TEXT - Fitch rates Suffolk County, NY TANs
Dec 11 - Fitch Ratings assigns an 'F1' rating to the following Suffolk County, NY (the county) notes: --$410,000,000 tax anticipation notes (TANs) for 2013 taxes, comprised of $300 million series I, and $110 million series II. The notes are expected to be sold through negotiation on Dec. 12 and are being issued in anticipation of real property taxes or assessments to be received in 2013. In addition, Fitch affirms the following ratings: --Approximately $1.4 billion in outstanding general obligation (GO) bonds at 'A+'; --$105 million of outstanding delinquent tax anticipation notes DTANS) at 'F1'. The Rating Outlook on the bonds is Negative. SECURITY The notes are general obligations of the county with a pledge of its 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 county legislature. KEY RATING DRIVERS LIMITED FINANCIAL FLEXIBILITY: Persistent operating deficits due primarily to over-estimation of economically sensitive sales tax revenues, the use of non-recurring revenues and increased fixed costs have led to reduced reserve levels and a significant structural imbalance. RELIANCE ON SHORT-TERM BORROWING: A narrowing cash position has increased the county's reliance on short-term cash flow borrowings. BUDGET MITIGATION PLAN IN PLACE: County management is addressing the significant structural imbalance through a phased-in budget mitigation plan which includes cost savings and revenue generating measures. Fitch views this positively, but is concerned that a number of measures are of a non-recurring nature and some may not come to fruition because of required state approval and litigation. STRONG ECONOMIC INDICATORS: The county benefits from a broad and wealthy economy characterized by below average unemployment rates and well above-average wealth levels. MODERATE DEBT BURDEN: The sizeable and wealthy tax base results in a manageable debt burden with above average amortization that Fitch believes can comfortably accommodate anticipated moderate capital needs. NARROW CASH FLOW COVERAGE: Projected coverage by revenues expected to be received by the 2013 note repayment date provide narrow coverage. WHAT COULD TRIGGER A RATING ACTION INABILITY TO MEET 2013 PROJECTIONS: The county's budget mitigation plan calls for some stabilization in 2013 through both recurring and one-time measures. A rating downgrade is likely if 2013 results are not realized and/or include more temporary solutions than planned. INCREASED SHORT-TERM BORROWING: The county's cash flow note proceeds have grown to a high level compared to the budget. A rating downgrade is likely if short-term borrowing levels do not stabilize or decline starting in 2013. Coverage of note repayment is tight and any deterioration would likely cause a downgrade to the short-term rating. CREDIT PROFILE Suffolk County encompasses the eastern two-thirds of Long Island including the Hamptons and Fire Island. The county's growing population totals approximately 1.5 million; the largest of any county in New York State outside of New York City. SUPERSTORM SANDY IMPACT MANAGEABLE On a wide-spread basis the county was not severely impacted by Superstorm Sandy, although the South Shore, which includes Fire Island, sustained significant damage. As of Nov. 26 the county estimates its loss at $70 million. FEMA is expediting reimbursement and the county expects to receive 75% reimbursement from FEMA with the remaining 25% received from non-federal sources such as state assistance and local government cost sharing. New York State is requesting that the federal government assume the local share. It is not clear at the present time what impact the storm will have on sales tax revenue but it is possible to see an up-tick in revenues as a result of purchases to rebuild damaged homes and replace destroyed automobiles. Tax certioraris may increase to reflect decreased property values in the affected areas due to storm damage and property tax receipts may decline as a result of higher delinquencies. LIMITED FINANCIAL FLEXIBILITY REDUCES RESERVE LEVELS The county's financial condition has deteriorated significantly over the last few years. The perpetual overestimation of sales tax revenue, which comprises 47% of major tax-supported fund revenue, use of non-recurring revenue items, and high and increasing fixed costs create pressure on the budget. The county recorded a fiscal year end December 31, 2011 GAAP operating deficit of $140 million or 5.4% of spending in the consolidated general and police district funds. The unrestricted (the sum of committed, assigned, and unassigned under GASB 54) general fund balance totaled a negative $265.2 million ($318.3 