NEW YORK, October 01 (Fitch) Fitch Ratings has assigned an 'AA' rating to the
following Dormitory Authority of the State of New York (DASNY) state sales tax
--$1 billion series 2013A.
The bonds are expected to sell through negotiation the week of Oct. 14, 2013.
This is the state's first offering of state sales tax revenue bonds.
The Rating Outlook is Positive, in line with the outlook on the state's general
obligation (GO) and GO-linked debt.
The bonds are secured by financing agreement payments to be made by the State of
New York, subject to legislative appropriation. Payments are derived from the
yield of one cent of the four-cent statewide sales tax, net of refunds, rising
to two cents after Local Government Assistance Corporation (LGAC) bonds are
fully retired, expected on or before in 2025.
KEY RATING DRIVERS
--STRONG STRUCTURE ELIMINATES RISK OF NON-APPROPRIATION: Bond payments require
annual state legislative appropriation. However, in the event of
non-appropriation the state would be unable to receive sales tax revenue
deposited in the sales tax revenue bond tax fund, which is expected to total
$2.9 billion in the current fiscal year. Fitch believes this structural feature
effectively eliminates the risk of non-appropriation.
--BROAD DEDICATED REVENUE SOURCE: The designated source of payment is
broad-based and provides generous coverage of debt service. Although revenues
dropped in the recession, the sales tax has been a relatively stable revenue
source over time and recent results are improved. Fitch also notes that although
the sales tax is the intended source of funds for debt service, there is access
to general fund resources in the extremely unlikely event that sales tax
revenues are inadequate.
--GENERAL CREDIT QUALITY OF NEW YORK STATE: Due to the strengths noted above,
the rating on the sales tax revenue bonds is equal to the 'AA' rating assigned
to New York's GO debt. New York's GO rating is based on the state's substantial
wealth and resources and broad economy, strong financial planning and reporting
practices, and moderate liability burden. The Positive Outlook reflects the
improved fiscal management practices of recent years that are resulting in
timelier, more sustainable budget-making. Notable recurring actions were taken
to close budget gaps in the downturn, and in the recovery the state has limited
the growth in spending.
The rating on the bonds is sensitive to changes in New York State's GO rating,
to which it is linked, as well as expected solid coverage to be provided by
sales tax revenues.
The current bond issue is the first offering under New York State's new state
sales tax revenue bond financing program. New York State has relatively little
GO debt (less than 10% of total net-tax-supported debt) and since 2002 has
financed the bulk of its capital needs through revenue bonds secured by 25% of
state personal income tax (PIT) revenues, subject to appropriation. The PIT
bonds replaced straight appropriation debt as the primary financing mechanism
for the state. There is about $27 billion of state PIT debt outstanding, issued
by five authorized issuers.
Earlier this year, the state passed legislation creating the new state sales tax
revenue bond financing program. The statutory language is specifically modeled
on the PIT bond program. The new program is expected to diversify the state's
borrowings but not increase overall borrowing. The state plans to use the sales
tax and PIT bonding programs interchangeably, and intends to finance its capital
needs going forward through these two programs plus the GO credit.
New York also has sales tax-backed bonds outstanding through LGAC. LGAC was
created in 1990 as a means of financing $4.7 billion of the state's accrued
general fund deficit, replacing the annual spring borrowing for local aid
payments. LGAC bonds are also backed by one cent of the state's sales tax,
which is required by statute to be deposited in the local government assistance
tax fund, subject to appropriation. LGAC has no remaining bonding
authorization, and outstanding bonds fully mature in 2025.
The new state sales tax revenue bonds are special obligations of the issuing
authority, secured by payments to be made by the state pursuant to a financing
agreement between the issuer and the state acting through the director of the
budget. These payments are to be made from amounts statutorily required to be
deposited into the newly created sales tax revenue bond tax fund: 1% of New York
State's 4% sales tax, net of refunds, at the start of the program, rising to 2%
once LGAC bonds are fully retired. The sales tax revenue bond tax fund is held
separate and apart from all other moneys of the state in the joint custody of
the Commissioner of Taxation and Finance and the Comptroller of the State. Debt
service is funded monthly on a 1/5, 1/11 basis, and amounts not required for
debt service flow to the state's general fund at least monthly.
Use of sales tax revenue bond tax fund receipts requires annual legislative
appropriation, but if appropriation is not made, the funds (about $2.9 billion
in the current fiscal year) are unavailable for general fund purposes, except if
needed for GO debt. Fitch believes this effectively eliminates the risk of
The sales tax is the state's second largest source of tax receipts, representing
about 20% of state tax revenues at $12 billion. It has been imposed since 1965.
The base of the sales tax is amended regularly, although the rate has been
changed only four times. The current rate of 4% has been in place since 1971,
but for a 0.25% temporary increase to 4.25% from June 2003 to 2005. The sales
tax has been a relatively stable revenue source over time. Receipts have
demonstrated solid growth following two years of recessionary tax base declines
in fiscal years 2009 and 2010.
Although the sales tax is the intended source of funds for debt service, the
state comptroller is required to transfer monies from the general fund without
the need for further appropriation if sales tax revenues were to be inadequate
for debt service, an event that Fitch believes is extremely unlikely.
Conversely, GO bondholders have access to the sales tax fund monies in the
similarly unlikely event that they were to be needed for that purpose. The
state retains the ability to amend, modify, or repeal the sales tax.U.S. State Government Tax-Supported Rating CriteriaAdditional Disclosure
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