Fitch Rates Nassau County, NY's Bond Anticipation and

Revenue Anticipation Notes | Reuters

Fitch Rates Nassau County, NY's Bond Anticipation and Revenue Anticipation Notes
Fitch Ratings assigns an 'F1' rating to the following bond anticipation notes (BANs) and revenue
anticipation notes (RANs) of Nassau County, NY (the county):
--$115,000,000 BANs, 2014 series A;
--$130,000,000 RANs, 2014 series A;
--$70,000,000 RANs, 2014 series B.
The BANs and RANs are expected to be sold through negotiation on June 12, 2014.
The BANs are being issued to renew, in part, the county's BANs, 2013 series B dated Dec. 11, 2013
and maturing July 1, 2014 issued to finance various costs related to the remediation and
restoration of county facilities and infrastructure from Superstorm Sandy damage.
The RANs are being issued in anticipation of receipt by the county of net allocable sales taxes for
the county's fiscal year commencing Jan. 1, 2014 and ending Dec. 31, 2014.
In addition, Fitch affirms the following ratings:
--Approximately $1.6 billion in outstanding general obligation bonds at'A';
--Approximately $247 million in outstanding Nassau Health Care Corporation (NCHCC) countyguaranteed 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 the bonds is Negative.
SECURITY
The GO bonds, notes 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 agreement is not subject to cancellation or termination.

KEY RATING DRIVERS

LIMITED FINANCIAL FLEXIBILITY: Positive operations in 2013 have improved the structural gap
for the fourth consecutive year. However, limited financial flexibility is evidenced by weak reserves
and high dependence on economically sensitive sale tax revenue which will continue to challenge
the county's financial position.
NO RESOLUTION TO PROPERTY TAX REFUNDS: The county continues to struggle to repay
property tax refunds, with the backlog increasing. To date, no viable plan has been approved, but
the county is exploring a resolution with the state.
LABOR COST CERTAINTY: Recently negotiated labor contracts provide long-term savings and
bring cost certainty to the budget. The favorable position is tempered by resultant cost pressures
including the inability to freeze wages through the contract term and higher salary expenses to
be funded with unproven new revenue sources.
SHORT-TERM MARKET RELIANCE; SOUND COVERAGE: Low liquidity and the county's reliance
on short-term market access for note repayment and operations is a key concern. However, note
coverage from projected 2014 revenues, borrowables and note proceeds is strong and note par has
declined slightly over the last few years.
STRONG ECONOMIC FUNDAMENTALS: The county maintains a diverse economic base and a
population with high income levels.
MANAGEABLE DEBT BURDEN: The sizable and wealthy tax base supports a manageable debt
burden with above-average amortization. Capital needs are moderate.

RATING SENSITIVITIES
REDUCTION OF STRUCTURAL GAP: Continued reduction in the structural deficit through
sustainable funding sources and reduced reliance on non-recurring revenues would lessen
financial pressure and enhance rating stability.
RESOLUTION TO PROPERTY TAX REFUNDS: A viable resolution to property tax refunds that
reduces the county's liability would be a credit positive.
WEAK LIQUIDITY POSITION: The county's high dependence on cash flow borrowing for liquidity
needs will continue to be a hindrance in obtaining a higher rating.
CREDIT PROFILE

