Fitch Rates Onondaga County, NY's $52MM 2018 GO Bonds 'AAA'; Revises Outlook to Negative.
Fitch has also affirmed the 'AAA' ratings on the following bonds:
--Issuer Default Rating (IDR);
--$317 million unlimited tax general obligation bonds.
The Rating Outlook has been revised to Negative from Stable.
The current bonds are scheduled to price on Sept. 25, 2018 via a competitive sale. Proceeds will be used to finance county wide capital improvements including repairs to county highways and roadways, improvements to water and sewer enterprises of the county, building repairs and renovations to structures used by the county administration and the county community college.
The full faith and credit and ad valorem taxing power of Onondaga County supports payment of debt service on the county's GO bonds, subject to the 2011 state statute limiting property tax increases to the lesser of 2% or the rate of inflation (the 2011 tax cap law). The cap can be overridden annually by a 60% vote of the county legislature.
The 'AAA' rating reflects the county's underlying economic and demographic stability, historically conservative budget management and low long-term liabilities. The county's demonstrated gap-closing capacity during prior downturns and strong independent legal revenue-raising ability further underpin the rating. Revision of the Outlook to Negative from Stable reflects a recent turn towards more aggressive revenue budgeting than has historically been the case, which has lowered reserves below the county's policy floor. Persistent aggressive budgeting and further depletion in reserves would likely result in negative action on the rating.
Economic Resource Base
Onondaga County is located near the geographic center of New York State, roughly midway between Albany and Buffalo. Syracuse (GOs rated 'A'/Stable by Fitch) serves as the county seat and is a regional economic center. The population is notable for its stability. The county had an estimated 466,194 residents in 2015 - almost unchanged from 468,973 in 1970 in sharp contrast with the experience of many other upstate communities over the same time period. The county benefits from an employment base that is bolstered by significant healthcare and higher education institutions. State University of New York at Syracuse, St. Joseph's Hospital Health Center, National Grid and Lockheed Martin are among the largest local employers.
KEY RATING DRIVERS
Revenue Framework: 'aa'
The county's natural revenue growth rate has tended to be sluggish, rising at slightly below the rate of inflation when adjusted for policy actions that have included tax cuts. The county has broad independent legal powers to raise tax and fee revenues. The county legislature can override the statewide property tax cap with a 60% majority vote and may increase fines and fees at will.
Expenditure Framework: 'aa'
Fitch expects the natural pace of spending growth to equal or marginally exceed the rate of revenue expansion. Control over spending is strong despite a state statutory framework that is favorable to labor. Carrying costs for debt service, pension contributions and other post-employment benefits (OPEB) are moderate.
Long-Term Liability Burden: 'aaa'
The county's long-term liability burden is low compared to its economic resource base. Long-term debt plus net pension liabilities equal approximately 7% of resident personal income.
Operating Performance: 'aaa'
The county retains the highest gap-closing capacity based on its overall level of fiscal reserves, solid control over spending and legal revenue-raising powers. Fitch expects the restoration of flexibility following a recession would be rapid. However, recent revenue forecasting has been aggressive and resulted in deficits in 2016 and 2017.
REVENUE GROWTH RATE: The rating is sensitive to future tax revenue growth patterns. If growth remains sluggish over the medium term, this could have negative implications for the rating.
FISCAL MANAGEMENT: The rating is sensitive to changes in fiscal management practices, which have historically been notable for their conservatism. Less conservative budgeting assumptions that result in weaker operating performance could negatively pressure the rating.
Onondaga County, in upstate New York, was previously a manufacturing center. As manufacturing's share of the local economy has declined, healthcare and higher education have expanded. Scientific and technical jobs have also grown as a share of employment as high tech and biomedical science are playing a greater role given their connection to university graduate programs. The county labor force has shrunk since the mid-1990s as a result of this rebalancing, to 240,102 in 2016 from 249,470 in 2000, although the pace has been gradual and the local unemployment rate has remained below average. Both the county and Syracuse remain a focus of major upstate New York economic development initiatives. The county has received more than $500 million in state grant funding since 2010. Wealth and income levels are close to the U.S. average but below the state average.
Major general fund revenue sources in 2017 were gross state sales taxes (equal to 48% of reported revenues, but closer to 35% when distributions to underlying localities are netted out), property taxes (21%), federal grants (12%) and state aid (12%). The county share of gross sales taxes was equal to 75% of the total collected in 2017, with the remainder distributed primarily to the City of Syracuse. Revenue growth has been sluggish since 2007. When adjusted for policy actions, revenues have grown at a rate that is slightly below the rate of inflation. Property taxes have actually declined since 2010 because the county legislature has consistently reduced tax millage rates to provide relief to homeowners despite modest tax base growth in recent years.
