ny local governments

7/27/2019 NY Local Governments

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Table of Contents:

SUMMARY OPINION 1DESPITE RECENT DOWNGRADES, MOSTRATINGS REMAIN STABLE 2CREDIT DRIVER #1: SLOW ECONOMICGROWTH ACROSS THE STATE,CHALLENGES VARY BY REGION 3UPSTATE REGION EXPERIENCES LONG-TERM ECONOMIC TRANSFORMATION 3DOWNSTATE SUFFERS REAL ESTATEMARKET DECLINES, TAX APPEALS;WEALTH AND INCOME LEVELS REMAINHIGH 4CREDIT DRIVER #2: LIMITED REVENUEGROWTH DUE TO STATEWIDEPROPERTY TAX CAP AND WEAKNESS ORVOLATILITY IN OTHER SOURCES 5CREDIT DRIVER #3: DIFFICULTYMANAGING RISING PERSONNEL COSTS 7CREDIT DRIVER #4: STRONGMANAGEMENT PRACTICES GENERALLYRESULTING IN SUFFICIENT RESERVELEVELS AND FAVORABLE DEBT PROFILES 9CREDIT DRIVER #5: STATE OVERSIGHTTHAT HELPS STABILIZE OR IMPROVEFINANCIAL OPERATIONS 11Analyst Contacts:

NEW YORK +1.212.553.1653

Robert Weber +1.212.553.7280Assistant Vice President - Analyst

[email protected]

Geordie Thompson +1.212.553.0321

Vice President - Senior Credit Officer

[email protected]

contacts continued on the last page

SPECIAL COMMENT

U.S. PUBLIC FINAOCTOBER 21, 2013

Key Credit Drivers of New York LocalGovernmentsStrong Local Fiscal Management and State Oversight Help Mitigate Sluggish Economy, Tax Cap,and Rising Fixed Costs

Summary Opinion

Five key factors drive our assessment of New York local government credit. Three of thesedrivers put downward pressure on credit quality, but they are mitigated by two fundamentalstrengths. We expect the vast majority of New York local government ratings to remainresilient, although downgrades are likely to continue to outpace upgrades.

The key pressures facing New York local governments1 are:

Relatively slow economic growth across the state, although specific weak points vary byregion;

Limited revenue growth due to the statewide property tax cap and weakness or volatilityin other revenue sources; and

Difficulty managing labor costs including pensions and other post retirement benefitsHowever, two fundamental strengths enable most of them to manage the challenging credit

environment effectively:

Strong management practices, generally resulting in sufficient reserves and favorabledebt profiles; and

State oversight that helps stabilize and improve financial operations for the most stressedgovernments

1 We do not address New York City (Aa2 stable) itself in this report due to its size and unique characteristics.
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2 OCTOBER 21, 2013 SPECIAL COMMENT: KEY CREDIT DRIVERS FOR NEW YORK LOCAL GOVERNMENTS

Despite Recent Downgrades, Most Ratings Remain Stable

We maintain underlying ratings on over 1,000 local governments in New York. The distribution ofthe ratings is skewed slightly lower than for the nation as a whole (Exhibit 1). The vast majority ofNew York local government ratings apply to debt secured by a general obligation pledge. Unless

otherwise noted, all references to ratings in this report apply to GO debt.

EXHIBIT 1

New York Rating Distribution Slightly Lower Than Nation

Source: Moodys Investors Service

New York local governments have felt the effects of the recession and weak recovery, as evidenced bydowngrades outpacing upgrades since the beginning of 2010 (Exhibit 2). Still, the vast majority ofratings have not changed over this time frame.

EXHIBIT 2

New York Downgrades Outpace Upgrades Since 2010


Eight New York local governments have experienced downgrades of three notches or more since 2008,but the number of such downgrades remains well below that of several states including Michigan,California, and Minnesota (Exhibit 3). The main driver of these multi-notch downgrades was theinability or unwillingness of management to make budgetary adjustments in a challenging operatingenvironment.

