Albany, NY (August 22, 2013)
"Today's action by Moody's Investors Service to revise our State's outlook from stable to positive is another strong affirmation of the progress we have made to put New York's fiscal house in order. After years of late budgets and legislative gridlock, we have been able to show that New York State is working again and confidence in government is being restored. Since taking office, my administration has delivered three on-time and balanced budgets, controlled government spending, and cut taxes for the middle class to their lowest levels in 60 years. New York has gained over 300,000 private sector jobs with more being added every day, and this momentum is leading us to fiscal stability and economic prosperity."
Excerpt of Moody’s Report Included Below
Moody's moves New York State outlook to positive; affirms GO at Aa2
State has $62.1 billion in net tax-supported debt outstanding
NEW YORK, August 22, 2013 -- Moody's Investors Service has changed the outlook on New York State to positive, and affirmed the Aa2 rating on New York's $3.5 billion of General Obligation Bonds. Moody's has also affirmed the ratings on all outstanding appropriation-backed and G.O.-related bonds as well as various state intercept programs (see detailed list below).
SUMMARY RATING RATIONALE
The positive outlook reflects improvements in the state's economy, governance, financial position and fiscal outlook that, if continued, would allow the state to improve its reserves and draw closer to structural balance.
New York's Aa2 general obligation rating reflects the relative strength and recent resilience of its economy; governance constraints including a history of late budgets and limited executive authority to reduce appropriations; a financial position that has improved but remains below average; a moderate combined debt and pension burden; and sound debt management and frequently updated financial forecasting. The rating incorporates notable improvements in the state's economy, governance, financial position, and budgetary balance over the past three fiscal years, as well as remaining risks, including weakness in the financial services sector, continued revenue volatility, and relatively low fund balance and liquidity positions.
- Broad-based, mature, and wealthy state economy that attracts a highly-educated and global workforce, and has shown above-average resilience during the recovery
- Long track record of closing annual budget gaps, and more recently, with more structurally balanced solutions
- Accumulated rainy day reserves have remained stable for 10 consecutive years, providing cash flow flexibility, although at comparatively low levels
- State pension system is well funded compared to other states and unfunded liability is modest, placing state's fixed costs at the 50-state median relative to total revenues
- Recent reversal of history of political gridlock, reflected in timely budgets, implementation of spending controls and move toward structurally balanced budgets.
- Revenue volatility stemming from the state's dependence on the financial services sector and income taxes, posing risks to budgetary balances, liquidity, and financial stability
- Relatively low fund balances provide minimal protection against revenue volatility
- Above-average state tax-supported debt burden partly reflects a past record of deficit-related bonding
DETAILED CREDIT DISCUSSION
FINANCIAL POSITION IMPROVES BUT REMAINS EXPOSED TO VOLATILE REVENUE TRENDS
New York finished fiscal 2013 with a $1.61 billion budgetary general fund balance (3.1% of receipts and net transfers), slightly diminished from a nearly $1.8 billion closing balance the previous year. The closing balance included $1.1 billion in the Tax Stabilization Reserve, $175 million in the Rainy Day Reserve, $75 million in undesignated fund balance and $77 million in unrestricted reserved administratively designated for prior year labor agreements. The state operating funds closing balance increased to $4.3 billion (4.9% of receipts and net transfers) from $3.8 billion in fiscal 2012. State operating funds include the General Fund, state-financed special revenue funds and debt service funds.
The state has had difficulty achieving the enacted budget revenue forecasts in recent years, and total receipts in 2013 fell $281 million below the initial projection. However, the state was able to maintain budget balance largely through restraining disbursements.
Based on GAAP fiscal 2013 figures (ending 3/31), New York's financial position improved but remained slightly negative and well-below pre-recession levels. Available General Fund balances (unassigned balances plus the Rainy Day Fund) increased to negative $2.2 billion (-3.6% of revenues and net transfers) in fiscal 2013, marking significant improvement from the negative $5.6 billion low in fiscal 2010.
With a $100 million deposit in fiscal 2012, the $1.1 billion (1.8% of revenues) Tax Stabilization Reserve Fund has remained fairly stable for more than ten years, providing consistent but moderate liquidity support. However, reserves are small relative to revenues and given the historic volatility of the state's revenue base.
The state's liquidity position has strengthened, and the lowest General Fund monthly cash balance in fiscal 2013 was $1.5 billion, compared to negative $87 million in fiscal 2011. As a result, the state has not deferred school aid payments, STAR distributions or tax refunds in the past two fiscal years, nor has it borrowed internally from its short-term investment pool ($3.8 billion ending balance in fiscal 2013) during the same period. The state's fund balance and liquidity position remain below pre-recession levels and provide limited cushion against historically volatile revenue trends. In the past two recessions, sharp revenue losses have led to rapid decreases in GAAP fund balance.
