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Fitch Upgrades Ulster County, NY's GO Rating and IDR to 'AA' from 'AA-'; Outlook Stable.

New York: Fitch Ratings has upgraded the following Ulster County, New York general obligation (GO) bond ratings to 'AA' from 'AA-':

--Approximately $48.7 million GO bonds, series 2012 bonds;

Fitch also upgrades the county's Issuer Default Rating (IDR) to 'AA' from 'AA-'.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from the county's full faith and credit and taxing power, subject to state statute limiting property tax increases to the lesser of 2% or an inflation factor (the tax cap law). The limit can be overridden by a 60% vote of the county legislature.

ANALYTICAL CONCLUSION

The upgrade to 'AA' from the 'AA-' GO and IDR ratings reflects the county's very strong financial resilience with high reserve balances supported by significant legal ability to increase revenue. The county's economic base is diverse but supports a relatively slow level of revenue growth. The long-term liability burden is low relative to personal income and carrying costs for pension and debt service account for a modest portion of general fund expenditures.

Economic Resource Base

The County is located on the west side of the Hudson River between New York City and Albany. The local economy is based on tourism and agriculture but also benefits from its proximity to the New York City metropolitan region. The total population of 179,225 has declined slightly (1.8%) since the 2010 Census. Wealth levels are average compared to state and national levels.

KEY RATING DRIVERS

Revenue Framework: 'aa'

Fitch anticipates the continuation of steady but somewhat slow revenue growth based on historical revenue performance and recent improvement in the local tax base. The county's revenue framework is supported by significant legal ability to increase property tax revenues under the provisions of the New York State tax cap.

Expenditure Framework: 'aa'

Fitch views the county's ability to reduce operating spending to help address potential budget gaps as solid and carrying costs for debt service, pension and other post-employment benefits (OPEB) are modest.

Long-Term Liability Burden: 'aaa'

The long-term liability is burden is low compared to the county's economic resource base. Overall debt plus unfunded pension liabilities together equal approximately 5% of resident personal income.

Operating Performance: 'aaa'

Fitch believes that the combination of the county's strong reserves, significant ability to increase revenues and solid capacity to reduce expenditures provide the highest gap closing capacity.

RATING SENSITIVITIES

Financial Flexibility: The current IDR and GO rating assumes the county will continue to manage its finances in a prudent manner and maintain a high level of financial flexibility throughout economic cycles.

CREDIT PROFILE

The county's stable economic base is anchored by the State University of New York (SUNY) New Paltz with enrollment of almost 7,700 students and 1,500 employees. The New York State Correctional Department operates four major detention facilities and employs approximately 1,740 people. Tourists are drawn to the area by Woodstock, a large art and cultural center, and the Catskills and Shawangunk Mountains. The county reports new resort developments currently under construction. The county unemployment rate has generally trended slightly below state rates. The local tax base declined modestly in 2014 and 2015 but grew 9% from 2016 through 2018.

Revenue Framework

General fund operating revenues are derived from a mix of sales taxes (which account for 40% of general fund revenue), state and federal aid (30%) and property taxes (roughly 21%).

General fund revenues absent policy action (such as the sale of the county nursing home) have generally trended at or near the level of inflation. The property tax levy has been held fairly flat reflecting generally stable AV. Fitch believes that the county's prospects for revenue growth will be in line with inflation given increasing sales tax collections, stable AV trends, and ongoing development in the local economy.

New York State law requires property tax revenue increases be limited to the lesser of CPI or 2% annually, unless a supermajority of the local governing body vote for a larger increase. The ability to override the cap provides substantial legal flexibility to raise revenues the county. Additionally, the county has the ability to increase other fees and departmental revenue. Sales tax rates are controlled by the state legislature. The county has a base sales tax rate of 3% and an additional 1% sales tax rate that requires periodic extension. The current 1% sales tax rate will expire November 30, 2020.

As part of the expansion of New York State gaming a casino is being developed in nearby Sullivan County. Under state law, neighboring counties are entitled to a share of the tax revenues generated from casinos for impact costs. Ulster County expects to receive $1.5 million to $2 million per year (less than 1% of general fund revenue) as its share in revenue once the facility is operating. Management plans to use these funds to supplement economic development and operating funds.

