AFFIRMS Aa3 LONG-TERM G.O. RATING AFFECTING $282 MILLION IN OUTSTANDING DEBT
Bond Anticipation Notes, 2011 Series II
Expected Sale Date
Bond Anticipation Note
NEW YORK, Aug 8, 2011 -- Moody's Investors Service has assigned a MIG 1 rating to the City of
Rochester's (NY) $71.4 million Bond Anticipation Notes - 2011 Series II.
Concurrently, Moody's has affirmed the city's Aa3 long-term general obligation
bond rating, affecting $282 million in outstanding long term debt secured by the
city's unlimited property tax pledge.
The MIG 1 rating additionally reflects the city's demonstrated ability to access
the bond market to permanently finance the notes at maturity. The Aa3 rating
reflects the city's maintenance of a satisfactory financial position despite
persistent economic challenges and an above average debt burden. Proceeds will
redeem $40.7 million of outstanding notes and provide $30.6 million of new money
to fund capital projects. Projects included in the current offering are
general city purposes ($31.9 million), improvements to school facilities ($21.3
million), water and sewer facilities ($15.2 million), Parking ($1.8 million) and
various other projects.
Effective January 1, 2012, all local governments in New York State will be
subject to a property tax cap which limits levy increases to 2% or the rate of
inflation, whichever is lower. While school district debt has been exempted from
the cap it has not been for all other local governments. Moody's will continue
to treat all general obligation debt issued in New York as an unlimited tax
pledge through the end of the year. We continue to research what the impact of
the new property tax cap will be on debt issued by nonschool districts after it
goes into effect next year. For more information regarding the property tax cap
please reference the Special Comment "New York State's Property Tax Cap
will Further Pressure Local Government Finances; School District's Most
Impacted" released July 5, 2011.
"University presence stabilizes the city's tax base
"Ample funds outside the General Fund that can be used for operations.
"State aid reductions for both the City and the School District will
challenge the city's financial position.
DEMONSTRATED MARKET ACCESS
The city is a frequent debt issuer with a strong history of favorable market
access. The city received five bids on it's February 2011 note sale, nine bids
on its August 2010 note sale, five bids on its February 2010 note sale, six bids
on its February 2009 note sale, eight, six and five bids, respectively, on its
August 2008, February 2008 and October 2007 note sales. Given this history,
Moody's expects the city will be able to refinance the current notes at their
August 16, 2012 maturity.
SATISFACTORY FINANCIAL POSITION EXPECTED TO REMAIN STABLE DESPITE
Moody's believes that the city has demonstrated conservative
financial management practices that have supported the maintenance of
satisfactory reserve levels in the face of economic weakness. The city
ended fiscal 2010 with a $4.4 million General Fund operating surplus, increasing
General Fund balance to $33.97 million or 7.2% of General Fund revenues. The
operating surplus represents the fifth consecutive year where General Fund
balance increased. While reserves remain narrow, the city has historically
maintained significant reserves outside the General Fund, which are legally
available for General Fund operations. Despite the appropriation of $4.2 million
in fund balance for fiscal 2010 and a revenue shortfall of $6.1 million, driven
mostly by $5.1 million in charges for services, the city was still able to
operate at a surplus. The city offset these revenue declines by conservative
budgeting on various expenditures. Additional liquidity is provided by the
city's Debt Service Fund, which ended fiscal 2010 with ample $57 million, of
which $36 million is available to General Fund operations. The city also
benefits from approximately $21.4 million in unrestricted assets in its Internal
Service Fund, which enhances liquidity and offsets weaker reserve levels in the
General Fund. Financial flexibility is further enhanced by significant annual
funding of capital improvements on a pay-as-you-go basis, with the General Fund
transferring $38 million to the Capital Projects Fund for this purpose in 2010.
Moody's analysis of the city's financial position also factors the
fiscal condition of the Rochester City School District, a component unit of the
city. The school district receives a flat $119.1 million contribution from the
city every year (approximately 21% of district revenues in 2010). The district
ended 2010 with a $17.2 million addition in the district's General Fund balance,
primarily due to midyear budget cuts and not filling vacant positions.