THIRD CONSECUTIVE ON-TIME BUDGET REDUCES PROJECTED SHORTFALLS
For the third consecutive year, the state adopted a timely budget for fiscal 2014. From the mid-1970s until 2004 the state's budget was more than 30 days late 14 times, and exceeded the 30 day threshold in all but one year from 1994 to 2004. Since 2005, state budget adoption exceeded that threshold only in 2010.
The state operating budget increases $1.9 billion (2.1%) over fiscal 2013, driven by growth in aid to school districts, Medicaid, various local assistance grants and debt service.
Budget gaps at the time of enactment were projected to grow from about $2 billion in fiscal 2015 to $2.9 billion in fiscal 2017. This picture is brighter than that painted prior to budget enactment when the budget office placed the 2016 gap at $5.7 billion. The reduction in the projected gaps stems primarily from the extension to fiscal 2017of increases in several taxes, including the personal income tax.
Fiscal 2014 revenues through July 2013 have benefited from a $250 million financial settlement with Bank of Tokyo-Mitsubishi and settlement of tribal compacts, which will add $204 million to the state's coffers this year.
STATE REGAINS JOBS LOST IN RECESSION
Despite strong job gains coming out of the recession, New York remains vulnerable to adverse financial market conditions given its dependence on income tax payments from the wealthy and its high exposure to securities industry employment. Through the recession, job losses in the state were less severe than the nation, and year-over-year growth has surpassed or closely approximated the U.S. through the recovery. As a result, the state has regained its pre-recession peak payroll employment level in 2012 while the US has not yet achieved that benchmark. But while US payroll employment growth gained momentum in 2012, increasing to 1.7% from the 1.2% pace in 2011, New York's 1.4% pace stayed on par with the previous year. Both the state and the US have seen more muted job gains through the first half of 2013.
The state's unemployment rate remained consistently below the U.S. average but has proved more stubborn in the economic recovery. In June 2013, the state's unemployment rate was 7.6%, versus 7.5% in the US, compared to a recession peak of 8.9% for the state and 10% for the nation.
The overall employment figures in New York State are themselves not as meaningful as they are elsewhere, due to the state's high reliance on taxes paid by those in the high-paying financial services industry. The state lost over 69,000 financial activity jobs from peak to trough during the downturn.
The loss of these highly paid jobs affects the state finances disproportionately given the progressive tax structure and the high percentage of total tax revenue coming from income taxes (60% in fiscal 2012). Personal income declined further during the recession than in the US. More recently, personal income growth been slightly slower than the US, growing 2.4% in 2012 compared to 3.5% for the US. The state's per capita personal income remains very strong at 122% of the US level.
WELL-FUNDED PENSION PARTLY OFFSETS HIGH DEBT POSITION
New York State bonded debt position is the fifth highest in the nation on a per capita basis. Total net tax supported debt (NTSD) of $62.1 billion comprises 5.4% of gross state product, compared to the 2.4% national median. Debt per capita is $3,174, compared to the median $1,074, and debt as a percent of personal income is 6.3% compared to 2.8% nationally.
New York has a below-average employee unfunded pension liability burden, based on its share of the NYS Employees Retirement System and the Police and Fire Retirement System. We estimate the state's portion of the reported combined $8.9 billion of unfunded pension liabilities for the two systems was $3.8 billion as of March 31, 2011. Together, these reported unfunded liabilities total 2.9% of New York's 2011 all governmental fund revenues.
Due to the state's amortization of pension contributions, which we view as a form of deficit borrowing, state contributions to its pension plans were 67% of the required contribution in 2013. According to the state's amortization payment schedule, it will contribute an increasing percentage of the required contribution until 2018, at which point its contributions will exceed the required amount.
The state's adjusted net pension liability, under our methodology for adjusting reported pension data, is $22 billion or 16.6% of all governmental fund revenues, compared to a state median of 45.1%. Moody's adjusted net pension liability applies a bond index rate to determine the present value of plan liabilities, incorporates the market (rather than actuarial) value of plan assets and makes certain other changes to improve comparability of reported pension liabilities. The adjustments are not intended to replace New York's reported liability information, which reflects the state's long-term funding plans, but to improve comparability with other rated states. New York's share of liability for both pension plans was determined in proportion to its contributions to each plan.
The state recently implemented pension reforms for new employees that will raise the retirement age, increase employee contributions to their pension plan, and increase the number of years included in the calculation of final average salary, upon which pension benefits are based.
EXPOSURE TO VARIABLE RATE DEBT AND INTEREST RATE DERIVATIVES MODEST
As of March 31, 2013, New York had $2.3 billion of variable rate debt outstanding, which comprised a modest 4% of net tax supported debt. The state has approximately $2.1 billion in swaps outstanding, with a combined mark-to-market of negative $255 million at mid-August 2013. The state is exposed to potential interest rate volatility related to the recent downgrade of liquidity provider Bank of America, which provides letters of credit on 34% of the state's variable rate debt. The state reports, however, that remarketings have been successful.
The positive outlook reflects improvements in the state's economy governance, financial position and fiscal outlook that, if continued, would allow the state to improve its reserves and draw closer to structural balance.