Fitch Rates New York City $100MM Auction Rate GOs 'A+' Underlying.

NEW YORK -- Fitch Ratings assigns an underlying 'A+' rating to New York City, New York's $100 million general obligation (GO) auction rate bonds, fiscal 2007 series C, consisting of $40 million subseries C-3 (due Jan. 1, 2031) and $60 million subseries C-4 (due Jan. 1, 2032). In addition, Fitch affirms approximately $35 billion in outstanding New York City GO bonds at 'A+'. The Rating Outlook is Stable. The bonds are expected the week of Jan. 8. JP Morgan, Loop Capital Markets LLC, and Merrill Lynch & Co. are the broker-dealers. The bonds will be insured by Ambac Assurance Corporation (subseries C-3) and Financial Security Assurance Inc. (subseries C-4).

The underlying 'A+' rating considers the breadth of the city's economy, high income levels, strong economic performance and financial operations, and demonstrated budget management and controls. Offsetting factors include high and rising levels of debt and fixed costs and economic and revenue vulnerability to the cyclical securities industry and real estate market.

Robust economic growth continues following three years of employment decline through 2003 that totaled about 5%. New York City employment rose 1.4% in 2005, just under the 1.5% national growth rate. November 2006 employment was 1.1% above a year prior, compared to 1.3% for the U.S. The monthly year-over-year employment gains in 2006 have been as high as 1.9% in July; the city forecasts employment growth of 1.5% for the year. Notably, city unemployment rates have declined on an absolute basis and as compared to the national average. Personal income per capita of $40,342 in 2004 was 122% of the U.S.

Fiscal 2006 was another year of strong financial performance for the city. Tax revenues exceeded initial projections by about $4 billion, and the city realized a large surplus for the third straight year. As in past years, much of the fiscal 2006 surplus was used to balance the subsequent year's budget. The surplus roll to fiscal 2007 was $3.75 billion, after a $1 billion deposit into an irrevocable trust to fund the city's $50.5 billion retiree health care benefits liability as well as other discretionary expenditures.

The fiscal 2007 budget assumed slowing momentum, but the November financial plan revision reflected ongoing strength. Revenues continue to benefit from robust performance in commercial real estate and financial services, resulting in significantly increased forecasts of real estate transaction, business, and personal income tax revenues. With a $2.2 billion increase in tax revenue estimates, fiscal 2007 is now expected to end with a $1.9 billion surplus. After the application of this surplus to offset the fiscal 2008 gap, the projected deficit for next year is only $510 million. The fiscal 2009 gap remains a high $4.1 billion. Revenue estimates for fiscal 2007 appear to be conservative.

Of concern are the funding shortfalls for the Health and Hospitals Corporation (HHC) that resulted in a net increase in city funding along with matching federal funds to HHC in fiscal 2006, although the city expects to recoup this money in the following two fiscal years. A recent New York State Court of Appeals decision ended the longstanding Campaign for Fiscal Equity (CFE) lawsuit regarding funding of New York City schools, finding for about $1.9 billion in incremental annual operating funding. The figure is much smaller than the incremental funding included in previous findings. The state may choose to increase funding above this requirement, and it is uncertain what portion of any increment the state will require the city to fund.

Debt levels are high, with net tax-supported debt of about $52.6 billion, 16% of 2004 personal income and $6,458 per capita, including a recent $2 billion financing by the Hudson Yards Infrastructure Corporation (backed by development-related tax revenues and the city's backstop commitment to pay interest when necessary; rated 'A-' by Fitch). The Transitional Finance Authority (TFA) has issued $650 million of an authorized $9.4 billion in bonds for education, backed by state building aid (rated 'A+' by Fitch). The state will provide $1.8 billion in additional direct assistance for education and incremental state building aid to fund debt service on half of the TFA building aid revenue bonds. The building aid bonds are not included as net tax-supported debt.

As mentioned above, the city has created a trust for retiree health care benefits. Deposits to the trust are irrevocable, although they can be used at any time to pay the annual costs of retiree benefits (estimated at $1.4 billion in fiscal 2007). Going forward, all pay-as-you-go (PAYGO) funding of retiree health care will flow through the trust. In addition to the PAYGO amount, an additional $1 billion will be deposited into the trust fund in fiscal 2007. The city implemented GASB 45 in its financial statements for fiscal 2006.

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