New York, March 08, 2016 -- Issue: State Personal Income Tax Revenue Bonds 2016A; Rating: Aa1; Sale Amount: $1,230,130,000; Expected Sale Date: 03-08-2016; Rating Description: Dependent (Rating moves with Parent)
Summary Rating Rationale
Moody's Investors Service has assigned a Aa1 rating to approximately $1.2 billion of New York State Urban Development Corporation State Personal Income Tax Revenue Bonds Series 2016A, issued by the New York State Urban Development Corporation (UDC), doing business as Empire State Development. The bonds are scheduled to price on March 8.
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 personal income tax revenues that are dedicated to the bonds 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 high rating, but the need to appropriate the revenues caps the rating at that of the state, which is rated Aa1 with a stable outlook.
The outlook for New York is stable, reflecting its adequate liquidity, growth of formal and informal reserves, and continued control of spending growth. The outlook also reflects our expectation that the state will build on its improvements in fiscal management, 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 revenues without annual appropriation requirement
State rating upgrade
Factors that Could Lead to a Downgrade
Diversion of state personal income tax receipts prior to deposit to the Revenue Bond Tax Fund
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.
The UDC State Personal Income Tax Revenue Bonds are secured by a pledge of payments made pursuant to a financing agreement entered into by UDC and the NYS Director of Budget, backed by a dedication of 25% of the New York State personal income tax.
The state's total personal income tax receipts have averaged 6.5% annual growth since 2004. In addition to the impacts of economic trends, total PIT receipts are affected by tax rate and base changes. Tax revenues are volatile: this 11-year period has included double-digit growth rates and significant year-over-year declines reflecting underlying economic cycles and tax rate changes.
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 $2.13 million or more. The top rate is scheduled to apply at a lower income threshold and decline to 6.85% after tax year 2017. The PIT yielded $43.7 billion in fiscal 2015 (including deposits to the STAR fund) and is projected to yield $47.1 billion in 2016, accounting for nearly a third of total revenues and more than 60% of governmental funds tax collections.
State law prohibits the pledge of particular revenues to secure debt. The state instead created strong security for the bonds through statutory dedication of personal income tax revenues. The Comptroller is required to deposit personal income tax withholding receipts into the dedicated revenue bond tax fund (RBTF) in an amount equivalent to 25% of the state's total monthly personal income tax receipts. 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 dedicated personal income tax receipts (i.e. 25% of total personal income tax receipts) in 12 consecutive months of the previous 18 months are at least 2 times projected MADS.
The state budget office projects the 25% PIT dedication will provide coverage of 3.5 times debt service based on $11.773 billion of dedicated receipts in fiscal 2016 and maximum annual debt service (MADS) of about $3.042 billion. Coverage (including the impacts of projected new PIT debt) is forecast to trend down to about 3.2 times debt service by fiscal 2019 after the reduction in the top PIT tax rate occurs in at the end of calendar 2017. The state has from time to time reduced or increased PIT rates, contributing to changes in coverage.
"Lock Box" Requires Satisfaction of Debt Service Before Use for Other Purposes
The state comptroller deposits the dedicated personal income tax 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 receipts to result in 25% of PIT 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 personal income tax receipts set aside are insufficient to make the certified financing agreement payments on the bonds. 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 bond sale will be used to refund certain outstanding state personal income tax revenue bonds and other state-supported debt.
New York State is the third largest US state by population. Located in the Northeastern US, New York has a large and diverse economy with high per capita income at 121.9% of the US average and gross state product of $1.227 trillion.
The New York State Urban Development Corporation is New York's primary vehicle for implementing the state's economic development goals through issuance of tax-exempt and taxable bonds and the exercise of other powers related to granting real estate tax exemptions, condemning property and excepting development from local codes. The UDC does business as Empire State Development, an umbrella organization created in 1995 to house the state's economic development efforts.
The principal methodology used in this rating was The Fundamentals of Credit Analysis for Lease-Backed Municipal Obligations published in December 2011. The additional methodology used in this rating was US Public Finance Special Tax Methodology published in January 2014. Please see the Ratings Methodologies page on www.moodys.com for a copy of these methodologies
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.
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Marcia Van Wagner
Moody's Investors Service, Inc.
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Moody's assigns Aa1 to New York's $1.2B Personal Income Tax Revenue Bonds issued by UDC; outlook stable
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007