Fitch Rates Westchester County (NY)'s $25 million DASNY Lease Revenue Bonds 'AA+'; Outlook Stable
--$25 million Dormitory Authority of the State of New York (DASNY) court facilities lease revenue bonds, (The County of Westchester), series 2016.
The lease revenues bonds are expected to sell via negotiation on Oct. 5, 2016 and are being issued to refund the DASNY court facilities lease revenue bonds, series 2006A & series 2006B for budgetary savings.
The Rating Outlook is Stable.
The DASNY lease revenue bonds are special obligations of the authority, payable from basic rent payments by the county under a lease agreement. The payments are subject to annual appropriation and further secured by a state aid intercept mechanism. There is no debt service reserve requirement.
KEY RATING DRIVERS
Analytical Conclusion: The 'AA+' rating on the lease revenue bonds is one notch below the county's Issuer Default Rating (IDR), reflecting the appropriation-based security. The county's 'AAA' IDR rating is based on the county's stable general fund reserves, strong flexibility to close budget gaps, and low long-term liability burden.
Economic Resource Base
Westchester County is located immediately north of New York City. Its wealthy tax base benefits from the strong regional economy and resident income levels rank well above state and national averages. The county's unemployment rates have historically trended below state and national averages.
Revenue Framework: 'aaa' factor assessment
The county's independent legal ability to raise property tax and fee revenues is considerable. The county legislature can override the tax levy cap with a 60% majority and increase fines and fees at will. Fitch expects revenue growth, which has exceeded the rate of inflation, to remain relatively stable based on current trends in the local economy.
Expenditure Framework: 'aa' factor assessment
Expenditure growth should remain in line with the state's contribution to mandated social service costs and expected spending on the county's work force. The county has solid expenditure flexibility and carrying costs for pension, debt and other post-employment benefits (OPEB) are moderate.
Long-Term Liability Burden: 'aaa' factor assessment
Long-term debt and pension liabilities are low compared to the county's resource base. The county's future borrowing plans are modest and the pension plans are well funded.
Operating Performance: 'aaa' factor assessment
Exceptionally strong gap closing ability is afforded by the county's highly stable reserves, which in combination with its budgetary flexibility provide a satisfactory cushion relative to expected revenue volatility. The county maintained stable general fund reserves throughout the recession and recovery, primarily through expenditure control.
Reserve Maintenance: The rating is sensitive to the maintenance of reserves sufficient to offset expected levels of revenue volatility in an economic downturn.
The county has a diverse tax base that combines wealthy residential areas, several major retail developments, and numerous corporate headquarters, including IBM and Pepsi. Recent growth in biotech, health care and additions to the county's extensive retail base are adding to the economic profile. Assessed valuations increased significantly from 2014 through 2016 after declines from 2008 through 2013.
The county has significant legal ability to raise local revenues. Fitch expects natural revenue growth which has historically been strong to moderate slightly given current sales tax trends. Property taxes are the largest source of revenue at 31%, followed by sales taxes at 28%, and intergovernmental revenues at 24%.
Fitch believes that growth prospects for revenue are solid based on the strong growth trends in the local economy. Revenue growth for the county exceeded the level of inflation over the past decade.
Sales tax collections grew steadily from 2010 through 2014, reflecting economic recovery. Sales taxes dipped in 2015 by.5% and the county projects growth of 1% for 2016 based on year to date trends. The recent sluggish sales tax collections are largely attributable to low gas and energy prices.
The county legislature's ability to override both the county Executive Budget and the state tax cap provides substantial legal capacity to raise revenues. The county enacted formal legislation, Act 169-2010 which sets the property tax levy each year to $548 million, although the county legislature may amend this policy during the annual budget process with a super-majority vote. New York State law requires property tax revenue increases to be limited to the lesser of CPI or 2% annually, unless a supermajority of the local governing body votes for a larger increase.
Additionally, the county has the ability to implement departmental revenues, fees and other local taxes. Recently, the county has seen increases in the mortgage recording, auto use, and hotel occupancy taxes.
