News Column

Fitch Rates Erie County Fiscal Stability Authority, NY's Bond Anticipation Notes 'F1+'

August 26, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings assigns an 'F1+' rating to the following Erie County Fiscal Stability Authority, New York's (ECFSA or the authority) bond anticipation notes (BANs):

--$108,000,000 series 2014A.

In addition, Fitch affirms approximately $399 million ECFSA sales tax and state aid secured bonds at 'AA+'.

The BANs are scheduled for negotiated sale on September 3, 2014.

Proceeds will be used to provide cash flow funds to Erie County.

The Rating Outlook on the bonds is Stable.

SECURITY

The bonds and BANs are secured by a pledge of ECFSA's right title and interest in revenues of the authority which consist of the county's local sales tax revenues, state aid revenues paid to the authority, and other aid, rents, fees and charges of the authority.

KEY RATING DRIVERS

STRONG LEGAL PLEDGE: The authority is a bankruptcy-remote, statutorily defined issuer. A tight legal framework with a first perfected security interest in the pledged revenues protects bondholders.

STRONG COVERAGE LEVELS: Coverage levels are high, and the bonds maintain statutorily defined non-impairment mechanisms and maximum outstanding debt limits.

MARKET ACCESSIBILITY: The 'F1+' rating on the BANs reflects the strong 'AA+' long-term rating and the flexibility at maturity to roll over or retire the notes with long-term debt.

SENSITIVE REVENUE STREAM: The pledged sales tax revenue is economically sensitive and derived from a somewhat below-average economic base.

RATING SENSITIVITIES

DEBT SERVICE COVERAGE: The rating is sensitive to shifts in debt service coverage levels. Given the broad coverage and somewhat limited economic base, a change in coverage sufficient to affect the rating is unlikely.

CREDIT PROFILE:

Erie County (GOs rated 'A'; Stable Outlook by Fitch) is located in Western New York bounded by Lake Erie on the west and Canada to the north. The county includes Buffalo (GOs rated 'A+'; Stable Outlook), the state's second largest city by population.

Declining population trends experienced during most of the past decade appear to have leveled off in recent years. The 2010 U.S. Census recorded a population of 919,040, a 3.3% decline since 2000. Wealth indices, including market value per capita of $51,000, are below the national and state benchmarks, consistent with the upstate New York region.

ROBUST SECURITY STRUCTURE

ECFSA was created under the Erie County Fiscal Stability Authority Act (the Act) as a public benefit corporation by the state of New York in 2005 to provide a debt funding vehicle and perform financial control and oversight of the county. The Act allows ECFSA to issue debt for county purposes of up to $700 million in bonds (of which 57% is currently outstanding) and $250 million in cash flow notes with all debt maturing by 2039. The additional bonds test (ABT) for senior debt is strong, requiring 3.0(x) coverage of maximum annual debt service (MADS) from sales tax revenues alone. Fitch does not believe the ABT provides much additional protection given the limitation on issuance amount.

ECFSA is a bankruptcy-remote issuer. The bond structure grants a first perfected security interest in Erie County's 4.75% local sales tax less the 65% of the first 3% currently required to be paid to cities and school districts. The state collects sales tax revenues and distributes them to the state comptroller, who then pays the revenues directly to the bond trustee. The county receives residual revenues only after the payment of ECFSA's debt service and operating requirements. The bonds are also secured by non-reimbursement-based state aid revenues, if applicable, but there have been no such state aid payments for several years.

STRONG PLEDGE FOR BANS

While the legal pledge for the BANs is revenue of ECFSA, which includes county sales tax revenue and state aid, repayment is expected to be derived from set-asides made by the county into a 'blocked account.' Set-asides in the blocked account can only be used for debt service on the notes. If the county fails to make a set-aside payment within three business days of its due date, ECFSA will notify the trustee to deposit funds received from the next sales tax installment into a bond sub-account.

If funds are not sufficient at the last set-aside date (30 days prior to the note maturity) to repay bondholders, either the authority or the county is authorized to issue rollover BANs or long-term bonds. Fitch believes this schedule provides adequate time to issue such debt given the authority issuance is already in place and any uncertainty as to the repayment from set-asides would be identified by the authority and acted upon earlier than 30 days prior to maturity.

SOLID COVERAGE LEVELS EXPECTED TO CONTINUE

Pledged sales tax revenue has grown steadily, providing healthy debt service coverage and strong bondholder protection. Sales tax revenues were up 4.5% in 2011, 2.4% in 2012, and 2.3% in 2013. For the first four months of 2014, sales tax revenues are up 2.9%, below the 3.4% assumed in the 2014 budget. Coverage of debt service by 2013 revenue was 10.3x. Coverage of MADS ($63 million in 2016) was 6.7x based on 2013 revenues.

Potential threats to current strong debt service coverage include declines in county sales tax revenue and alterations of the tax structure by the state or county. Fitch believes the former is mitigated by the stability of the county's tax base, and while pledged revenues are economically sensitive, the magnitude of deterioration that would need to occur to have a significant impact on debt service coverage appears unlikely.

While the county and state both have the unilateral ability to alter the tax structure, Fitch believes that the risk is mitigated by state and county non-impairment clauses; specifically, the county covenants to maintain a local sales tax rate of at least 3% through 2039. In addition, any change in local tax law cannot result in coverage below 2.0x MADS on all outstanding authority bonds. Of the 4.75% sales tax rate, 1.75% is subject to biennial renewal, with the next renewal expected on Nov. 30, 2015. These taxes have historically had strong support so Fitch believes that renewal is likely.

On a pro forma basis, 2013 collections of only the county's share of the 3% local sales tax provide 2.5x coverage of MADS. The authority receives a lower percent of the first 3% of the local sales tax than of the additional 1.75% due to allocations of the revenues to municipalities and school districts.

STABLE COUNTY ECONOMY WITH GROWTH POTENTIAL

Erie County is a major New York industrial and commercial center. Major components of the employment base include government, education and health services, which lend stability to the economy. Leading employers include the state and federal governments, Kaleida Health and the University of Buffalo, part of the State University of New York system.

The county's economy stabilized in 2010 after experiencing several years of job losses due to the recession. Unemployment rates exceeded 8% in 2009 and 2010 but have since moderated and remain below both the state and national levels. For June 2014 the county recorded an unemployment rate of 6.9% compared to state and national rates of 6.5% and 6.3%, respectively. Recent employment growth has been negligible.

Taxable assessed value growth has been consistent with valuations increasing in each of the past ten years. Average annual tax base growth over the past five years was 2.1% including a 3.6% increase in fiscal 2013.

Economic development is strong with a number of public and private sector projects in various stages of construction. Fitch believes these projects in conjunction with the state's multi-year commitment to the region to provide $1 billion of economic development incentives should spur job growth.

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, CoreLogic Case-Shiller Index, IHS Global Insight, Zillow.com, National Association of Realtors, Underwriter and Bond Counsel.

Applicable Criteria and Related Research:

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

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

--'Fitch Affirms Erie County, New York's GOS at 'A'; Outlook Stable' (July 14, 2014).

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=857574

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

Karen Wagner

Director

+1 212-908-0230

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Eric Friedman

Director

+1 212-908-9181

or

Committee Chairperson

Doug Offerman

Senior Director

+1 212-908-0889

or

Media Relations, New York

Elizabeth Fogerty

+1 212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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