Expenditure Framework

The majority of the county's expenditures are for economic assistance and social services (44%), general government expenses (22%), and public safety (16%).

Fitch expects the rate of expenditure growth to remain in line with revenue growth based on current staffing and service levels. Employee wages and benefits are up 2% in the 2018 budget and account for approximately 41% of total spending. The county plans on maintaining current service levels but streamlining certain operations through consolidations of contracts and other operational improvements. Expenditures for social services and economic assistance are expected to remain manageable due to the state cap on Medicaid cost increases.

The county's expenditure flexibility is solid given low carrying costs for debt service and post-employment benefits coupled with a satisfactory ability to reduce operating costs to close budget gaps. The county has reduced full time staffing levels to 1,183 from 1,900 over the past seven years. Staffing reductions have largely been achieved through attrition and elimination of vacancies. Over 300 positions were eliminated through the sale of the county-owned nursing home in 2013. Most employees are covered under two labor contracts that have been expired since December 2016 including CSEA, the largest collective bargaining unit, which represents 66% of the workforce. The county has a history of negotiating modest salary increases in exchange for modest benefit concessions, including higher health care contributions.

Debt service, pension contribution and OPEB costs account for a modest 9% of 2016 general fund expenditures. The county has not taken advantage of the option to amortize pension payments provided by the state. Additional expenditure flexibility is provided by management's ability to reduce budgeted capital expenditures in event of a revenue shortfall. The 2018 budget includes $15 million for infrastructure projects, which accounts for 5% of budgeted expenditures.

Long-Term Liability Burden

Fitch estimates the county's overall debt and its proportionate share of the net pension liability of the New York State Local Employees Retirement System (NYSLERS) at approximately 5% of personal income. The majority of the overall debt is overlapping debt of various school districts, towns, villages and the city of Kingston. The county's future debt plans are modest including $40 million in authorized but unissued debt. The 2018-2021 capital improvement plans include approximately $105 million in planned projects; however, this incorporates state and federal grants that the county expects would significantly reduce the par amount of tax-supported debt. Amortization of outstanding principal of about $100 million is rapid with 80% paid in ten years.

NYSLERS is a cost-sharing multiple-employer defined benefit pension plan. As of December 31, 2016, the plan's ratio of assets to actuarial liability was an estimated 81% assuming an adjusted 6% rate of return. OPEB is funded on a pay as you go basis as there is no authority under present state law to establish a trust account or reserve for this liability. The unfunded OPEB liability as of Dec. 31, 2016 was $128.8 million, equivalent to 1.6% of personal income.

Operating Performance

Fitch believes the county's financial resilience in a downturn would be exceptionally strong. Fitch assesses the county's inherent budget flexibility as superior given the county's strong legal ability to increase revenue and reduce expenditures. The county maintained satisfactory reserves throughout the most recent economic downturn and Fitch believes this trend will continue. The unrestricted general fund balance was 17% of general fund spending in 2016. The county's policy of maintaining unassigned general fund balances of 5% to 10% of expenditures is consistent with the current rating. Unassigned general fund balance was 9% of expenditures in 2016.

The county's track record of maintaining stable financial operations during periods of economic recovery is strong. The county closed the county owned nursing home in 2013, privatized mental health services and consolidated contracts to reduce operating expenditures. In 2017, the county lowered the property tax levy by 0.25% and appropriated $16 million in fund balance. Based on current estimates, the county expects to replenish the majority of the appropriation through positive budgetary variances including an increase in sales tax revenue collections. Expenditure savings were generated by holding numerous positions vacant and through reduction in social service caseloads. The 2017 unrestricted general fund balance is expected to be approximately a 15% of general fund spending.

The 2018 executive budget holds expenditures relatively flat, lowers the property tax levy by another 0.25% and appropriates $12.75 million in general fund balance. The county appropriates fund balance on an annual basis, generally for one-time capital projects including road improvements and other infrastructure projects. Budgeted sales tax growth is 2% growth over 2017 estimated collections. The budget also appropriates $15 million in pay as you go capital funding. Fitch views the county's consistent pay-as-you-go infrastructure spending, even during periods of economic recession, as a source of financial flexibility.
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Publication:Daily the Pak Banker (Lahore, Pakistan)
Geographic Code:1U2NY
Date:Mar 8, 2018
Words:1612
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