In addition, Fitch affirms the 'AA' rating on the city's approximately
The Rating Outlook is Stable.
The series 2014 bonds are expected to be priced via negotiation on
The bonds are general obligations of the city secured by a pledge of the city's full faith and credit and the levy by the city of ad valorem taxes (without limit as to rate or amount) on all real property within the city subject to taxation. The city is not subject to
KEY RATING DRIVERS
SOLID ECONOMIC UNDERPINNINGS: The city has a broad economic base and serves a unique role as a national and international center for commerce, culture, and tourism. Recession-related job declines have been well under comparable national averages and job recovery has been strong, although the unemployment rate remains elevated.
HIGHLY EFFECTIVE BUDGET MANAGEMENT: The city's sound approach to budget development features reasonable revenue and expenditure forecasting, proactive budget monitoring, and effective actions to eliminate projected deficits.
LABOR SETTLEMENT REDUCES UNCERTAINTY: A recently ratified agreement with the
Uncertainty remains with the financial plan's assumption that remaining open contracts achieve similar terms as the UFT's through fiscal 2018.
HIGH & GROWING LONG-TERM LIABILITIES: Fitch anticipates a continued high debt burden given the city's significant capital commitments and expected future tax-supported issuance. Post-employment liabilities are also high. However, Fitch expects the combined burden on the budget of long-term liabilities will remain fairly stable.
DIVERSE BUT CYCLICAL REVENUE: Economically sensitive revenues, including personal income, business, and sales tax, comprise a sizable share of the city's budget and are highly vulnerable to variability in the financial services industry. Recent performance shows a trend of sound growth with some year-to-year variability.
PRUDENT BUDGET MANAGEMENT: The rating is sensitive to the city's ability to keep out-year budget imbalances contained in light of limited spending flexibility and proposed labor settlements. Evidence that the newly-higher gaps are the beginning of a trend, rather than a one-time adjustment, would likely result in negative rating action.
LONG-TERM LIABILITY CONTAINMENT: Fitch is increasingly concerned about the city's large and growing long term liability burden. Growth in the budget burden associated with these liabilities would reduce overall financial flexibility and negatively affect the rating.
RECENT TRENDS REINFORCE EXPECTATION FOR CONTINUED BUDGET BALANCE
The key credit strength underpinning Fitch's 'AA' rating is the city's tight budget monitoring and control as demonstrated by its ability to achieve consistent balance and manage out-year gaps. Regular reviews by various external financial oversight entities enhance the city's own internal analysis which includes monthly reporting and three detailed budget updates annually. Nascent gaps are dealt with quickly, and year-end results tend to be very close to break-even, with modest, positive variation from budget.
Current fiscal 2014 estimates show revenues a sizable 7.3% above the level forecast in Junes 2013, due largely to a surge in real estate transaction-related taxes and receipt of federal disaster recovery funding. Expenditures show a similar increase, reflecting an increase in prepayments of subsequent year expenditures, the retention of
The city released its executive fiscal 2015 budget and four-year financial plan on
LOW RESERVES MITIGATED BY STRUCTURAL PREPAYMENTS
The city's inability to carry a fund balance somewhat limits financial flexibility. Management consistently offsets this constraint by using accumulated surpluses to prepay debt service and other expenses in subsequent years. Fitch expects the city to retain at least a modicum of accumulated surplus and continue the practice of prepaying out-year expenses. A marked change in this long-standing approach would be viewed negatively by Fitch.
The city accumulated an
FORWARD TREND IN OUT-YEAR GAPS IS KEY
Fitch expected labor settlements to result in a moderate increase in out-year budget gaps, and therefore views the gaps as a neutral credit factor They are still fairly low relative to spending on a historical basis, but the trend from this point will be a key determinant in rating trajectory. Fitch's expectation is that gaps will continue to be moderate in the out-years and addressed on an annual basis. Evidence of a trend of increasing gaps relative to spending would lead to negative rating pressure.
The fiscal 2015 executive budget includes out-year gaps growing to 3.6% of budget in fiscal 2018 from 3.2% in fiscal 2016, still well below levels at the time the fiscal 2012 budget was presented of 6-7% of spending. The increased gaps result from the city's inclusion of the cost of a proposed labor settlement with the UFT and applies the same costs (except for retroactive payments to UFT and other union members for 2009 and 2010) to the city's other bargaining units. The UFT contract, which was recently ratified, removes a significant uncertainty from the city's budget. Talks with other unions are reportedly ongoing.
LABOR SETTLEMENT COSTS MODERATE BUT NOT ALL FUNDED IN FINANCIAL PLAN PERIOD
Salary increase rates are fairly modest, but the impact on the budget is nonetheless notable. The city estimates the gross cost for the UFT contract and those of other unions whose contracts expired at the same time at
The UFT contract restructures 4% salary increases for both 2009 and 2010 as annual 2% increases in fiscal 2015-2018, and includes increases of 1% in each of 2013-2015, 1.5% in 2016, 2.5% in 2017, and 3% in 2018. All increases are effective
Estimated costs assume 5% annual attrition through fiscal 2018 and 2.5% thereafter. The lump sums amount to
If the same salary increases (net of the retroactive component, which the city's other bargaining units have already received), are applied to other bargaining units, the city calculates the gross cost for all unions to be
The city has negotiated
CARRYING COSTS EXPECTED TO REMAIN LARGE BUT MANAGEABLE
Fitch expects the carrying costs for debt service, pensions and OPEB to remain a stable burden on the budget despite the large capital and fringe benefit pressures. Fitch recognizes the city's conservative budgeting of debt service expense and views positively the city's ability to achieve sizable interest rate savings from debt refinancing over the last several years. Debt service consumes
A more notable concern is the cost of pension and other post-employment benefits (OPEB), which total
Fitch believes cost pressures associated with pensions will continue. As of the most recent actuarial valuation date of
The unfunded actuarial accrued liability for OPEB is a very high
HIGH AND RISING DEBT IS A CREDIT CONCERN
Debt metrics are expected to remain high but stable relative to the city's vast tax base. Fitch-calculated net tax-supported debt including
The city's capital commitments are extensive, totaling
ECONOMY HAS INHERENT STRENGTHS BUT NOT WITHOUT CHALLENGES
Fitch considers the city's unique economic profile, which centers on its singular identity as an international center for numerous industries and major tourist destination, to be a credit strength. The character of the
The city's economic profile also benefits from good wealth levels; per capita personal income is 130% of the U.S. and market value per capita is over
The city's economy (and operating budget) is strongly linked to the financial sector, which accounts for approximately 12% of total employment but 30% of earnings. Financial activities employment declined 0.4% in 2013, and the high-earning securities and commodities component of the sector dropped 2.2% jobs following a 1.6% decline in 2012.
Fitch will publish a full rating report on NYC on or about
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, CoreLogic Case-Shiller Home Price Index, and
--'Tax-Supported Rating Criteria' (
--'U.S. Local Government Tax-Supported Rating Criteria' (
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
Source: Fitch Ratings
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