million on a combined basis), or a large negative 12.3% of spending. Further reducing financial flexibility and to help close budget gaps, the county continued to draw down its Tax Stabilization Reserve Fund (TSRF) in 2011 by $40.1 million, reducing the balance to roughly $49 million from a high of $127 million in 2008. Fitch expects the county to meet its goal of not drawing additional funds from the TSRF in 2012 and 2013. CASH FLOW PRESSURE LEADS TO INCREASED RELIANCE ON SHORT-TERM BORROWING Fitch views as a credit negative the county's increased reliance on capital market access for liquidity needs to relieve cash flow pressures. The county has historically issued annual cash flow notes in anticipation of receipt of delinquent and current property taxes (DTANs and TANs, respectively). However, due to limited financial flexibility and a narrowing cash position, the amount of the borrowings has increased over the last few years. The county issued $520 million in 2011 (includes $100 million issued in January 2012 from the December 2011 borrowing) compared to $310 million issued million in 2006. Cash flow borrowings in 2012 will total $600 million (includes $110 million to be issued in January 2013 from the December 2012 borrowing) and include $85 million of revenue anticipation notes (RANs) - the first time the county has issued RANs in over two decades. Current cash flow projections for 2013 show $585 million in cash flow borrowing, lower than 2012 borrowings but still a high 21% of 2013 budgetary expenses. Fitch remains concerned about the county's increased dependence on short-term borrowing and an inability to stabilize at current levels and/or reduce these amounts will cause downward pressure on the rating. NARROW CASH FLOW COVERAGE FOR NOTE REPAYMENT Cash flow provides narrow coverage of 1.16x on the notes at maturity. With consideration of borrowable balances in the TSRF, coverage improves slightly to 1.21x. Fitch believes the county's cash flow projections are reasonable but subject to some volatility given some execution risk related to cost cutting and the county's general optimistic revenue forecasting. PHASED-IN BUDGET MITIGATION PLAN IN PLACE The county has adopted a phased-in budget mitigation plan to address the $428 million budget deficit for 2011 through 2013. The formation and implementation of this plan to date demonstrates management's willingness to address fiscal problems cooperatively. However, Fitch remains concerned that many of the measures are non-recurring in nature with some requiring state approval and resolution of outstanding litigation. The ability to restore structural long-term balance and improve financial flexibility will continue to be challenging. Under stage 1 of the budget mitigation plan the county is projecting a combined savings of $117.2 million for 2012 and 2013. By far the most significant measure is the amortization of $60.7 million of the 2013 pension payment, which would provide relief that year but increase costs in later years. Other sizeable measures, which Fitch considers to be more structural in nature, include: $25 million in savings from the embargo of department funds, and the doubling of red light cameras, which was approved by the state, with estimated revenues of $12 million in 2013. Stage 2 mitigation measures include savings from the PBA contract, sale of the county-owned Foley Nursing Facility, and union health care concessions resulting in cost savings of $73 million. The new PBA contract is an eight-year contract expiring in 2018. Fitch expresses some concern that a no layoff clause over such a lengthy contract could impede the county's overall cost flexibility although the county reports that current staffing levels are at a minimum. Fitch notes favorable contract terms for the county include no retroactive pay for 2011 and 2012 and no increases until June 1, 2013; saving the county an estimated $43.7 million in retroactive salaries in 2013. Pay increases from mid-2013 through 2018 average about 3.5% annually, roughly the same as the last arbitration award. The new contract also appears to provide the county with a more affordable police force in future years through the freezing of starting salaries and the entire 2013 - 2018 pay scale for new officers. The contract further requires additional steps to reach the top pay grade and new officers contribute 15% to health care costs. All new county employees are now required to contribute 15% to their health care costs and the county estimates it will save about $17 million from a new pharmaceutical agreement. The sale to a private operator of the county-owned, financially pressured Foley Nursing Facility