News Column

Fitch Rates Monroe County GOs 'BBB+'; Outlook to Stable

June 17, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings assigns a rating of 'BBB+' to the following bonds to be issued by Monroe County, NY (the county):

--$29,920,000 public improvement serial bonds - 2014.

The bonds are expected to sell via competition the week of June 23. Proceeds will fund various capital improvements.

Simultaneously, Fitch downgrades approximately $343.7 million of outstanding general obligation and public improvement bonds to 'BBB+' from 'A-'.

The Rating Outlook is revised to Stable from Negative.

SECURITY

The current offering and all bonds issued after 2011 are general obligations of the county for which the county has pledged its full faith and credit and ad valorem tax, subject to the 2011 state statute limiting property tax increases to the lesser of 2% or an inflation factor (the tax cap law). This limit can be overridden annually by a 60% vote of the county's governing body.

The county has pledged its full faith and credit and unlimited taxing power for debt service on outstanding GO bonds issued prior to 2011. No exemption is made under the tax cap law for debt service on outstanding GO debt; however, the constitutionality of this provision has not been tested.

KEY RATING DRIVERS

DOWNGRADE CONSIDERATIONS: The 'BBB+' reflects the county's constrained financial flexibility reflected in thin reserves, revenue limitations, and a relatively inflexible expenditure budget. A trend in negative operating performance, though of relatively small magnitude, is concerning given the county's limited cushion.

UPSTATE ECONOMIC CENTER: The county's economy has experienced substantial diversification away from its historically manufacturing-based roots into health, higher education, and services. Long-term population loss appears to have abated since 2000.

ADEQUATE MANAGERIAL PRACTICES: Management's financial planning and review tools have helped contain discretionary cost growth.

MODERATE LONG-TERM LIABILITIES: The county's credit profile benefits from a moderate debt burden and rapid amortization as well as low pension and other post-employment benefit (OPEB) costs.

TAX LEVY LIMIT: All GO bonds are rated on parity despite the state-imposed tax levy limit because the county may exceed the tax cap in any one year with 60% approval of the county legislature.

RATING SENSITIVITIES

FINANCIAL PERFORMANCE: The rating and Stable Outlook assumes some degree of variability in the county's financial performance; however, an inability to continue to control budget imbalances and/or evidence of outsized deficits may result in additional negative rating action.

CREDIT PROFILE

Monroe County is home to Rochester and located on the southern shore of Lake Ontario in northern New York.

HIGHLY CONSTRAINED FINANCIAL FLEXIBILITY

County operations are constrained with thin margins. The county drew down fund balance in both fiscals 2012 and 2013. Operating deficits after transfers were marginal but of a heightened concern given such a thin base. Fitch believes that over the long run, the county will be challenged to increase its financial flexibility materially above its current cushion.

The unrestricted general fund balance at the close of 2013 was an extremely weak $4 million or 0.3% of spending, down from $11 million or 0.9% of spending in 2011. While the operating deficit was only $2.9 million (0.2% of spending), 2013 performance reflects the county's resuming amortization of a portion of its annual pension costs, representing $21 million of 1.7% spending. Additionally, performance was negative despite increases in charges to underlying municipalities for snow and ice removal. Sales taxes, the county's largest revenue stream, underperformed relative to budget.

The 2014 budget was balanced without use of fund balance; however, the county is now projecting an operating deficit of $2 million to $9 million (0.2-0.7%) based on first quarter operating results. Some intra-year costs savings appear achievable from open position review and changes to service delivery, which may be positive for the budget. However, the projected deficit does not factor in an underperformance of sales tax revenue, which was budgeted to increase 2.7% on the year, compared to first quarter performance of 1.9%.

Fitch views as a credit positive the county's proven efforts to reduce its reliance on one-time revenue sources. The budget includes $16 million or 1.3% in one-time revenues, including $10.2 million from tax lien sales which Fitch expects to become a more recurring revenue source given changes in lien sale practices. Other one-time revenues are associated with asset sales that may not come to fruition as well as state reimbursements. These sources are down from more elevated levels in prior years ($33 million in 2013).

PROJECTED BUDGET DEFICITS

The county continues to project out-year, albeit reduced, budget gaps that Fitch believes are likely to materialize at least in part. The county's multi-year budget forecast anticipates a combined $60 million deficit for 2015 and 2016, down from $106 million for 2013 - 2014 due partially to the elimination of some budgeted-but-unfilled positions from the budget, which had served as a key source of expenditure flexibility in years past. Additional savings are a result from changes in Medicaid costs and an increase in charges to local governments for services.

