News Column

Fitch Affirms Syracuse IDA NY Rev Bonds at 'AA-'; Outlook Positive

June 3, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings affirms the following Syracuse Industrial Development Authority (IDA), NY ratings at 'AA-':

--Approximately $111 million school facility revenue bonds (Syracuse city school district project), series 2008A, 2010, 2011A, and 2011B.

The Rating Outlook is Positive.

SECURITY

The bonds are secured solely by state aid revenues annually appropriated to the Syracuse City School District (the district) by the state of New York (the state) and remitted to the district from the period Dec. 1 through March 31 (the collection period).

The funds are subject to appropriation by the district as installment purchase payments. The district's budget is subject to approval by the city of Syracuse (the city). Installment purchase payments are not subject to offset, counterclaim, or reduction.

In the event that the district fails to appropriate state aid sufficient to cover debt service payments by Nov. 10, state aid sufficient to cover the subsequent principal and interest payments will be intercepted and forwarded to the trustee. As intercepted aid is not subject to appropriation by the district, this provision effectively removes the risk to bondholders of no-appropriation by the district.

The 2008 bonds are additionally secured by a surety-funded debt service reserve funded to the IRS standard; there is no debt service reserve securing the 2010 or 2011 bonds.

KEY RATING DRIVERS

RATING BASED ON STATE INTERCEPT: The rating on the bonds, one notch below Fitch's 'AA' general obligation (GO) bond rating state of New York, reflects the security provided by the state aid intercept for the bonds. Bondholders benefit from remittance of state aid to a depository fund from which debt service is set aside before flowing to the district and, in the event of a failure to appropriate, a state aid intercept structure that provides for pre-default payment.

STRONG COVERAGE: Interceptable state aid provides strong coverage of maximum annual debt service (MADS). Coverage from state aid may decline in the coming years due to the district's extensive capital and borrowing plans and charter school competition and declining enrollment. However, Fitch expects coverage levels to remain strong.

GENERAL STATE CREDIT QUALITY: The Positive Outlook reflects Fitch's Positive Outlook on the state's GO and related debt.

RATING SENSITIVITIES

CHANGE IN NEW YORK'S GO RATING: This rating is sensitive to a change in the state's GO rating or Outlook, to which these bonds are linked.

MATERIAL WEAKENING IN COVERAGE LEVELS: The rating assumes continued strong coverage of debt service by interceptable state aid.

CREDIT PROFILE

The New York state legislature Chapter 58 Pt. A-4 of the Laws of 2006 (the act), authorized the bonds to encourage the city and district to renovate its public schools. Capital improvement plans under phase one totaled $150 million. The second phase was authorized by the state legislature in 2013 and authorizes up to $300 million in additional capital improvements. The district is preparing currently a capital and financial plan for phase two, which is subject to state comptroller approval. The district estimates its total capital improvement costs over all phases of its modernization efforts at approximately $900 million, the sum of which is expected to be financed under the program.

The school district is governed by an independently elected board of education. The city council approves the district's budget and levies taxes on its behalf but does not otherwise exercise direct control over the district.

STRONG COVERAGE BY STATE AID

State aid is remitted monthly and unevenly and is collected first by a state aid depository fund from which debt service is set aside; the remaining funds are forwarded to the district. In the event of non-appropriation of debt service by the district, state aid is intercepted and paid directly to the trustee in advance of debt service payments. This mechanism is the basis for Fitch's 'AA-' rating. During the collection period, the set-aside state funds are released to the district once the trustee receives notification that funds have been appropriated and from which monthly remittances during the collection period the funds will be set aside. Historically, the district has elected for all funds to be intercepted in March, a high point in its annual state aid collections which covered MADS 6.6x in 2014.

Approximately 60% of interceptable state aid was remitted to the state aid depository fund during the intercept period in fiscal 2013, which covered MADS 13.8x. Further projects are anticipated to be approved for state building aid which has covered an average of approximately 80% of project costs over the past five years, in which case coverage will remain very strong.

State aid to the district has rebounded, up 2.6% in 2013 and 3.2% (projected) for 2014. The district is budgeting a 1.1% increase in state aid for 2015.

SENIOR AND PARITY CLAIMS CREATE RISKS TO INTERCEPT COVERAGE

Interceptable coverage could be diminished due to various senior and parity claims to state aid for education. Late charter school payments and outstanding state aid revenue anticipation notes (RANs) have senior claims to set aside state aid funds. However, RANs are junior to bond repayment if the state aid intercept is triggered. The district consistently issues RANs, with $76 million and $54 million issued in fiscal years 2013 and 2014, respectively. The district projects a similar level in cash-flow borrowing for 2015.

Further, the district has outstanding general obligation debt that is subject to post-default state aid intercept which could marginally diminish coverage. In case of a GO default, the intercept of funds to cure that default would be senior to the regular payments on the rated bonds. However, if the intercept for the rated bonds is also triggered, the defaulted GOs and the rated bonds would become parity obligations under the intercept.

Coverage of MADS remains strong at 11.8x in 2014 with all senior and parity claims netted from funds remitted during the intercept period.

RISK OF LATE STATE BUDGET MITIGATED

Fitch believes that the timing of the intercept period (Nov. 15 through March 31) mitigates risks associated with the possibility of late state budget adoption. The state's fiscal year starts April 1. Historically, the state has been up to four-and-a-half months late in adopting a budget, although the state has been on time in adopting its annual budget in recent fiscal years. Moreover, the risk of historical and potential delays in state aid payments during times of state budgetary and cash flow pressure is mitigated by the very high coverage levels.

DECLINING DISTRICT ENROLLMENT AND CHARTER SCHOOL COMPETITION

Declining district enrollment and increased charter school competition may negatively affect the amount of state aid revenue in future. The district has experienced a 2.9% enrollment decline since 2004, to an estimated 21,703 students in 2014, faster than the city's population loss of approximately 1.4% over the same period. The district is projecting a small enrollment decline over for next year, which Fitch believes is realistic given marginal increases in charter school competition.

Two charter schools operate within the district. These independently operated schools educate 1,282 pupils (5% of district and charter enrollees). All charter schools receive state-set per-pupil aid which passes through the district. The district has budgeted to make approximately $15.7 million in charter school payments for fiscal 2014. One charter school will be expanding from its current capacity by a further 125 students for 2015. More importantly, in 2010 the state legislature increased the state-wide number of charter schools permitted. This may result in a further increase in the number of charter schools operating within and competing with the district. Nevertheless, Fitch expects coverage levels to remain solid given that coverage is high and current and new debt will be supported by building aid.

For more information on the state's GO rating, see Fitch's press release 'Fitch Affirms New York State GO and Related Bonds at 'AA' Outlook Remains Positive' dated Sept. 5, 2013, 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 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, National Association of Realtors.

Applicable Criteria and Related Research:

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

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

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

--'Fitch Affirms New York State GO and Related Bonds at 'AA' Outlook Remains Positive' (Sept. 5, 2013);

--'Rating Guidelines for State Credit Enhancement Programs', (April 18, 2013).

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

U.S. State Government Tax-Supported Rating Criteria

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

Rating Guidelines for State Credit Enhancement Programs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=704880

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=832759

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

Associate Director

+1-212-908-0384

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Eric Friedman

Director

+1-212-908-9181

or

Tertiary Analyst (State of New York)

Douglas Offerman

Senior Director

+1-212-908-0889

or

Committee Chairperson

Arlene Bohner

Senior Director

+1-212-908-0554

or

Media Relations:

Sandro Scenga, +1-212-908-0278 (New York)

sandro.scenga@fitchratings.com


Source: Fitch Ratings


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