NEW YORK--(BUSINESS WIRE)--Fitch Ratings has downgraded the town of Huntington, NY's (the town) ratings as follows:
--Approximately $82.35 million in general obligation (GO) bonds outstanding as of Aug. 2, 2016 to 'AA+' from 'AAA';
--Issuer Default Rating (IDR) to 'AA+' from 'AAA'.
The Rating Outlook is Stable.
SECURITY
The bonds are general obligations of the town payable from its full faith and credit and ad valorem taxing power, 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 town board.
KEY RATING DRIVERS
The downgrade to 'AA+' reflects the application of Fitch's revised criteria, published on April 18, 2016, which includes a more focused consideration of the adequacy of reserves given an entity's budgetary flexibility and revenue volatility.
Economic Resource Base
The town of Huntington is located at the western end of Suffolk County, approximately 40 miles east of Manhattan on Long Island Sound. It is within commuting distance to New York City with residents commuting daily from four train stations within the town on the Long Island Railroad. The town is affluent as evidenced by wealth and income levels that are considerably higher than state and national averages, but recovery in the tax base and associated revenues has been slow.
Revenue Framework: 'a' factor assessment
The town's independent legal ability to raise revenues including property taxes and fees is considerable. The town can override the tax cap levy with a 60% majority vote and increase fees and fines at will. Absent policy action, Fitch believes that revenues will remain flat based on current economic trends.
Expenditure Framework: 'aa' factor assessment
Overall expenditure growth will likely exceed expected revenue growth. Expenditure flexibility is solid. Carrying costs for debt service, pension and other post-employment benefits (OPEB) are moderate, accounting for approximately 15% of expenditures.
Long-Term Liability Burden: 'aaa' factor assessment
The long-term debt and pension liability burden is low compared to the town's resource base.
Operating Performance: 'aa' factor assessment
Gap-closing capacity is very strong. Reserves declined in recent years primarily to fund one time capital expenditures and to offset revenue shortfalls. Fitch believes the town would take action to maintain its financial resilience throughout a downturn.
RATING SENSITIVITIES
RESERVE LEVELS KEY: The rating is sensitive to the level of reserves given the volatility of the town's revenue stream. Fitch expects reserves to remain at or above current levels throughout the economic cycle. Further draws would diminish financial flexibility and could trigger a downgrade.
CREDIT PROFILE
Growth in assessed valuation (AV) has been flat over the past decade and future tax base growth will be driven by redevelopment efforts as the town is largely built out. A planned expansion of Canon USA's headquarters, the recently expanded Walt Whitman mall, and numerous other commercial and residential development projects suggest at least stable AV in the near to medium term.
Revenue Framework
Fitch believes that the town's revenue growth prospects are likely to remain flat absent policy action given the trend of stagnant assessed values. The town does have substantial independent legal ability to increase revenues. Property taxes comprise over 40% of revenue. Mortgage taxes had accounted for approximately 15% of the budget prior to 2008 but declined to less than 9% in fiscal 2015.
The town's revenue declined over the past 10 years as taxable property value depreciated and mortgage tax collections fell. Since 2007, mortgage tax revenue declined significantly by an aggregate $7.4 million (-48.2%). Mortgage taxes have contributed to the town's revenue volatility over the past decade and underperformance resulted in budgetary shortfalls in fiscal 2014 and 2015. Fitch believes future revenue growth prospects will improve slightly given recent improvements in the local economy, but overall revenue will likely remain flat absent policy action based on current trends.
New York State law requires property tax revenue increases be limited to the lesser of CPI or 2% annually, unless a supermajority of the local governing body vote for a larger increase. The ability to override the cap provides substantial legal flexibility to raise revenues the county. Additionally, the town has the ability to increase other fees and departmental revenue. The town has begun charging an ambulatory fee for services previous paid for with property tax revenue, freeing up an estimated $1 million tax levy capacity under the property tax cap in 2017.
The town demonstrated a willingness to increase tax rates as needed, increasing the general fund property tax rate in by 6.7% in 2013, 4.1% in 2014 and 8.8% in 2015. The town has also increased the property tax levy in the highway fund to support road projects.
