Fitch Rates Suffolk County, New York's Tax Anticipation

Notes 'F1'

NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'F1' rating to the following Suffolk County,
NY (the county) notes:
--$410,000,000 tax anticipation notes (TANs) for 2014 taxes, comprised of $300,000,000 series I and
$110,000,000 series II.
The notes are expected to be sold via negotiation on Dec. 11, 2013. The notes are being issued in
anticipation of real property taxes or assessments to be received in 2014.
In addition, Fitch affirms the following rating:
--Approximately $1.4 billion of outstanding general obligation bonds at 'A';
The Rating Outlook on the bonds is Negative.
SECURITY
The bonds and notes are general obligations of the county with a pledge of its faith and credit and ad
valorem tax, subject to the 2011 state statute limiting property tax increases to the lesser of 2% or
an inflation factor (the tax cap law). This limit can be overridden annually by a 60% vote of the
county legislature.
KEY RATING DRIVERS
CHALLENGED FINANCIAL PROFILE: The county's financial profile is characterized by structural
imbalance, a large accumulated deficit, and limited financial flexibility. Weak liquidity levels,
resulting in increased use of cash-flow borrowing, heighten Fitch's concern.
SHORT-TERM MARKET RELIANCE; NARROW COVERAGE: Market access remains critical given the
county's high reliance on cash flow borrowing due to weak liquidity levels. Projected coverage by
revenues expected to be received by the 2014 note repayment date provide adequate but narrow
coverage.
STRONG ECONOMIC INDICATORS: The county benefits from a broad and wealthy economy and tax
base characterized by below average unemployment rates and high wealth levels.
MANAGEABLE LONG-TERM LIABILITIES: The sizable and wealthy tax base results in a manageable
debt burden, and amortization is above average. Capital needs are moderate and state pension plans
are well funded.
RATING SENSITIVITIES
WEAK FINANCIAL OPERATIONS: Fitch's concerns about the county's ability to attain stable
financial operations and build reserves, much less reduce its large accumulated deficit, continue to

pressure the rating. Meaningful progress in reducing the accumulated deficit with largely recurring
measures would be a positive rating consideration.
NARROW LIQUIDITY: An increase in cash flow borrowing beyond the current projections would be
viewed negatively.
CREDIT PROFILE
Suffolk is among the wealthiest counties in the state and nation, benefiting from its proximity to
New York City and a well-educated work force. The county encompasses the eastern two-thirds of
Long Island including the Hamptons and Fire Island. The county's growing population totals
approximately 1.5 million, the largest of any county in New York State outside of New York City.
BUDGET DEFICIT INCREASES IN 2012
On an audited budgetary basis for 2012 (year-end Dec. 31) the county recorded a general fund
operating deficit of $94.8 ($99.4 million when the police district is added), worse than the $63.2
million previously estimated. The cumulative general fund balance deficit on a budgetary basis at the
end of 2012 was $154.4 million ($156.5 million combined).
In addition to lower sales and property tax receipts and short-term costs associated with Super
Storm Sandy, approximately $56.3 million of the decline in fund balance is attributable to timing
issues that increased the 2012 deficit but benefitted the 2013 operating budget.
On an audited GAAP basis, the accumulated general fund balance at Dec. 31, 2012 totaled a
negative $325.2 million, an increase from negative $166.7 million at Dec. 31, 2011. The unrestricted
(sum of committed, assigned and unassigned) general fund balance totaled a negative $401.7
million, or a large 17.6% of 2012 general fund expenditures.
SMALLER OPERATING DEFICIT FOR PROJECTED 2013 BUDGETARY RESULTS
For year end Dec. 31, 2013, the county is projecting a $3 million general fund budgetary deficit ($6
million deficit when police district is added) compared to a $95 million shortfall in 2012. The
improvement is a result of strong sales tax growth due to an improving economy, coupled with the
economic boost from rebuilding associated with Super Storm Sandy. At the end of the third quarter,
county sales tax revenues were up 9.2% compared to same period in 2012.
Additionally, budget mitigation has yielded expenditure reductions and some new sources of
recurring revenues. The most significant measure was the amortization of $60.7 million of the 2013
pension payment, which provides relief this year but increases costs in later years. Other sizeable
measures that Fitch considers to be more structural in nature included: (1) a property tax increase
in the police district that provided additional revenue of $12.4 million; (2) $20 million in annual
savings from the embargo of county department funds as a result of the declaration of a second
fiscal emergency in 2013; and (3) a decrease of approximately 1,000 employees since January 2012
with projected annualized savings of $53.3 million in 2013. Strict position control is in place with
open positions requiring authorization from the county executive.
Fitch views this progress positively, but believes financial operations will remain challenged as the
county struggles to achieve ongoing budgetary balance and rebuild reserve levels.
2014 BUDGET INCLUDES USE OF RESERVES

