Fitch Rates New York City $600MM GOs 'A+'; Stable Outlook.
The 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, large projected outyear funding gaps, and vulnerability to the cyclical securities industry and real estate market.
Economic improvement continues following three years of employment decline through 2003, totaling about 5%. New York City employment rose 0.5% in 2004 and the pace of growth accelerated to 1.4% in 2005, just under 1.5% for the U.S. March 2006 employment was 1.6% above a year prior, matching the national growth rate, with particular strength in financial activities (up 2.8%) and educational and health services (up 2.6%). City unemployment rates continue to decline on an absolute basis and as compared to the national average - 5.8%, or 114% of the U.S., in 2005. Personal income per capita of $40,342 in 2004 was 122% of the U.S.
In 2005, Wall Street revenues and bonuses and tourism and hotel occupancy were at record levels. Continued growth is expected this year, although Wall Street profits for 2005 were revised downward following a weak fourth quarter and the rate of Wall Street bonus growth is slowing. The commercial real estate market remains strong, with the vacancy rate dropping below 10% in 2005 and projected to continue to fall. The extraordinary residential real estate market is projected to have reached a cyclical peak with gradual declines in prices and sales volume expected over the next two years, although there are vulnerabilities to a more pronounced decline.
Financial operations have recovered from the recession and the effects of Sept. 11. Corrective tax increases and other measures were implemented, which were followed by economic improvement, generating large surpluses in fiscal years 2004 and 2005. Although surpluses have been utilized to balance subsequent years' budgets, creating vulnerability, revenue estimates have consistently increased, and the fiscal 2006 surplus roll to fiscal 2007 is now estimated at $3.4 billion. Fiscal 2006 non-property tax revenue estimates have been revised upward by $3 billion, or about 19%, from original estimates, once again driven by extraordinary growth in real estate transaction taxes and strength in personal income and business taxes. The additional revenues more than absorb the impact of additional costs for collective bargaining agreements and city's Health and Hospitals Corporation (HHC). In addition, the city plans to put $1 billion in fiscal 2006 in an irrevocable trust to fund what is expected to be a large retiree health care benefits liability; the mayor's proposed budget for fiscal 2007 includes an additional $1 billion deposit to the trust.
The mayor's proposed budget for fiscal 2007 budget reflects upwardly revised revenue and expenses projections and the application of the $3.4 billion fiscal 2006 surplus roll. Despite proactive actions by the city to reduce outyear gaps, gap estimates ($3.6 billion in fiscal 2008) have increased compared to January 2006 levels due to decreases in non-property tax and federal and state revenue estimates and increases in expenditure forecasts. Medicaid growth is restrained due to the phased-in state assumption of increases over 3%, and pension requirements are expected to rise at a more moderate pace than in recent years. Revenue assumptions are reasonable, with a continuing healthy economy and Wall Street environment in 2006 and financial market slowdown in 2007. Once again, receipts from taxes related to property transactions are projected to drop sharply from recent heights. Of concern are funding shortfalls for HHC that have resulted in a net increase in city funding to HHC of $385 million in fiscal 2006, although the city expects to recoup this money in the following two fiscal years.
Debt levels are high, with net tax-supported debt of about $50 billion, or 15.2% of 2004 personal income, and an expansive capital program of more than $19 billion in GO issuance through fiscal 2010. Recent New York State action to increase funding for New York City school construction, in response to the capital mandates of a school funding court decision, is expected to result in significant additional assistance. The Transitional Finance Authority (TFA) has been authorized to issue $9.4 billion in bonds for education, and the city has received authorization to assign state building aid to TFA. In addition to $1.8 billion in direct assistance, the state will provide incremental state building aid to fund debt service on half of the new TFA authorization. About $4.9 billion of TFA bonds for education are included in the four-year capital plan through fiscal 2010.
The subseries J-1 bonds will mature June 1, 2008-2032. Call provisions are yet to be determined.
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|Date:||May 18, 2006|
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