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Rating Action:

Moody's downgrades to Aa2 New York State's GO and related credits; outlook revised to stable

01 Oct 2020

NOTE: On October 08, 2020, the press release was corrected as follows: The third sentence of the first paragraph of the press release was changed to “Moody's downgraded to Aa3 from Aa2 ratings on other appropriation-backed debt including the Mental Health Services Facilities and New York City Transitional Finance Authority, NY's Building Aid Revenue Bonds.” Revised release follows.

New York, October 01, 2020 -- Moody's Investors Service has downgraded to Aa2 from Aa1 its rating on the State of New York's general obligation (GO), personal income tax revenue, sales tax revenue, New York Local Government Assistance Corporation (LGAC), and NYC Sales Tax Asset Receivable Corporation (STARC) bonds. Moody's also downgraded to Aa2 from Aa1 its rating on the New York State Workers' Compensation Board Pledged Assessment and Employer Assessment Revenue Bonds. Moody's downgraded to Aa3 from Aa2 ratings on other appropriation-backed debt including the Mental Health Services Facilities and New York City Transitional Finance Authority, NY's Building Aid Revenue Bonds. The outlook for the state of New York and these associated bond ratings has been revised to stable from negative.

Moody's affirmed the enhanced VMIG 1 on variable rate demand obligations backed by stand by bond purchase agreements associated with certain bonds issued by the Dormitory Authority of the State of New York, and affirmed MIG 1 ratings on State Personal Income Tax Subordinate Revenue Anticipation Notes.

Concurrently with this action, Moody's has assigned a Aa2 rating to $2.4 billion of the State of New York Personal Income Tax Revenue Bonds (General Purpose) bonds, consisting of $2.36 billion Series 2020A (Tax-Exempt) and $48 million Series 2020B (Federally Taxable) issued through the Dormitory Authority of the State of New York.

RATINGS RATIONALE

Today's action downgrading New York's ratings reflects the financial consequences to the state of the disproportionate impact of the coronavirus pandemic on the City of New York (Aa2 negative), the state's economic engine, and on the Metropolitan Transportation Authority, the state controlled and funded transit system in the city and downstate region. While the public health response to the pandemic brought the city's infection rate down to among the lowest of big cities, the lasting economic consequences will likely be amongst the most severe in the nation and require significant fiscal adjustments by the city, the MTA, and the state. The depth of the city and state's economic downturn will be coupled with its extended duration because recovery relies on both global containment of COVID-19 and repairing the attractiveness of the city for office workers, tourists, business travelers, and families. While the state has taken actions to balance the budget, thus far they are primarily of a stop-gap nature and decisions about lasting budgetary changes to address the state's large projected budget gaps have been postponed.

We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. The economic and fiscal consequences of the coronavirus crisis are a key driver for this rating action.

New York's Aa2 general obligation rating reflects the state's large and diverse economy which, when the pandemic passes, will support economic recovery. The state's moderate leverage will allow it to absorb some increased debt for its own needs and those of the MTA, and various budget management tools that provide financial flexibility will enable the state to achieve budget balance, although immediate achievement of structural balance is unlikely. The rating also recognizes New York's relatively high cost of living, reliance on the volatile financial services industry and other economic drivers based in New York metropolitan area and the challenges of funding growing healthcare and local school aid costs in an uncertain federal policy environment.

The Aa2 and Aa3 ratings on the state's appropriation-supported debt reflects the more essential purposes for which the bonds have been issued and the legal structures associated with the bonds. The higher rating on the dedicated personal income tax, sales tax, LGAC and STARC bonds reflects the very strong incentive to appropriate given that the state must set aside these funds for debt service, after appropriation, before the balance of these significant tax revenues is available for other purposes. The one-notch distinction in the rating on other appropriation-backed debt reflects the more moderate legal structure incorporated in the greater risk of non-appropriation.

The Aa2 rating on New York State Workers' Compensation Board Pledged Assessment and Employer Assessment bonds is based on the strong assessment base, a mid-year assessment adjustment process and other very strong legal provisions. The rating is closely related to the state's GO rating, and that relationship and the lack of structural elements that might otherwise supersede it cap this rating at the level of the GO.

The VMIG 1 short term ratings on certain bonds issued by DASNY incorporate (i) the credit quality of JPMorgan Chase Bank, N.A. as liquidity support provider under the Standby Bond Purchase Agreement (SBPA), (ii) the long-term rating of the bonds and (iii) Moody's assessment of the likelihood of an early termination or suspension of the SBPA without a final mandatory tender. Events that would cause termination or suspension of the SBPA without a mandatory purchase of the bonds are directly related to the credit quality of the Authority and/or the State. Accordingly, the likelihood of any such event occurring is reflected in the long-term rating assigned to the bonds.

