Fitch Rts Suffolk Cnty, New York TANs 'F1+'; Affs GO Rtg at 'A+'; Stable Outlook

Business Wire, Dec 16, 2003

Business Editors

NEW YORK--(BUSINESS WIRE)--Dec. 16, 2003

Fitch Ratings assigns its short-term 'F1 ' rating to Suffolk County, NY's $225,000,000 Tax Anticipation Notes (TANs), 2004 (Series I) and affirms the 'A ' and 'F1 ' ratings, respectively, on the county's $608 million of outstanding general obligation bonds and $22 million of outstanding bond anticipation notes. The TANs are scheduled to sell competitively on Dec. 18 and are due on Aug. 12, 2004. The TANs are general obligations and carry the county's full faith and credit pledge. The Rating Outlook is Stable.

The assignment of Fitch's highest short-term rating to Suffolk County's tax anticipation notes (TANs) reflects the satisfactory coverage of TAN repayment in the month tax revenues are received and the repayment structure that requires the set-aside of first available property tax revenues. While cash flows for 2004 are conservatively projected and account for a significantly higher required pension fund contribution over 2003, they do not incorporate the full impact of pending union contract negotiations, albeit some reserves are available in the tax stabilization reserve fund (TSRF). The county's 'A ' general obligation bond rating reflects the diversified economic base, ample taxable resources, sound financial management, and moderate debt levels with manageable capital needs.

Suffolk County uses short-term cash flow borrowing due to the concentration of property taxes received in June of each year, which is the middle of the county's fiscal year. Property taxes represent 21% of 2004's projected cash flow receipts net of short-term borrowing. June's 2004 projected receipts and accumulated balances cover TAN principal and interest a sound 1.95 times (X). In response to the county's required 149% increased pension fund contribution in 2004, the county budgeted half of the appropriation and plans to issue the remaining $65 million in pension obligation bonds (POBs) by next December to maintain adequate liquidity. The year-end projected ending cash balance, after TAN repayment and POBs issuance, equals a low $6.5 million (below 1% of cash receipts); nonetheless, property tax revenues are set aside monthly upon receipt providing ample build-up of cash prior to the August repayment.

The underlying 'A ' rating on Suffolk County's general obligation debt reflects a broad, wealthy economic base, a demonstrated willingness to take strong actions to achieve budgetary balance, and a moderate overall debt profile. The current economic environment continues to pressure the county's operations, requiring implementation of revenue enhancements and cost reductions. Fiscal 2003 estimates show a $73 million general fund balance, equal to approximately 4.4% of spending, up from the 3% in 2002. Projected fiscal year-end 2003 results are favorable due mostly to the state's reinstatement of a sales tax on apparel purchases under $110, providing an additional $40 million since June 2003. Additional flexibility is provided by the state's retirement cost reform program, authorizing all counties to fund the minimum contribution of only 4% of payroll versus the 11% originally budgeted by the county. Conversely, the county's police district fund is projected to show a $3.9 million deficit as a result of increased class sizes, which is expected to be remedied with a 6.5% tax rate increase for the district fund in the 2004 budget.

The adopted fiscal 2004 general fund budget shows an 8.2% increase over 2003 with no tax rate adjustment given the overall 3.9% tax rate increase in other funds. The new recurring revenue stream yielded from the reinstatement of the sales tax is budgeted to rise by $120 million, which is expected to partially offset continued increases in social service and health insurance costs. Additional flexibility is available in the county's TSRF since the 2004 balance is expected to reach approximately $86 million or 5% of budgeted expenditures. The TSRF balance is anticipated to provide needed flexibility for union contracts not yet settled. The county did, however, favorably settle the police union contract with four years of 3.75% salary increases. Fitch believes the county's continued reliance on the often volatile sales tax and non-recurring items to achieve structural balance remains a credit risk in this economic environment. However, Fitch also notes that the county's 3.25% sales tax base growth assumption for 2004 is significantly more conservative than in prior years and does not reflect the most recent 2003 figures which continue to outperform projections.