Expenditure Framework
The town's expenditure framework is solid. Fitch expects the rate of expenditure growth to be above that of revenues, offset by a solid capacity to cut spending, if necessary.
The majority of the town's general fund expenditures are for community services, public safety, culture and recreation, transportation and general government which will likely increase at the rate of inflation absent any policy action. Employee salaries and benefits account for more than 40% of the town's general fund budget. The majority of employee salaries are managed through labor contracts.. The town implemented a retirement incentive in 2015 that generated $1 million in annual town-wide salary and benefit savings.
Carrying costs for pension, debt service and OPEB were a moderate 15.9% of governmental fund expenditures in 2015. The town has the ability to amortize a portion of its annual pension cost increases granted by the state program which ends in 2020. The town utilized this option once in fiscal 2012 for budgetary relief to address possible cash flow issues and one time expenditure demands associated with Superstorm Sandy. Fitch believes that the future pension payments will remain manageable given the strength of the state plans' funded positions.
The town's ability to reduce expenditures is solid. The town manages labor expenditures through attrition and requires that all new hiring decisions are authorized by the town management. The prior Civil Service Employees Association contract that expires Dec. 31, 2016 had a no-layoff clause. Currently, the town has nine vacant positions that can be eliminated to reduce general fund expenditures. The town's practice of annually dedicating approximately 10% of total governmental expenditures to ongoing capital investment enhances overall financial flexibility and has helped to minimize both debt service carrying costs and the town's debt burden.
Long-Term Liability Burden
The long-term liability burden for unfunded pension obligations and debt is low accounting for 3.8% of personal income. The town dedicates a portion of current property taxes to pay go capital, helping to maintain the town's low debt profile. The town has limited future direct borrowing plans because it is largely built out and its infrastructure is well-developed; however the majority of the long-term liability burden relates to overlapping debt which can be difficult to predict.
The town participates in New York State and Local Employees' Retirement System, a cost-sharing, multiple-employer defined benefit pension plan. As of March 31, 2015, the plan was well-funded with assets covering 97% of liabilities. Using Fitch's more conservative 7% discount rate assumption the ratio is sound at an estimated 92%. The town funds 100% of its actuarially-based required payments.
The town's other post-employment benefit (OPEB) unfunded liability of $221 million is significant as the total unfunded liability accounts for 1.9% of personal income. The town continues to fund its OPEB liability on a pay-as-you-go basis as there is no authority under present state law to establish a trust account or reserve fund for this liability.
Operating Performance
Fitch believes the town would maintain current service levels by raising revenues or making additional spending reductions in the event of a moderate economic downturn. Historical general fund revenue demonstrated a high level of volatility primarily driven by economically sensitive mortgage tax collections. During the period of high mortgage tax collections, the town set up restricted reserves in the general fund for potential liabilities including pension and employee benefit increases, workers compensation and capital needs. These reserves were drawn upon to offset the precipitous drop in mortgage tax collections in FY2006-2012. Available general fund reserves including these restricted reserves for specific operating expenses have declined to 10.8% in fiscal 2015 from 25.7% in fiscal 2012. The remaining overall available reserve contributes to the town's strong gap-closing ability. Revenue volatility may be somewhat lower than historical data suggest. Fitch expects that the town would employ offsetting revenue and expenditure-side policy actions sufficient to maintain an adequate level of financial flexibility.
Reserve draws in fiscal 2013 and 2014 were largely for one-time capital expenditures. A portion of the draw was for revenue shortfalls including reductions in mortgage taxes and delays in implementing parking fee increases. The town has continued its efforts to reduce budget gaps with tax rate increases and cost reductions including property tax increases and an early retirement incentive which have helped stabilize operations. The town's 2016 pension payment and labor costs are expected to be below budget, and mortgage tax collections are $1 million above budget, which is projected to add $1.6 million to available general fund balance. The town has a formal fund balance policy to maintain total general fund balance of 10% of general fund expenditures and is currently well above with a total fund balance of 24.7% of expenditures. Unrestricted general fund balance was 6.9% of spending in FY15.
In accordance with Fitch's policies the issuer appealed and provided additional information to Fitch that resulted in a rating action that is different than the original rating committee outcome.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.
Applicable Criteria
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879478
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1009924
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1009924
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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