In addition, Fitch affirms the 'AA' rating on the city's approximately
The Rating Outlook is Stable.
The series 2015 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 SETTLEMENTS REDUCE UNCERTAINTY: Recently ratified agreements with several bargaining units reduce uncertainty about the resolution of long-expired labor agreements. Fitch believes the overall package represents a sizeable but manageable funding need, although some uncertainty remains regarding still-unsettled contracts.
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. 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 and four-year financial plan updates annually. Nascent gaps are dealt with quickly, and year-end results tend to be very close to break-even, with positive variation from budget.
Fiscal 2014 revenues (on an unaudited basis) were a sizable 7.4% above the level forecast in
The city's fiscal 2015 budget totals
LOW RESERVES MITIGATED BY STRUCTURAL PREPAYMENTS
The city's inability to carry a meaningful 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 that have emerged 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 out-year gaps will continue to be moderate and addressed on an annual basis. Evidence of a trend of increasing gaps relative to spending would lead to negative rating pressure.
The financial plan includes out-year gaps growing to 3.7% of budget in fiscal 2018, still well below levels at the time the fiscal 2012 budget was presented of 6 - 7% of spending. As expected, the increased gaps result from the city's inclusion of the cost of the labor settlement with the
LABOR SETTLEMENT COSTS MODERATE BUT NOT ALL FUNDED IN FINANCIAL PLAN PERIOD
Salary increase rates in the labor settlements are fairly modest, but the impact on the budget is nonetheless notable. The city estimates the gross cost, if most UFT contract terms are extended to all employees, 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 many of 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
HIGHLY DETAILED ESTIMATES OF DIVERSE REVENUE MIX; RISKS REMAIN
The city benefits from a diversity of revenue sources, although many are subject to economic volatility. Fitch believes that the city's revenue estimates, based on a highly detailed and frequently-reviewed analysis are reasonable. The property tax is the largest source, at 27% of fiscal 2013 audited funds, followed by personal income tax at 14% and sales tax at 10%. Intergovernmental sources are primarily for education and social services programs and make up 28% of fiscal 2013 revenue.
Combined taxes make up 65% of total revenue. The city has a modest amount of room to increase the property tax levy under the cap. Real estate transaction taxes (real property transfer and mortgage recording) totaled a modest but increasing 2.6% of fiscal 2013 revenues.
Assessed value (AV) grew by a healthy 6.1% in fiscal 2015, following 5.7% growth in fiscal 2014. Current projections indicate 5.3%, 4.4% and 4.1% growth in fiscal years 2016 through 2018, respectively, as the pipeline of value increases to be phased in declines. The phase-in of value changes over five years evens out year-to-year volatility and enhances predictability.
Areas of revenue risk beyond forecast tax variations include state revenue shortfalls that could result in reduced aid to municipalities including
Management estimates the gross cost to public sector facilities from Hurricane Sandy to be
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 spending on pension and other post-employment benefits (OPEB), which total
While Fitch views favorably the increase to
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 tourism sector is performing exceptionally well, attracting a record 54 million visitors in 2013, the fourth record year in a row. The city estimates that continued strong visitor-related spending and moderate economic growth yielded sales tax growth of 5.3% in fiscal 2014, after 5.5% growth in fiscal 2013.
The economic profile of the city also benefits from good wealth levels; per capita personal income is 130% of the U.S. and market value per capita is over
The local economy (and operating budget) is strongly linked to the financial sector, which accounts for approximately 11% 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.
However, overall resident employment increased by 1.7% in 2013, with employment growth, similar to income levels, exceeding the state and nation. The unemployment rate decreased to a still-high 8.7% in 2013 from 9.4% in 2012. Recent data show continued improvement; the
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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