NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns the following ratings to Nassau County, NY (the county):
--$93,500,000 general improvement bonds, 2013 series C at 'A';
--$1,045,000 general improvement bonds, 2013 series D at 'A';
--$123,000,000 bond anticipation notes, 2013 series B at 'F1';
--$148,000,000 tax anticipation notes, 2013 series A at 'F1';
--$77,000,000 tax anticipation notes, 2013 series B at 'F1'.
The series D bonds, the bond anticipation notes (BANs) and the tax anticipation notes (TANs) are expected to be sold through negotiation and the series C bonds via competitive sale on Dec. 5, 2013.
The bonds are being issued to fund various public purposes, including capital projects, judgments and settlements, tax certiorari payments, termination pay and workers' compensation settlements.
The BANs are being issued to take out $123 million of the county's $186
million 2013 series A BANs dated Feb. 28, 2013 and maturing Feb. 5, 2014
that were issued for Superstorm Sandy-related purposes. The county will
use $63 million of unspent series A BANs proceeds to pay the balance of
such BANs at maturity.
The TANs are being issued in
anticipation of the collection by the county of real property taxes for
the fiscal year commencing Jan 1, 2014 and ending Dec. 31, 2014.
In addition, Fitch affirms the following ratings:
--Approximately $1.5 billion in outstanding general obligation bonds at 'A';
--Approximately $259 million in outstanding Nassau Health Care Corporation (NCHCC) county-guaranteed bonds at 'A';
--Approximately $13.1 million in outstanding Nassau Regional Off-Track Betting Corporation (NROTBC) revenue bonds series 2005 at 'A-'.
The Rating Outlook for all long-term debt is Negative.
SECURITY
The GO bonds, notes and NCHCC bonds are secured by the county's faith
and credit and taxing power, subject to a 2011 state statute limiting
property tax increases to the lesser of 2% or an inflation factor (tax
cap law). This limit can be overridden annually by a 60% vote of the
county legislature.
The NROTBC bonds are backed by the
county's covenant under a support agreement with the NROTBC to make
loans to NROTBC equal to debt service on the bonds from legally
available funds of the county as appropriated for such purpose. The
county commits to transfer funds to the trustee to pay debt service not
later than 15 days prior to any debt service payment date. The
obligations of the county under the support agreement are unconditional
and irrevocable, and the support agreement is not subject to
cancellation or termination.
KEY RATING DRIVERS
LIMITED FINANCIAL FLEXIBILITY: The county's lack of financial flexibility is evidenced by limited reserves, high dependence on economically sensitive sales tax revenue, use of non-recurring measures, and labor contracts that will continue to challenge the county's ability to achieve structural balance.
SHORT-TERM MARKET RELIANCE; SOUND COVERAGE: Low liquidity remains a concern, as does the county's reliance on short-term market access to fund operations in anticipation of sales tax receipts and for note repayment. Note coverage from projected 2014 revenues and borrowables is strong and note par has declined slightly over the last few years.
STRONG ECONOMIC FUNDAMENTALS: The county maintains a diverse economic base and a population with high income levels.
MANAGEABLE DEBT BURDEN: The sizable and wealthy tax base results in a manageable debt burden with above average amortization. Capital needs are moderate.
WEAK INTERGOVERNMENTAL RELATIONSHIPS: Fitch believes the ability to implement programs to improve fiscal stability will continue to be impaired absent improvement in the county administration's interactions with either its legislative minority or the Nassau County Interim Finance Authority (NIFA).
RATING SENSITIVITIES
CONTINUED COST-CUTTING MEASURES ESSENTIAL: Management's ability to continue to reduce costs, of which labor is by far the largest, is essential to near-term budget balance and rating stability.
RESOLUTION OF LITIGATION: The county is exposed to potential significant liabilities related to tax refund and wage freeze litigation. A favorable outcome to pending litigation in conjunction with the alleviation of the fixed costs burden could stabilize the rating at the current level.
CREDIT PROFILE
The county is located on Long Island, approximately 15 miles east of Manhattan. The population of about 1.3 million has remained fairly steady, growing by 1.1% since 2000.
2012 OPERATING SURPLUS; CUMULATIVE DEFICIT REDUCED
The county reported a budgetary surplus of $41.5 million (1.6% of spending) in its five defined primary operating funds (general, police headquarters, police district, fire prevention, debt service) for fiscal 2012 (year-end Dec. 31). The results include $9.7 million in unanticipated costs representing the county's 10% portion of Superstorm Sandy related expenditures. The primary components that added to the budgetary surplus were higher sales tax revenues of $22 million, lower debt service costs and the sale of property. The county achieved a budgetary savings of approximately $150 million in labor through a combination of layoffs, restructuring of operations, labor concessions, and other actions.
