Fitch Assigns Implied 'AA' to Erie Cty Fiscal Stability Auth, New York's Sales Tax & State Aid Revs.

NEW YORK -- Fitch assigns an implied 'AA' rating to The Erie County Fiscal Stability Authority's (ECFSA) sales tax and state aid secured bonds. There is currently no debt of ECFSA outstanding and there are no immediate plans for issuance. This is the first rating assigned to ECFSA by Fitch. The Rating Outlook is Stable.

The 'AA' rating incorporates elements of both municipal and structured finance credit analysis. ECFSA was formed to provide a debt funding vehicle for the county as well as to provide financial control and oversight functions. Pursuant to its authorizing legislation, ECFSA receives the county's share of sales and compensating use taxes authorized by the state and imposed by the county as well as state aid appropriated by the state under the aid and incentive for municipalities program. Should the ECFSA issue debt on behalf of the county, the bond structure will grant a first perfected security interest in sales tax revenues as well as state aid. Although the county receives only a nominal amount of state aid revenues, sales tax revenues provide strong debt service coverage, even under stress test scenarios.

Statutory and contractual covenants prohibit actions by New York state (the state) and Erie County (the county) to impair bondholder rights. The primary credit concern is the right of the state and county to alter the tax structure, however this risk is somewhat mitigated by non-impairment covenants of both entities. Issuance by ECFSA would require that the county issuance a declaration of need requesting ECFSA to issue debt on its behalf. Since its inception in June 2005, the ECFSA has not been requested to issue debt on behalf of the county, and there are currently no plans for the county to make such a request.

Bonds issued by ECFSA as authorized by the ECFSA Act would be secured by the county's portions of the local sales tax (currently 4.75%) and state aid. The state and county have covenanted not to impair bondholder rights as long as authority debt is outstanding; specifically, the county covenants to maintain a local sales tax rate of at least 3% through 2039 when the authority is disbanded. Additionally, any change in the local tax law cannot result in coverage below 2 times (x) maximum annual debt service on ECFSA bonds. It is expected that a bond indenture will require that the ECFSA assign its rights, title and interest in the pledged revenues to a trustee, and will direct that the state transfers such revenues directly to the trustee. Revenues would be transferred to the county for operations only after debt service on ECFSA's obligations is paid.

Stress tests show that pledged revenues provide very strong coverage. Pursuant to the ECFSA Act, the amount of senior lien bonds outstanding is limited to $700 million, and cash flow notes to $250 million. Coverage of pro forma MADS by 2005 pledged revenues for the maximum $700 million issuance allowable is strong at 5.0x. Coverage based solely on the 3% portion of the sales tax required to be levied by the county through 2039 equals 2.4x. Pledged revenues would have to decline 3.9% annually through 2027 to hit the 2x coverage minimum. The additional bonds test for senior debt is strong requiring 3x coverage of MADS from sales tax revenues alone.

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