News Column

Fitch Rates Syracuse, NY's GOs 'A'; Outlook Stable

June 5, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings assigns an 'A' rating to the following Syracuse, NY (the city) limited tax general obligation (LTGO) bonds:

--$12,432,110 public improvement (serial) bonds, series 2014B.

The bonds are expected to price via competitive sale the week of June 9. Proceeds will be used to finance various capital projects.

In addition, Fitch affirms the 'A' rating on approximately $110 million of outstanding LTGO bonds and approximately $159 million of outstanding unlimited tax general obligation (ULTGO) bonds.

The Rating Outlook is Stable.

SECURITY

The current issue and the series 2014A&B, 2013A&B, 2012, and 2011A&B bonds are general obligations of the city for which the city 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 by a 60% vote of the city legislature.

The city has pledged its full faith and credit and unlimited taxing power for debt service on outstanding GO bonds issued prior to these bonds. 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

REGIONAL ECONOMIC DRIVER: The city's economy is substantial and diverse, anchored by a major research university and health institutions and serving as the economic engine for the region. The city is currently benefiting from economic development activity.

FINANCES STABILIZE; RISKS REMAIN: The city has augmented its fund balance through one-time and recurring revenues to a level at which the city can sustain moderate deficits as projected over the next few years; however, the limited flexibility for further revenue enhancements and expenditure cuts remains a risk for the city's long-term financial profile.

BELOW-AVERAGE ECONOMIC PROFILE: Syracuse's extremely low wealth indicators, high poverty rate, and elevated unemployment statistics are somewhat tempered by the city's stable housing market.

LONG-TERM LIABILITIES CHALLENGE BUDGET: Large pension and other post-employment benefits (OPEB) payments place pressure on recurring spending.

TAX LEVY LIMIT: The bonds are rated on par with outstanding ULTGO debt, since the city may exceed the state tax cap in any one year with 60% approval of the common council.

RATING SENSITIVITIES

FALLING RESERVES: Fitch assumes the city will be able to reduce out-year budget gaps to a large degree. Should the city be unsuccessful and sustain material operating deficits, there could be downward rating pressure. Upward movement is unlikely in the near term given operating pressures, including those posed by long-term liabilities and weak economic indicators.

CREDIT PROFILE

Syracuse is New York's fifth largest city and encompasses a 26-square-mile area located in Onondaga County in north central New York.

REGIONAL ECONOMIC ENGINE

The city serves as the economic center for the region and is anchored by higher education, healthcare and business services. Major employers include State University of New York (SUNY) Upstate Medical University with almost 8,000 employees, Syracuse University (6,504), Wegmans (4,100), and St. Joseph's Medical Center (3,142).

About 50% of the city's property is tax-exempt, and the city is looking for ways to better monetize the activity of these tax-exempt organizations. Several of the tax-exempts have signed service agreements with the city, highlighted by Syracuse University, which pays $1 million a year. The city is experiencing a degree of urban revitalization including the opening of a third wing at Destiny USA, a large shopping mall on the edge of downtown; residential redevelopment efforts; and a $350 million mixed-use project.

BELOW-AVERAGE ECONOMIC PROFILE

Economic indicators are depressed with per capita income levels at 59% of the state average and individual poverty rates more than double the state and national mean. The city's unemployment rate was 7.5% in March 2014, above the state (7.2%) and national (6.8%) averages but down from past highs. The 2010 census data show some stabilization in the city's population over the past decade, arresting a multi-decade trend in population decline.

RECENT SURPLUSES REVERSE TREND OF DEFICITS

The city experienced a structural imbalance which led to general fund balance draws from fiscal 2009 through fiscal 2011 (year end June 30). The city generated a moderate surplus in fiscal 2012 and a strong surplus in 2013, though the fiscal 2013 surplus largely resulted from an accelerated state aid payment. Going forward, the city projects sizeable deficits, although these may not be fully realized as actual results have consistently exceeded expectations. The inability of the city to continue outperforming its projections would put downward pressure on the rating.

The city's fiscal 2013 results show a $25 million operating surplus after transfers, equal to 10.8% of spending and largely attributable to a one-time $20.9 million 'spin-up' payment from the state. The spin-up is the acceleration of a March 2014 payment from the state to June 2013, so the city benefits from the payment in fiscal 2013 while the state is unaffected as the payment remains within its 2014 fiscal year.

Positive state highway aid and sales and property tax performance as well as conservative budgeting of staffing allowed the city to outperform its fiscal 2013 operating budget, which was break-even with the inclusion of the spin-up payment. The fiscal 2013 surplus and the release of the restricted funds from fiscal 2012 results in a $70.2 million unrestricted fund balance (equivalent to 31.4% of expenditures).

DEFICITS FORECASTED FOR 2014 AND BEYOND

The city's fiscal 2014 budget assumed an $18 million draw, equal to 8.6% of spending. The budget assumed no spin-up payment, flat property tax revenues, a 3.4% increase in sales tax revenues, and a $3 million increase in pension costs. The city currently expects to finish the year ahead of budget with a $9 million deficit, as there have been savings on staffing and pension costs were below budget. Sales tax revenue is expected to be close to budget.

The city is projecting annual deficits of $20 million in 2015, growing to $22.6 million in 2018 or 9.7% of 2013 actual spending. The city has a strong history of outperforming budgeted projections but may be challenged to do so in the future. Police and fire contracts remain open since 2010 and 2012, respectively, and could be a pressure point. Actual performance near the deficit levels projected would exhaust all of the city's remaining fund balances, causing downward pressure on the rating.

PENSION AND OPEB COSTS CREATE PRESSURES

The city faces elevated fixed costs in the form of pension and OPEB payments. The city's pensions are part of two cost-sharing multiple employer state systems, the New York State Local Employees' Retirement System (ERS) and the New York State Policemen's and Firemen's Retirement System (PFRS). As of March 31, 2013, ERS is well-funded at 87%, or an estimated 83% assuming a 7% return, while PFRS is 88% funded or an estimated 83% assuming a 7% return.

The city's general fund pension payments made up a high 12.7% of spending in fiscal 2013. The payment for fiscal 2014 is expected to decline, with another small decline forecasted for fiscal 2015 and going forward, so pensions are expected to be less of a pressure for the city. The state has offered municipalities the opportunity to amortize part of their payments, but the city does not plan to do so.

The city's fiscal 2013 OPEB payment was $21 million or 9.5% of general fund spending. The payment reflects about 29% of the actuarially required contribution. As of July 1, 2012, the city's unfunded OPEB liability was $933 million, or a very high 21% of market value. The city is attempting to negotiate increased health care contributions from employees, which would help mitigate the OPEB burden but still likely to leave the city with a large liability.

ABOVE-AVERAGE DEBT BURDEN

The city's overall debt burden including overlapping debt is high at 8.8% of market value due primarily to weak real estate values. Debt appears more manageable on a per capita basis at $2,753, and amortizes rapidly with 70% of principal retired in 10 years. The city has limited additional borrowing needs. Total carrying costs for debt, pensions and OPEB are a moderate 16% of governmental fund expenses.

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).

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=833158

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Fitch Ratings

Primary Analyst

Eric Friedman

Director

+1-212-908-9181

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Stephen Friday

Associate Director

+1-212-908-0384

or

Committee Chairperson

Arlene Bohner

Senior Director

+1-212-908-0554

or

Media Relations:

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

Email: elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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