The MIG 1 rating on the State Personal Income Tax Subordinate Revenue Anticipation Notes reflects the long-term credit quality of the state of New York (Aa2 stable) and its pledge of subordinated indebtedness financing agreement payments backed by dedicated personal income tax receipts.

RATING OUTLOOK

The stable outlook reflects the strength of the state's resources and tools to align spending and revenue until the coronavirus threat is sufficiently under control for people to resume normal activities.

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS

- GO rating: Faster than expected recovery of the state's economy that bolsters the capacity to close anticipated budget gaps and build reserves

- GO rating: Maintaining relationship between spending growth and growth in economic capacity post-pandemic

- GO rating: Elimination of structural imbalance and related reliance on one-time and temporary balancing measures

- For dedicated tax revenue, appropriation, and special tax (Workers' Compensation Board) ratings: state GO rating upgrade

- Special tax ratings - Assessment Bonds: additional bondholder protections that include constitutional protection of the assessment revenue stream or creation of a third party collection process that fully segregates the assessments from the state's finances

- Short term ratings: not applicable

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS

- GO rating: Continued reliance on non-recurring budget solutions or deficit financing practices

- GO rating: Significant increase in leverage beyond currently planned levels

- GO rating: Deterioration of liquidity requiring repeated cash flow borrowings beyond fiscal 2021

- For dedicated tax revenue, appropriation, and special tax (Workers' Compensation Board) ratings: state GO rating downgrade

- Special tax rating: failure to achieve mid-year rate adjustment, if necessary; or significantly weakened debt service coverage

- Dedicated tax revenue rating: diversion of dedicated tax revenues prior to deposit in appropriate revenue bond tax fund

- Short term ratings (VMIG): downgrade of the short-term rating on the liquidity facility provider or the long term rating on the bonds below A2

- Short term ratings (MIG 1): Downgrade of the state's general obligation rating below A2

LEGAL SECURITY

The general obligation bonds are secured by the full faith and credit of the state.

The state's dedicated tax bonds are secured by the deposit of portions of the personal income tax or the state general sales tax into revenue bond funds, the balance of which cannot be accessed for general fund purposes until the legislature has appropriated debt service payments and they have been set aside. In addition to the State Dedicated Sales Tax Revenue bonds, deposits from the state general sales tax also secure the LGAC and STARC bonds. Other appropriation and lease revenue bonds are ultimately secured by appropriations made by the New York legislature.

The DASNY Workers' Compensation Board Pledged Assessment and Employer Assessment bonds are secured by an assessment on worker's compensation insurance policies paid by employers statewide to a segregated account. Debt service payments do not require appropriation.

Bonds with VMIG short-term ratings are ultimately secured by annual appropriations made by the New York State legislature from legally available sources, and are supported by a liquidity facility provided by JPMorgan Chase Bank, N.A.

Bonds with MIG-1 short term ratings are ultimately secured by annual appropriations made by the New York State legislature from legally available sources.

USE OF PROCEEDS

Proceeds of the DASNY Series 2020AB bonds will be used for various capital purposes of the state, including higher education, transportation, health and environmental projects, among others. Proceeds will also be used to refund certain outstanding state-supported debt.

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 126% of the US average and gross state product of $1.67 trillion.

METHODOLOGY

The principal methodology used in the general obligation ratings was US States and Territories published in April 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1084466. The principal methodology used in the New York State Workers' Compensation Board assessment bonds ratings was US Public Finance Special Tax Methodology published in July 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1077147. The principal methodology used in the underlying lease and appropriation ratings was Lease, Appropriation, Moral Obligation and Comparable Debt of US State and Local Governments published in July 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1102364. The principal methodology used in the short-term enhanced rating was Variable Rate Instruments Supported by Conditional Liquidity Facilities published in March 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1057134. The principal methodology useed in the short-term underlying ratings was Short-term Debt of US States, Municipalities and Nonprofits Methodology published in July 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1210749. The additional methodology used in the personal income tax revenue, sales tax revenue, New York Local Government Assistance Corporation, and New York City Sales Tax Asset Receivable Corporation bonds ratings was US Public Finance Special Tax Methodology published in July 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1077147. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website 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.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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

Matthew Butler
Additional Contact
State Ratings
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

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