0%

5%

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20%

25%

30%

35%

Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Speculative

Grade

NY National

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30

40

50

60

70

2008 2009 2010 2011 2012 2013 H1

Upgrades Downgrades


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EXHIBIT 3

Multi-Notch Downgrades 2008-2013 Q2

State Number of Downgrades

CA* 104

MI 27

MN 11

IL 10

AL 9

PA 9

NY 8

*California is overrepresented due to a change in law which caused all rated tax allocation bonds in California to be downgraded to below

investment grade.


Credit Driver #1: Slow Economic Growth Across the State, Challenges Vary by

RegionThe pace of economic recovery in New York has been uneven, with each region experiencing its ownset of economic drivers. For the purpose of generalizing economic trends, we split New York into twodistinct regions: Downstate (the area around New York City and much of the Hudson Valley) andUpstate (the balance of the state).

Upstate Region Experiences Long-term Economic Transformation

Upstate New York has a long history of decline in industry and population, and relatively weak wealthand income indices, particularly in the major cities (Exhibits 4 and 5). The area suffered during theGreat Recession, but upstate tax base valuations have remained relatively stable because the region did

not experience significant real estate value increases during the boom. Economic activity has started topick up in some metropolitan areas, including Albany (A1 stable) and Rochester (Aa3 stable). In thesecities, as well as in Buffalo (A1 stable), a strong higher education presence has brought stability to theeconomy. Rochester has long benefited from the presence of two major universities and, for manyyears, maintained a relatively stable manufacturing presence anchored by the Eastman KodakCompany and the Xerox Corporation (Baa2 stable). Although Kodak has significantly downsized overthe years, and filed for bankruptcy in early 2012, the company has spun off many high-tech firms inthe area that have contributed to the local economy.

EXHIBIT 4

Long-term Change in Rank Among Top U.S. Cities by Population

Rank 1920 1930 1940 2010New York 1 1 1 1

Buffalo 11 13 14 72

Rochester 23 22 23 100

Syracuse 37 40 41 170

Source: U.S. Census Bureau


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EXHIBIT 5

Upstate New York Cities Maintain Weak Demographics

CityPer Capita Income

(% of U.S. median)

Median FamilyIncome

(% of U.S. Median)Median Home Value

(% of U.S. median)Poverty Rate

(2000)Unemployment

(July2013)

Buffalo 69.4 61.2 35.5 26.6 10.2Syracuse 70.3 66 45.1 27.3 8.9

Utica 70.6 67.6 46.3 24.5 8.9

Schenectady 79.1 72.8 62.5 20.8 8.4

Troy 77.8 77.2 77.9 19.1 9.2

Source: Census Bureau

Despite the long-term declines in many of the major upstate cities, the surrounding communities havefared reasonably well. For example, the population of Monroe County (Baa1 negative) has increasedeven though the city of Rochesters population has declined.

The Southern Tier of New York is on the Marcellus Shale, which has large natural gas reserves thathave attracted energy companies to the region. New York has a moratorium on natural gas extraction,but cities like Elmira (A2 negative) have benefitted economically from drilling in borderingPennsylvania (Aa2 stable). However, drilling activity has declined recently because of lower natural gasprices, so its not clear how long the economic activity around natural gas exploration will last.

Downstate Suffers Real Estate Market Declines, Tax Appeals; Wealth and IncomeLevels Remain High

New York City is the economic engine of the downstate region. The city is highly dependent onemployment in the financial services sector, which has tended to be volatile. Despite the weakness inthe financial sector following the economic downturn, the city has recovered all of the private sector

jobs lost during the downturn. The service sector has grown and so has the construction industry ashomes and businesses are repaired following Hurricane Sandy.

Despite the citys relatively strong recovery, portions of the metro area continue to experience thetrend of declining property values that began at the onset of the economic downturn (Exhibit 6).Homeowners and businesses in the downstate counties are among the highest-taxed in the country,and tax appeals by residential and commercial taxpayers have pressured some municipalities.

