September 26, 2012 / 3:41 PM / 5 years ago

TEXT-Fitch rates NYS Dormitory Authority PIT bonds 'AA'

Sept 26 - Fitch Ratings has assigned an 'AA' rating to the following
Dormitory Authority of the State of New York (DASNY) state personal income tax
(PIT) revenue bonds (general purpose):

--$830 million series 2012D (tax-exempt);

--$54 million series 2012E (tax-exempt); 

--$48 million series 2012F (federally taxable).

The bonds are expected to sell through negotiation the week of Oct. 8, 2012. 

In addition, Fitch affirms the 'AA' rating on approximately $25 billion in 
outstanding PIT bonds issued by various state agencies. 

The Rating Outlook is Positive. 

SECURITY 

The bonds are secured by financing agreement payments to be made by the State of
New York, subject to legislative appropriation. Payments are derived from 25% of
the state's PIT receipts. 

KEY RATING DRIVERS

STRONG STRUCTURE ELIMINATES RISK OF NON-APPROPRIATION: Bond payments require 
annual state legislative appropriation; however, in the event of 
non-appropriation the state would be unable to receive PIT revenue deposited in 
the revenue bond tax fund, up to the greater of 25% of annual PIT receipts or $6
billion. Fitch believes that this structural feature effectively eliminates the 
risk of non-appropriation.

PIT THE STATE'S MAJOR REVENUE SOURCE: The PIT makes up about 60% of state tax 
receipts, and the additional bonds test is adequate to offset volatility in the 
revenue stream. 

GENERAL CREDIT QUALITY OF NEW YORK STATE: Due to the strengths noted above, the 
rating on the PIT bonds is equal to that assigned to New York's GO debt. Fitch's
'AA' GO rating on New York is based on a wealthy economy linked to financial 
services, the state's moderate debt burden and well-funded pensions, and strong 
financial planning and reporting practices. The Positive Outlook reflects 
actions in recent budgets to identify sustainable solutions to budgetary 
challenges, a notable change from the historical tendency to rely on 
nonrecurring measures to address weakening in the state's volatile revenue 
system during downturns.

WHAT COULD TRIGGER A RATING ACTION

Changes in New York State's GO rating, to which this rating is linked.

CREDIT PROFILE 

Underlying the 'AA' rating on the PIT bonds is the importance of the PIT to 
state finances (about 60% of tax receipts), the set-aside of PIT revenues for 
debt service, the trapping of funds if appropriation is not made, and the 2x 
additional bonds test (ABT). Because of these strengths, the rating on PIT bonds
is equal to that assigned to New York's GO debt despite the appropriation 
requirement. 

The PIT revenue stream responds quickly to changing economic conditions. 
Although a temporary rate increase was included in the state's fiscal 2010 
enacted budget, the fiscal 2010 revenue forecast was reduced repeatedly and PIT 
receipts for the year declined 5.7% from fiscal 2009 levels. Fiscal 2011 
revenues, though below budget expectations, rose 4.2% over the prior year. 
Despite reductions in the revenue forecast in fiscal 2012, performance for the 
year was solid with PIT receipts up 7.1%, year over year, and 3.8% growth is 
expected for the current fiscal year, which began on April 1. In a December 2011
special legislative session, the state extended through 2014 the bulk of the 
temporary income tax rate increases on the highest earners that were scheduled 
to expire after tax year 2011. This will bolster PIT revenues through fiscal 
2015. Positively, debt service coverage remained strong throughout the downturn.


Although payment of debt service on PIT bonds is subject to appropriation, each 
month an amount equal to 25% of estimated available PIT revenue (i.e. receipts 
after refunds) is deposited into the revenue bond tax fund from the withholding 
portion of the tax. After retention of 125% of financing agreement payments for 
PIT bonds due in the succeeding month, excess monies are transferred to the 
state's general fund. Should amounts in the revenue bond tax fund be 
insufficient, the state comptroller is required to transfer from the general 
fund without the need for further appropriation. If no appropriation is made, 
deposits to the revenue bond tax fund are trapped and cannot be used (except for
GO debt, if necessary), depriving the state of the monies in excess of debt 
service. 

The state repeatedly lowered the forecast for PIT revenues over the course of 
fiscal 2009, and revenues came in at $36.8 billion, basically flat to fiscal 
2008. Even with the temporary PIT rate increase, which established two new 
brackets and a top rate of 8.97% as compared to the prior 6.85%, fiscal 2010 
revenues fell to $34.8 billion, reflecting a large decline in state personal 
income. Although the state's revenue forecast was reduced over the course of the
year, fiscal year 2011 revenues rose to $36.2 billion. 

The PIT revenue stream showed continued growth in fiscal 2012, although the 
state's outlook again weakened during the year. (The temporary tax rates in 
effect for tax years 2009 through 2011 had a significant positive effect on 
state revenues through fiscal 2012.) Fiscal 2013 revenues are projected to rise 
to $40.3 billion. Fitch believes that given the economic sensitivity of the 
state's revenues and the uncertainty in the economic environment, downside risk 
to the forecast remains, although debt service coverage continued to be 
substantial even with deterioration in revenue performance in the recession and 
Fitch expects it to remain so.U.S. State Government Tax-Supported Rating Criteria

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