News Column

Fitch Rates DASNY's $1.2B Personal Income Tax Revenue Bonds 'AA+'

June 23, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'AA+' rating to the following Dormitory Authority of the State of New York (DASNY) state personal income tax (PIT) revenue bonds (general purpose):

--$1,084,935,000 in series 2014C (tax-exempt);

--$81,625,000 in series 2014D (federally taxable).

The bonds are expected to sell on or about June 24, 2014 via competitive sale.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by financing agreement payments to be made by the State of New York, subject to legislative appropriation. Payments are derived from 25% of the state's PIT receipts.

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 PIT revenue deposited in the revenue bond tax fund, up to the greater of 25% of annual PIT receipts or $6 billion. Fitch believes that this structural feature effectively eliminates the risk of non-appropriation.

PIT THE STATE'S MAJOR REVENUE SOURCE: The PIT makes up about 62% of New York State's tax receipts. The additional bonds test prevents overleveraging of the revenue stream and provides adequate offset to the historical volatility in the revenue stream.

GENERAL CREDIT QUALITY OF NEW YORK STATE: Due to the strengths noted above, the rating on the PIT bonds is equal to that assigned to New York's general obligation (GO) debt. Fitch upgraded the rating on New York's GO bonds and linked credits, including PIT revenue bonds, on June 20, 2014.

RATING SENSITIVITIES

The rating on the PIT bonds is sensitive to changes in New York State's GO rating, to which it is linked.

CREDIT PROFILE

Underlying the 'AA+' rating on the PIT bonds is the importance of the PIT to state finances, the set-aside of PIT revenues for debt service, the trapping of funds if appropriation is not made, and the 2x additional bonds test (ABT). Debt service coverage continued to be substantial even with deterioration in revenue performance in the last recession and Fitch expects it to remain so. Because of these strengths, the rating on PIT bonds is equal to that assigned to New York's GO debt despite the appropriation requirement. Fitch upgraded the GO rating of New York State on June 20, 2014 to 'AA+' with a Stable Rating Outlook. PIT revenue bonds and other securities linked to New York State's GO credit rating were likewise upgraded.

The PIT revenue stream responds quickly to changing economic conditions, and recovered following a year-over-year drop of 5.7% in fiscal 2010 that would have been steeper if not for enactment of a temporary rate increase. Temporary rate increases have been extended twice since then; under current tax law, the temporary increases remain in place through 2017. Fiscal 2011 revenues rose 4.2% from the prior year and fiscal 2012 performance was solid, with PIT receipts up 7.1%. Revenues rose 3.8% in fiscal 2013 and 6.8% in fiscal 2014, reflecting both the impact on state collections of federal tax law changes for calendar 2013 and strong capital markets performance. Fiscal 2015 growth is forecast at 1.8%, reflecting the application of temporary PIT credits enacted with the fiscal 2015 budget as well as lower extension payments in early fiscal 2015 linked to the impact of the 2013 federal tax changes noted earlier.

For additional parity bonds to be issued, historical revenue bond tax fund receipts must cover future maximum annual debt service (MADS) on all PIT bonds by at least 2x. MADS coverage under this test is about 3.9x after this bond sale. PIT bonds are the primary financing vehicle for the state and substantial additional issuance is expected in the coming years, with the state's current financial plan forecasting MADS coverage dropping to a low of 3.5x in fiscal 2018. In 2013 the state began issuing under a new sales tax-backed revenue bond credit (Fitch rates the state sales tax revenue bonds 'AA+', Outlook Stable). Following the first $1 billion issuance in October 2013, the state plans to issue about $1 billion in bonds annually, compared to about $3.5 billion per year under the PIT credit.

Although payment of debt service on PIT bonds is subject to appropriation, each month an amount equal to 25% of estimated available PIT revenue (i.e. receipts after refunds) is deposited into the revenue bond tax fund from the withholding portion of the tax. After retention of 125% of financing agreement payments for PIT bonds due in the succeeding month, excess monies are transferred to the state's general fund. Should amounts in the revenue bond tax fund be insufficient, the state comptroller is required to transfer from the general fund without the need for further appropriation. If no appropriation is made, deposits to the revenue bond tax fund are trapped and cannot be used (except for GO debt, if necessary), depriving the state of the monies in excess of debt service.

The upgrade on June 20, 2014 of New York's GO rating to 'AA+' from 'AA' is based on the fiscal management improvements made by the state in recent years and Fitch's expectation that the state will continue to adhere to strengthened fiscal management practices going forward. The state has implemented a wide range of beneficial changes to its budgeting, including on-time budget enactment, consensus revenue forecasting, and curbs on expenditure growth, while avoiding significant reliance on one-time resources. These changes have resulted, in Fitch's view, in more sustainable budget performance compared to the state's earlier fiscal practices, in which the state relied on non-recurring actions to cover persistent structural spending pressures and to respond to severe, recession-driven revenue cyclicality.

Recent fiscal management improvements remain untested by a severe recessionary event, but in Fitch's view the state is in a materially improved position to address future economic and revenue cyclicality. Although the state has built only modest reserves, Fitch believes that with proactive budget management New York continues to have a margin of flexibility to respond to unforeseen economic and revenue weakness beyond the level provided by its reserve balances.

The state's substantial wealth and resources and broad economy remain ongoing credit strengths. The rating continues to recognize 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 matches the median for U.S. states rated by Fitch.

For additional background on the state's general credit, see Fitch's press release 'Fitch Upgrades New York State GO and Related Bonds to 'AA+'; Outlook Stable' dated June 20, 2014, available on the Fitch web site at 'www.fitchratings.com'.

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

In addition to the sources of information identified in Fitch's report 'Tax-Supported Rating Criteria', this action was additionally informed by information from the underwriters and IHS Global Insight.

Applicable Criteria and Related Research:

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

--'U.S. State 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. State Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=835914

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

Douglas Offerman

Senior Director

+1-212-908-0889

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Laura Porter

Managing Director

+1-212-908-0575

or

Committee Chairperson

Marcy Block

Senior Director

+1-212-908-0239

or

Media Relations

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

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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