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Fitch Rates Erie County, NY's $47.5MM GO Bonds 'A+'; Outlook Stable.

New York: Fitch Ratings has assigned an 'A+' rating to Erie County, NY's $47.5 million general obligation (GO) bond issue, series 2018A ($45 million) and 2018B ($2.5 million). Fitch has affirmed the 'A+' ratings on the following county securities:

--$24.4 million GO public improvement serial bonds, series 2015A;

--$17.2 million GO refunding serial bonds, series 2015B;

--$1.8 million GO sewer district serial bonds, series 2015C;

--$17.9 million GO public improvement serial bonds, series 2014A;

--$1.9 million GO sewer district bonds, series 2014B;

--$14.3 million GO public improvement serial bonds, series 2012A;

--$28.8 million GO public improvement serial bonds, series 2016A;

--$1.9 million GO sewer district series bonds, series 2016B.

Fitch has also affirmed the county's Issuer Default Rating (IDR) at 'A+'.

The Rating Outlook is Stable.

SECURITY

The bonds are GOs of the county and are backed by its full faith and credit and ad valorem tax pledge, subject to the 2011 state statute limiting property tax increases to the lesser of 2% or an inflation factor (the tax cap law). This limit can be overridden by a 60% vote of the county's governing body. No exemption is made under the tax cap law for debt service on outstanding GO debt, but the constitutionality of this provision has not been tested.

ANALYTICAL CONCLUSION

Erie County's 'A+' IDR and GO bond ratings reflect steady tax base growth, stable financial operations and a stabilizing economic growth trajectory. The ratings also factor in a low long-term liability burden compared to the county's economic resource base. The ratings are constrained by volatility related to the county's heavy reliance on economically sensitive sales taxes and comparatively limited offsetting reserves, as well as its narrow liquidity due to a high level of inter-governmental receivables.

Economic Resource Base

Erie County is a commercial and industrial center in western New York located on Lake Erie near the Canadian border. The county includes the city of Buffalo (IDR 'AA-'/Stable), the second largest city in New York State. The population appears to be stabilizing following several decades of decline related to shrinkage of the manufacturing sector.

KEY RATING DRIVERS

Revenue Framework: 'aa'

Fitch anticipates that general fund revenues will expand at approximately the rate of inflation as the tax base continues a slow, but steady, expansion and improvements in the local economy drive modest sales tax growth. Like other New York counties, Erie County's independent legal ability to raise property taxes and user fees is unlimited.

Expenditure Framework: 'a'

The pace of spending growth is likely to exceed the natural rate of revenue expansion in the absence of continuous policy action. Expenditure flexibility benefits from comparatively low fixed carrying costs equal to about 10% of spending in 2017. However, the county's ability to make large spending reductions without impacting core services is limited given deep workforce adjustments made in the prior decade to resolve a fiscal crisis.

Long-Term Liability Burden: 'aaa'

The long-term liability burden is low compared to the economic resource base. Overall debt and net pension liabilities equal approximately 8% of resident personal income.

Operating Performance: 'a'

The county retains just adequate gap-closing capacity supported by considerable independent revenue-raising powers coupled with a limited ability to cut core spending. Fitch expects management would close budget gaps emerging from a moderate economic downturn with a combination of minimal draws on fiscal reserves, action to raise recurring revenue, and modest spending cuts.

RATING SENSITIVITIES

REVENUE PERFORMANCE: Expectations for tax revenue growth that is consistently above recent historical levels could lead to positive rating pressure if stronger growth persists through business cycles.

CHANGE IN FINANCIAL RESILIENCE: The rating reflects Fitch's expectation that financial operations will be structurally balanced and reserve levels will be maintained near current levels. Higher reserve levels would strengthen the credit profile, while a narrowing of reserves could put negative pressure on the rating. An increased assessment of the county's expenditure flexibility would also support gap-closing capacity and the assessment of financial resilience.

LIQUIDITY PRESSURE: The rating is sensitive to the county's management of its narrow cash balances and the level of cash flow borrowing. Weaker liquidity or a material increase in cash flow borrowing could pressure the rating.

CREDIT PROFILE

Erie County's population appears to be stabilizing following several decades of contraction related to the decline of the county's once-dominant manufacturing sector. Growth in healthcare, recent investments in newer industries such as solar power and significant public investment by New York State appear to have halted a prior pattern of out-migration. Population was an estimated 925,528 in 2017, up nearly 1% from 2010.

Erie County's employment base is weighted toward health care, higher education, and government, which lend economic and employment stability to the county. Leading employers include the state and federal governments, Kaleida Health System, and the University of Buffalo. Wealth indices are below those of the state but close to the national averages. Poverty rates are in line with the state and U.S. Economic development activity is strong and includes a recently-completed biomedical research expansion at Buffalo Medical School, a genomics center at the University of Buffalo and the production of solar panels by Panasonic and Tesla, Inc. that began in 2017 at a facility formerly owned by Solar City. The Panasonic-Tesla facility employs 500. Fitch believes these projects, in conjunction with $1 billion of state development incentives, are likely to further stabilize the local population.

