Fitch Affirms New York State's 'AA+' IDR and Related Bond Ratings; Outlook Stable
In addition, Fitch has affirmed the 'AA+' rating on the state's general obligation (GO) bonds, and the ratings on other bonds that are linked to the state's IDR, as detailed at the end of this release.
The Rating Outlook is Stable.
The GO bonds are backed by the full faith and credit of the State of New York.
KEY RATING DRIVERS
New York State's 'AA+' IDR reflects its considerable economic resources, solid economic performance and prospects, strong ability to control the budget, and responsive budget management. The state is in a materially improved position to address future economic and revenue cyclicality relative to past experience, in Fitch's view, due to budget management improvements. Liabilities and related carrying costs are above the median for states but remain a manageable burden on resources.
Economic Resource Base
The state's economic resource base is broad although dominated by service sectors. Financial activities are a particularly large and important component of overall economic and fiscal performance, although prone to above-average cyclicality. Economic growth is concentrated in the downstate region, home of the nation's largest metropolitan area. Wealth indices are well above average and employment growth has been steady coming out of the recession.
Revenue Framework: 'aaa' factor assessment
New York State's revenue base is diverse and has strong growth prospects, driven by the state's solid economic profile. Taxes in general, and the large personal income tax (PIT) component in particular, are economically sensitive. The state has complete independent legal control over revenues.
Expenditure Framework: 'aaa' factor assessment
The natural pace of New York's spending growth, driven by education and Medicaid funding demands, is likely to be marginally above revenue growth over time, requiring ongoing budget management. The state has ample flexibility to control spending.
Long-Term Liability Burden: 'aaa' factor assessment
New York State's debt burden is just above the median for U. S. states, although net tax-supported debt has declined steadily in recent years. Pensions are well-funded, with unfunded liabilities below the median for states. Overall, liabilities are a low burden on resources.
Operating Performance: 'aa' factor assessment
Operating performance has been aided by improved budgeting practices in recent years, including caps on annual spending growth and conservative forecasting. Formal budgetary reserves are modest, with financial resilience driven by the state's willingness to adjust revenues and expenditures in response to fiscal deterioration. The state's multiyear budget planning process, updated quarterly, and consensus revenue forecasting enable it to stay abreast of changing fiscal circumstances.
CONTINUED CAREFUL BUDGET MANAGEMENT: The 'AA+' IDR assumes the state remains committed to strengthened budget management practices. Ongoing proactive financial management is critical to the state's credit quality given its limited formal reserve funding position.
New York's economy is characterized by considerable breadth and strong wealth levels. Services dominate the state's economic profile, including large financial activities, education and health services, and information sectors, with economic activity centered on New York City and the surrounding region. Financial activities are important to the state's overall fiscal performance but have a history of volatility. Measured on a per capita basis, New York's personal income was 121% of the nation's in 2015, ranking it fourth among the states.
In contrast to previous downturns, labor market weakening in the last recession was less severe relative to that of the nation. State employment experienced only one year of decline, 2.7% in 2009, compared to a 5.6% drop for the U. S. between 2007 and 2010. Employment growth in the recovery has been very steady and the state surpassed its pre-recession employment peak in Sept. 2012. The unemployment rate, in contrast to past experience, has trended higher than the nation's during the recovery, although as of July 2016 it measured 4.7%, below the 4.9% national rate.
Revenues to support state operating funds, which encompass general fund and other state-funded activity except capital spending, derive primarily from taxes on personal income, sales and corporate activities. PIT receipts are especially important, as they account for about 49% of state operating fund revenues as of fiscal 2016, while sales tax revenues are 14% and corporate levies are 8% of revenues. The PIT is levied through a progressive rate structure, including a temporary top rate expiring at the end of 2017. Tax revenues in general are economically sensitive, with PIT receipts tied to volatile capital gains exhibiting historical cyclicality.
New York's solid economic profile and strong performance are the basis for revenue growth that is likely to equal or exceed the pace of national economic performance over time. Tax revenues, adjusted for the estimated impact of tax policy changes, grew at a pace that exceeded national GDP growth over the 10-year period ending in 2014. Fitch expects this trend to continue.
Like most states, New York has the independent legal ability to raise operating revenues without any external approval required.
New York's expenditure profile is broad, driven by an expansive scope of services. Medicaid and education, including local education support and higher education, are the largest spending commitments, drawing about half of total state operating funds. Rising Medicaid needs include those emerging from the state's assumption of local Medicaid growth that was previously the obligation of county governments. Education is also a significant growth driver.
As with most states, spending in the absence of policy actions is expected to be in line with to marginally above expected revenue growth, driven by social services, particularly Medicaid, as well as by education. The state has substantial flexibility to cut spending as needed, with the broad expense-cutting authority common to most U. S. states. Fixed carrying costs for debt and retiree benefits are above average for a state, but represent a low burden on resources.
New York has implemented broad curbs on spending growth since fiscal 2012, including a 2% state operating funds expenditure growth benchmark and a Medicaid growth global cap linked to historical medical CPI trends. For Medicaid, targets have proved achievable and the administration has been granted powers that strengthen the state's ability to remain on budget; however, future growth targets may be more challenging to meet, given that the forecast cap gradually falls to lower levels going forward compared to the recent past, from 3.4% in FY 2017 to 2.8% by FY 2020, the end of the state's multiyear planning period. A separate school aid growth cap tied to statewide personal income gains has been less successful at restraining growth but remains the state's policy benchmark.
