension costs are moderate but growing rapidly,
which Fitch believes will lead to budgetary pressure over the medium term.
Significant long-term costs related to other post-employment benefits are also
MANAGEABLE DEBT BURDEN: Despite the city's rapid pay-out of existing debt,
leverage remains moderate on a per capita basis but high as a percentage of
market value, reflecting the city's weak tax base.
ECONOMY TRANSITIONING AWAY FROM RELIANCE ON KODAK
Rochester is New York's third largest city and is located in Monroe County
(GOs rated 'A-', Stable Outlook by Fitch) in north central New York. The city
serves as the economic center for the region and is anchored by higher
education and healthcare. Major employers include the University of
Rochester/Strong Memorial Hospital with over 20,000 employees, Wegmans
(13,976), Rochester General Health System (7,600), and Xerox (6,116), which
moved its headquarters away from Rochester in 1978 but still maintains a
Eastman Kodak was historically the largest employer with over 60,000 employees
in the 1980s but is now down to 5,129 employees with additional downsizing
expected. Eastman Kodak filed for chapter 11 bankruptcy protection in January
2012. While the city's economy has been able to withstand the historical
reduction in Eastman Kodak's labor force, the company remains among the city's
largest employers. Fitch will continue to actively monitor further
developments stemming from the bankruptcy filing. Favorably, the city
currently has a number of ongoing development projects to encourage corporate
development near the University of Rochester.
INFERIOR SOCIOECONOMIC PROFILE
Socioeconomic indicators are depressed with per capita income levels at 58% of
the state average and individual poverty rates more than double the state and
national mean. The city's October 2012 unemployment rate is a high 10.7%, well
above the state (8.3%) and national (7.5%) averages. The 2010 census data show
a 4% decline in population over the past decade.
STABLE FINANCIAL POSITION
Revenues are well diversified, with property tax, sales tax and state aid
making up the bulk of revenues. The city's taxable assessed value (TAV) has
remained steady through the nationwide economic downturn, with the FY 2013
level up slightly from the prior year. As a result, the residential tax rate
was reduced for fiscal 2013 to $19.32 per $1,000, a five-year low.
The non-homestead tax rate is up slightly to off-set declines in non-homestead
TAV, but management expects the non-homestead TAV to stabilize through plant
investment by Rochester Gas and Electric, the city's largest taxpayer at 10.2%
of TAV. Home prices remain stable. Tax collections are below average,
averaging between 92% and 93% collected within the fiscal year of the levy.
The city's general fund consistently generated operating surpluses from fiscal
2007 through fiscal 2011, raising the general fund balance to a solid level.
Fiscal year 2010 ended with a $4.4 million surplus after transfers, bringing
total general fund reserves to $34 million and unreserved levels to $13.3
million or 2.9% of expenditures plus transfers out.
The city has historically kept general fund reserve levels low by maintaining
substantial fund balances in other funds that are readily available for
general fund operations. These funds include the debt service fund and an
internal service fund, which had a $20 million fund balance at the close of
fiscal 2012. Additionally, the city makes sizeable annual transfers to the
capital projects fund, including a $36 million transfer in fiscal 2012, which
could be reduced if necessary.
Fiscal 2011 ended with a large increase in general fund balance levels.
General fund revenues exceeded expenditures by $20.6 million, excluding all
transfers. The city had a net surplus after transfers of $33.7 million, ending
the year with an unrestricted fund balance (the sum of committed, assigned and
unassigned as per GASB 54) of $61.4 million or a solid 13.1% of expenditures.
Fitch notes that the sizeable increase in general fund balance was driven in
part by transfers required by GASB 54.
The city made approximately $27 million of transfers from the debt service
fund related to the reclassification of a retirement fund and a sinking fund.
Net results of the combined general fund and debt service fund was a $4
million deficit. However, these results also reflect a net $8.7 million
transfer to the internal service fund, which is available for operations as
needed. Fiscal 2011 results featured a 4.6% increase in sales tax revenues and
savings from a hiring freeze, offsetting a mid-year reduction in state aid.
Audited fiscal 2012 results were slightly below breakeven with a minimal
general fund deficit (0.4% of expenditures); below the city's expectation for
a marginal surplus. Fitch is not concerned due to the small size of the swing
(totaling 1.4% of fiscal 2012 spending), adequate resultant unrestricted
balance (12.7% of spending) and favorable current year budget performance
(detailed below). The FY 2013 adopted budget anticipates a $3.5 million use of
general fund balance, but management currently expects a small increase in
fund balance as pension and health care costs are below budget. Sales tax
revenue is budgeted to increase by 2% and is on target through six months. The
property tax levy is flat, with rates decreased to offset an increase in TAV.
State aid revenue will be up as a result of a $15.4 million spin-up payment.
The proceeds of this payment will be used to offset a $13.5 million increase
in pension payments. The spin-up is the acceleration of a March 2014 payment
from the state to June 2013, so the city benefits from the payment in FY 2013
while the state is unaffected, as the payment remains within its 2014 fiscal
year. State aid is expected to revert to approximately its prior level of
approximately $105 million in FY 2014.
PENSION AND OPEB COSTS CREATE PRESSURES
The city is facing growing fixed costs in the form of pension and OPEB
payments. The FY 2011 pension payment for employees in the general fund was
$25.9 million, or 5.5% of general fund expenditures. The FY 2012 payment
increased to $31.3 million, while the FY 2013 payment is budgeted for $46.6
million, which will be offset by the spin-up payment from the state.
Pension costs are forecast to peak at about $61 million in FY 2015 before
gradually declining to $43 million in FY 2022, the final year of projections.
Fitch believes the projected rise in pension costs will consume an
above-average level of general fund resources going forward, which could lead
to budgetary pressure. Fitch will monitor the city's plans to manage its
increased pension obligations. The city is permitted by state law to amortize
a portion of its pension payment, but has chosen not to do so thus far. The
city is a part of two well-funded cost-sharing multiple-employer state plans.
The city's fiscal 2011 OPEB payment was $20 million or a moderate 4.2% of
expenditures, representing 40% of its annual required contribution. The FY
2012 OPEB payment was $24.9 million, and the fiscal 2013 payment is expected
to be slightly below this. As of July 1, 2011, the city's unfunded OPEB
liability was notably high at $613 million, or 10% of market value. The city
has begun reserving money to address this liability, which Fitch views
ABOVE-AVERAGE DEBT BURDEN
The city's overall debt burden is high at 7.2% of market value due primarily
to weak real estate values. Debt appears more manageable on a per capita basis
at $2,086. Debt service is moderate at 11.8% of general fund spending and
should not increase significantly. Debt amortizes extremely rapidly, with 92%
paid off in 10 years. The city has moderate additional borrowing needs, and
uses cash for many of its financing needs. Total carrying costs (pension, OPEB
and debt service) represent a moderate 23% of government fund expenditures.
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, Zillow.com, and 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
U.S. Local Government Tax-Supported Rating Criteria
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Eric Friedman, +1-212-908-9181
One State Street Plaza
New York, NY 10004
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