Fitch Rates DASNY's $1.1B Sales Tax Revs 'AA+'; Outlook Stable
--Approximately $1.1 billion in state sales tax revenue bonds, series 2016A.
The bonds will be offered via competitive sale on Sept. 22, 2016.
The Rating Outlook is Stable.
DASNY state sales tax revenue bonds are secured by financing agreement payments to be made by the State of New York, subject to legislative appropriation. Payments are derived from the yield of one cent of the four-cent statewide sales tax, net of refunds, rising to two cents after Local Government Assistance Corporation (LGAC) bonds are fully retired, expected in 2025.
KEY RATING DRIVERS
STRUCTURE ENHANCES INCENTIVE TO APPROPRIATE: Bond payments require annual state legislative appropriation. However, in the event of non-appropriation the state would be unable to receive sales tax revenue deposited in the sales tax revenue bond tax fund, which is expected to total $3.2 billion in the current fiscal year. Fitch believes that this structural feature enhances the incentive to appropriate, warranting a rating on par with New York State's 'AA+' Issuer Default Rating (IDR).
STRONG GROWTH PROSPECTS: Dedicated sales taxes intended for bond repayment are broad-based, reflecting the strength of New York State's economy, and provide generous coverage of debt service. Sales tax revenues are economically sensitive and fell in the last recession, but sales taxes generally have been resilient, and Fitch views growth prospects to be solid going forward.
STATE GENERAL FUND AVAILABLE: Sales taxes are the intended source of repayment; however, in the extremely unlikely event that sales tax revenues are inadequate, the State Comptroller is required to transfer funds from the general fund, without requiring an appropriation, to cover the deficiency.
STATE CREDIT QUALITY: The rating is sensitive to changes in New York State's IDR, to which it is linked, as well as expected solid coverage of debt service to be provided by sales tax revenues.
New York State first established the state sales tax revenue bond financing program in 2013, with the goal of funding broad state capital spending needs, much like the long-established personal income tax (PIT) revenue bonds and the less frequently used state GO bonds. At present there are about $4.3 billion in outstanding state sales tax revenue bonds. As of the state's last enacted budget, for fiscal 2017, there were also about $31.3 billion in PIT revenue bonds and $2.7 billion in GO bonds outstanding.
The state sales tax revenue bonds are special obligations of the issuing authority, secured by payments to be made by the state pursuant to a financing agreement between the issuer and the state acting through the director of the budget. Sales tax bonds can be issued by any of three state agencies, including DASNY, the Empire State Development Corporation and the New York State Thruway Authority. Payments to bondholders are made from amounts statutorily required to be deposited into the sales tax revenue bond tax fund, currently amounting to 1% of the statewide 4% sales tax, net of refunds.
New York also had $2.1 billion in separately-secured sales tax-backed bonds outstanding through LGAC as of the enacted fiscal 2017 budget. LGAC bonds are supported by a separate one cent of the state's sales tax, which is required by statute to be deposited in the local government assistance tax fund, subject to appropriation. No additional LGAC authorization remains, and the bonds' final maturity is in 2025, after which the state sales tax revenue bonds will be secured by 2% of the state's 4% sales tax, doubling the resources available for debt service.
The sales tax revenue bond tax fund is held separate and apart from all other moneys of the state in the joint custody of the Commissioner of Taxation and Finance and the Comptroller of the State. Debt service is funded monthly on a 1/5, 1/11 basis, and amounts not required for debt service flow to the state's general fund at least monthly.
Use of sales tax revenue bond tax fund receipts requires annual legislative appropriation, but if an appropriation is not made, the receipts (about $3.2 billion estimated in fiscal year 2017) are unavailable for general fund purposes, except if needed for GO debt service. Fitch believes this mechanism enhances the legislature's incentive to appropriate debt service, warranting a rating on par with the state's 'AA+' IDR.
The sales tax is the state's second largest source of tax receipts, representing about 18% of state tax revenues in fiscal 2016. It has been imposed since 1965. The base is amended regularly, although the rate has been changed only four times. The current rate of 4% has been in place since 1971 except for a 0.25% temporary increase to 4.25% from June 2003 to 2005.
For additional parity bonds to be issued, historical sales tax revenue bond tax fund receipts must cover future maximum annual debt service (MADS) on all state sales tax revenue bonds by at least 2x. The state has stated its intent to manage to higher coverage levels.
Although sales taxes are economically sensitive, receipts have generally been resilient over time, providing generous coverage of debt service. Under Fitch's Tax-Supported Rating Criteria, published in April 2016, in considering dedicated tax securities, Fitch assessed the drivers and growth prospects for pledged revenues as well as their resilience through economic cycles. Although receipts declined 6.8% in aggregate between fiscal years 2008 and 2010, growth has been solid since then, reflecting broad gains in the state's economy, and Fitch believes future growth prospects are strong.
Actual fiscal 2016 revenues provide ample coverage of forecast MADS, in fiscal 2021, at 5.3x following this issuance. Assuming issuances of about $1.3 billion annually over the next four years under the state's current forecast, MADS coverage would fall to a still high 3.9x by fiscal 2020, the end of the state's financial plan period.
Although the sales tax is the intended source of funds for debt service, the state comptroller is required to transfer monies from the general fund without the need for further appropriation in the extremely unlikely event that sales tax revenues were to be inadequate for debt service, further strengthening the security. Conversely, GO bondholders have access to the sales tax fund monies in the similarly unlikely event that they were to be needed for that purpose. The state retains the ability to amend, modify, or repeal the sales tax.
NEW YORK STATE CREDIT QUALITY
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.