was approved by the county legislature earlier this year and was expected to close on Dec. 31, 2012. Litigation has been filed by one of the unions and the sale has been delayed. A decision on whether to proceed with the sale or file a nursing home closure plan, which would require state approval, will be made during the first quarter of 2013. If the nursing home sale does not proceed and the facility is closed there will be a budgetary impact of a $23 million loss of revenues in the 2013 adopted budget. County management does not foresee any issues with obtaining state approval for closure as this procedure is in line with state policy. Additionally, the $20 million Yaphank land sale, which was also expected to close by the end of 2012, has been delayed due to litigation. The county attorney believes the suit is without merit and intends to submit a motion to dismiss. The county expects to close the transaction in April 2013. The current TAN issue was increased by $10 million to compensate for the sale not taking place in December 2012. 2013 BUDGET ADDRESSES REMAINING GAP The 2013 adopted budget was approved by the county legislature on Nov. 7 with a few minor changes and no county executive vetoes. The budget is balanced and includes a 5.0% increase in operating revenues and other financing sources over the 2012 adopted budget with a modest 1% increase in spending. Sales tax revenue growth of 3.75% over estimated 2012 sales tax revenues appear reasonable. For 2012, the county is forecasting a 3.85% growth in sales tax. Major budget initiatives that address the deficit include structural initiatives. The 2.6% increase in the police district property tax rate will provide an additional $12.4 million in revenue in 2013 and the county projects annualized savings of $53.3 million from 2012 staff reductions. Viewed less favorably by Fitch are non-recurring items including the $70 million in revenues from the sale-lease back of the H.L. Dennison building, which requires state approval. The budget prudently does not contemplate the use of any additional funds from the $49 million TSRF. STABLE ECONOMY AND TAX BASE ENHANCED BY STRONG WEALTH LEVELS The county benefits from its proximity to New York City, as well as its own stable and diverse employment base which includes numerous corporate and regional headquarters. The unemployment rate (7.4% for 2011) has historically been below state and national levels. For the month of October 2012, the county unemployment rate was 7.3%, higher than the October 2011 rate of 7.0%, but still below both the state and national rates of 8.3% and 7.5%, respectively. Well above-average economic indicators include high income levels (per capita personal income in 2010 was 131% of the nations) and high per capita market value ($180,000). The county's tax base continues to grow, albeit at a slower rate than in previous years. The tax base is diverse with the top 10 taxpayers comprising a low 1.36% of assessed value. Total property tax collections remain strong, averaging 98% in 2011. MANAGEABLE DEBT AND LONG-TERM LIABILITIES The county's debt ratios at $3,758 per capita and 2.1% of market value are moderate, reflecting the wealthy tax base. Debt amortization is above-average with 63% retired in ten years and debt service represents a manageable 5.2% of major fund spending. Debt ratios should remain stable given the modestly growing tax base and manageable capital needs. The county plans on issuing approximately $60 million of general obligation bonds during the spring of 2013 for various capital projects. The June 2012 adopted three-year capital improvement program (CIP) for 2013 -2015 totals $515.2 million. The county participates in New York State's well-funded pension funds. Payments make up a moderate share of spending (4.6% of 2011 spending) but are expected to increase, even with the ability granted by the state to amortize most of the increase in annual pension payments over ten years. This option, which the county has taken, provides some near-term budget relief but will make future year budgeting for these payments more challenging.
The unfunded actuarial accrued liability for other post-employment benefits (OPEB) was $4.4 billion as of Dec. 31, 2011, or a moderate 1.6% of market value. This amount is expected to increase as the county plans to continue to fund its OPEB liability on a pay-go basis and officials have no plans to alter benefits. Carrying costs for debt service, pension and OPEB pay-go equaled a manageable 12.7% of 2011 spending, but is slightly understated due to the county's amortization of part of the pension payment.
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