Fitch Rates Nassau County, NY's GO Bonds and Tax Anticipation Notes; Outlook Revised to Stable

Fitch Ratings assigns the following ratings to Nassau County, NY (the county):

--$273,600,000 general improvement bonds, 2014 series A at 'A';

--$140,000,000 tax anticipation notes, 2014 series A at 'F-1';

--$60,000,000 tax anticipation notes, 2014 series B at 'F-1'.

The bonds are expected to be sold through competition on Dec. 4.

The bonds are being issued to fund various public purposes, including capital projects, judgments and settlements, tax certiorari payments, and termination pay

The TANs are expected to be sold through negotiation on Dec. 4.

The TANs are being issued in anticipation of the collection by the county of real property taxes for the fiscal year commencing Jan. 1, 2015 and ending Dec. 31, 2015.

In addition, Fitch affirms the following ratings:

--Approximately $1.6 billion in outstanding general obligation bonds at 'A';

--Approximately $243 million in outstanding Nassau Health Care Corporation (NCHCC) county-guaranteed bonds at 'A';

--Approximately $13.1 million in outstanding Nassau Regional Off-Track Betting Corporation (NROTBC) revenue bonds series 2005 at 'A-'.

The Rating Outlook on the bonds is revised to Stable from Negative.

SECURITY

The GO bonds, notes and NCHCC bonds carry the county's faith and credit and taxing power, subject to a 2011 state statute limiting property tax increases to the lesser of 2% or an inflation factor (tax cap law). This limit can be overridden annually by a 60% vote of the county legislature.

The NROTBC bonds are backed by the county's covenant under a support agreement with the NROTBC to make loans to NROTBC equal to debt service on the bonds from legally available funds of the county as appropriated for such purpose. The county commits to transfer funds to the trustee to pay debt service not later than 15 days prior to any debt service payment date. The obligations of the county under the support agreement are unconditional and irrevocable, and the support agreement is not subject to cancellation or termination.

KEY RATING DRIVERS

OUTLOOK REVISED TO STABLE: The Outlook Revision to Stable reflects a steady reduction in the structural deficit and reduction of out-year risks with state legislation reforming property tax refunds, reduction of litigation, and less restrictive labor contracts.

LIMITED FINANCIAL FLEXIBILITY: The primary driver of the 'A' rating is Fitch's expectation that the county's financial flexibility will remain limited, evidenced by weak reserves and a high dependence on economically sensitive sales tax revenues.

IMPROVED RELATIONSHIP WITH NIFA: An improved working relationship with the Nassau County Interim Finance Authority (NIFA) has led to the negotiation, approval and implementation of several important revenue enhancing and expenditure reduction initiatives. NIFA's power as an oversight board remains a credit positive, providing some limits to downside risk.

SHORT-TERM MARKET RELIANCE; SOUND COVERAGE: Cash flow borrowing has declined, but the county continues to rely heavily on short-term market access for note repayment and operations. Note coverage from projected 2015 revenues, borrowables and note proceeds is strong.

STRONG ECONOMIC FUNDAMENTALS: The county maintains a diverse economic base and a population with high income levels.

MANAGEABLE LONG-TERM LIABILITIES: The sizable and wealthy tax base supports a manageable debt burden with above average amortization. Capital needs are moderate and state pension plans are well funded.

RATING SENSITIVITIES

CONTINUED MODEST PROGRESS: The 'A' rating and Stable Outlook incorporate Fitch's expectation that the county will continue to make modest progress in sustainable deficit reduction to maintain a stable, albeit tightly balanced, financial profile. The rating is sensitive to a shift in these fundamentals.

CREDIT PROFILE

The county is located on Long Island, approximately 15 miles east of Manhattan. The population of approximately 1.3 million has remained fairly steady, growing by 1.1% since 2000.

STRUCTURAL DEFICIT REDUCTION; MANAGEABLE OUTYEAR GAPS

The revision of the Outlook to Stable from Negative largely reflects slow and steady reduction in the structural deficit and county and NIFA projections for manageable deficits going forward. The 2013 budgetary basis structural deficit related to the primary operating funds was down for the fourth consecutive year to $96.6 million from $116.9 million in 2012.

