TEXT - Fitch affirms Islip, NY 'AAA' GO bonds
Jan 29 - Fitch Ratings has affirmed its 'AAA' rating on the following town of Islip, New York (the town) securities: --$57,440,000 public improvement general obligation (GO) bonds, series 2000, 2004, 2005, 2006, 2007, and 2008. The Rating Outlook is Stable. SECURITY The town has pledged its full faith and credit and unlimited taxing power for debt service on outstanding GO bonds. This pledge is 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. No exemption is made under the tax cap law for debt service on outstanding GO debt; however, the constitutionality of this provision has not been tested. SENSITIVITY/RATING DRIVERS STRONG RESERVES; STRUCTURAL IMBALANCE: The town has notably high reserve levels; however, ongoing structural imbalance has led to moderate reserve drawdowns. PROACTIVE BUDGETARY MANAGEMENT: The town consistently outperforms its budget due to conservative budgeting of revenues and prudent, proactive cost containment. ABOVE-AVERAGE ECONOMIC INDICATORS: The town's wealth indicators are above average and its unemployment rate is below the state average. MODERATE LONG-TERM OBLIGATIONS: The town's debt profile is characterized by a moderate amount of rapidly amortizing debt, as well as above average carrying costs and some deferral of expenses associated with long-term obligations. WHAT COULD TRIGGER A RATING ACTION CONTINUED STRUCTURAL IMBALANCE: Continued structural imbalance may pressure reserve levels and the town's future budgets, which could create pressure on the town's highest quality rating. CREDIT PROFILE The town of Islip is located on the south shore of Long Island in Suffolk County (GO 'A+', Outlook Negative by Fitch), approximately 45 miles east of New York City. The town had 335,000 residents at the 2010 Census, up a modest 4% over the past decade. STRUCTURAL IMBALANCE AND STRONG RESERVES The town has experienced at least three years of structural imbalance across operating funds (general, highway, and town outside village), reducing total fund balance by 26% since 2009 and leaving unrestricted operating fund balance at $56.2 million or 52.4% of spending at year-end 2011. Fitch notes that the town's fund balances remain healthy and that draw downs on reserves were planned; however, continued structural imbalance would result in diminished financial flexibility and downward rating pressure. Cost containment efforts include the elimination of the department of human services and realized savings from 37 layoffs at the end of 2009, as well as requiring new town employees to pay for a portion of their health care benefits. Non-recurring measures in the 2013 budget include the sale of land ($7 million or 6.3% of operational spending) and the use of OPEB reserves to fund the town's pay-go obligation. 2011 financial results came in under budget with a smaller-than-budgeted use of fund balance of $8.6 million or 10.8% of spending. The town projects ending 2012 with approximately $25 million to $30 million in total operating fund balance (23% to 27% of 2011 spending); this significant draw-down is due to one-time expenses associated with Hurricane Sandy, which are largely reimbursable. The town anticipates that approximately $12 million of the $13 million in clean-up expenses will be reimbursed by FEMA or the state and may book a $4 million expedited reimbursement in fiscal 2012, depending on the timing of receipt. Prior to Hurricane Sandy, the town reports that expenditures were tracking under budget, notably from lower-than-budget healthcare spending growth. Fitch approximates total structural fund balance use, excluding the effect of the storm, of $15 million to $20 million (14% to 18% of spending) in 2012 and would view unfavorably significantly greater negative audited results. The town's board has shown a willingness to raise revenue, increasing the property tax rate by 28% with a tax levy cap override for its 2013 budget. This increase comes after the town held flat its tax rate for 16 years. The increase will generate an additional $10.6 million in 2013. The town has also increased recreational fees by 7% or $425,000. Fitch notes positively that these tax increases suggest progress toward restoring structural balance, as the town has budgeted only $4.5 million in use of operating fund balances in 2013, down notably from $23 million in its 2012 budget. ABOVE-AVERAGE ECONOMIC INDICATORS The town's wealth indicators are high with median household income at 160% of U.S. The town's unemployment rate was 7.7% in October 2012, below the state (8.3%) and above the national (7.5%) rates. Assessed valuation has declined only marginally from its pre-recession peak in 2009 (-0.5%), although overall market value is down by 20% over the same time period. Town residents benefit from access to the New York City and Long Island labor markets as well as local employment opportunities. Notable town employers include Good Samaritan and Southside hospitals, NBTY (vitamin manufacturer and wholesaler), and Computer Associates International (software), each employing between 2,500 and 3,500 in 2012. The town is largely built-out, limiting assessed valuation development opportunities. Estimates of local damage from Hurricane Sandy exceed $30 million, representing less than 0.1% of market value, which Fitch believes is unlikely to significantly affect assessed valuation and subsequent year collections. MODERATE DEBT BURDEN The town's overall debt burden, most of which is for overlapping school districts and the county, is moderate at $3,458 per capita or 3.2% of market value. Debt service expense in 2011 was an above average 14% of operating fund spending in 2011, reflective of the rapid amortization rate of 83% in 10 years. The town has not yet adopted a 2013 capital budget but management anticipates continued annual bonding of a moderate $15 million to $17 million annually, which Fitch believes should be easily managed. The town participates in a state-run cost-sharing defined benefit pension plan which is well funded under the aggregate cost valuation method. The town's 2011 pension payment was $5.1 million or a manageable 5% of 2011 operating fund spending; however, due to the system investments' underperformance through the recent economic trough, annual pension costs are expected to increase. The town is also deferring the maximum allowable portion of its annual contribution to the state pension system ($3.2 million in 2013), providing near-term budget relief but making future year budgeting for payments more challenging. The town plans to continue to take advantage of this option as the state comptroller makes it available. The town's payment for OPEB in 2011 was $8.3 million or 7.5% of operating funds spending. The town has drawn down on its OPEB reserve since 2007, nearly exhausting this source from a once healthy $20 million, which will add to future budgetary pressure. The town's OPEB unfunded actuarially accrued liability is $222 million or 0.6% of market value. The town's overall carrying costs for debt service, pension and OPEB pay-go was a significant 27% of operating fund spending in 2011.
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