The county is located on Long Island, approximately 15 miles east of Manhattan. The population of
approximately 1.3 million has remained fairly steady, growing by 1.1% since 2000.
POSITIVE RESULTS IN 2013
The county is expected to end fiscal 2013 (year-end Dec. 31; unaudited) with a budgetary surplus
of $54.7 million or a $48.9 million operating surplus on a GAAP basis for the five operating funds
(general, police headquarters, police district, fire prevention and debt service). The county's
expected results for 2013 on a NIFA presentation basis (which excludes one-time measures among
other things) is a negative $78.3 million or 2.9% of budgeted major operating fund expenses. This
is a decrease of 59% from 2009 (negative $190.7 million), but slightly higher than in 2012
(negative $68.8 million).
In 2013, revenues and expenses were lower than budgeted by approximately 2.1% and 4.0%,
respectively. Budgeted revenues were short due primarily to lower state and federal aid but were
offset by $18.5 million in higher sales tax revenues. Lower than budgeted expenses in early
intervention and pre-school costs, debt service expenses and payroll and fringe benefits were
offset by higher police overtime.
Sales tax, which makes up 40% of major tax-supported fund revenue, outperformed budget for the
past four years although revenues are down year-to-date. Positively, the structural deficit related
to the primary operating funds has been reduced for the fourth consecutive year from $116.9
million in 2012 to a still sizable $96.6 million in 2013.
2014 BUDGET INCLUDES SOME QUESTIONABLE COMPONENTS
Fitch believes the 2014 adopted budget includes a number of questionable components, some of
which require NIFA or legislative action, including the bonding of approximately $230 million of
tax certificate refunds.
The 2014 adopted budget of $2.8 billion ($1.7 billion general fund) is relatively flat from the fiscal
2013 budget. The budget does not include any increased fees and is the fourth consecutive year
without a property tax increase. Budgeted sales tax growth of 4% over the 2013 adopted budget
is considered prudent by Fitch given historical performance.
Year-to-date sales tax revenues are down 8% due in all likelihood to inclement weather in the first
quarter. Based on the projected growth rate of 4% for the remainder of the year, sales tax revenue
would be short by approximately $15 million. Management is currently forecasting a $2.1 million
budgetary surplus for year-end including the sales tax shortfall.
CONTINUING FINANCIAL PRESSURES IN OUT YEARS
The county's 2014-2017 multi-year financial plan projects budget gaps of $48.7 million in 2015;
$62.8 million in 2016, and $63.5 million in 2017 or 1.7%, 2.1% and 2.1% of spending, respectively.
Gap-closing measures include revenue from video gaming terminals beginning in 2015, county
office consolidation, sale of surplus county property, and state mandate reform. In light of the
recently negotiated labor contracts, the county is required to submit a new multi-year plan to NIFA
by June 30.
Fitch remains skeptical about the county's ability to implement gap-closing measures to produce
meaningful savings and/or generate offsetting revenues. Some of the measures are of a non-

recurring nature and may not be realistic given that one or more will require state legislation,
action by the county legislature, or approval from NIFA.
Fitch recognizes the strides the county has made in decreasing the structural deficit on a
budgetary basis. Fitch believes the gaps are manageable relative to the size of the county's
operating funds budget, but the tight level of financial flexibility is particularly concerning in a
time of economic recovery.
RESTATEMENT OF 2012 AUDIT
A review of the county's 2013 audit by the independent accounting firm uncovered pension
expenses going back to 2004 that were not recorded properly. While there is no budget impact,
there will be a GAAP impact. The fiscal 2012 general fund ending balance will be restated to $28
million (1.2% of general fund spending) from $81.8 million (3.7%). Total government funds will be
restated to reflect an $87 million reduction in fund balance. This is troubling to Fitch given that it
reduces already weak fund balance and reserve levels and extends the timing of the county's
return to adequate GAAP reserve position.
LABOR COST CERTAINTY; REVENUE RISK
NIFA approved labor settlements in early May with the county's three police unions and the CSEA,
ending a three-year wage freeze. Fitch views this positively, as the agreements, which run through
2017, bring cost certainty to the budget process and minimizes litigation risk.
Unions have given up wage increases for 2013, reducing the county's potential retroactive liability
to $101 million from $232 million. Additionally, the agreements include contributions to health
care insurance and pensions by all new employees and work rule changes. NIFA has mandated
that the county submit a revised four-year plan for approval by June 30 to address the cost of the
new agreements, which NIFA has estimated at $130 million over the term of the contracts.
The county plans to cover the costs through new and unproven revenue sources. The county
projects revenues from speed cameras in school districts as the largest new revenue source. The
cameras were approved by the state legislature and are expected to generate $25 million to $30
million annually. Other revenue sources include higher fees for county facilities such as parks and
beaches, additional assessment fees and increased traffic and parking fees.
NIFA RELATIONSHIP IMPROVING
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. Recently, the
relationship with county management has improved as evidenced by working jointly and
cooperatively in lifting the wage freeze and negotiating new labor contracts.
Fitch considers the county's revenue estimates to pay the cost of the new contracts as somewhat
aggressive. However, Fitch takes comfort that despite losing its wage freeze power through fiscal
2017 on settled contracts, NIFA provides an added layer of oversight and has line-item veto
power to assure budgetary balance. Fitch believes NIFA will not approve the county's new multiyear plan, due June 30, unless it believes it is viable.
COURTS REJECT COUNTY'S POSITION ON PROPERTY TAX REFUNDS

