2008-04-09 23:51:43 -

- Fitch Ratings assigns an 'AA-' rating to New York City, New York's (the city) $525,000,000 general obligation (GO) bonds, fiscal 2008 series L, consisting of $475,000,000 subseries L-1 tax-exempt bonds and $50,000,000 subseries L-2 taxable bonds. The bonds are scheduled to be sold on or about April 15 via negotiation, and will mature Apr. 1, 2010-2028. Early redemption provisions

will be determined upon pricing. In addition, Fitch has affirmed approximately $34 billion in outstanding New York City GO bonds at 'AA-'. The Rating Outlook is Stable.

The city's credit strength is based on the breadth of the economy, high income levels, strong economic performance and financial operations, 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, now under pressure, and to the real estate market.

With the continuation of several years of strong financial performance, primarily attributable to the robust performance of Wall Street and real estate, the city adopted a budget and financial plan in June 2007 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.

The city has subsequently modified the June financial plan, most recently in January, to reflect negative financial market developments. While property taxes are projected to show relatively steady base growth, personal income tax growth is now expected to slow from 12.8% in fiscal 2007 to 1% in fiscal 2008 before dropping 5.6% in fiscal 2009. Sales tax base growth of 4.3% in fiscal 2008 is followed by a projected decline of 1% in fiscal 2009. Business tax growth has been revised downward significantly this year. Projections now show declines in both fiscal 2008 and 2009. Drops in real estate transaction taxes continue through fiscal 2011. Wall Street profits are estimated to have dropped from $20.9 billion in calendar 2006 to $2.8 billion in 2007, and are expected to rise to $9.2 billion in 2008. The bonus pool is estimated to have declined from $34.9 billion in 2006 to $31.2 billion in 2007, and is expected to fall further to $23.1 billion in 2008. Fitch believes that these forecasts are prudent given recent events, although the extent of actual securities industry losses and projected real estate declines remain an uncertainty.

Based on current forecasts of spending and expenditures, the city will end the current fiscal year with $1.6 billion more funds available to offset the fiscal 2009 gap than originally expected, for a total surplus roll of $4.1 billion. After the October 2007 plan revision, the city implemented a hiring freeze for non-essential positions and called on agencies to submit spending reduction programs of 2.5% for fiscal 2008 and 5% for fiscal 2009. Savings from the hiring freeze and spending reduction programs of 2.7% for fiscal 2008 and 4.3% for fiscal 2009 are reflected in the revised January plan.

The January preliminary budget proposal for fiscal 2009 is balanced even after applying $350 million to offset the fiscal 2010 gap (currently estimated at $4.2 billion after applying the offset). In addition to the increased availability of fiscal 2008 moneys, spending restraint is used to offset the decreased revenue forecast. The proposed budget includes extension of a 7% property tax rate cut, although the mayor has stated that this may be changed based on the direction of the economy and the city's success in achieving its labor savings and intergovernmental revenue goals. Since then, the mayor called on agencies to identify an additional 3% in cuts for fiscal 2009, citing decreased expectations of state aid. The city's budget monitors anticipate that the city's budget remains in balance through fiscal 2009, although cite a variety of budgetary risks, including a sharper downturn in Wall Street-related revenues, lower state aid and higher salary and fringe benefit growth trends.

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 121% of the national average. After an employment drop of 5% between 2000 and 2003, much more severe than the national decline of 1.4%, the city has enjoyed strong job growth in recent years. Nonfarm employment rose 2.1% in 2007, and February 2008 employment rose 1.3%. The city forecasts employment growth slowing going forward, to just 0.1% in 2008 and 0.4% in 2009. The unemployment rate as of February 2008 was 4.1%, lower than the 4.8% U.S. level, and below the 4.8% recorded in February 2007. New York's economic dependence on Wall Street remains, with financial activities accounting for about 12.5% of jobs and 30% of earnings.

Debt levels remain high, with net tax-supported debt of about $53 billion, 15.3% of 2005 personal income and $6,364 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.

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