2008-08-01 23:04:09 -

- Fitch Ratings assigns an 'AA-' rating to New York City, New York's $965 million general obligation (GO) bonds fiscal 2009 series A, consisting of $800 million subseries A-1 tax-exempt bonds and $165 million subseries A-2 taxable bonds. The tax-exempt bonds are scheduled to be sold next week through negotiation. The taxable bonds are scheduled to be sold Aug. 6

through competitive bid. In addition, Fitch affirms approximately $35 billion in outstanding New York City GO bonds at 'AA-'. This affirmation includes the city's $33.45 million fiscal 2003 series G, subseries G-5 bonds, which are being remarketed as uninsured fixed-rate bonds as part of the city's plan to convert outstanding auction-rate debt. The Rating Outlook is Stable.

The city's credit strength is based on the breadth of the economy, high income levels, and exceptional budget management and controls, including a consistently demonstrated ability and resolve to close budget gaps. Offsetting factors include high and rising levels of debt and economic and revenue vulnerability to the cyclical securities industry and to the real estate market. Although Fitch believes that the city has reacted quickly to the current downturn, revising revenue forecasts and taking proactive steps to maintain balance and reduce outyear budget gaps, the extent of actual securities industry losses and real estate declines remains a major uncertainty going forward.

With the continuation of several years of strong financial performance, primarily attributable to the robust performance of Wall Street and real estate, in June 2007 the city adopted a budget and financial plan that was characterized by prudent fiscal management and conservative revenue forecasting. The city used a large fiscal 2007 surplus to offset gaps in the three subsequent years of the financial plan and assumed softening in the securities industry and real estate. Notably, fiscal 2008 was budgeted with $2.5 billion applied to offset gaps in fiscals 2009 and 2010.

The city modified the financial plan over the course of the 2008 fiscal year to reflect negative financial market developments and took action to control costs, including a hiring freeze and agency spending reduction programs that lowered expenditures in fiscal 2008 and beyond. Fiscal 2008 results were stronger than anticipated, with overperformance in personal income, sales, and business tax revenues. The city rolled about $4.6 billion in fiscal 2008 surplus into fiscal 2009 (with about $460 million of that rolled into fiscal 2010 and $350 million into fiscal 2011) and applied an additional $2 billion to pay debt service due in fiscal 2010. With these actions, the fiscal 2010 gap is currently estimated at a relatively manageable $2.3 billion. The projected gap rises to $5.2 billion in fiscal 2011. These forecasts assume that the 7% property tax rate cut is rescinded in fiscal 2010 for a benefit of about $1.2 billion. The city assumes that personal income, business, sales, and real estate-related tax revenues all will drop in fiscal 2009 and remain weak in fiscal 2010. Of course, while revenue estimates appear reasonable continued economic deterioration, particularly as it relates to the securities industry, could result in further negative forecast revisions and widened outyear gaps. For example, the current assumption that Wall Street profits will total $7.1 billion in calendar 2008 is likely to be revisited.

New York possesses inherent strength in the scope of its unique economy and its singular identity as a major tourist destination and an international center for numerous industries. The city's personal income per capita is 127% of the national average. Economic dependence on Wall Street remains, with financial activities accounting for about 12.5% of jobs and 30% of earnings. After an employment drop of 5% between 2000 and 2003, much more severe than the national decline of 1.4%, the city enjoyed strong job growth through 2007. Nonfarm employment in the city rose 2.1% in 2007, well above the 1.1% national increase. Although growth has continued this year, the pace of growth has declined. Nonfarm employment rose 0.6% in June 2008, compared to a decline of 0.1% for the nation. Financial activities employment in the city dropped 0.4% in June, reflecting Wall Street layoffs. The city's unemployment rate as of June 2008 was 5.4%, 98% of the U.S. level.

Debt levels remain high, with net tax-supported debt of about $53 billion, 13.7% of 2006 personal income and $6,357 per capita. Pensions are well funded. The city has created a trust to begin to offset its $57.8 billion retiree health care benefits (OPEB) liability (as of June 30, 2007). Deposits to the trust are irrevocable. Essentially all pay-as-you-go (PAYGO) funding of retiree health care flows through the trust. In addition to the PAYGO amount, the city deposited $1 billion into the trust in fiscal 2006 and an additional $1.5 billion in fiscal 2007. Since monies in the trust can be used at any time to pay the annual costs of retiree benefits ($1.5 billion in fiscal 2008), the $2.5 billion in the trust provides a possible budget relief valve in financially strained times.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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 Ratings, New York
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Richard Raphael, 212-908-0506
Amy Laskey, 212-908-0568
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