Taken together, city and school district reserves totaled $111.4 million,
equivalent to an adequate 10.9% of combined operating revenues. Inclusion of the
city's substantial Debt Service Fund balance increases available combined
reserves to a satisfactory 14.5% of combined operating revenues. Moody's
believes the city's financial reserves, as well as annual budgetary flexibility
afforded by pay-go capital spending, provide the city satisfactory financial
cushion to weather near-term pressures related to the ongoing economic recession
and anticipated state aid reductions.
The city's fiscal 2011 General Fund budget anticipated a 1.4% decline in
revenues (budget-to-budget), net of the 2010 spin-up receipt which is not
budgeted in 2010. The budget maintains the property tax rate essentially flat at
the 2010 level, although the levy is projected to increase by $4.3
million, driven by expected assessed value growth. The budget assumes a $3.6
million decline in state aid, a $1.3 million decline in fines and forfeitures,
and a $700,000 (0.5%) decline in sales tax. These reductions are offset by a $12
million use of fund balance (which is not expected to be replenished) which is
to be transferred out of the Debt Service Fund and into the General Fund, and
$10 million reduction in pay-go capital expenditures. Management reports
that the city will finish the year with General Fund balance consistent to that
in the previous year. The school district budget for fiscal 2011 also includes a
larger fund balance appropriation ($25.8 million), which the district intends on
fully replenishing, a reduction in state aid revenues, and maintains the city
revenue contribution at $119.1 million. The school budget reduces expenditures
by $36.2 million, driven by health insurance savings, favorable renegotiation of
the district's transportation contract, and the elimination of 200 full time
equivalent positions. The district was successful in replenishing the fund
balance appropriation through expenditure cuts and a district wide hiring
freeze. The city began the budget process with a $50 million budget gap
however they were able to close the gap through a cut in capital spending
($15.9 million), departmental reductions and efficiencies ($16 million), and a
proposed tax and fee increase ($5.5 million), in addition to other revenue and
expenditure enhancements. The city's adopted 2012 budget anticipates a $7
million (1.9%) decline in revenues (budget-to-budget) with appropriated fund
balance of $4.9 million and transfers from the Debt Service Reserve Fund of $3.9
million (significantly below fiscal 2011). The budget also includes an increase
of 4% over budget (flat when compared to year end actual) in sales tax
revenues. Conservative management and maintenance of healthy reserve levels
remain important buffers in the face of economic vulnerabilities, including a
declining population and sales tax receipts which are expected to be challenged
in the near term.
CITY'S TAX BASE REMAINS STABLE WITH PERSISTENTLY ELEVATED UNEMPLOYMENT
Following a period of declining assessed valuation in the early half of this
decade reflecting continued population decline and the loss of
manufacturing jobs, the city's taxable values have stabilized in recent
years, due in large part to increases from revaluations completed every
four years (most recently, a 10.8% increase in 2009). The city's population has
gradually declined over the past 35 years from 295,011 in 1970 to approximately
210,565 in 2010 (28.8% decrease), reflecting the continued struggle with
manufacturing job losses. Since 2000, Rochester's labor force has
declined approximately 16.2% (approximately 18,185 individuals) reflecting
downsizing by two of the city's larger employers, Eastman Kodak (senior
unsecured rated Caa1/stable outlook) and Xerox (senior unsecured rated
Baa2/positive outlook). However, according to Moodyseconomy.com, Rochester is
the best-performing large metro area in New York. Job growth has spread to
nearly every industry-more than 75% were either adding workers or holding
payroll levels steady in April. The city also benefits from a number of stable
institutions, including the University of Rochester (rated Aa3/stable outlook;
8,750 students) and the Rochester Institute of Technology (rated A1/stable
outlook; 13,422 students). In addition, a robust health care sector supports
over 23,000 jobs. Further growth in this sector is expected, given a January
2008 announcement of a $550 million expansion by the University of Rochester,
projected to occur over a five to ten year period. Positively the city has seen
an increase in construction permits mostly due to ongoing residential
construction. Since 2009 the value of construction permits has increased to
$40.2 million in 2011 from $2.9 million. The city expects an additional 300 new
housing units to be added with the expansion of the City Center project.