Revenue growth prospects are likely to remain slow based on the recent sales tax history and management's expectation that state and federal aid will be stagnant. When the county's 10-year tax-sharing agreement with Syracuse ends in 2020, sales tax revenues could drop if Syracuse pushes to retain a greater share of the county's gross sales tax revenues. Sales taxes expanded solidly between 2010 and 2014, but growth stalled in 2015-2017 due to the gasoline price correction. Less robust sales tax growth, if it continues, will align future revenue growth prospects more closely to the performance of the county's property tax levy. Collection rates are strong at over 97%. Prolonged revenue stagnation could eventually lead to negative pressure on the rating.
The county's independent legal revenue-raising ability is essentially unlimited as it applies to property taxes, as well as to fines, fees and service charges levied by the county. New York municipalities have operated under a 2% annual property tax levy growth cap since 2011; however, the cap may be overridden by a 60% majority of a municipality's elected body. The county levies a 3% sales tax, the maximum without state approval, and an additional 1% that requires reauthorization by the state legislature for two-year periods. In June 2017, the state legislature reauthorized Onondaga County's added 1% sales tax rate above the 3% rate threshold through November 30, 2019. Fitch views the state's periodic approval of existing sales tax rates as pro forma.
The current rating assumes that the terms of the county's tax-sharing agreement with Syracuse will be materially unchanged upon its renewal in January 2021.
The county's largest expenditure item is for economic assistance and opportunity, which includes state-mandated health and social safety-net programs. This item accounts for 41% of spending. Other notable spending categories include general government (22%), public safety (21%), special education and community college subsidies (8%) and other social services (6%). The remainder relates to roads, parks and water & wastewater services.
Spending has grown slowly in recent years due to a combination of state mandate relief and work force shrinkage. Fitch expects the natural pace of spending growth to be in line with, to slightly above, revenue growth in the absence of policy action. Fitch's view is based on its expectation that recent sales tax growth rates will continue for the near-term, set against employee salary increases that have been in line with inflation. New York State's efforts to maintain full pension funding, limit Medicaid cost increases and provide relief from unfunded mandates have benefited local governments.
Fitch views the county's control over spending as solid in light of its successful history of policy action to control costs and reduce staff size. As of August 2018, the county had 3,054 full-time employees, excluding community college staff. Between 2008 and 2018, the county reduced headcount by 1,170, or 28%, including 200 positions eliminated through an early retirement incentive implemented in 2017. Management believes that it can achieve additional staffing efficiencies in the future if needed. Other tools to control costs include delaying cash-funded capital projects, reducing non-mandated programs and re-negotiating service contracts.
As per New York's legal framework for public sector workers, municipalities' ability to adjust workforce size and furlough employees during downturns is strong. Localities must wait for new labor contracts to be agreed upon before adjusting wages and benefits, however, given that expired contract terms remain in force until a new contract is finalized. Only one contract - the contract with the county sheriff's union - is subject to binding arbitration. Settlements through arbitration have rarely occurred in practice. In addition, the county legislature may withhold salary increases for a single fiscal year by a simple majority vote if a contract has expired and the bargaining process has reached an impasse. The legislature has occasionally taken such steps in the past.
The county benefits from moderate fixed carrying costs for debt service, pensions and other post-employment benefits (OPEB), which totaled approximately 13% of governmental spending in 2017. Debt service accounted for 7.2%, required pension contributions for 3.1%, and OPEB pay-go contributions for 2.4% of spending.
The county settled its current contract with the Civil Service Employees Association (CSEA) in early 2017. CSEA members account for roughly 70% of the county workforce. The contract included 2% annual salary increases through 2019 and modest retroactive pay. Moderate expenditure growth could potentially be undermined by rising employee healthcare costs over the life of the contract, though growth in 2018 has been restrained.
Long-Term Liability Burden
The long-term liability burden, as calculated by Fitch, accounts for a low 8% of personal income. The majority of long-term liabilities (64%) relate to the debt of overlapping units of government, including towns, villages, and school districts. The county's proportionate share of the unfunded liability of the New York State and Local Employees' Retirement System (NYSLERS) accounts for 15%, and direct debt makes up the remaining 21%.