Revenue Framework

The county budget is heavily dependent on sales taxes to fund operations. Sales tax accounted for 53% of 2017 general fund revenues, with 85% ($660 million) providing benefit to the county and the remainder ($116 million) passed from the county to local municipalities (i.e. towns, cities and school districts) to assist them in funding their operations. All sales tax is collected by New York State and remitted to the county by the New York State Comptroller. Property taxes accounted for the largest remaining portion of general fund revenues at 18% in 2017.

Revenues are likely to expand at rates approximating the U.S. CPI as the local economy and tax base grow at a slow, steady pace. The county assumed 2.6% year-over-year growth in sales taxes for its 2018 budget and projects 1.75% growth for 2019 and 1.5% growth for 2020 and 2021, as per its four-year plan. These projections are in line with the U.S. CPI average of 1.8% for 2006-2016. Fitch believes that stronger labor force, population and tax base growth over the longer term - if sustained - could lead to improved revenue growth prospects.

Like other New York counties, Erie County's independent legal ability to raise revenues is essentially unlimited. The county may raise service charges, fees and fines without limit, and its power to raise property taxes faces minimal constraints. New York municipalities have operated under a 2% annual property tax levy cap since 2011; however, a 60% majority vote of an elected body - the county legislature in the case of a county - may override the levy cap. The county legislature can also independently levy sales taxes up to a rate of 3%, and at a higher rate with the consent of the state assembly. A local sales tax with a rate of 4.75% has been in place since Jan. 2006. The rate is divided into 3%, 1%, 0.5% and 0.25% components with the latter two levied in 2005 and 2006, respectively. The latter two portions totaling 0.75% must be renewed periodically by the state assembly.

Erie County operates under a "soft" control board: the Erie County Fiscal Stability Authority (ECFSA) (bonds rated 'AAA'; Outlook Stable by Fitch). The ECFSA was created by New York State in 2005 in response to a county fiscal crisis in order to oversee and reform county finances and achieve structural balance. The ECFSA has played an advisory role since 2009, when it was converted from a "hard" control board that directly managed the county's budget to a "soft" control board that provides budgetary review and consultation, approves proposed debt issues, and audits the county's four-year financial plans. ECFSA will exist until the final maturity of all ECFSA notes and bonds, currently scheduled for Dec. 31, 2039. ECFSA collects a portion of county sales taxes to pay annual debt service on ECFSA-issued debt. It remits the remainder to the county, which appear as 'transfers in' to the general fund in the county's CAFRs. The county uses the transferred taxes to fund general government operations.

Expenditure Framework

Similar to other New York counties, social services (classified in the county's CAFRs as 'economic assistance and opportunity') constitute the largest share of Erie County's general fund spending (44% in 2017). Public safety, health and education accounted for smaller portions of general fund operations at 11%, 6% and 5% of spending, respectively, in 2017. General government functions made up 31% of spending in 2017, although more than a quarter of this line item represents transfers of a pro rata share of county sales taxes to local municipalities.

Fitch expects the natural pace of spending growth will be modestly above the rate of revenue expansion in the absence of policy action. Employee health insurance, retiree healthcare costs, and contractual salary increases will be the main cost drivers, although capital spending on roads and bridges caused by unpredictable weather conditions could also have an impact. Both health insurance and employee salary increases are likely to modestly outpace inflation, as is annual financial support for the Erie County Medical Center Corporation (ECMCC), the county-affiliated health center. Fitch believes management will continue to be proactive in addressing cost pressures to maintain structural balance.

Fitch regards expenditure flexibility as limited given the depths of the budget cuts made during the 2005-2007 fiscal crisis. During the crisis, the county workforce was reduced by about 25% and tens of millions of dollars of cuts were made to eliminate an accumulated general fund deficit and restore structural balance. Management believes virtually all non-essential spending was eliminated, leaving limited room for new cuts; management estimates that spending reductions of greater than 4% would negatively impact services. The county is therefore focused on making continuous, and incremental, spending adjustments to preserve structural balance and maintain services at current levels.

Capital plans are modest. Following the current debt issue, the county will have $26 million of authorized, but unissued, bonding capacity. The majority of the remaining projects proposed in its capital plan relate to sewer system improvements. Fixed carrying costs for debt service, actuarially-determined pension contributions and other post-employment benefits (OPEB) were modest at 10% of 2017 governmental spending, and are projected to decline modestly over the medium-term with notable drop-offs in debt service in 2021 and 2024. Future reductions in carrying costs could expand spending flexibility from its currently narrow levels.

The county has 4,540 full-time employees who participate in nine collective bargaining units. The largest labor units include the Civil Service Employees Association (CSEA) with 2,400 members, American Federation of State County and Municipal Employees (AFSME) with 560 members and the Teamster's Local with 530 members.