Much of the wealth generated in New York City is reflected in suburban communities in the Countiesof Westchester (Aaa negative), Nassau (A2 stable), and Suffolk (A2 negative). That socioeconomicstrength, as well as strong commercial activity, has buoyed the credit quality of downstate localgovernments, as a high-income, wealthy populace typically has supported property tax increases tosustain a high level of governmental services. This also helps explain why many of the downstatepopulations have among the highest tax burdens in the country, a potential hurdle to maintaininglocal government budgetary balance in a weakened economy.


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EXHIBIT 6

Downstate Tax Base More Volatile than Upstate


Credit Driver #2: Limited Revenue Growth Due to Statewide Property Tax Capand Weakness or Volatility in Other Sources

New York local governments face revenue constraints because of the statewide property tax cap andreliance on economically volatile revenues. The cap, which went into effect on January 1, 2012, limitsannual tax levy growth to the lower of 2% or the rate of inflation, subject to certain adjustments. TheNew York State comptroller recently announced that the levy growth cap for municipalities with fiscalyears beginning January 1, 2014 will be 1.66% and for those that begin March 1, 2014, the limit willbe 1.7%. Local governments whose fiscal years begin later in 2014 could face growth limits that aremore constrained. While the law curbs increases in the revenue source over which local governmentshave the greatest control, it also has provisions that allow local governments to exceed the limit.Counties and cities can override the cap with a 60% vote of the legislative body. Approximately 32%

of counties and 30% of cities voted for overrides in fiscal 2013, significantly more than in fiscal 2012,the first year of the cap. Despite an exemption for debt service, school district operations are moreconstrained by the cap because their budgets are subject to a public vote each year, and an override ofthe cap requires 60% voter approval. This has resulted in fewer overrides for school districts: for fiscal2014, 28 out of 675 (4.1%) school districts attempted to exceed the cap; only 10 of those succeeded.In fiscal 2013, 48 (7.1%) attempted an override and 29 succeeded.

Some local governments increase the levy beyond 2% or CPI (see Exhibit 7) by utilizing one or moreof the various exceptions the law allows. Growth in annual required contributions (ARCs) to the statepension plan, a notable exception to the cap, has driven the actual limit for most school districts above

2% for fiscal 2014. Given these and other exemptions, the actual limit on the levy will vary by issuerand by year.

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2006 2007 2008 2009 2010 2011 2012

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EXHIBIT 7

Tax Cap Calculation

Base Last year's tax levy

+ Inflationary Factor Lesser of CPI or 2%

+ Tax Base Growth Factor New Growth/Additions to Properties

+ Pension Factor Pension contribution growth exceeding 2%

Source: New York State Comptroller

Slow or no growth in state aid, sales tax and mortgage tax revenues continues to pressure localgovernments to either raise property tax revenues or cut expenditures. State aid for school districts isexpected to grow over the next two years, but aid to municipalities is expected to stay flat. Sales taxand mortgage tax growth remains volatile with some areas faring worse than others.

Primary revenue sources for school districts are property tax and state aid, although the breakdownbetween the two sources depends heavily on the demographics of the district. Overall, school districtsare more dependent on state aid than are the other local government sectors. The volatility in state aid

has made annual budgeting a challenge for many school districts during the economic recovery. Stateaid for many districts remains below peak levels of a few years ago.

State aid for education increased 4% in fiscal 2013 and another 4% in fiscal 2014. While fundinglevels remain below the peak of 2008, the increases have provided some financial relief for schooldistricts.

Local government dependence on sales tax revenues varies widely, from virtually none for schooldistricts to as much as 50% for counties, cities, towns and other local governments. This economicallysensitive revenue source declined annually in 2008 and 2009, but has rebounded overall in the past 3years. Border communities like Niagara County (Aa3) have experienced strong sales tax revenuegrowth as the weakened US dollar has helped increase local retail activity. Sales tax revenues have notgrown as robustly in much of the state: Dependence on this volatile revenue source will be a challengefor many.


