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NY Local Governments

NY Local Governments

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Published by Nick Reisman

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Published by: Nick Reisman on Oct 22, 2013
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10/22/2013

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Table of Contents:
Analyst Contacts:
NEW YORK +1.212.553.1653
Robert Weber +1.212.553.7280
 Assistant Vice President - Analyst
robert.weber@moodys.com
Geordie Thompson +1.212.553.0321
Vice President - Senior Credit Officer 
geordie.thompson@moodys.com
» contacts continued on the last page
SPECIAL COMMENT
U.S. PUBLIC FINANCE
 
OCTOBER 21, 2013
 
Key Credit Drivers of New York LocalGovernments
Strong Local Fiscal Management and State Oversight Help Mitigate Sluggish Economy, Tax Cap,and Rising Fixed Costs
Summary Opinion
Five key factors drive our assessment of New York local government credit. Three of thesedrivers put downward pressure on credit quality, but they are mitigated by two fundamentalstrengths. We expect the vast majority of New York local government ratings to remainresilient, although downgrades are likely to continue to outpace upgrades.The key pressures facing New York local governments
1
are:
»
 
Relatively slow economic growth across the state, although specific weak points vary by region;
»
 
Limited revenue growth due to the statewide property tax cap and weakness or volatility in other revenue sources; and
»
 
Difficulty managing labor costs including pensions and other post retirement benefitsHowever, two fundamental strengths enable most of them to manage the challenging creditenvironment effectively:
»
 
Strong management practices, generally resulting in sufficient reserves and favorabledebt profiles; and
»
 
State oversight that helps stabilize and improve financial operations for the most stressedgovernments
1
We do not address New York City (Aa2 stable) itself in this report due to its size and unique characteristics.
 
 
U.S. PUBLIC FINANCE
 
2 OCTOBER 21, 2013SPECIAL COMMENT: KEY CREDIT DRIVERS FOR NEW YORK LOCAL GOVERNMENTS
Despite Recent Downgrades, Most Ratings Remain Stable
 We maintain underlying ratings on over 1,000 local governments in New York. The distribution of the ratings is skewed slightly lower than for the nation as a whole (Exhibit 1). The vast majority of New York local government ratings apply to debt secured by a general obligation pledge. Unlessotherwise noted, all references to ratings in this report apply to GO debt.
EXHIBIT 1
New York Rating Distribution Slightly Lower Than Nation
Source: Moody’s Investors Service
New York local governments have felt the effects of the recession and weak recovery, as evidenced by downgrades outpacing upgrades since the beginning of 2010 (Exhibit 2). Still, the vast majority of ratings have not changed over this time frame.
EXHIBIT 2
New York Downgrades Outpace Upgrades Since 2010
Source: Moody’s Investors Service
Eight New York local governments have experienced downgrades of three notches or more since 2008,but the number of such downgrades remains well below that of several states including Michigan,California, and Minnesota (Exhibit 3). The main driver of these multi-notch downgrades was theinability or unwillingness of management to make budgetary adjustments in a challenging operating environment.
 
0%5%10%15%20%25%30%35%Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 SpeculativeGradeNY National0102030405060702008 2009 2010 2011 2012 2013 H1Upgrades Downgrades
 
 
U.S. PUBLIC FINANCE
 
3 OCTOBER 21, 2013SPECIAL COMMENT: KEY CREDIT DRIVERS FOR NEW YORK LOCAL GOVERNMENTS
EXHIBIT 3
Multi-Notch Downgrades 2008-2013 Q2
State Number of Downgrades
CA*
104
MI
27
MN
11
IL
10
AL
9
PA
9
NY
8
*California is overrepresented due to a change in law which caused all rated tax allocation bonds in California to be downgraded to belowinvestment grade.
Source: Moody’s Investors Service
Credit Driver #1: Slow Economic Growth Across the State, Challenges Vary byRegion
The pace of economic recovery in New York has been uneven, with each region experiencing its ownset of economic drivers. For the purpose of generalizing economic trends, we split New York into twodistinct regions: “Downstate” (the area around New York City and much of the Hudson Valley) and“Upstate” (the balance of the state).
Upstate Region Experiences Long-term Economic Transformation
Upstate New York has a long history of decline in industry and population, and relatively weak wealthand income indices, particularly in the major cities (Exhibits 4 and 5). The area suffered during theGreat Recession, but upstate tax base valuations have remained relatively stable because the region didnot experience significant real estate value increases during the boom. Economic activity has started topick up in some metropolitan areas, including Albany (A1 stable) and Rochester (Aa3 stable). In thesecities, as well as in Buffalo (A1 stable), a strong higher education presence has brought stability to theeconomy. Rochester has long benefited from the presence of two major universities and, for many years, maintained a relatively stable manufacturing presence anchored by the Eastman Kodak Company and the Xerox Corporation (Baa2 stable). Although Kodak has significantly downsized overthe years, and filed for bankruptcy in early 2012, the company has spun off many high-tech firms inthe area that have contributed to the local economy.
EXHIBIT 4
Long-term Change in Rank Among Top U.S. Cities by Population
Rank 1920 1930 1940 2010
New York
1 1 1 1
Buffalo
11 13 14 72
Rochester
23 22 23 100
Syracuse
37 40 41 170
Source: U.S. Census Bureau

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