Fitch Rates $357MM New York State ESDC Income Tax Bonds 'AA-'.

NEW YORK -- Fitch assigns an 'AA-' rating to $357 million Empire State Development Corporation (New York State Urban Development Corporation) state personal income tax (PIT) revenue bonds, consisting of $40.3 million series 2007A (economic development and housing) and $316.955 million series 2007B (state facilities and equipment). The bonds are scheduled to sell the week of Feb. 26 through negotiation with a syndicate led by Morgan Stanley. Fitch also affirms the 'AA-' rating of approximately $8.3 billion outstanding PIT revenue bonds issued by New York state agencies. The Rating Outlook is Stable.

Underlying the 'AA-' rating on the PIT bonds are the importance of the PIT to state finances (about 60% of tax receipts), the ample portion set aside for debt service, the trapping of funds if appropriation is not made, and the additional bonds test. Due to these strengths, the rating on the PIT bonds is equal to that assigned to New York's general obligation (GO) debt.

Although payment of debt service is subject to appropriation, each month an amount equal to 25% of estimated PIT receipts (after refunds and deposits to the school tax relief fund) is deposited into the revenue bond tax fund. The deposits are made from the withholding portion of the tax. After retention of 125% of financing agreement payments for PIT bonds due in the succeeding month, excess moneys are transferred to the state's general fund. Should amounts in the revenue bond tax fund be insufficient, the state comptroller is required to transfer from the general fund without the need for further appropriation. If no appropriation is made, deposits to the revenue bond tax fund are trapped and cannot be used (except for GO debt, if necessary), depriving the state of the moneys in excess of debt service.

PIT revenue available for debt service, as defined in statute, is estimated at $30.4 billion in fiscal 2007 (88% withholding), up from $27.6 billion in fiscal 2006 and $25 billion in fiscal 2005. For additional parity bonds to be issued, historical revenue bond tax fund receipts must cover future maximum annual debt service (MADS) on all PIT bonds by at least 2 times (x). After this issue, MADS coverage is about 8.4x.

The fiscal 2008 state executive budget includes a proposal to eliminate the deduction of deposits to the school tax relief fund in the definition of PIT receipts for bond purposes. This proposal is made in conjunction with a proposed expansion of the state property tax relief program; the change would increase the amount of PIT receipts flowing to the revenue bond tax fund, out of which debt service is paid and based on which the additional bonds test is calculated. PIT bonds are now the primary financing vehicle for the state, and substantial additional issuance is expected in the coming years.

The 'AA-' rating and Stable Rating Outlook on New York's GO credit reflects the state's substantial wealth and resources and broad economy, somewhat tempered by uneven performance across the state, and strong recovery from the challenges experienced earlier in this decade. Nonfarm employment has expanded every month since March 2004, with December 2006 nonfarm employment up 0.7% over the prior year. Debt is expected to remain above average, at the upper end of the moderate range; pensions are well funded. Financial performance has been strong in recent years, benefiting from robust revenue results tied to the cyclical financial services and housing sectors, and near-term financial prospects are good. Credit improvement will depend on harnessing this momentum and bolstering the state's financial position in anticipation of future downturns.

The series 2007A bonds mature Dec. 15, 2007-2026 and the series 2007B bonds mature March 15, 2008-2037; call provisions are yet to be determined.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.