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EXHIBIT 8

County Sales Tax Collections Remain Volatile

Source: Department of Taxation and Finance, Office of Tax Policy Analysis, Sales Tax Cash Distribution Database; additional calculations by the Office of theState Comptroller. Numbers not adjusted for tax rate or tax law changes. Does not include collections in New York City.

The counties collect and remit sales tax revenue to their respective local governments through sharingarrangements for which the counties have ultimate authority. Some counties, including Dutchess (Aa1negative) and Orleans (A1), have capped the nominal amount of sales tax they will share with theircities and towns to levels that do not allow for additional growth. In Onondaga County (Aa1 stable), anew 10-year sales tax agreement with Syracuse (A1 negative) eliminates the minimum sales tax fundinglevel and allows for the city to share in future growth of sales tax.

Hurricane Sandy exacerbated local government spending pressures and caused a disruption toeconomic activity in the Fall of 2012, temporarily depressing sales tax revenues. Data for the first sixmonths of 2013 show sales tax receipts have rebounded substantially, however, in the affected

downstate areas as rebuilding has driven robust retail activity. This is a common phenomenon ofnatural disasters of Sandys magnitude, one also illustrated the prior year when upstate countiesaffected by Hurricane Irene and Tropical Storm Lee experienced sales tax growth in 2012. Overall, thedownstate counties have experienced significant growth in sales tax revenue while receipts are flat todeclining upstate. In addition to the storm effect, this reflects the long-term strength of the downstateeconomy over the upstate economy.

Credit Driver #3: Difficulty Managing Rising Personnel Costs

Local governments in New York face constraints to limiting growth in wages and pension andhealthcare costs. Considering the volatility in sales tax revenues and cap on growth in property tax

revenues, the ability to manage rising personnel costs is a crucial determinant of credit quality in thestate.

Wages. Issuers in New York face serious hurdles to controlling wages because of the TriboroughAmendment of the States Taylor Law. Enacted in 1982, the amendment requires continued paymentof step and longevity salary increases after the expiration of a labor contract. This creates a disincentivefor collective bargaining units to settle for small or no salary increases, since the amendment upholdsthe provisions of the previous contract. Several employee contracts with Buffalo, for example, remainunsettled, including some that expired in 2004.

6.6%

1.2%

3.5%

-6.8%-6.3%-7.4%

-7.9%

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1.3%

6.2%

3.6%

7.7%

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4.1%

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4.2% 3.5% 3.3%2.3%

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2008 2009 2010 2011 2012 2013

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Pensions. Pension costs continue to grow rapidly. Almost all local government employees participatein one of three state-run multi-employer cost sharing plans: the New York Police and Fire RetirementSystem (PFRS), New York Employee Retirement System (ERS) and New York Teachers RetirementSystem (TRS). The median adjusted unfunded pension liability for New York cities, counties andschool districts is a moderate 0.76 times fiscal 2011 operating revenues. Required local government

pension contributions have grown dramatically over the past three years, largely due to weakinvestment performance during the recession. The Comptroller recently announced that pensioncontributions for all municipalities will decline for 2014, but we expect the 2015 requiredcontributions to begin increasing again. The state has provided some long-term budgetary relief tolocal governments by adding a new pension tier increasing contribution rates and the retirement agefor employees in that tier. The new tier only applies to new employees, however, so local governments

will not realize savings for many years and local governments will continue to face pressure fromgrowing pension continuations for the foreseeable future.

The state has allowed local governments to amortize a portion of their annual pension contributionsince 2010, a practice that some have chosen to undertake. The number of local governmentsparticipating in the pension amortization program has increased over the past three years from 57

(1.5% of all local governments) in 2011 to 171 (4.6%) in 2012 to 188 (4.7%) in 2013. By deferringcurrent year operating expenses into later years local governments incur higher long-term costs toavoid near-term budgetary relief. This practice can exacerbate existing budgetary pressures, especiallyfor the most financially stressed municipalities.


