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MOODY'S ASSIGNS MIG 1 TO THE CITY OF ROCHESTER'S (NY) $71.4 MILLION BOND ANTICIPATION NOTES, 2011 SERIES II

08 Aug 2011

AFFIRMS Aa3 LONG-TERM G.O. RATING AFFECTING $282 MILLION IN OUTSTANDING DEBT

Municipality
NY

Moody's Rating

ISSUE

RATING

Bond Anticipation Notes, 2011 Series II

MIG 1

  Sale Amount

$71,390,000

  Expected Sale Date

08/09/11

  Rating Description

Bond Anticipation Note

 

Opinion

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.

RATINGS RATIONALE

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.

STRENGTHS:

"University presence stabilizes the city's tax base

"Ample funds outside the General Fund that can be used for operations.

WEAKNESSES

"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 ECONOMIC CHALLENGES

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.

KEY STATISTICS:

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 supporting debt)

Direct debt burden: 2.3% (adjusted for state school building aid and self supporting debt)

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.

REGULATORY DISCLOSURES

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.

Analysts

Robert Weber
Analyst
Public Finance Group
Moody's Investors Service

Andy Moleon
Backup Analyst
Public Finance Group
Moody's Investors Service

Kevork Khrimian
Senior Credit Officer
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
USA

MOODY'S ASSIGNS MIG 1 TO THE CITY OF ROCHESTER'S (NY) $71.4 MILLION BOND ANTICIPATION NOTES, 2011 SERIES II
No Related Data.
© 2020 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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