The county's proposed NIFA-approved Multi-Year Financial Plan (2016-2018) projects budget gaps of $48.9 million in 2016; $72.5 million in 2017, and $92.3 million in 2018 or 1.4%, 2%, 2.6% of spending, respectively.

Fitch believes the current gaps are manageable relative to the size of the county's operating funds budget but remains skeptical about the county's ability to implement gap-closing measures which will result in breakeven operations. Some of the measures are of a non-recurring nature and may not be realistic given that one or more will require state legislation, action by the county legislature, or approval from NIFA.

POSTIIVE 2013 RESULTS

The county recorded for 2013 (year-end Dec. 31) a budgetary surplus of $55 million. The GAAP basis operating surplus after transfers totaled $48.6 million for the five operating funds (general, police headquarters, police district, fire prevention and debt service). The county's results for 2013 on a NIFA presentation basis (which excludes one time measures among other things) was a negative $78.6 million or 2.9% of budgeted major operating fund expenses. This is a sharp reduction of 59% from 2009 (negative $190.7 million), but slightly higher than in 2012 (negative $68.8 million).

2013 revenues and expenses were lower than budgeted by approximately 2.1% and 4%, respectively. Budgeted revenues were short due primarily to lower state and federal aid and shortfalls in various departmental revenues but were offset by $18.4 million in higher sales tax revenues and $38.8 million in lower expenses for social service programs.

WEAKER FINANCIAL PERFORMANCE PROJECTED FOR 2014

Sales tax revenues make up approximately 40% of major tax-supported fund revenues and outperformed budget for the past four years. Year-to-date sales tax revenues have been weak but improving as the year goes on. First quarter revenues were down by 15% from the prior year but year-to-date have recovered - down by approximately 6%. The county currently anticipates a $48.5 million reduction, ending the year 4.4% down from the 2014 adopted budget.

Management is projecting, before corrective actions, a $33.6 million operating deficit after transfers compared to $3.2 billion in spending. The county is projecting $19.6 million in lower state and federal aid reimbursement and $18.6 million in higher salaries and wages due to contractual increases. Offsetting factors include $20.3 million in lower debt service costs, $14.2 million net increase in speed camera revenue and $12.9 million in lower than anticipated fringe benefits.

Offsetting actions to close the deficit include financing of termination pay ($13.3 million), community development block grant funding of the county's 10% match for FEMA expenses ($12.7 million) and expense reductions from the voluntary separation incentive program and revoked spending ($8 million). If these measures are successful, some of which Fitch believes may not be achievable, management projects a $5.9 million surplus for the year. The county will continue to monitor the potential for additional sales tax shortfall and has identified opportunities to offset negative budget variances through debt service savings, higher than budgeted speed camera revenue and lower early intervention and pre-school expense.

2015 ADOPTED BUDGET INCLUDES PROPERTY TAX INCREASE

The 2015 adopted budget of $2.98 billion ($1.8 billion general fund) is a 6.4% increase over the 2014 adopted budget. The budget growth is driven by treatment related to transitional (tax refund) financing, contractual increases related to new speed camera program and mass transportation, and salaries and fringe benefits. The budget includes sales tax revenue growth of 3% based on reduced 2014 projections. Positively, the budget includes new or increased recurring revenues led by a 3.4% increase in property taxes estimated to bring property taxes to 28% of total revenues.

PROPERTY TAX REFUND REFORM

Fitch views as a credit positive the recently passed state legislation that structurally reforms property tax refunds. The creation of a Disputed Assessment Fund, effective for the 2017 tax roll, will be funded by commercial property owners who challenge their assessments, and will eliminate the county's need to borrow for future property tax refunds.

Fitch believes the resolution to property tax refund relieves the county of a substantial obstruction in its path towards long-term fiscal balance and liquidity improvement. The county legislature has also approved the issuance of bonds totaling $125 million in 2014 (included in this issue), and agreed to $60 million in each of 2015, 2016, and 2017 to reduce the $325 million accumulated tax refund liability.