Fitch views positively the county's shift in formerly aggressive sales tax budgeting (which makes up 40% of major tax-supported fund revenue). Sales tax outperformed budget for the past four years and the structural deficit related to the primary operating funds has been reduced for the third consecutive year from $251.6 million in 2009 to a still sizable $115.6 million in 2012.
On an audited GAAP basis the operating funds (general and police district) reported a $27.5 million operating surplus after transfers, increasing the combined fund balance to $111.4 million or 4.3% of spending. However, reserve levels continue to be weak with an unrestricted (sum of committed, assigned and unassigned) fund balance of negative $30.9 million or a negative 1.2% of combined spending.
POSITIVE MOMENTUM CONTINUES IN 2013
The county is projecting a fiscal 2013 $15 - $25 million operating surplus after transfers on a budgetary basis. Positive results are due to higher than anticipated sales tax revenues and lower than projected expenses in debt service, fringe benefits and early intervention and special education which should result in another year of cumulative deficit reduction. Year-to-date sales tax receipts are 8.5% higher than 2012 actual receipts for the same period.
2014 BUDGET INCLUDES SOME QUESTIONABLE COMPONENTS
The county legislature adopted the 2014 budget with minor amendments, and spending of $2.8 billion ($1.7 billion general fund) is relatively flat from the fiscal 2013 budget. Budgeted sales tax growth of 4% over the 2013 adopted budget is considered prudent by Fitch given potential continued pickup form Sandy rebuilding. The budget does not include any increased fees and is the fourth consecutive year without a property tax increase. Fitch believes the balanced budget includes a number of questionable components, some of which require NIFA or legislative action including the sale of certain properties for which no contracts currently exist and bonding of approximately $230 million of tax cert refunds.
CONTINUING FINANCIAL PRESSURES IN OUT YEARS
The county's 2014 - 2017 multi-year financial plan projects reduced budget gaps compared to the previous plan starting at 1.5% of spending in fiscal 2015 and growing to 1.8% of spending in fiscals 2016 and 2017. Fitch recognizes the strides the county has made in decreasing the structural deficit on a budgetary basis. Fitch believes the gaps are manageable relative to the size of the county's operating funds budget, but troubling due to the county's existing limited fund balance position.
Fitch remains skeptical about the county's ability to implement gap-closing measures to produce savings and/or generate offsetting revenues. Some of the measures are of a non-recurring nature and may not be realistic given that one or more will require state legislation, action by the county legislature, or approval from NIFA.
LITIGATION CONCERNS
Adding to the county's financial pressure is outstanding litigation related to the wage freeze and tax certs which exposes the county to potential significant liabilities. Fitch believes an adverse decision for either or both cases would make it more difficult to achieve structural balance in the near to medium term.
NIFA WAGE FREEZE POWER CHALLENGED
In 2011 NIFA implemented a wage freeze that is now in effect until March 2014. Three labor unions filed suit to reverse the wage freeze. In Feb. 2013, the U.S. District Court for the Eastern District of New York issued an opinion granting the union's summary judgment which would nullify NIFA's imposition of the wage freeze. NIFA and the county appealed and in September the federal appeals court overturned the lower court decision on jurisdictional grounds, with respect to state law claims. The unions' federal claims are currently on hold in federal court. However, the unions continue litigation, filing suit in state Supreme Court on their state law claims.
The county estimates that if a final decision goes against the county its retroactive liability would be approximately $230 million through fiscal 2013 including costs such as payroll taxes, pension contributions, etc. This amount is not included in the 2014-2017 multi-year financial plan.
Out year budget gaps would increase substantially if the county is required to repay approximately $230 million of wage savings achieved through 2013 as well as budget savings that continues to accrue. The county anticipates financing any adverse settlement, although county legislature and NIFA approval would be required.
TAX CERT LEGISLATION CHALLENGED
In 2010 the county passed legislation that eliminates its responsibility for making tax cert payments to towns, special districts, and all but one of the school districts. The legislation results in a significant reduction in the county's liability by shifting a portion of the cost of tax refunds to local municipalities in accordance with general state law. The legislation is being challenged by a number of the underlying jurisdictions.
The county's position was upheld in the Nassau County Supreme Court but overturned in February 2013 by the New York State Appellate Court. The State Court of Appeals is scheduled to hear oral arguments in January 2014 with a decision probable by mid-2014. The county estimates that, in the event the decision is not reversed on appeal, the amount of its liability for paying the refunds would be approximately $60 million or 2.1% of annual spending. Fitch believes the county could manage the $60 million but recognizes that a loss by the county would create yet another road block in its path towards overall fiscal balance.
Fitch is concerned with the county's ability to fund the total accumulated tax liability (not part of the suit), which is estimated at approximately $335 million at Dec. 31, 2012. The county planned, with NIFA's approval, to issue approximately $305 million in tax cert bonds through fiscal 2014 to cover the liability but the county legislature did not provide the requisite two-thirds majority.
