Fitch Assigns 'AA+' to $951MM DASNY Sales Tax Revs; Outlook Stable
--$951.2 million in state sales tax revenue bonds, series 2015B.
The bonds will be offered via competitive sale on Oct. 13, 2015.
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 on or before 2025.
KEY RATING DRIVERS
STRONG STRUCTURE ELIMINATES RISK OF NON-APPROPRIATION: 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 effectively eliminates the risk of non-appropriation.
BROAD DEDICATED REVENUE SOURCE: The designated source of payment is broad-based and provides generous coverage of debt service. Although revenues dropped in the last recession, the sales tax has been a relatively stable revenue source over time and recent results reflect the state's steady growth in the current expansion. Fitch also notes that although the sales tax is the intended source of funds for debt service, there is access to general fund resources in the extremely unlikely event that sales tax revenues are inadequate.
GENERAL CREDIT QUALITY OF NEW YORK STATE: Due to the strengths noted above, the rating on the sales tax bonds is equal to that assigned to New York's general obligation (GO) debt by Fitch.
The rating on the bonds is sensitive to changes in New York State's GO rating, to which it is linked, as well as expected solid coverage 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 using the program to fund 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 $3.5 billion in outstanding state sales tax revenue bonds. As of the state's last enacted budget, there were about $29.8 billion in personal income tax (PIT) revenue bonds and $3 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 director of the budget. Sales tax bonds can be issued by any of three state agencies, including DASNY, the Empire State Development 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 New York State's 4% sales tax, net of refunds.
New York also had $2.3 billion in separately-secured sales tax-backed bonds outstanding through LGAC as of the enacted fiscal 2016 budget. LGAC bonds are backed 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 to support 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 appropriation is not made, the funds (about $3.16 billion in fiscal year 2016) are unavailable for general fund purposes, except if needed for GO debt. Fitch believes this mechanism effectively eliminates the risk of non-appropriation.
The sales tax is the state's second largest source of tax receipts, representing about 18% of state tax revenues. It has been imposed since 1965. The base of the sales tax 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.
The sales tax has been a relatively stable revenue source over time. Receipts having been growing steadily in recent years following two years of tax base declines in fiscal years 2009 and 2010.
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. 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.
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. Actual fiscal 2015 revenues provided coverage of forecast MADS, in fiscal 2016, at 5.5x following this issuance. Assuming issuances of approximately $1.3 billion annually over the next four years under the state's current forecast, MADS coverage would fall to 4.2x by fiscal 2019, the end of the state's financial plan period.
NEW YORK STATE'S 'AA+' GENERAL OBLIGATION CREDIT QUALITY
New York's 'AA+' GO rating is based on the state's substantial wealth and resources and broad economy. The rating also recognizes the outsized role that the financial activities sector plays in the state's economy and revenue system. State net tax-supported debt levels have been relatively stable as a percentage of personal income. Fitch expects the state's debt levels to remain above average but still in the moderate range. Pensions are well funded, and the combined burden of debt and pensions is below average for U.S. states rated by Fitch.