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Fitch Upgrades New York City GOs To `A+'.

Business Editors & Analysts

NEW YORK--(BUSINESS WIRE)--Sept. 15, 2000

The City of New York general obligation bonds, fiscal 2001 series B $350,000,000 tax-exempt bonds and $75,000,000 taxable bonds to be offered through negotiation by a syndicate led by Solomon Smith Barney on or about Sept. 18 are rated `A+' by Fitch. Details to be determined. Additionally, the rating on approximately $26 billion in outstanding general obligation bonds is upgraded to `A+' from `A'. The rating upgrade recognizes the strength and breadth of the city's economic resurgence, which should continue to generate strong revenue growth and large surpluses. While the budgeting of surplus contributes to projected outyear funding gaps, which would be larger if unrecognized potential costs were included, this is largely offset by the very conservative revenue estimating. Furthermore, the city has demonstrated its exceptional budget monitoring and management capabilities, particularly a consistently demonstrated ability and resolve to close budget gaps when they appear and achieve surplus, for 20 consecutive years. Burdensome debt levels and capital requirements will continue to constitute a rating restraint for the foreseeable future.

New York possesses inherent strength in the sheer scope of its unique economy and its singular identity as an international center for numerous industries and as a cultural and tourist destination. Its ability to continue to attract human talent and corporate enterprises is reflected in the city's above average per capita income at over 128% of the national average and the recent proliferation of new economy industries, estimated at over 250,000 related jobs. Economic resurgence continues. After hovering over 15% in the mid-1990s, class A Manhattan office vacancy rates in June were below 3% and are dramatically reduced form last year with asking rents increasing 20-30%. Residential rents and prices are also climbing. While real estate capacity could constrain growth, development has been broadening to new areas of the city, although extending this progress will remain a challenge.

The booming real estate market is indicative of the city's recent strength. New York Stock Exchange member firms achieved a record $16.3 billion in pre-tax profits last calendar year, and are on track to repeat last year's record as profits for the first half were over $13.6 billion. While the city's economic dependence on Wall Street remains a vulnerability, with finance insurance and real estate (FIRE) comprising a disproportionate 30% share of earnings, economic broadening and strengthening is demonstrated. Following three years of modest expansion through 1996, private sector job growth picked up to a 2.5% pace and resulted in what has been the largest six year stretch of growth in over a half century. The job growth is broad based, particularly strong in business services, with very little growth occurring in FIRE. Further indications of the continuation and breadth of economic growth include the personal income tax withholdings increasing over 11% this summer--a non-Wall Street bonus period. Tourist visitors increased 11% in 1999, and somewhat slower growth continues this year, but is expected to reach a level that will be nearly one-third higher than the 1996 number of visitors. High hotel occupancy rates continue.

With economic recovery, the city achieved a large $1.4 billion surplus in fiscal 1997 which through prudent forecasting and budgeting and continued economic growth, has been effectively rolled forward and increased each year culminating in a record $3.2 billion estimated surplus or over 8.2% of fiscal 2000 spending. The $3.2 billion surplus was achieved despite over $1.3 billion in new tax cuts implemented. Approximately $1.9 billion was allocated to prepay fiscal 2001requirements, with the balance allocated to the budget stabilization account to reduce outyear funding gaps. City generated revenues exceeded original fiscal 2000 estimates by over $2.1 billion or over 75% of the projected $2.7 billion outyear projected funding gaps.

Revenues are very likely again to exceed estimates this year as they are based on conservative assumptions. Property tax revenues comprise 37% of city generated revenues and are extremely predictable. The four year projections are based on the required five year phase in of commercial and multifamily residential market value increases that have already occurred, with only 5% annual increases assumed for projected market value growth, which is currently growing at a much faster pace. The personal income tax base is estimated to decline 2.9% in fiscal 2001 following an extraordinary 24.6% base increase in fiscal 2000, although withholdings through the first quarter are up over 11% and Wall Street bonuses will likely match last year's levels. Wall Street profits are forecasted this year at 35% below 1999 levels and for the next four years at 65% below the 1999 level. The sales tax base is estimated to grow only 1.8% in fiscal 2001, following a 10.7% increase. Employment was projected to decelerate to 2.0% and then 0.6% growth in calendar years 2000 and 2001 from 2.5% last year, while through June it has continued to grow at about last year's pace.

Challenges remain. The projected outyear annual budget gaps of $2.5-$2.7 billion exclude provisions for wage increases beyond two years for contract renewals, which according to the financial control board could add another $750 million by the fourth year. City work force contracts have or will expire in fiscal 2001. The four-year financial plan also assumes significant labor productivity concessions, which have to be negotiated. Also, the state, subsequent to the city's budget adoption, legislated pension cost of living adjustments (COLAs) which gradually increase annual city costs to a level that will exceed $500 million by the fifth year. However, certain scheduled tax reductions are being reconsidered which would enhance revenues by over $300 million and the Mayor has announced plans to develop a spending reduction program of as much as $300 million.

With strong personal income base growth and enacted tax reductions, increased tax capacity has been generated with city tax revenues falling to 7.6% of personal income from over 9% in 1992. Nevertheless, the city's debt burden has risen to high levels and capital plans remain large. Debt ratios include tax-supported debt at 10.9% of the full value of the property tax base and 14.1% of personal income.

Fitch is an international rating agency that provides global capital market investors with the highest quality ratings and research. Dual headquartered in New York and London with a major office in Chicago, Fitch rates entities in 75 countries and has some 1,100 employees in more than 40 local offices worldwide. The agency, which is a combination of Fitch IBCA and Duff & Phelps Credit Rating Co., provides ratings for Financial Institutions, Insurance, Corporates, Structured Finance, Sovereigns and Public Finance Markets worldwide.
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Publication:Business Wire
Geographic Code:1USA
Date:Sep 15, 2000
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