Fitch Affirms Islip, NY's ULTGOs at 'AAA'; Outlook to Negative

Fitch Ratings has affirmed its 'AAA' rating on the following town of Islip, New York (the town) securities:

-- $31,955,000 public improvement unlimited tax general obligation (ULTGO) bonds, series 2005, 2006, 2007, and 2008.

The Rating Outlook is revised to Negative from Stable.

SECURITY

The town has pledged its full faith and credit and unlimited taxing power for debt service on outstanding GO bonds. This pledge is subject to the 2011 state statute limiting property tax increases to the lesser of 2% or an inflation factor (the tax cap law). This limit can be overridden annually by a 60% vote of the town council. No exemption is made under the tax cap law for debt service on outstanding GO debt; however, the constitutionality of this provision has not been tested.

KEY RATING DRIVERS

OUTLOOK CONSIDERATIONS: The Outlook Revision to Negative is driven by a structural imbalance in the town's three primary operating funds: general, town outside village, and highway funds (together, the operating funds) that has persisted since fiscal 2007. Recent attempts to balance the budget have been unsuccessful and continuation of this trend would erode the town's strong reserve position to levels inconsistent with the current rating.

LIMITED FLEXIBILITY: Fitch believes that further tax increases beyond the statutory tax cap may be politically difficult, limiting the town's ability to independently raise revenues. The town has started to restore spending in recent years following wage and resident standard of living pressures.

ABOVE-AVERAGE ECONOMIC INDICATORS: The town's wealth indicators are above average and its unemployment rate is below the state average.

MODERATE LONG-TERM OBLIGATIONS: The town's debt profile is characterized by a moderate amount of rapidly amortizing debt and manageable carrying costs related to debt service and retirement benefits.

RATING SENSITIVITIES

CONTINUED STRUCTURAL IMBALANCE: The continued use of reserves to support town operations without a clear strategy for restoring balance between recurring revenues and expenditures would result in a downgrade.

CREDIT PROFILE

The town of Islip is located on the south shore of Long Island in Suffolk County (ULTGO rated 'A'; Outlook Stable by Fitch), approximately 45 miles east of New York City. The town's population of 336,320 in 2013 represents a 4.2% increase over its 2000 population.

PERSISTENT STRUCTURAL IMBALANCE ERODES STRONG RESERVES

The town's operating funds continue to be structurally imbalanced despite attempts by management to control expenditures and raise revenues. Town management currently projects a $7.3 million net operating deficit after transfers across the operating funds in fiscal year 2014 (despite budgeting for an $11.3 million deficit). This would reduce unrestricted operating fund balance to $41.7 million, a still strong 33.4% of budgeted operating fund spending.

The town's fiscal 2015 budget calls for a $14.3 million deficit across the operating funds, which would reduce unrestricted operating fund balance to $27.2 million, or 20% of budgeted operating fund spending. The town has a history of outperforming its budgets, but has yet to identify a clear strategy to resolve the ongoing structural imbalance. While Fitch believes that the town's current reserve levels are sufficient to weather further mild operational imbalances at the current rating level, Fitch's concern lies in the uncertain duration and magnitude of the town's ongoing structural deficits.

The town's structural imbalance was primarily driven by a collapse in its annual mortgage tax revenue collections, which declined 73% from a peak of $26 million in fiscal 2006 to a trough of $6.7 million in fiscal 2010 and has remained stagnant in the time since. Exacerbating this shortfall has been a series of natural disasters (Hurricane Irene in 2011, Superstorm Sandy in 2012, and historic snowfall and flooding in 2014). Lingering effects from these natural disasters are fairly immaterial, although they have certainly made budgeting more difficult and the town is still awaiting over $12 million in potential cost reimbursements from FEMA and New York State.

Fitch believes that both revenue and expenditure flexibility are limited, which furthers concerns that the imbalance may persist over the near to mid-term. The town has attempted to make up the budgetary shortfall by raising property taxes (overriding the tax cap in fiscal 2013 and raising tax rates 28%) and fees. However, management believes that the town is likely to keep future property tax increases within the cap and fees cannot practically be raised any further. The town has also addressed the expenditure side of the budget by attrition, layoffs, and eliminating departments. However, concessions from the town's labor units have been fairly limited and the town has started to restore expenditures in fiscal 2014 and 2015 to maintain current service levels and address wage pressures.

ABOVE-AVERAGE ECONOMIC INDICATORS

The town's wealth indicators are high with median household income at 161% of the national average. The town's unemployment rate was 5.2% in September 2014, which is below the state (5.6%) and national (5.7%) rates. However, year-over-year improvements in the town's unemployment rate have been driven by labor force contractions that exceed losses in employment. The town is largely built-out, limiting assessed valuation development opportunities. Assessed valuation continues to post very mild year-over-year declines but could potentially see a bump beyond fiscal 2015 as two large developments (Islip Pines and Heartland project) within the town begin construction.

Town residents benefit from multiple modes of transportation to the New York City and Long Island labor markets as well as local employment opportunities. Notable town employers include Good Samaritan and Southside hospitals, NBTY (vitamin manufacturer and wholesaler), and Computer Associates International (software), each employing between 2,500 and 3,500 in 2013.

MODERATE DEBT BURDEN

The town's overall debt burden is moderate at $3,276 per capita or 3.3% of market value. Principal amortization is very rapid, with 87% of debt retired within 10 years. The town does not maintain a capital budget document, but management anticipates continued annual bonding of a moderate $15 million to $20 million annually, which Fitch believes will not have a material impact on the town's overall debt profile.

The town participates in a state-run cost-sharing defined benefit pension plan, New York State and Local Employee Retirement System (NYSLERS), which reported a high 94.6% funded rate at fiscal year-end 2013; using Fitch's more conservative 7% discount rate, the funded rate remains a still high 82.7%. The town's 2013 pension payment was $6.8 million or a manageable 3% of 2013 total governmental spending. Given improvements in the market value of the pension assets, town management expects required contributions to decrease modestly over the next several years; however, this effect will be net zero upon consideration of the town's continued amortization of past deferred pension costs.

The town provides other post-employment benefits (OPEB) on a pay-go basis. The fiscal 2013 pay-go amount was $8.5 million, or 3.7% of total governmental spending. The town's OPEB unfunded actuarially accrued liability is $230 million or a modest 0.7% of market value; per New York state law, the town is not permitted to set up a trust to prefund this liability.

The town's overall carrying costs for debt service, pension, and OPEB pay-go was an affordable 16% of total governmental spending in 2013. Fitch believes that these costs will remain a manageable burden on the town's overall budget.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, National Association of Realtors, and Zillow.

Applicable Criteria and Related Research:

-- 'Tax-Supported Rating Criteria' (Aug. 14, 2012);

-- 'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=958476

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