Fitch Rates New York City TFA $600MM Building Aid Revs 'A+'; Outlook Stable.
The rating is based on the credit quality of the State of New York (general obligation bonds rated 'AA-' with a Stable Outlook by Fitch), as bonds are payable from annual state appropriations of building aid. State building aid assists local school districts across the state with the cost of constructing and improving elementary and secondary education facilities. Appropriation risk is minimal given the constitutional mandate for, and strong history of, state support for education. Moreover, the additional bonds test (ABT) only considers aid associated with projects that have already been approved by the State of New York, even though aid related to projects that will be approved by the state in the future is also pledged to the bonds.
In the 2006 state legislative session, the TFA was authorized to issue an amount of up to $9.4 billion outstanding for education to address the capital demands of the Campaign for Fiscal Equity (CFE) school funding lawsuit. As permitted by the legislation, the city assigned all of its state building aid to the TFA to secure the bonds.
State building aid, which is earned on an individual project basis, consists of confirmed building aid and incremental building aid. Confirmed building aid refers to aid payable for projects that have already been approved by the state. Such aid is subject to annual state appropriation but is not subject to any additional statutory or administrative conditions or approvals. The state has covenanted that the calculation of reimbursable costs for a project will not change once the project has been approved; the level of reimbursement can change over time pursuant to a statewide formula that is calculated every year, but this ratio has been relatively stable over time. Incremental building aid refers to state building aid to be received for projects approved by the state in the future.
Both confirmed and incremental building aid are the property of the TFA and are pledged to the bonds. However, the ABT considers only confirmed building aid. In order for additional debt to be issued, confirmed building aid payable in the fiscal year preceding each year in which bonds are scheduled to be outstanding must be at least 1 times (x) debt service in that year. Since state building aid for a given project is provided over 30 years, this allows for a level debt service structure for the bonds in which coverage by confirmed building aid drops from a high of about 3.3x in fiscal 2009 to a low of about 1x in fiscal 2038. Fitch expects that the incremental building aid generated by the city's ongoing education capital program will result in substantially higher actual coverage in the outyears. The average state reimbursement rate for education projects in the city currently is about 50%, and the TFA receives all building aid regardless of whether the project is financed with TFA building aid bonds or through a different financing mechanism.
Pursuant to the TFA indenture, since building aid is TFA revenue it must be available first to TFA future tax secured bonds issued prior to the first issuance of building aid revenue bonds. Given the very strong coverage that the pledged personal income and sales tax revenues provide for future tax secured bonds (about 8.4x in fiscal 2009 and remaining strong even after an additional steep drop-off in revenues expected in fiscal 2010), it is unlikely that building aid would ever be needed for this purpose. TFA future tax secured bonds sold after the date of the initial issuance of the building aid bonds have no claim on building aid.
In addition to previously outstanding TFA future tax secured bonds, the payment of building aid is also subject and subordinate to certain other prior statutory and state constitutional claims. Fitch does not believe that these will impair the ability to pay debt service. Holders of the TFA building aid bonds benefit from the statutory covenants in the original TFA Act prohibiting action that would impair bondholders and the bankruptcy-remote nature of the issuer. However, since the pledged revenue stream requires annual state appropriation, the bondholders do not enjoy the same insulation from government operations that is a key factor in the 'AA+' rating of the TFA future tax-secured bonds. The issuance of the fiscal 2009 series S-5 bonds does not affect the 'AA+' rating on the future tax secured bonds.
For more information on the State of New York, see Fitch Research 'Fitch Affirms New York State GOs at 'AA-'; Outlook Stable' dated May 21, 2009.
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|Date:||May 29, 2009|
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