Additionally, the 17 story Midtown Tower is currently being renovated and is
expected to include 176 residential apartments, 24 high-end condominium's and
over 100,000 square feet of commercial, retail and restaurant space. Cody Gate
Ventures, a British venture capital firm, has purchased one of the former Kodak
buildings and plans to move three new technology firms into the area. The
project is expected to create 250 new high paying technology jobs and could
generate more than $100 million in new investment. As part of the midtown
revitalization project PAETEC Holding Corporation had planned to move its
headquarters to a newly constructed 3.5 story building downtown, however,
the Windstream Corporation announced on August 2, 2011 plans to acquire PAETEC.
It is unclear at this time whether Windstream will continue with this project.
Unemployment in Rochester, at 9.8% in May 2011, remains above the state, but in
line with national levels (7.8% and 8.7%, respectively). Wealth indices are
below the state average and full value per capita is a modest $29.809 (based on
New York State special equalization rate).
ABOVE AVERAGE DEBT BURDEN WITH RAPID DEBT REPAYMENT POLICY
The city's direct and overall debt burdens, which factor bonds and bond
anticipation notes issued on behalf of the Rochester City School District, are
above average at 6.9% and 7.9% of full valuation, respectively. After adjusting
for state school building aid to the district, the city's direct and
overall debt burden is still a high 5.6% of full valuation. Moody's notes that a
special purpose entity has been established that may issue debt for school
purposes moving forward. Depending upon the structure and security of these
issues, this vehicle may provide some relief for the city's direct debt burden.
Debt payout is aggressive with 86% of principal repaid within ten years. Future
significant increases in the city's direct debt burden, whether driven by
debt issuance or tax base deterioration could impact credit quality. The city
has no variable rate debt and is not party to any derivative agreements.
WHAT COULD MAKE THE RATING GO UP:
"Significant increase in socioeconomic profile of the city.
"Significant decline in the city's debt burden.
WHAT COULD MAKE THE RATING GO DOWN:
"Significant increase in debt burden.
"Significant decline in liquidity, including all funds available for
General Fund operations.
2010 Population: 210,565
2012 Full Valuation: $6.1 billion
2012 Full Value Per Capita: $28,986
1999 Per Capita Income: 67% of state average
1999 Median Family Income: 61% of state average
Unemployment Rate (May 2011): 9.8%
Overall debt burden: 5.9% (adjusted for state school building aid and self
Direct debt burden: 2.3% (adjusted for state school building aid and self
Fiscal 2010 General Fund balance: $33.9 million (7.2% of General Fund revenue)
Fiscal 2010 Operating Funds combined balance: $148,785 million (14.5% of
Combined Revenues of City General Fund, City Debt Service Fund, School District
General Fund, and School District Debt Service Fund)
Outstanding General Obligation Debt: $282 million
The principal methodology used in this rating was Bond Anticipation Notes and
Other Short-Term Capital Financings published in May 2007. Please see the Credit
Policy page on www.moodys.com for a copy of this methodology.
For ratings issued on a program, series or category/class of debt, this
announcement provides relevant regulatory disclosures in relation to each rating
of a subsequently issued bond or note of the same series or category/class of
debt or pursuant to a program for which the ratings are derived exclusively from
existing ratings in accordance with Moody's rating practices. For ratings issued
on a support provider, this announcement provides relevant regulatory
disclosures in relation to the rating action on the support provider and in
relation to each particular rating action for securities that derive their
credit ratings from the support provider's credit rating. For provisional
ratings, this announcement provides relevant regulatory disclosures in
relation to the provisional rating assigned, and in relation to a
definitive rating that may be assigned subsequent to the final issuance of the
debt, in each case where the transaction structure and terms have not
changed prior to the assignment of the definitive rating in a manner that
would have affected the rating. For further information please see the ratings
tab on the issuer/entity page for the respective issuer on www.moodys.com.
Information sources used to prepare the rating are the following: parties
involved in the ratings and public information.
Moody's considers the quality of information available on the rated
entity, obligation or credit satisfactory for the purposes of issuing a rating.
Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.
Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.
The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Public Finance Group
Moody's Investors Service
Public Finance Group
Moody's Investors Service
Senior Credit Officer
Public Finance Group
Moody's Investors Service
Journalists: (212) 553-0376
Research Clients: (212) 553-1653
MOODY'S ASSIGNS MIG 1 TO THE CITY OF ROCHESTER'S (NY) $71.4 MILLION BOND ANTICIPATION NOTES, 2011 SERIES II
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007