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NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'A' rating to the following general
obligation (GO) bonds of Nassau County, NY (the county):
--$127,500,000 general improvement bonds, 2013 series B.
The bonds are expected to be sold through competitive bid on August 8.
The bonds are being issued to finance capital projects, tax certiorari payments, environmental
projects, and judgments and settlements.
In addition, Fitch affirms the following ratings:
--Approximately $1.5 billion in outstanding GO bonds at 'A';
--Approximately $259 million in outstanding Nassau Health Care Corporation (NCHCC) county
guaranteed bonds at 'A';
--Approximately $13.1 million in outstanding Nassau Regional Off-Track Betting Corporation
(NROTBC) revenue bonds series 2005 at 'A-'.
The Rating Outlook for all long-term debt is Negative.
SECURITY
The GO bonds, and NCHCC bonds are secured by the county's faith and credit and taxing power,
subject to a 2011 state statute limiting property tax increases to the lesser of 2% or an inflation
factor (tax cap law). This limit can be overridden annually by a 60% vote of the county legislature.
The NROTBC bonds are backed by the county's covenant under a support agreement with the
NROTBC to make loans to NROTBC equal to debt service on the bonds from legally available funds
of the county as appropriated for such purpose. The county commits to transfer funds to the trustee
to pay debt service not later than 15 days prior to any debt service payment date. The obligations of
the county under the support agreement are unconditional and irrevocable, and the support
filed suit to reverse the wage freeze. In February 2013, the U.S. District Court for the Eastern
District of New York issued an opinion granting the union's summary judgment which would nullify
NIFA's imposition of the wage freeze. The judge stayed his decision pending the results of NIFA's
and the county's appeal.
The county estimates that if the decision is not reversed on appeal, its retroactive liability would be
approximately $230 million through fiscal 2013 including costs such as payroll taxes, pension
contributions, etc.
The county believes that fiscal 2013 cash flow should not be affected, which Fitch views as
reasonable given the likelihood of a lengthy appeals process. However, the projected updated
budget gap of $35.4 million for fiscal 2014 would substantially increase if NIFA loses its appeal and
the county is required to repay approximately $230 million of wage savings achieved through 2013
as well as budget savings that continues to accrue. The county anticipates financing any adverse
settlement to repay the $230 million of back wages, although the county legislature and NIFA
approval would be required.
TAX CERT LITIGATION
In 2010 the county passed legislation that eliminates its responsibility for making tax cert payments
to towns, special districts, and all but one of the school districts, passing on a portion of the cost of
tax refunds to local municipalities in accordance with general state law. This legislation, effective in
2014, would significantly reduce the county's liability but was challenged by a number of the
underlying jurisdictions.
The county's position was upheld in the Nassau County Supreme Court but overturned in February
2013 by the New York State Appellate Court. The State Court of Appeals will likely hear oral
arguments in October with a decision probable by the end of the year. The county estimates that, in
the event the decision is not reversed on appeal, the amount of its liability for paying the refunds
would be approximately $60 million annually. Fitch believes the county could manage the $60
million but recognizes that a loss by the county would create yet another road block in its path
towards overall fiscal balance.
The county's ability to fund the total accumulated tax liability, which is estimated at approximately
$335 million at Dec. 31, 2012 and is not part of the suit, is of some concern to Fitch. The county
planned, with NIFA's approval, to issue approximately $305 million in tax cert bonds through fiscal
2014 to cover the liability but the county legislature did not provide the requisite two-thirds
majority.
The administration and county legislature recently reached an agreement to issue $75 million in
bonds for tax certs, $40 million of which is included in the current bond issue. The remaining $35
million is expected to be approved by the legislature in September 2013. In addition, the county has
represented it will be utilizing $20 million of operating revenue to fund tax cert payments, bringing
the total amount allocated for tax certs to $95 million. The county administration continues to
negotiate with its legislature, but it is unclear whether bonding for the remaining tax certs will be
accomplished. Failure of the county legislature to approve additional financing could result in
significant unbudgeted operating expenditures accrued in fiscal 2013. The county is in discussions
with the state to explore alternate tax cert financing options.