IMPROVED RELATIONSHIP WITH NIFA

Fitch believes NIFA's oversight has had some positive effects on the county's financial operations, such as instilling increased budgeting discipline. Fitch takes comfort that despite losing its wage freeze power through fiscal 2017 on settled contracts, NIFA provides an added layer of oversight and has line item veto power to assure budgetary balance.

Through an improved working relationship, several important initiatives have been successfully negotiated and approved including the creation of the Disputed Assessment Fund, new labor contracts with moderate increases, New York State legislation authorizing 56 speed camera zones and an agreement with United Water to manage the county's water and sewer facilities.

DECLINE IN CASH-FLOW BORROWING

The county generally issues short-term RANs and TANs around May/June and November/December of each year. Proceeds fund operations in anticipation of sales and property tax receipts and maintenance of cash balances sufficient to repay maturing notes.

Note par has declined over the past few years. Note borrowing in 2012 equaled $476 million or a somewhat elevated 16% of operating fund receipts ($20 million was to account for timing differences with respect to Superstorm Sandy). For 2013, borrowings totaled $433 million (14.1% of receipts) and note par for 2014 is expected to decline further to $400 million (13.2% of receipts). Projected note issuance for 2015 is $400 million but will be reevaluated and potentially downsized, depending on the timing of FEMA reimbursement.

Fitch notes the positive decline in cash flow borrowing but remains concerned about the county's dependence on short-term funding, particularly as the borrowings overlap each other requiring additional issuance to repay outstanding notes.

SOUND NOTE REPAYMENT COVERAGE

The county's cash flows along with proceeds of outstanding notes generally provide substantial coverage for notes with funds for their repayment fully set aside comfortably in advance of maturity. The current RAN issue matures on March 16, 2015 ($130 million) and April 15, 2015 ($70 million). Coverage is sound at 3.5x in March and 3.2x in April. With consideration of borrowable balances in non-major funds, coverage increases to 4.1x and 4.6x in March and April, respectively. The current $200 million issue of tax anticipation notes due in September and October 2015 has strong projected coverage of 3.0x and 3.1x exclusive of borrowable resources.

STRONG SOCIOECONOMIC CHARACTERISTICS

The county benefits from a broad, diverse economy and well above-average economic indicators, including $152,000 market value per capita and solid income levels with 2012 per capita income and medium household income at 151% and 183%, respectively, of the U.S.

The county's unemployment rate remains lower than the rates for New York State and the nation. For September 2014, the county's unemployment rate was 4.7% compared to 5.6% and 5.7% for the state and nation, respectively. The year-over-year decline in unemployment (from 5.8% in September 2013) is attributable to the decline in the labor force (1.7%), outpacing the decline (0.5%) in employment.

INCREASING BUT MANAGEABLE DEBT LEVELS

The county's debt ratios continue to increase but are still manageable in relation to its wealthy tax base. Overall debt totals an above-average $4,396 per capita but a more moderate 2.9% of market value given the strong tax base. However, Fitch believes the statistics are understated as they exclude debt issued by school districts (not available).

Debt ratios should remain fairly stable given manageable capital needs and above-average amortization with 56% (including debt issued by the NIFA) retired in 10 years.

WELL-FUNDED STATE PENSION PLANS

The county participates in the well-funded New York State pension plans. At March 31, 2013, the state and local employees' plan and the state and local police and fire plan had funded ratios of 87% and 88%, respectively. Using Fitch's more conservative 7% discount rate assumption, the plans' funding levels would still be sound at an estimated 82% and 83%, respectively.

County pension payments in 2013 made up a moderate share (4%) of spending. The county has taken advantage of the ability granted by the state to amortize most of the increase in annual pension payments for 2012 and 2013 over 10 years and for 2014 over 12 years. This amortization option provides some near-term budget relief but will make future year budgeting for these payments more challenging.

The moderate pension liability is somewhat offset by a high unfunded actuarial accrued liability for other post-employment benefits (OPEB) at $4.6 billion as of Dec. 31, 2013 or 2.2% of market value.

Carrying costs for debt service, pension and OPEB pay-go equaled a high 21.6% of 2013 total governmental fund spending, with the county's amortization of part of the pension payment somewhat offsetting above-average debt repayment.

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, CoreLogic Case-ShillerIndex, IHS Global Insight, and National Association of Realtors.

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=931055

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