Earlier this year the administration and county legislature reached an agreement to issue $75 million (out of $305 million) in bonds for tax certs; $40 million was issued in July with the remainder $35 million included in the current bond issue. In addition, the county has represented it will utilize $20 million of operating revenue to fund tax cert payments, bringing the total amount allocated for tax certs to $95 million.
The county administration continues to negotiate with its legislature, but it is unclear whether bonding for the remaining tax certs will be accomplished. Failure of the county legislature to approve additional financing could result in significant unbudgeted operating expenditures.
RELIANCE ON SHORT-TERM BORROWING
The county generally issues short-term RANs and TANs around May/June and November/December of each fiscal period in order to fund operations in anticipation of sales and property tax receipts, respectively and maintain a cash balance sufficient to help repay maturing notes. Note borrowing in 2012 equaled $476 million or a somewhat elevated 16% of operating fund receipts ($20 million was to account for timing differences with respect to Superstorm Sandy).
Fiscal 2013 and 2014 issuance is projected to be lower at $433 million (14.1% of receipts) and $400 million (13.2% of receipts), respectively. Fitch remains concerned about the county's dependence on short-term borrowing, particularly as the borrowings overlap each other requiring additional issuance to repay outstanding notes.
SOUND NOTE REPAYMENT COVERAGE
The county's cash flows along with proceeds of outstanding notes generally provide substantial coverage for notes with funds for their repayment fully set aside comfortably in advance of maturity. This current TAN issue matures on the 15th of September ($148 million) and October ($77 million) 2014.
Coverage is sound at 2.5x in September and 2.6x in October. With consideration of borrowable balances in non-major funds, coverage increases to 3.1x and 3.6x in September and October, respectively. Revenue anticipation notes ($210 million) issued in June 2013 and due in March and April 2014, have projected coverage of 3.5x and 5.4x when borrowable resources are considered.
STRONG SOCIOECONOMIC CHARACTERISTICS
The county benefits from a broad, diverse economy and well above-average economic indicators, including solid income levels with 2012 per capita income and medium household income at 152% and 182%, respectively, of the U.S.
The county's unemployment rate remains lower than the rates for New York State and the nation. For August 2013, the county's unemployment rate was 5.9% compared to 7.5% and 7.3% for the state and nation, respectively. From August 2012 to August 2013, employment and labor force numbers were positive-trending, posting 2.8% and 1.5% increases, respectively, higher than both state and national growth rates.
INCREASING BUT MANAGEABLE DEBT LEVELS
The county's debt ratios are increasing but still manageable in relation to its wealthy tax base; market value per capita is high at $161,000 despite recent market value declines. Overall debt totals an above-average $4,395 per capita but a more moderate 2.9% of market value given the strong tax base. However, these statistics are likely somewhat understated as they exclude debt issued by school districts (not available). For 2012 debt service represented a moderate 12.3% of total government fund spending.
Debt ratios should remain fairly stable given manageable capital needs and above-average amortization with 65% (including debt issued by the NIFA) retired in ten years, contributing to the above-average debt service burden.
WELL-FUNDED STATE PENSION PLANS
The county participates in well-funded New York State pension plans. At March 31, 2013, the state and local employees' plan and the state and local police and fire plan had funded ratios of 87% and 88%, respectively. Using Fitch's more conservative 7% discount rate assumption, the plans' funding levels would still be sound at an estimated 82% and 83%, respectively.
County pension payments in 2012 made up a moderate share (4.8%) of spending. The county has taken advantage of the ability granted by the state to amortize most of the increase in annual pension payments for 2012 and 2013 over 10 years and for 2014 over 12 years. This amortization option provides some near-term budget relief but will make future year budgeting for these payments more challenging.
The moderate pension liability is somewhat offset by a high unfunded actuarial accrued liability for other post-employment benefits (OPEB) at $4.8 billion as of Dec. 31, 2012 or 2.5% of market value. Fitch expects this amount to increase as the county plans to continue to fund its OPEB liability on a pay-go basis.
Carrying costs for debt service, pension and OPEB pay-go equaled a manageable 21.6% of 2012 total government fund spending, with the county's amortization of part of the pension payment somewhat offsetting rapid debt repayment.
NIFA OVERSIGHT PROVIDES ADVANTAGES AND HURDLES
NIFA has maintained an oversight role over the county since 2000. In January 2011, NIFA imposed a control period under its enabling legislation. The ability to break existing contracts is beyond NIFA's control-period powers. Upon declaration of a fiscal crisis NIFA has the ability to impose a wage freeze if it determines that such freeze is necessary to maintain a balanced budget. However, as discussed above this ability is the subject of litigation.
Fitch believes NIFA's oversight has had some positive effects on the county's financial operations, such as instilling increased budgeting discipline and imposing the wage freeze. But NIFA's oversight also has added a layer of complexity to decision-making.
Additional information is available at www.fitchratings.com.
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, CoreLogic Case-ShillerIndex, IHS Global Insight, 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
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S.
Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=809399
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