The state courts have rejected the county's attempt to end the practice whereby the county pays
the property tax refunds for the school, town and special district portions of the tax. The county
estimates that the amount of its liability for paying the refunds would be approximately $60
million or 2.1% of annual spending.
Fitch believes the county could manage the $60 million but is concerned with the county's ability
to fund the accumulated tax liability which totaled $325 million at the end of 2013. Without a
resolution to this issue the county will continue to struggle to repay property tax refunds,
creating an obstruction in its path towards overall fiscal balance and liquidity improvement. The
county is exploring alternative solutions with the state to reduce this liability.
RELIANCE ON SHORT-TERM BORROWING
The county generally issues short-term RANs and tax anticipation notes (TANs) around May/June
and November/December of each fiscal period. Proceeds fund operations in anticipation of sales
and property tax receipts and maintenance of cash balances sufficient to repay maturing notes.
Note par has declined slightly over the past few years. Note borrowing in 2012 equaled $476
million or a somewhat elevated 16% of operating fund receipts ($20 million was to account for
timing differences with respect to Superstorm Sandy). For 2013, borrowings totaled $433 million
(14.1% of receipts) and note par for 2014 is expected to decline further to $400 million (13.2% of
receipts).
Fitch remains concerned about the county's dependence on short-term borrowing, particularly as
the borrowings overlap each other requiring additional issuance to repay outstanding notes.
SOUND NOTE-REPAYMENT COVERAGE
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 current RAN issues mature on March 16, 2015 ($130 million) and April 15, 2015
($70 million. Coverage is sound at 4x in March and 3.8x in April. With consideration of borrowable
balances in non-major funds, coverage increases to 4.6x and 5.6x in March and April, respectively.
TANs ($225 million) issued in Dec. 2013 and due in Aug. and Sept. 2014, have projected
coverage of 3.4x and 3.7x 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 with 2012 per capita income and medium household income at 152%
and 182%, respectively, of the U.S.
The county's unemployment rate remains lower than the rates for New York State and the nation.
For March 2014, the county's unemployment rate was 5.2% compared to 7.3% and 6.8% for the
state and nation, respectively. From March 2013 to March 2014, employment and labor force
numbers were flat, posting 1.0% and 0% increases, respectively, slightly lower than both state
and national growth rates.
INCREASING BUT MANAGEABLE DEBT LEVELS
The county's debt ratios are increasing but still manageable in relation to its wealthy tax base;

market value per capita is high at $152,000 despite recent market value declines. Overall debt
totals an above-average $4,284 per capita but a more moderate 2.7% of market value given the
strong tax base. However, these statistics are likely somewhat understated as they exclude debt
issued by school districts (not available).
Debt ratios should remain fairly stable given manageable capital needs and above-average
amortization with 67% (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 well-funded New York State pension plans. At March 31, 2013, the state
and local employees' plan and the state and local police and fire plan had funded ratios of 87% and
88%, respectively. Using Fitch's more conservative 7% discount rate assumption, the plans'
funding levels would still be sound at an estimated 82% and 83%, 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 for 2012 and 2013 over 10 years and for 2014 over 12 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.
Carrying costs for debt service, pension and OPEB pay-go equaled a manageable 21.6% of 2012
total governmental fund spending, with the county's amortization of part of the pension payment
somewhat offsetting rapid debt repayment.
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,
CoreLogic Case-ShillerIndex, 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
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Fitch Ratings
Primary Analyst
Karen Wagner
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
+1-212-908-0230
or

Secondary Analyst
Amy R. Laskey
Managing Director
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