NEW YORK - (Business Wire) Fitch affirms the 'AA-' rating and Positive Rating Outlook on outstanding New York State general obligation (GO) bonds following review of the first quarterly update to the state's financial plan.
In the update the state meaningfully reduced forecasts of tax revenues. The state now forecasts a $630 million general fund shortfall for the current fiscal year and a $1.3 billion increase in the fiscal 2010 gap estimate, to $6.35 billion (including a $310 million Health Care Reform Act (HCRA) shortfall). The revisions are a response to developments since the enacted budget and highlight the importance of the cyclical financial services industry to state revenues. The current-year shortfall is largely attributable to lowered performance and expectations for business (particularly bank) taxes and, to a lesser extent, sales and use taxes; the outyear estimates for all major tax sources were reduced. Although Fitch recognizes the significant uncertainty associated with the declining economic and financial environment, the state is taking proactive steps to address the projected budget gaps. The fiscal 2009 shortfall is expected to be resolved through executive action to cut spending and the governor is seeking additional savings, including by calling a special legislative session, to hedge against the possibility of additional shortfalls this year and begin to address the fiscal 2010 gap. Future credit direction will depend on the severity and duration of the downturn and the state's success in achieving sustainable budget solutions.
New York's 'AA-' GO rating recognizes the state's substantial wealth and resources and broad economy, somewhat tempered by uneven performance across the state. Net tax-supported debt levels have been relatively stable as a percentage of personal income and are expected to remain above average but still in the moderate range; pensions are well funded.
Following several years of robust growth, the state reduced revenue forecasts on multiple occasions in fiscal 2008, largely due to lowered forecasts for the finance and insurance sector. The budget remained in balance, helped by lowered estimates of Medicaid spending, but outyear gap estimates steadily increased. Fiscal 2008 base tax growth of 6% represented a sharp drop from the 12.8% rate for fiscal 2007.
The enacted budget for fiscal 2009, which began on April 1, was based on the expectation of 2.6% base tax growth. Actions to close a $5.2 billion gap and fund about $900 million in new programs included 3.35% across-the-board agency spending cuts, a cigarette tax increase and other limited revenue measures, and use of non-recurring resources.
On July 30th the state released the first quarterly update to the fiscal 2009 financial plan. The estimate of business taxes was brought down by $510 million in fiscal 2009 ($340 million from the bank tax alone) and reduced substantially in each of the outyears. The sales tax forecast was lowered for the current and future years. Personal income tax (PIT) performance is now expected to be marginally better in fiscal 2009 than previously expected, reflecting overperformance to date, but estimated PIT revenues were reduced substantially in each of the outyears. For the first three months of fiscal 2009 total revenues have been in line with the forecasts included in the enacted budget, with PIT revenues related to calendar 2007 liability payments largely offsetting severe business tax underperformance. The financial plan revisions are based on expectations of further weakening going forward. Estimates for capital gains and bonuses were both sharply reduced.
In aggregate, the first-quarter financial plan revisions result in a $630 million current-year shortfall that the state believes can be resolved through spending control pursuant to executive action, including an additional across-the-board cut in state agency spending of 7%. The governor has called for a special legislative session starting Aug. 19 to identify $600 million in additional savings measures, for a total of $1.2 billion in savings this year. This would begin to address a fiscal 2010 budget gap that has grown from $5 billion at the time of budget enactment to $6.35 billion currently, including a $310 million HCRA shortfall. Pursuant to new programs launched with the fiscal 2008 budget, the financial plan assumes substantial annual increases in funding for education and property tax relief. The next quarterly update to the financial plan is scheduled for October 2008.
New York's personal income per capita is the fourth highest among the states, at 123% of the U.S. average. Following a 2.6% decline from 2000-2003, nonfarm employment has expanded year-over-year every month since March 2004. Employment rose 1.4% in 2007 compared to growth of 1.1% for the nation. Year-over-year monthly employment performance in 2008 has been decelerating but remains positive and above the U.S. The state's nonfarm employment grew 0.3% in June 2007, compared to a 0.1% decline for the nation. New York lost jobs in construction, trade and financial activities in June, but benefited from robust growth in education and health services. The state projects that nonfarm employment will grow 0.2% in calendar 2008 and be flat in calendar 2009. State unemployment rates, which historically have been above the national rate, have been slightly below or the same as those of the U.S. in the past few years.
Growth in the state is concentrated in the New York City region. The financial activities sector accounts for about 8% of jobs and 22% of earnings in the state, compared with 6% and 10% for the nation. This makes New York vulnerable to economic cyclicality, particularly given the prominence of personal income tax receipts in the state's revenue structure.
New York's net tax-supported debt is above average but still in the moderate range at 5.1% of personal income. Most of New York's debt has been issued by state public authorities and secured by appropriations; only about 7% is general obligation. While this results in a diffuse debt structure, there is strong centralization and oversight in the budget division, and approval by the public authorities control board is required for many of these bond issues.
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Fitch Ratings, New York
Laura Porter, 212-908-0575
Richard Raphael, 212-908-0506
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