The $3.4 billion (total operating expenditures and other financing uses) adopted 2014 budget
represents a 3.1% decrease in spending from the 2013 budget. Sales tax revenue growth in 2014 of
3% over estimated 2013 sales tax revenues appears reasonable as economic improvement is
expected to continue.
The cumulative deficit at the start of the 2014 budget process was $180 million, down from $250
million in 2013 due to better than expected sales tax growth and reduced payroll expenses. Major
budget initiatives that address the deficit and balance the 2014 budget include recurring revenues
and savings, and a lesser reliance on non-recurring revenue items. As in 2013, the largest measure
is the amortization of $87 million of the 2014 pension payment. On a recurring basis and for the
second year in a row, the budget includes a police district property tax increase which will generate
$11.3 million in revenue.
The transition of the remaining county health centers to federally qualified centers should produce
savings of approximately $3 million. Additionally, the county expects to continue to realize savings
from the 2012 and 2013 staff reductions and strict control over positions and overtime costs. Not
guaranteed, but included in the budget, is anticipated revenue of $3.2 million from the sale of the
nursing home property.
The budget does not contemplate the use of funds from the tax stabilization reserve fund. However,
the budget includes the transfer of $32.8 million from the sewer assessment stabilization reserve
fund to cover a spike in 2014 debt service payments. The county executive's recommended budget
had included debt restructuring through the Dormitory Authority of the State of New York which
would have required special state legislation and pushed debt service payments to future years. The
use of reserve funds, while not ideal, provides the county with flexibility, a lower cost of funding,
does not require state approval, and does not increase costs in later years.
RELIANCE ON SHORT-TERM CASH FLOW BORROWING
Fitch views as a credit negative the county's increased reliance on capital market access for liquidity
needs to relieve cash flow pressures.
The county has historically issued annual cash flow notes in anticipation of receipt of delinquent and
current property taxes (DTANs and TANs, respectively). However, due to limited financial flexibility
and a narrowing cash position, the amount of the borrowings has increased over the last few years
and since last year the county has issued RANs.
The county issued $600 million in cash flow notes in 2012 compared to $520 million in 2011. Cash
flow borrowing in 2013 will be $625 million, or a high 19.2% of 2013 budgetary expenses. For 2014,
the county is estimating $595 million in cash flow borrowing. Fitch expects the county's reliance on
cash flow borrowings at similar levels will continue for the next several years.
NARROW CASH FLOW COVERAGE FOR NOTE REPAYMENT
Cash flow provides narrow coverage of 1.16x on the notes at maturity. With consideration of
borrowable balances, coverage improves to a still thin 1.29x. Fitch believes the county's cash flow
projections are reasonable; actual coverage for 2013 repayments was better than projected (1.23x
vs. projection of 1.16x).
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 2012 was 131% of the nation) and high per capita
market value ($176,000). The county's unemployment rate remains lower than the rates for New
York State and the nation. In August 2013, the county's unemployment rate was 6.4% compared to
7.5% and 7.3% for the state and nation, respectively. The August 2013 rate is lower than the rate
recorded a year prior, as strong growth in employment (2.8%) outpaced labor force expansion
(1.3%).
MANAGEABLE LONG-TERM LIABILIITES
The county's debt ratios at $3,986 per capita and 2.3% of market value are moderate, with the latter
reflecting the wealthy tax base. Debt service represents a modest 5.0% of total government fund
spending.
Debt ratios should remain stable given manageable capital needs and above-average amortization
with 66% retired in ten years. The county usually issues debt on a semi-annual basis to finance its
ongoing capital program. The county plans on issuing approximately $65 million of general
obligation bonds during the spring of 2014 for various general capital purposes. The 2014-2016
capital program totals $681.7 million, a $166 million increase from the $515.2 million adopted 2013
- 2015 plan. The plan includes approximately $152 million of projects which may be eligible for
reimbursement by FEMA or other Federal Disaster Funds.
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 (4.4%) 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 $4.6 billion as of Dec. 31, 2012 or 1.8% of market value.
Carrying costs for debt service, pension and OPEB equaled a fairly low 12.7% of 2012 total
government 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-Shiller Index, IHS Global Insight, 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=811252
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