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Health care, Health care costs, including other post employment benefits (OPEB), have continued toincrease at a rate faster than inflation. It can be difficult for local governments to curb these increasesthrough reduced benefits or larger employee contributions because the Triborough Amendment alsoapplies to healthcare benefits.

The increasing cost of health care has impacted county-owned nursing homes as well. Counties receivesignificant state subsidies for nursing homes in the form of Intergovernmental Transfers (IGTs), whichmust be matched by the county. Many county-owned nursing homes are operating at a deficit, despitethe IGT matching funds, and require subsidies from their counties general operations. These transfersfrom General Funds represent an additional stress for counties, especially for those that have notadequately budgeted for them. Cost overruns at Rockland Countys nursing home, for example, led toapproximately $15 million in annual unbudgeted expenditures; the county continues to book agrowing receivable that it is likely not to collect. To relieve themselves of these additional financialburdens, many counties, including Albany (Aa3), Cattaraugus (Aa3), Orange, Rockland, Suffolk andothers, are looking to either close or sell their nursing homes, although this often proves more difficultor time-consuming than management expects.

Credit Driver #4: Strong Management Practices Generally Resulting in SufficientReserve Levels and Favorable Debt Profiles

New York local governments have a history of strong fiscal and debt management. Even in thecurrently strained operating environment (Exhibit 9), which has resulted in some draws on reserves tomanage financial operations, fund balance levels are close to national medians at all rating levels in allsectors. Local governments have steadily increased property tax levies despite the limit, and many havebeen willing to at least attempt to exceed the cap.

As revenue growth remains stagnant and expenditure growth continues, additional declines in fundbalances across the state are likely. Many municipalities will continue to rely on cash flow borrowingfor liquidity, especially those that face significant fiscal stress. Some local governments have agreed toconsolidate, such as the Village and Town of Seneca Falls, although this remains rare even with strongencouragement and incentives for consolidation from the state. Other local governments haveconsidered regional sharing of services and departments. The regional BOCES have achievedeconomies of scale by providing educational services that would be costly for individual schooldistricts.

As the challenges continue to grow, we expect New York local governments to continue to manage.Most likely they will do so through some combination of state mandate relief (especially for counties),increased flexibility to manage employee contracts, and increased aid to localities.


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EXHIBIT 9

Expenditure Growth Has Outpaced Revenue Growth Since 2007


Debt issued by New York local governments is generally restricted for capital spending and largelyconsists of long-term, fixed-rate bonds that amortize rapidly. The use of variable rate debt by localgovernments is not generally allowed, per state law, with the exception of New York City and somelocal authorities. School districts benefit from significant building aid from the state, which offsetsdebt costs, bringing adjusted overall debt burdens to about the US average for Moodys-rated districts.Debt burdens for Moodys-rated cities also remain close to national medians (Exhibit 10). Higher debtburdens at the lower end of the rating scale are reflective of the small size of many New York cities.

EXHIBIT 10

Debt Burden of New York Cities Mirrors Nation


Long-term bonds remain the typical form used for debt issuance, but many New York localgovernments are regular issuers of short-term notes, most commonly for capital spending in the formof bond anticipation notes (BANs). Local governments also borrow for intra-annual cash flow needs,either by issuing tax anticipation notes (TANs), revenue anticipation notes (RANs) or a combinationof the two. The market for New York short-term paper has been historically very strong, even forissuers rated in the low investment grade categories. For example, we downgraded Rockland County toBaa3 and left the rating on review for further downgrade in May 2012, but the county went to the

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2007 2008 2009 2010 2011

Change in Operating Fund Revenues Change in Operating Fund Expenditure

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Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1

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capital markets for $35 million in GO RANs in June 2012. Despite the countys significant fiscalstress, the notes were oversubscribed and received an interest rate of 3.75%, a strong indicator ofsignificant market interest in these notes, although the county paid interest rates that were significantlyabove market.

