Correction: Fitch Rates $586 MM New York City GOs 'A+'.

NEW YORK -- (This is an amended version of a press release issued Friday, July 9, and contains revised information on the tax-exempt bonds in the first paragraph.)

Fitch Ratings assigns an 'A+' rating to New York City, NY's $586.175 million general obligation bonds, fiscal 2005 series A, including $550 million tax-exempt bonds and $36.175 million taxable bonds. The tax-exempt bonds are to be offered by negotiation the week of July 12 through a syndicate led by Citigroup and the taxable bonds for bids July 13. Bond proceeds are intended to refund outstanding bonds. Additionally, $31.1 billion outstanding general obligation bonds are affirmed at 'A+'. The Rating Outlook is Stable.

The rating considers the breadth of the city's economy, high income levels, improved financial operations, and demonstrated budget management and controls. Offsetting factors include high and rising levels of both debt and fixed costs. Financial operations have recovered from the recession and the effects of Sept. 11, due initially to tax increases and other measures implemented last year, and more recently, to economic improvement, especially in the securities industry. Results for the fiscal year ended June 30 exceeded earlier projections, including those contained in the executive proposed 2005 budget. The 2005 budget is balanced, with the use of the prior year's surplus. Risks continue to include achievement of refinancing of Municipal Assistance Corporation (MAC) debt, still not consummated, and the trend of nondiscretionary expenditures increasing more rapidly than revenues, contributing to growing levels of out-year gaps.

Prompt action taken last year reversed a projected deficit for fiscal 2003 of $1 billion into a surplus of $1.4 billion. Property taxes were increased by 18.5%, which, along with a later $1 billion increase of the sales and income taxes, on a temporary basis, and other actions closed what was a $6.4 billion projected funding shortfall for fiscal 2004. Legislation to refinance MAC debt, saving the city $500 million annually in debt service, was enacted but was challenged by the state; the city now expects the transaction to occur in fiscal 2005, which would include reimbursement of fiscal 2004 MAC debt service.

Compared with the fiscal 2004 original budget, total revenues are now expected to be about 9.5% over estimates, with city funds increasing about 8.5%. Expenditures are about 5% higher due primarily to wage settlements and Medicaid costs. The projected surplus is over $1.9 billion, up from $1.3 billion projected in April, and $300 million in the original adopted budget. The increasing surplus estimates continued to reflect taxes exceeding expectations, particularly personal and corporate income, mortgage recording, and real property transfer taxes.

The budget for fiscal 2005 is based on reasonable assumptions of employment growth around 1% in calendar 2004 and 2005 and personal income at 5.4% and 4.7%, respectively. The revenue forecast has risen since the preliminary budget and financial plan was presented in January, attributable to the economy. However, expenses have also increased, mostly to cover labor settlement and Medicaid costs and new subsidies for HHC. Medicaid enrollment growth, fueled by lower eligibility thresholds enacted and programmatic expansion, is expected to level off next year, an uncertain assumption. About $1.4 billion of fiscal 2004 surplus is effectively employed, leaving $300 million in the general reserve and $220 million in the budget stabilization fund applied to fiscal 2006 requirements. Pay-as-you-go capital financing is set at $200 million, allowing additional flexibility. There are some specific risks, particularly the inclusion of $1 billion from MAC refinancing, as well as completion of labor settlements. While the MAC refinancing was upheld on May 13 by the state's highest court, the future outcome of this dispute is still not clear and a state appropriation for debt service on the bonds is not yet in place.

The projected out-year gap in fiscal 2006 is a large $3.7 billion, mostly reflecting the nonrecurring resources utilized in fiscal 2005. They include the 2004 surplus and the MAC debt service reimbursement for fiscal 2004 and about $700 million expected from the Port Authority pursuant to an agreement representing a lump sum and back rent. Also contributing to the out-year imbalances is the three-year phase-out of the temporary taxes raised last year and continued rapid growth in nondiscretionary expenses, including Medicaid, pensions, fringe benefits, and debt service.

Debt levels are high and continue to increase with net tax-supported debt now at $49.1 billion or about 16% of 2002 personal income. The capital program continues the expansion. However, economic improvement is evident. After declining 1.5% in 2003, employment has turned positive, with the May 2004 level 0.4% above the same month the previous year.

Wall Street profits rebounded in 2003 fueling 60% growth in bonuses this past winter driving strong growth in nonproperty tax revenues in fiscal 2004. Property value growth has remained strong, and healthy assessed valuation growth should continue as the large valuation increases of recent years are phased into the base. The city's office market has begun to improve this year.