Expenditure growth is expected to remain more or less aligned with revenue growth based on current growth trends and the state's role in supporting funding for mandated county services. Typical of most New York counties, the majority of the county's expenditures include public safety, social services, transportation, and health services. Approximately one third of the county's annual expenditures are for social services and economic assistance. Fitch expect growth in these costs to moderate due to the state cap on Medicaid cost increases and other initiatives including enhanced federal medical assistance reimbursements which provide some relief from mandated services.
Salaries and benefits account for over one third of the general fund budget and most employees are unionized. If a contract expires, New York law requires that the provisions in the prior labor contract be enforced and not altered until a new contract is ratified. All contracts are currently expired and the prior contracts included modest salary increases. The majority of the contracts expired in December 2015, except the Civil Service Employees Association (CSEA) which represents 2,888 or approximately two-thirds of the county's employees, expired in Dec. 31, 2011. Currently, the county and the CSEA have reached a preliminary labor agreement. Only public safety contracts are subject to binding arbitration; these account for 25% of the county's total 4,562 employees. The pace of spending growth for personal services is likely to remain in line with expected revenue growth, given anticipated expenditure reductions associated with employee salaries and benefits as the county recognizes savings from the separation incentive offered in 2015.
Expenditure flexibility is solid. Carrying costs for debt service, pension and other post-employment benefit (OPEB) costs are moderate, accounting for 12.1% of general fund expenditures in fiscal 2015. Pension costs have remained relatively stable, despite the county's practice of amortizing a portion of its annual pension payment increase each year since 2012. Each year's deferral must be amortized over 10 years.
Management's ability to adjust the size of the workforce during economic downturns is strong, but management can only adjust wages and benefits through contract negotiations. In the absence of current labor contracts, the county manages labor costs through vacancies, attrition and the utilization of separation incentives which were offered in 2010 and 2015.
Long-Term Liability Burden
The county's long term liability burden is low in relation to its wealthy tax base, with unfunded pensions and overall debt accounting for 5.1% of personal income or 2.7% of market value. The county's future borrowing plans are modest as forecast in the charter-mandated five-year capital planning process. Amortization of direct debt is rapid with 66% of principal scheduled to be retired within 10 years.
The county contributes to the state's well-funded defined benefit retirement systems. The county elected to amortize the maximum allowable annual pension contribution from fiscal 2013 through 2016 under the state pension stabilization program. The pension plans are well funded and all amortized payments must be retired within ten years. The ratio of combined pension assets to liabilities is reported as 98%. When adjusted by Fitch to a 7% discount rate it is 93% as of March 31, 2015. The unfunded actuarial accrued liability for other post-employment benefits (OPEB) is $1.9 billion, or 2.8% of personal income.
The county has strong financial resilience based on Fitch's belief that the county would use a combination of its solid revenue and expenditure flexibility and general fund reserves to offset the potential impact of a moderate recessionary revenue decline. The county has maintained available general fund reserves of about 8% of general fund expenditures since 2009.
The county maintained remarkably stable reserves throughout the most recent economic downturn and recovery despite a self-imposed limit on the property tax levy since 2012. The fiscal 2015 budget aggressively forecast a 5% increase in sales tax revenue. Due to low gas and energy prices, total collections were $22 million (4%) below budget. The county minimized the effects of the shortfall by holding positions vacant and implementing a separation incentive as well as other expenditure reductions which resulted in a nominal draw on general fund balance.
The county anticipates additional salary and benefit savings in 2016 as it recognizes the savings from the separation incentive implemented in 2015. Again in 2016, the budget assumed an aggressive 5.1% increase in sales tax revenues. The projection has been adjusted downward to 3% to reflect year-to-date collections that are $11 million below budget. The county anticipates closing the budget gap with $15 million in unbudgeted one-time revenues from the sale of a county property and a reduction in expenditures. Overall expenditures are currently tracking below budgeted estimates. Fitch believes that the county has satisfactory budgetary flexibility to ensure stable financial operations and the maintenance of sound financial reserves through its demonstrated willingness to manage expenditures.
The county annually issues tax anticipation notes (TANs) to provide cash flow prior to the property taxes being collected. In February 2016 the county issued $105 million in TANs which were paid off in May, once property taxes were collected. The county's audited year end cash levels improved slightly in 2015 but have remained relatively narrow.