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Rating Action:

Moody's assigns Aa1 to New York State's Personal Income Tax Revenue Bonds Series 2018A & B; outlook stable

04 Dec 2018

New York, December 04, 2018 -- Moody's Investors Service has assigned a Aa1 rating to approximately $1.72 billion of the State of New York's revenue bonds, consisting of $1.66 billion State Personal Income Tax Revenue Bonds (General Purpose), Series 2018A (Tax-Exempt) and $65.98 million Series 2018B (Federally Taxable) to be issued through the Dormitory Authority of the State of New York (DASNY). The transaction is scheduled to close on December 21 in a negotiated sale. The outlook is stable.

RATINGS RATIONALE

The Aa1 rating on the State Personal Income Tax Revenue Bonds reflects the strength of New York's personal income tax revenue base, very strong coverage of debt service, and a strong bond payment mechanism. The rating also reflects the recent dedication of receipts from the state's new Employer Compensation Expense Program (ECEP), discussed further in the Legal Security section below. The receipts that are dedicated to pay debt service are available to the state for general purposes only after an appropriation for debt service and if scheduled debt service set-asides have been made. The strength of the security structure supports a very high rating, but the need to appropriate the revenues effectively caps the rating at that of the state of New York, which is rated Aa1 with a stable outlook.

RATING OUTLOOK

The outlook for New York is stable, reflecting its adequate liquidity, adequate combined formal and informal reserves, and continued control of spending growth. The outlook also reflects our expectation that the state will close budget gaps largely with recurring solutions and contain its structural fiscal imbalance.

FACTORS THAT COULD LEAD TO AN UPGRADE

- Change in the legal security providing for direct pledge of segregated personal income tax and ECEP revenues without annual appropriation requirement

- State rating upgrade

FACTORS THAT COULD LEAD TO A DOWNGRADE

- Diversion of state personal income tax or ECEP receipts prior to deposit to the Revenue Bond Tax Fund (RBTF)

- Failure to appropriate financing agreement payments

- State rating downgrade, which could be triggered by growing structural budget gaps and reliance on non-recurring resources for recurring expenses

LEGAL SECURITY

The DASNY State Personal Income Tax Revenue Bonds are secured by a pledge of payments made pursuant to a financing agreement entered into by DASNY and the state Director of Budget, backed by a dedication of 50% of New York State personal income tax receipts and 50% of receipts of the ECEP. The state's total personal income tax receipts have averaged 3.2% annual growth since 2009, a period including the aftermath of the 2008 financial crisis and recession. In addition to the impacts of economic trends, total PIT receipts are affected by tax rate and base changes, which typically offset some of the inherent volatility of the tax revenues.

The state's personal income tax has a progressive rate structure which currently ranges from a minimum of 4% to a top rate of 8.82% for married couples filing jointly with incomes of $2.15 million or more. The top rate is scheduled to apply at a lower income threshold and decline to 6.85% after tax year 2019. The PIT yielded $51.5 billion net of refunds in fiscal 2018 and is expected to yield $50.4 billion in fiscal 2019, accounting for nearly a third of total revenues and more than 60% of governmental funds tax collections.

The ECEP is newly enacted and does not take effect until January 1, 2019. The program was created in response to last year's federal tax reform bill, which capped deductions for state and local tax payments on federal personal income tax returns. The ECEP allows employers to opt into a payroll tax, which remains a deductible business expense on federal tax returns, while employees are eligible for a credit on state personal income tax returns in an amount offsetting the employer liability. By design, the program is revenue neutral to the state with ECEP payments offset by lower personal income tax receipts. ECEP payments are to be made by employers on the same schedule as PIT withholding remittances.

New York's efforts to find mitigants to the federal cap on state and local tax deductions have created potential risks to the volume of dedicated receipts for the bonds. A new trust fund to capture charitable gifts for healthcare and education expenses would provide federal tax deductions to offset the diminished ability of taxpayers to deduct state and local tax payments and would also reduce state personal income tax receipts via a personal income tax credit. To offset this potential adverse impact, the state changed the dedication of revenues to 50% of personal income tax and ECEP from the previous dedication of 25% of personal income tax. The state has also performed modeling tests of the impact of the charitable gift option on personal income tax revenues, finding that with maximum participation, the program would reduce dedicated receipts, but maintain levels greater than projected receipts before the dedication percentage was raised. The US Treasury Department and the Internal Revenue Service have proposed regulations that would limit the ability of states to approve such programs. If adopted, the regulations would reduce the attractiveness of the charitable gift option to taxpayers.