Including the current issue, Onondaga County will have $757 million of long-term debt outstanding as of October 2018, with direct debt making up the largest component at roughly 50% of the debt burden. Low-interest loans from New York's state revolving fund for water and sewer projects account for 35% of the debt burden, and tobacco settlement securitization bonds account for 15%. The water and sewer loans were issued as part of the county's consent agreement related to the clean-up of Lake Onondaga, and are self-supporting. Fitch expects the direct debt burden will remain relatively stable in the near term given new debt plans that call for the issuance of roughly $20 million of new GO bonds annually, which roughly equals the amount of outstanding G.O. debt principal maturing each year, net of self-supporting debt (i.e. water & sewer bonds and notes).
The county participates in NYSLERS, a multi-employer defined benefit retirement plan created by the State of New York. The plan's ratio of combined pension assets to liabilities was 95% at March 31, 2017 using the plan's 7% rate of return assumption. Using Fitch's slightly more conservative 6% discount rate assumption, the plan's assets-to-liabilities ratio was 85%. In Fitch's view, New York State's pension systems are well-funded.
New York's Local governments have the option of deferring a portion of their full actuarially-determined pension contributions in a given fiscal year to help balance their budgets. The state requires local governments to amortize any such deferrals in future years. Onondaga County has never exercised this option. While its OPEB liability is large -- equal to nearly 4% of personal income -- the county has taken steps to control the growth rate of the liability. Fitch expects the OPEB burden to remain relatively stable as a percentage of personal income.
Fitch's Analytical Sensitivity Tool (FAST) generates a stress scenario under which Fitch expects the county would take appropriate actions to maintain fiscal flexibility and close budget gaps as they appear. As a result, Fitch views the county's financial resilience as strong enough to place it in the highest assessment category.
The county's track record of maintaining fiscal reserves during periods of recovery has historically been strong, but has lately shown signs of unevenness due to more aggressive revenue budgeting assumptions. After achieving several operating surpluses in the years following the recession that maintained general fund reserves above the county's policy-targeted level of 10% of revenues, aggressive budgeting of sales tax revenues in 2016 and 2017 resulted in two consecutive operating deficits. Prior draws on reserves in 2013 and 2014 were the result of planned transfers to the capital fund to finance infrastructure improvements.
Fiscal 2016 ended with a $15.8 million operating deficit that reduced available general fund balance to $68.6 million, equal to 9.4% of spending and transfers out. The county had budgeted 3% year over year growth in sales tax revenues in 2016, but revenues actually contracted by 1%. Retroactive pay associated with the CSEA contract settlement also helped to drive 2016's operating deficit. Fiscal 2017 concluded with a smaller, $7.7 million operating deficit that further reduced available reserves to $60.5 million, equal to 8.3% of general fund spending and transfers out, and below the county's internal policy target of maintaining reserves of at least 10% of general fund revenues. The county budgeted for 2% growth in sales taxes in 2017, but received slightly less than budgeted. Continued aggressive revenue budgeting would be a departure from the county's historically cautious budgeting practices and would be a credit concern to Fitch.
The 2018 adopted all-funds budget shrank by $14.4 million, or 1.2%, from the 2017 modified budget. General fund appropriations were reduced by 0.7%. The general fund budget included a $594,000 property tax levy increase and was balanced with $5 million of available reserves. The county budgeted for a small 2% growth in year-over-year sales taxes for 2018, but sales tax revenues are tracking above budget for the first eight months of 2018 due to a strong rebound in gasoline prices. Expenditures are below-budget, and management anticipates closing the year with a $4 million operating surplus. In its draft 2019 budget, the administration has assumed sales tax revenues will grow 3% above the 2018 estimated performance.
Fitch views the timely rebuilding of reserves after periods draws on reserves to fund operations positively, and expects municipalities to grow reserves as needed to maintain adequate financial cushions. Somewhat mitigating against the county's aggressive revenue budgeting in 2016-17 is the fact that the county has consistently utilized pay-as-you-go funding to handle a portion of its capital plans. Management has used cash to fund a portion of its capital program even during periods of economic stress, and has continued to make its full actuarially-determined pension contributions annually.
|Printer friendly Cite/link Email Feedback|
|Publication:||Daily the Pak Banker (Lahore, Pakistan)|
|Date:||Dec 24, 2018|
|Previous Article:||Fitch Affirms Cabela's Credit Card Master Note Trust.|
|Next Article:||Fitch Rates United Illuminating's Reoffering of PCRRBs 'A-'.|