RELIANCE ON SHORT-TERM BORROWING
The county generally issues short-term revenue anticipation notes (RANs) and tax anticipation notes
(TANs) around May/June and November/December of each fiscal period in order to fund operations
in anticipation of sales and property tax receipts, respectively, and maintain a cash balance
sufficient to help repay maturing notes. Note borrowing in 2012 equaled $476 million or a somewhat
elevated 16% of receipts ($20 million was to account for timing differences with respect to
Superstorm Sandy). The county expects to issue a slightly lower $448 million in cash flow notes in
2013.
The county's cash flows along with proceeds of outstanding notes generally provide substantial
coverage for notes with funds for their repayment fully set aside comfortably in advance of maturity.
The 2013 series A and B RANs mature at the end of March ($155 million) and April ($55 million)
2014, respectively. Coverage on the repayment dates is strong at 2.9x in March and 4.0x in April.
With consideration of borrowable balances in non-major funds, coverage is an even stronger 3.3x
and 5.0x in March and April, respectively.
TANs issued last December are due in September and October 2013, with respective projected
coverage of 2.9x and 3.5x when borrowable resources are considered.
STRONG SOCIOECONOMIC CHARACTERISTICS
The county benefits from a broad, diverse economy and well above-average economic indicators,
including solid income levels (per capita income in 2011 was 152% of the U.S.) and high per capita
market value ($162,000) despite recent tax base declines.
The county's unemployment rate remains lower than the rates for New York State and the nation. In
May 2013, the county's unemployment rate was 6.0% compared to 7.4% and 7.3% for the state and
nation, respectively. From May 2012 to May 2013, employment and labor force numbers were
positive-trending, posting 1.7% and 0.6% increases, respectively, higher than both state and nation
growth rates.
The effects of the economic downturn were milder here than in some areas; employment and home
price declines to date have been relatively moderate. In addition, sales tax revenue, the county's
largest source of general government funding, has been increasing.
MANAGEABLE DEBT BURDEN
Debt ratios are increasing but still manageable at $4,111 per capita and 2.9% of full market value.
However, these statistics are likely somewhat understated as they exclude debt issued by school
districts (not available). For 2012, debt service represented a moderate 12.3% of total government
fund spending.
Debt ratios should remain stable given manageable capital needs and above-average amortization,
with 71% (including debt issued by the NIFA) retired in 10 years, contributing to the above-average
debt service burden.
WELL-FUNDED STATE PENSION PLANS
The county participates in New York State pension plans which are well-funded with the state and
local employees' plan at 90% and the state and local police and fire plan at 92% as of March 31,
2012. Using Fitch's more conservative 7% discount rate assumption, the plans' funding levels would
still be sound at an estimated 86% and 87%, respectively.
County pension payments in 2012 made up a moderate share (4.8%) of spending. The county has
taken advantage of the ability granted by the state to amortize most of the increase in annual
pension payments over 10 years. This amortization option provides some near-term budget relief but
will make future-year budgeting for these payments more challenging.
The moderate pension liability is somewhat offset by a high unfunded actuarial accrued liability for
other post-employment benefits (OPEB) at $4.8 billion as of Dec. 31, 2012 or 2.5% of market value.
Fitch expects this amount to increase as the county plans to continue to fund its OPEB liability on a
pay-go basis. In Fitch's view there appear to be many legal obstacles to altering existing labor
contracts. The county has not received concessions on health care; most employees do not
contribute at all to the cost of coverage.
Carrying costs for debt service, pension and OPEB pay-go equaled a manageable 21.6% of 2012 total
government fund spending, with the county's amortization of part of the pension payment somewhat
offsetting rapid debt repayment.
NIFA OVERSIGHT PROVIDES ADVANTAGES AS WELL AS HURDLES
In January 2011, NIFA imposed a control period under its enabling legislation. NIFA has maintained
an oversight role over the county since 2000. The ability to break existing contracts is beyond
NIFA's control-period powers. Upon declaration of a fiscal crisis NIFA has the ability to impose a
wage freeze if it determines that such freeze is necessary to maintain a balanced budget. However,
as discussed above, this ability is the subject of litigation.
Fitch believes NIFA's oversight has had some positive effects on the county's financial operations,
such as instilling increased budgeting discipline and imposing the wage freeze, but NIFA's oversight
has also added a layer of complexity to decision-making.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this
action was additionally informed by information from Creditscope, University Financial Associates,
S&P/Case-Shiller Home Price Index, IHS Global Insight, and National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=798192
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