The 2015-2016 gaps are not significantly out-sized relative to the budget, equivalent to 2.7% and 3.9% of spending, respectively. Concern exists nonetheless based on county's already thin fund balance position, and aforementioned budgetary challenges.

REVENUES DIVERSE BUT EXHIBITING MODEST GROWTH

The county's revenues are derived from diverse sources including sales tax (35% of 2013 general fund revenue), state and federal aid (27%), and property tax (28%). However, a majority of the sales tax is a pass-through to underlying municipalities and school districts. Additionally, Fitch anticipates that growth in property tax revenue will rely on tax base increases because of management's commitment to a static tax rate; the rate remains unchanged since 2008. Revenues increased a modest 0.3% in 2012 and 0.8% in 2013.

LIQUIDITY REMAINS DEPENDENT ON BORROWING

The county's available general fund liquidity levels remain low in 2013 (with the majority of the $15.3 million reserved for note repayment). Borrowable funds outside of the general fund boost it to a more adequate level, totaling $96.7 million. The governmental cash position remains weak when viewed in context of its $460 million in current liabilities. Year-end is typically a low point in the county's cash position due to the timing of property tax collections and state aid remittances. Monroe County's cash flow borrowing is ordinarily repaid within five months and in 2013 remained consistent with trends over the last four years at $75 million. This amount, a moderate 6% of general fund revenue, is down from prior levels.

LOW FIXED-COST BURDEN

The county's debt profile is generally a credit positive, with moderate overall net debt per capita of $2,498 and 4.7% of market value. Amortization is rapid, with 79% retired in 10 years.

The county's six-year capital improvement plan contemplates approximately $170 million in tax-supported improvements and a manageable $80 million in biennial GO bonding, which may slightly elevate debt levels. Management expects that the balance of capital needs will be funded through excess operating revenues from county enterprise funds as well as outside funding sources.

The county participates in state-run cost-sharing defined benefit pension plans which are well-funded at 87% as of March 31, 2013. Using Fitch's more conservative 7% discount rate assumption, the plan's funding level is an estimated 82%. The 2013 pension payment represents a low 2.6% of operational spending. This amortization option provides some near-term budget relief but will make future year budgeting for these payments more challenging.

The county funds its OPEB liability on a pay-as-you-go basis. OPEB together with debt service and pension payments account for a low 8.1% of governmental fund spending and would have remained affordable at 10.4% if the county had fully funded its OPEB ARC. The county's OPEB liability is somewhat high, approaching nearly $700 million. The county's ability to address this burden is subject to collective bargaining. The county's three largest union contracts have been open since 2008.

UPSTATE NEW YORK ECONOMIC CENTER

Monroe County's status as one of upstate New York's key economic centers and third largest population center in the state is a credit strength. The county's economy has diversified away from its historically manufacturing-dominated economy and is now home to a robust healthcare and higher education presence, with the University of Rochester and its associated medical center as the county's leading employer with almost 30,000 employees.

Other leading employers include Wegmans Food Markets, Xerox Corporation, Unity Health System, and Paychex, Inc., with each employing in excess of 3,500 people. Eastman Kodak Company emerged from Chapter 11 bankruptcy in 2013 and remains a top employer, even after reducing its employment by 30% over the past two years to 3,429.

County unemployment is down to 5.3% in April 2014 from 6.8% the year prior. Negatively, the gain was largely driven by loss of labor force. Nevertheless, unemployment rates were below state (6.1%) and national (5.9%) averages. The county's per capita money income and median household income are both 99% of national averages.

The county's long-run population out-migration trend appears to have moderated and shows early signs of reversal, with marginal population growth of 1.9% since 2000, to 749,800 in 2012. The county's housing market did not experience a boom or bust through the past business cycle, resulting in continued assessed valuation growth at a moderate pace, up 12.8% since 2008 and a modest 1% for 2014. Positively, median home sales priced for Q1 2014 was up 2.4% from the same quarter year prior.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=835068

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Stephen Friday, +1-212-908-0384

Associate Director

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Eric Friedman, +1-212-908-9181

Director

or

Committee Chairperson

Michael Rinaldi, +1-212-908-0833

Senior Director

or

Media Relations

Elizabeth Fogerty, New York, +1-212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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