State law prohibits the direct pledge of particular revenues to secure debt. The state instead created strong security for the bonds through statutory dedication of personal income tax revenues and more recently, ECEP receipts. The comptroller is required to deposit personal income tax withholding receipts and ECEP receipts into the dedicated revenue bond tax fund (RBTF) in an amount equivalent to 50% of the state's total monthly receipts from each tax. In addition to withholding, personal income tax receipts include estimated taxes, delinquencies, and final returns. Financing agreement payments are made from the RBTF to the trustees for debt service.

Structure Includes Ample Coverage And Leverage Constraint

Additional bonds may be issued only if revenue bond tax fund receipts (i.e. 50% of personal income tax receipts and ECEP receipts) in 12 consecutive months of the previous 18 months are at least 2 times projected MADS.

The state budget office estimates that upon issuance of the Series 2018 bonds, the 50% revenue bond tax fund receipts provide coverage of 7.2 times debt service based on about $26.5 billion of dedicated receipts and maximum annual debt service (MADS) of about $3.67 billion. Coverage (including the impacts of projected new PIT debt) is forecast to trend down to about 5.8 times debt service by fiscal 2022. The state has from time to time reduced or increased PIT rates, contributing to changes in coverage. In addition to the scheduled expiration of the top tax rate mentioned above, the state recently converted a state program designed to reduce local property taxes for certain households from a state expenditure to a personal income tax credit, reducing net personal income tax projections by about $2.6 billion in fiscal 2018.

"Lock Box" Requires Satisfaction of Debt Service Before Use for Other Purposes

The state comptroller deposits the dedicated personal income tax and ECEP receipts into the revenue bond tax fund upon certification of revenues by the commissioner of the state's Department of Taxation and Finance. The funds are set aside daily from withholding or ECEP receipts to result in 50% of PIT and ECEP receipts set aside monthly. There must be a legislative appropriation to pay debt service and the monthly financing agreement payments must be made in order for receipts in excess of debt service requirements to be transferred to the general fund and used for any other purpose.

While the legislature has no obligation to appropriate the funds, this structure provides a very strong incentive to appropriate since the state relies on the excess revenues to meet its budgetary needs. Furthermore, similar provisions apply to other significant borrowing vehicles of the state, including Sales Tax Revenue bonds which is the other primary means by which the state accesses the capital markets because of the requirement that general obligation debt be approved by the voters. Failure to appropriate would compromise the state's ability to borrow for its capital needs.

Providing additional bondholder protection, the enabling act requires the comptroller to transfer funds from the general fund to satisfy debt service requirements if appropriated and certified receipts set aside for the bonds are insufficient to make the certified financing agreement payments. The comptroller is empowered to do so without appropriation. However, if funds are insufficient to pay debt service on the state's general obligation bonds, the comptroller is also empowered to direct first revenues of the state to that purpose. If those revenues are insufficient, the comptroller may transfer funds from the dedicated PIT or dedicated sales tax funds to pay general obligation debt service. We consider the likelihood of this occurring as very remote.

Rating Capped At State GO Rating

We consider the security for the state personal income tax revenue bonds to be very strong. However, the lack of an explicit pledge of revenues, the appropriation requirement and the potential, however remote, that the RBTF could be drawn upon to satisfy GO obligations prevent the security from meeting the criteria to "pierce" the state's Aa1 GO rating. As such, we view this rating as capped at the state GO rating.

USE OF PROCEEDS

The proceeds of the Series 2018 bonds will be used to finance or reimburse the costs of various capital projects and programs of the state, and to refund certain outstanding state-supported bonds that were previously issued by DASNY and the state's economic development arm, Empire State Development. Refunded bonds may have previously been secured under different state financing programs.

PROFILE

New York State is the 4th largest US state by population. Located in the Northeastern US, New York has a large and diverse economy with high per capita income at 121% of the US average and gross state product of $1.547 trillion.

METHODOLOGY

The principal methodology used in these ratings was Lease, Appropriation, Moral Obligation and Comparable Debt of US State and Local Governments published in July 2018. An additional methodology used in these ratings was US Public Finance Special Tax Methodology published in July 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain 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 certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain 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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Marcia Van Wagner
Lead Analyst
State Ratings
Moody's Investors Service, Inc.
7 World Trade Center
250 Greenwich Street
New York 10007
US
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Timothy Blake
Additional Contact
Municipal Supported Products
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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