Although most New York local governments issue long-term debt for capital purposes, as financialchallenges have mounted, an increasing number are using long-term debt for operating purposes.Many New York local governments borrow regularly to finance successful tax certiorari claims and thepayment of tax appeals has contributed to significant budgetary strain for some municipalities. Forexample, Rockland County, as well as several local governments within the county, increased theirannual borrowing for tax certiorari payments after the Mirant Corporations successful tax appealresulted in increased reimbursements and a dramatic decline in assessed valuation. Others have issueddebt to finance the costs related to employee separation agreements.

Credit Driver #5: State Oversight That Helps Stabilize or Improve FinancialOperations

The states oversight of municipalities and history of involvement with those that are facing severefinancial strain have contributed to local government stability. The state legally requires school districtsto undergo annual audits of their financial statements and all governments must provide unauditedfinancial information to the state comptroller annually. The state also restricts the extent to whichmunicipalities can finance deficits with debt issuance.

The state has a long history of support for local governments facing fiscal crises, starting with thestates response to the New York City fiscal crisis in the 1970s. It provides local governments withvarious types of assistance, including the implementation of control boards (Nassau County, Erie,Buffalo), the authorization of deficit financing (Glen Cove, Hempstead Village, East Hampton), orthrough audit and budget reviews. The result of this history of involvement is a record of no local

government Chapter 9 bankruptcy filings in New York (although the state does specifically permitsuch filings) and no defaults on general obligation debt.

To further identify and address local government distress, the New York State Comptrollers office hasrecently implemented an early warning system to identify municipalities that are in or near fiscaldistress and provide support by request.2 The comptrollers office has stated that it will providetraining and other non-financial tools to local governments to assist in ameliorating financial stress.

While the early-warning system can be useful in outlining strategies for managing financial strain, thecomptrollers office does not require a municipality take any particular course of action.

The governor and state legislature recently passed legislation creating a Financial Restructuring Boardto assist distressed local governments. The board would be authorized to make recommendations and

provide fiscal guidance as well as provide as much as $5 million per government in state grants ($80million in grant funding is available to municipalities through this program in 2013). The board

would also serve as an alternative to arbitration with police, fire and deputy sheriffs collectivebargaining groups, if both the municipality and employees agree. While the provisions of newlegislation are credit positive for local governments, they must choose to accept the additionaloversight and the board has no authority to require a local government to comply with itsrecommendations.

2 SeeNew York's Monitoring System for Local Government Financial Stress is Credit Positive
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The legislation also changes the binding arbitration process and makes it more favorable for localgovernments. Under the new legislation, the binding arbitration process must take into account amunicipalitys ability to pay, specifically as it relates to the statewide property tax cap, a 70% weightingin the process. The remaining 30% would be afforded to other statutory criteria such as wagecomparison and public interest. The current binding arbitration process does not have any weighting

factors and does not factor the tax cap. This change could result in significant additional control overrising expenditures.

Recent actions of the New York State Legislature, however, highlight limitations to the stateswillingness and ability to help local governments deal with financial stress. In addition to the rejectionof requests for local sales tax increases in the past two years, the state legislature also rejected requestsby municipalities to issue deficit financing in 2012, including Long Beach and Rockland County.Both municipalities received legislative approval to issue the deficit reduction bonds in 2013 but LongBeachs authorization expired before they were able to get to the market and the governor has yet toapprove Rocklands request.
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Report Number: 153848

AuthorsValentina GomezRobert WeberDan Seymour

Associate AnalystDiana Situ

Production AssociatesMasaki ShiomiGinger Kipps

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contacts continued from page 1

Analyst Contacts:

NEW YORK +1.212.553.1643

Valentina Gomez +1.212.553.4861

Analyst

[email protected]

Tiphany J. Lee +1.212.553.4772

Associate Analyst

[email protected]

Dan Seymour +1.212.553.4871

Analyst

[email protected]

Naomi Richman +1.212.553.0014

Managing Director - Public Finance

[email protected]
http://www.moodys.com/http://www.moodys.com/http://www.moodys.com/

ny local governments

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