Long-Term Liability Burden
Based on Fitch's most recent state pension report, the burden of net tax-supported debt and adjusted unfunded pension obligations attributable to the state measures 6% of personal income, slightly above the 5.8% U. S. state median. This is a low burden on resources.
New York's net tax-supported debt totals 4.6% of personal income as of March 31, 2016, above the median for U. S. states rated by Fitch, although the state's debt burden has trended steadily lower during the current decade. Most of New York's debt has been issued by state public authorities and secured by annual state appropriations; only about 5% are GOs. There is strong centralization and oversight within the Division of the Budget and approval by the Public Authorities Control Board is required for many of these bond issues.
Funding of two major statewide pension systems, covering general and police and fire employees, has benefitted from historically strong contribution practices. An optional contribution deferral mechanism, authorized in 2010 and used by the state several times since, temporarily lowered the state's contributions in return for required higher future contributions as deferrals are repaid. Reported ratios of fiduciary assets to total pension liabilities as of the systems' March 31, 2016 financial statements are sound, at 90.7% for the employees' system and 90.2% for the uniformed employees' system, lower than the previous year in part due to lower investment income and a shift to a relatively conservative 7% return assumption, from 7.5%.
Historically, New York's budget performance was challenged by persistent structural pressures and recession-driven revenue cyclicality, including from the capital gains component of the PIT. These factors frequently led the state to rely on one-time measures to achieve balance. In the most recent downturn and recovery the state has made significant improvements in budget management, materially increasing its financial resilience vis-a-vis future economic and revenue cyclicality, in Fitch's view. Recent improvements include more conservative consensus revenue forecasting, targeted formulas to restrain state operating fund and Medicaid spending growth, on-time budget enactment, and avoiding overreliance on one-time resources.
The state has generally not prioritized building budgetary reserves to absorb revenue-related cyclicality. At present the state has a combined $1.8 billion tax stabilization fund and rainy day reserve fund, equal to a modest 2.5% of state operating fund tax revenues.
The state's general fund ending balance has expanded materially in recent years, given the receipt of approximately $8.7 billion in monetary settlements with financial institutions since fiscal 2015. The state intends to apply these windfalls to one-time needs, notably capital spending, with resources expected to be disbursed over multiple years. In the meantime, these resources have temporarily augmented state liquidity.
Dedicated Tax Bonds
The state has a variety of bonds that are supported by specific tax revenues, subject to appropriation. These are: sales tax revenue bonds, PIT revenue bonds, sales tax-supported bonds issued by the New York Local Government Assistance Corporation (LGAC), New York City Sales Tax Asset Receivable (STAR) Corporation bonds, and Thruway Authority dedicated highway and bridge trust fund bonds. Although the ratings are capped by the state's IDR due to the appropriation requirement, Fitch considers the credits under our dedicated tax bond rating framework to evaluate the strength of the underlying revenue streams. For each of these credits, pledged revenues have strong growth prospects and provide ample coverage of MADS, including under a model-generated downturn scenario tied to a 1% recessionary GDP decline, as well as based on the largest consecutive historical revenue decline.
Although payment of debt service requires legislative appropriation, the bonds are rated on par with the state's IDR, rather than one notch below as is more common for appropriation-backed debt, because Fitch judges the incentive for appropriation to be significantly enhanced. In the absence of an appropriation, significant receipts (PIT receipts for the PIT revenue bonds and sales taxes for sales tax revenue, LGAC, STAR and highway and bridge trust fund bonds) would be unavailable for general fund purposes (except for GO debt, if necessary). This mechanism, in Fitch's view, enhances the legislature's incentive to appropriate and warrants a rating on par with the state's 'AA+' IDR. Fitch notes that, for the PIT and sales tax revenue bonds, in the event that pledged resources are insufficient, the Comptroller is required to transfer general fund resources to ensure bondholder payment.
Related Rating Actions
In conjunction with the affirmation of the state's IDR, Fitch has affirmed the ratings on the following bonds at 'AA+' with a Stable Outlook:
--State PIT revenue bonds issued by the Dormitory Authority of the State of New York (DASNY), the New York State Environmental Facilities Corporation (EFC), Empire State Development/New York State Urban Development Corporation (ESD), the New York State Housing Finance Agency (HFA), and the New York State Thruway Authority;
--State sales tax revenue bonds issued by DASNY;
-- LGAC senior and subordinate lien bonds;
-- STAR Corporation bonds; and
--Thruway Authority Highway & Bridge Trust Fund bonds.
Fitch also has affirmed the ratings on various state appropriation-supported bonds, at 'AA' with a Stable Rating Outlook, one notch below the IDR:
--Service contract bonds issued by state agencies;
--DASNY Board of Cooperative Education Services (BOCES) bonds;
--DASNY City University of New York (CUNY) revenue bonds;
--DASNY Department of Health revenue bonds;
--DASNY Fashion Institute of Technology bonds;
--DASNY mental health services facilities improvement revenue bonds;
--DASNY secured hospitals program revenue bonds;
--New York City Transitional Finance Authority state building aid revenue bonds;
--State of New York Municipal Bond Bank Agency (MBBA) special school purpose revenue bonds (prior year claims);
--MBBA special school purpose revenue bonds (prior year claims - The City of New York), 2012 series A; and
--Tobacco Settlement Financing Corporation (state contingency contract secured) asset backed revenue bonds.
Finally, Fitch has affirmed the rating on the DASNY school districts revenue bond financing program revenue bonds at 'AA-'/Stable Outlook, two notches below the IDR.
The ratings on all of the related debt listed above are directly linked to the state's IDR.