Salary increases negotiated under recent labor contracts have generally been in the range of 2% per annum, not including step raises. The latest round of contracts with CSEA and AFSME resulted in 2% increases for 2018 plus modest retroactive pay, a 2.25% hike in 2019, and 2.5% in 2020-2022. The county has attempted to balance out salary increases with savings in other areas of the contracts, e.g. greater employee healthcare contributions.

Long-Term Liability Burden

The long-term liability burden, consisting of net overall debt and adjusted pension liabilities, is low at 8% of resident personal income. Debt issued by overlapping units of government including cities, townships, school districts, the city of Buffalo, the ECFSA and the Buffalo Fiscal Stability Authority (BFSA), accounts for the bulk of long-term liabilities at almost 79% compared to 12% for direct county debt. Amortization of direct debt is rapid with 76% of principal maturing within 10 years. Fitch-adjusted net pension liabilities account for a modest share of the total liability at $322 million, or 10%. The unadjusted net pension liability reported in the county's financial statements totaled $96 million in 2017.

The county participates in two state-sponsored defined benefit pension plans: the New York State and Local Employees Retirement System (ERS) and the New York State Teachers' Retirement System (TRS). Most county employees are members of ERS, while staff at the community college contributes to TRS. As of March 31, 2017, the assets-to-liabilities ratio for ERS was 95% using the plan's 7.5% assumed rate of return. Using Fitch's more conservative 6% discount rate assumption, the ratio of assets-to-liabilities was 85%. The county's proportionate share of ERS's liability accounts for the bulk of its pension liability. The county consistently pays its full annual actuarially-determined contributions (ADCs) to ERS and TRS and has not participated in the pension contribution smoothing options permitted by the state.

The county continues to fund its OPEB liability on a pay-as-you-go basis, as there is no authority under present state law to establish a trust account or reserve fund for this liability. As of Dec. 31, 2017, the county's OPEB liability totaled $1 billion, or 2.4% of resident personal income.

Operating Performance

Financial resilience is adequate, as Fitch believes the county retains a high degree of control over recurring revenues that will assist it in closing economically-driven budget gaps as they appear.

Fitch regards the county's budget management track record since 2009, when the ECFSA reverted to an advisory role, as strong. Management has consistently made decisions designed to enhance fiscal flexibility and achieve structural balance, while keeping up on all required payments, including annual actuarially-determined pension contributions. The county has maintained available reserves at about 8% of spending since 2009 and achieved operating surpluses in five of the last seven years.

Fiscal 2017 concluded with an $18.7 million general fund surplus as revenues outperformed due to a rise in sales taxes linked to higher retail gas prices, a payment by ECMCC to the county that was $8 million higher-than-budgeted. Below-budget fringe benefit costs for public safety employees, lower social service caseloads and quicker reimbursements of social service costs by the state also contributed to surplus operations in 2017. Available reserves ended 2017 at $130 million, or 9% of general fund expenditures and transfers out.

The 2018 adopted $1.65 billion county all-funds budget rose by 1% over 2017, with the general fund portion growing by 1.7% over the prior year. The budget was balanced with $14 million in new property tax revenues despite a slight millage rollback and $16 million of appropriated reserves, including $4 million of ECMCC revenue. The budget assumed 1.5% growth in sales taxes in 2018 compared to 2017 actuals (2.6% versus 2017 budgeted) based on stronger-than-expected sales tax growth in late 2017, followed by 1.5% growth in 2019.

Actual results for the first eight months of 2018 indicate year-over-year growth in sales taxes of 4.5% versus the 1.5% budgeted. Unless sales taxes pull back in the fourth quarter, management estimates a positive revenue variance of $11.4 million, coupled with below-budget expenditures. County officials estimate a $5 million to $10 million general fund operating surplus for fiscal 2018.

The county's financial flexibility is constrained by its narrow liquidity, as it reports high levels of state receivables pertaining to social services. The county utilizes annual cash flow borrowing to cover expenditures until the property tax levy is collected in full. Cash flow borrowing has remained high despite improved reserve levels due to persistently low cash. After dropping to $20 million in 2010, the revenue anticipation notes (RANs) issued by the county gradually rose to $112 million in 2017. The size of the county's 2018 RAN issue (Sept. 26, 2018 issue date) fell back to $80 million due to stronger cash balances resulting from faster economic growth and revenue over-performance in 2017 and 2018.

The county prepares a four-year financial plan for ECFSA. The latest ECFSA-approved plan runs through 2021. The plan projects a cumulative budget deficit of $3 million for the period. Management has identified gap-closing measures including cost reductions, fund holdbacks and minor revenue adjustments. Fitch expects a continuation of current financial practices, including the maintenance of fund balances at a minimum of 5% of expenditures through economic cycles are per the county's internal policies. Continued strong oversight of spending would likely allow the county to address future out-year budget gaps while maintaining adequate financial flexibility.
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Publication:Daily the Pak Banker (Lahore, Pakistan)
Geographic Code:1U2NY
Date:Jan 8, 2019
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