Fitch Rates NY Thruway $400MM Personal Income Tax Bonds 'AA-'; Outlook Positive.

NEW YORK -- Fitch assigns an 'AA-' rating to approximately $400 million New York State Thruway Authority state personal income tax (PIT) revenue bonds (transportation), series 2008A. The bonds are scheduled to sell through negotiation during the week of Aug. 25 and mature March 15, 2009-28. Fitch also affirms the 'AA-' rating of approximately $10.8 billion outstanding PIT revenue bonds issued by New York state agencies. The Rating Outlook is Positive.

Underlying the long-term 'AA-' rating on the PIT bonds is the importance of the PIT to state finances (about 60% of tax receipts), the ample portion of PIT set aside for debt service, the trapping of funds if appropriation is not made, and the 2 times (x) additional bonds test (ABT). Due to these strengths, the rating on PIT bonds is equal to that assigned to New York's general obligation (GO) debt.

Although payment of debt service on PIT bonds is subject to appropriation, each month an amount equal to 25% of estimated available PIT revenue (i.e., receipts after refunds) is deposited into the revenue bond tax fund 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, rose from $30.6 billion in fiscal 2007 to $36.6 billion in fiscal 2008. This reflects legislative action that, effective April 1, 2007, eliminated the prior deduction of deposits to the school tax relief fund in the definition of available PIT receipts for bond purposes. This action was taken in conjunction with an expansion of the state property tax relief program. The change increases the amount of PIT receipts flowing to the revenue bond tax fund, out of which debt service is paid and based on which the ABT is calculated. Fiscal 2009 revenues are projected to rise to $38.2 billion.

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). MADS coverage under this test is now about 8.9x. PIT bonds are the primary financing vehicle for the state and substantial additional issuance is expected in the coming years. The change in the calculation of available PIT revenues boosts coverage in the near term and allows for more bonding in the longer term.

New York's 'AA-' GO rating recognizes the state's substantial wealth and resources and broad economy, somewhat tempered by uneven performance across the state. Net tax-supported debt levels have been relatively stable as a percentage of personal income and are expected to remain above average but still in the moderate range; pensions are well funded.

In the first-quarter update to its financial plan, released on July 30, the state meaningfully reduced forecasts of tax revenues. The state now forecasts a $630 million general fund shortfall for the current fiscal year and a $1.3 billion increase in the fiscal 2010 gap estimate, to $6.35 billion (including a $310 million Health Care Reform Act [HCRA] shortfall). The revisions were a response to developments since the enacted budget and highlight the importance of the cyclical financial services industry to state revenues. The current-year shortfall is largely attributable to lowered performance of and expectations for business (particularly bank) taxes and, to a lesser extent, sales and use taxes; the outyear estimates for all major tax sources were reduced.

Although Fitch recognizes the significant uncertainty associated with the declining economic and financial environment, the state is taking proactive steps to address the projected budget gaps. The fiscal 2009 shortfall is expected to be resolved through executive action to cut spending and the governor is seeking additional savings, including by calling a special legislative session, to hedge against the possibility of additional shortfalls this year and begin to address the fiscal 2010 gap. Future credit direction will depend on the severity and duration of the downturn and the state's success in achieving sustainable budget solutions. The next quarterly update to the financial plan is scheduled for October 2008.

Fitch issued an exposure draft on July 31 proposing a recalibration of tax-supported and water/sewer revenue bond ratings which, if adopted, may result in an upward revision of this rating (see Fitch research 'Exposure Draft: Reassessment of the Municipal Ratings Framework').

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.