Dec 6 - Fitch Ratings assigns an 'AA' rating to the following New York City
general obligation bonds:
--Approximately $500 million general obligation (GO) bonds, fiscal 2013 series
--Approximately $350 million general obligation bonds, fiscal 2013 series E.
The bonds are expected to be sold via negotiation on Dec. 11
In addition, Fitch affirms its 'AA' rating on the city's $41 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 cap.
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 well within historical norms, although risks to the forecast are
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
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 plans.
EXPECTATION FOR CONTINUED BUDGET BALANCE
The current forecast for fiscal 2013 spending totals $69 billion, a 3% increase
from fiscal 2012 actual spending. The budget includes neither retroactive
payments for most expired labor contracts not yet settled nor salary increases
for fiscal 2013. A modest reserve for collective bargaining assumes increases of
1.25% per year thereafter.
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 . Combined taxes make up 64%
of total revenue.
Areas of revenue risk include proceeds from the sale of taxi medallions, which
total $1.5 billion over the plan period, $250 million in state aid related to
agreement on a teacher evaluation plan, reimbursements for Hurricane
Sandy-related costs, state revenue shortfalls that could result in reduced aid
to municipalities including New York City, and federal actions that could result
in reduced funding to the city.
Management estimates the gross cost to public sector facilities from Hurricane
Sandy to be $4.5 billion, but anticipates a high percentage if not all will be
eligible for reimbursement. The estimate does not include the cost of
enhancements for future damage mitigation.
Despite expense and revenue pressures, 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. The out-year gap estimates
included in the city's November modification to the financial plan are sizeable
at $1.2 billion for fiscal 2014, $2.8 billion for fiscal 2015, and $2.6 billion
for fiscal 2016 but below historical standards.
Simultaneously with the recent November budget modification, the city released a
gap-closing program of $555 million for fiscal 2013 and $2.6 billion through the
plan period. Nearly $1 billion of the program affects the Department of
Education. The fiscal 2013 program is primarily to offset the delay in receipt
of funds from the sale of additional taxi medallions and new needs of $135
million since the adopted budget. The program calls for headcount reductions of
627 in fiscal 2013 and 1,315 in fiscal 2014. Nearly all are to be through
attrition. The reductions are modest relative to the city's overall headcount,
which totals more than 255,000.
In addition to headcount reductions, a moderate amount of the gap-closing
program represents revenue assumptions or cost savings that are not within the
city's control and therefore uncertain. However, Fitch anticipates that savings
not realized in the items presented will be replaced with other reductions or
revenue enhancements, and that those actions will largely be of a recurring
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.
In fiscal 2013 $2.4 billion, or 3.6% of total spending, 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 reflect a lower amount by which actual tax
receipts exceed projections than in past years, although receipts were still
ahead of budget. Fitch assumes that by fiscal year-end the surplus available for
fiscal 2014 will be at least similar to the level rolled into fiscal 2013.
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 eliminated from the fiscal 2013 budget
given a recent state court ruling that the legislation authorizing the sale of
additional medallions was unconstitutional. The city has filed an appeal but
does not expect any revenue to be available until fiscal 2014 if the appeal is
successful. The current financial plan includes $790 million in taxi medallion
revenue in fiscal 2014, $447 million in fiscal 15, and $223 million in fiscal
Another non-recurring resource in fiscal 2013 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
LONG-TERM SPENDING PRESSURES
Debt service will consume $6.1 billion or 8.9% of the fiscal 2013 budget. Debt
service is forecast to increase to $7.5 billion or 9.7% of total spending by
fiscal 2016. Fitch recognizes the city's conservative budgeting of debt service
expense and views positively the city's ability to achieve sizable interest rate
savings from debt refinancing over the last several years.
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 current fiscal 2013
budget. The rapid escalation in pension costs (from $1.5 billion in fiscal 2002)
is projected to level off through fiscal 2016 despite changes in actuarial
assumptions including a drop in the expected investment return rate to 7% from
8% and actual investment returns for fiscal 2012 of only 1.4%.
During this period employee benefits are projected to continue to rise an
additional $1.7 billion. About $2.1 billion of the fiscal 2013 employee benefit
costs are for other post-employment benefits (OPEB). Fiscal 2013 pension and
OPEB costs consume 14% of total funds. Adding debt service, carrying costs rise
to 23% of spending, which Fitch considers to be on the high end of the moderate
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. Fitch-calculated net tax-supported debt including
Transitional Finance Authority (TFA) future tax secured bonds equals
approximately $8,026 per capita, and 8.1% of the five-year average of full
value. The city's capital commitments are extensive, totaling $34.3 billion
through fiscal 2016, including $7.0 billion for self-supporting water and sewer
projects and $8.4 billion for education. Tax-supported issuance plans during
fiscal 2013-2016 include $9.5 billion of city GOs and $11.2 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 $9.7 billion in outstanding
variable-rate debt or 15% of 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 demonstrated 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 average. However, the
well above-average individual poverty rate of 20.1% in 2011, compared to 15.2%
for the U.S., indicates significant income disparity.
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. Financial activities employment rose only 0.1% in 2011. The
high-earning securities and commodities component of the sector shed 1,900 jobs
or 1.1% 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. The unemployment rate of 9.2% in October 2012 matched
the October 2011 rate and remained above the state and federal rates, while
year-over-year employment growth was below both.
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 two MSAs, along with Chicago, to post annual declines in
September 2012. 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 increased1% 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 Portfolio
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