OREANDA-NEWS. Fitch Ratings has affirmed the 'AA+' rating on the State of New York's general obligation (GO) bonds.

In addition, Fitch affirms the ratings on debt linked to the state's GO rating, as detailed at the end of this release.

The Rating Outlook is Stable.

SECURITY

The GO bonds are backed by the full faith and credit of the State of New York.

KEY RATING DRIVERS

SUSTAINABLE BUDGETING PRACTICES: The rating reflects the improved fiscal management practices of recent years that have resulted in timely and more sustainable budget-making. Notable recurring actions were taken to close budget gaps in the downturn, and the state has limited spending growth in recent years.

WEALTHY ECONOMY LINKED TO FINANCIAL SERVICES: New York's economy is broad, with substantial wealth and resources. The financial activities sector is significant to the state's economy and finances, although it is prone to above-average cyclicality.

STRONG FINANCIAL PLANNING AND REPORTING: The state stays abreast of changing conditions through comprehensive quarterly updates of a four-year financial plan.

MODERATE LIABILITY BURDEN: New York's debt burden is above average but in the moderate range, and the debt burden has declined in recent years. Pensions are well-funded, with the unfunded liability below the state median. The combined burden of debt and pensions matches the national median.

RATING SENSITIVITIES

CONTINUED CAREFUL BUDGET MANAGEMENT: The 'AA+' rating assumes the state's continued commitment to spending control and realistic forecasting of revenues. Ongoing proactive financial management is critical to the state's credit quality given its limited formal reserve funding position.

CREDIT PROFILE

New York's GO bond rating reflects the state's strengthened fiscal management and Fitch's expectation that the state will continue to adhere to these practices going forward. The state implemented a wide range of beneficial changes to its budgeting in recent years and has largely maintained them since; these changes include on-time budget enactment, consensus revenue forecasting, expenditure growth curbs linked to specific formulas, and avoiding significant reliance on one-time resources. In Fitch's view, these changes have resulted in more sustainable budgeting compared to earlier practices, in which the state relied on nonrecurring actions to cover persistent structural pressures and recession-driven revenue cyclicality.

Recent improvements remain untested by a severe recessionary event, but, in Fitch's view, the state is in a materially improved position to address future economic and revenue cyclicality. Fitch believes that, with ongoing proactive budget management, New York continues to have a margin of flexibility to respond to unforeseen economic and revenue weakness beyond the level provided by its modest formal reserve balances.

The state's substantial wealth and resources and broad economy remain ongoing credit strengths. The rating continues to recognize the outsized role that the cyclical financial activities sector plays in the state's economy and revenue system.

The state's net tax-supported debt level is moderate, and above average for a state, but has declined gradually in recent years as a percentage of personal income. Pensions are well-funded, and the combined burden of debt and pensions matches the median for U.S. states rated by Fitch.

IMPROVED FINANCIAL MANAGEMENT

The state's credit has been strengthened by significant improvements in financial management in recent years, including notable efforts over the last five enacted budgets to constrain expenditure growth through targeted formulas. Although New York's financial position was strained during the last recession, its approach to budgeting was more focused on sustainable, structural solutions than was the case during past downturns.

The fiscal 2012 budget addressed a large budget shortfall primarily through aggressive spending control and policy reforms, lowering the cumulative four-year budget gap projected at the time to $10 billion, from $63 billion. Notably, it included a framework for ongoing expenditure control that has continued to inform subsequent enacted budgets, including 2% annual growth in state operating funds and tying annual Medicaid growth to the 10-year rolling average for medical CPI. A separate school aid growth cap tied to statewide personal income gains has been less successful at restraining growth but remains the state's policy benchmark.

Fitch believes that restraining spending growth will remain a challenge for the state despite several years of successes to date. For Medicaid, targets have proved achievable and the administration has been granted powers that strengthen the ability to remain on budget; however, future targets are forecast at slightly lower levels than the recent past, ranging from 3%-3.6% annually through the state's FY 2019 planning period. For school aid, spending above the formula cap has been driven by several factors, most recently including funding needs in order to implement reforms in the fiscal 2016 budget.

FISCAL 2015 BENEFITED FROM SETTLEMENTS

The fiscal 2015 budget as enacted addressed a fiscal 2015 budget gap estimated at $1.7 billion and covered a tax reduction package with a first-year impact forecast at $725 million. Including enacted policy actions, the four-year gap estimate was lowered to $7.5 billion, from $11.5 billion. The tax reduction package included temporary personal income tax (PIT) credits targeting filers in communities outside New York City that maintain a 2% property tax cap, as well as permanent tax changes affecting business and estate taxes, among other changes. The cumulative impact through fiscal 2018 was estimated at $4.1 billion.

Fiscal 2015 actual performance far exceeded budget expectations. Monetary settlements with financial institutions provided a significant windfall, with more than $4.9 billion received during the fiscal year, compared to $275 million assumed in the enacted budget; another $2.5 billion has been received since the end of fiscal 2015. The state prudently plans to apply the majority of one-time settlement funds to one-time needs, consistent with the state's improved fiscal management of recent years. Planned uses for the funds include $4.5 billion for pay-go capital and $850 million for the first year payment to the federal government to settle an audit disallowance; another $1.5 billion remains undesignated to date.

Even excluding the impact of settlements, budgetary performance in fiscal 2015 was steady. All funds tax receipts totaled $71 billion, 1.9% higher than the previous year, driven largely by stronger collections in personal income, sales and corporate income taxes. State operating disbursements of $92.4 billion were 2% higher than the previous year and within the overall spending growth cap.

The state also deposited $316 million to the rainy day reserves, bringing its fiscal 2015 balance to $1.8 billion, a high level relative to historical experience but low relative to the state's historical revenue volatility. Given steady performance and the settlement funds noted earlier, the state ended the year with a general fund closing fund balance of $7.3 billion.

FISCAL 2016 ENACTED BUDGET CONSISTENT WITH RECENT PLANS

The fiscal 2016 enacted budget largely conforms with recent state budgeting practices. The enacted plan closed a fiscal 2016 gap estimated at $1.8 billion as of the state's mid-year forecast. Including the four-year impact of actions taken in the budget, the gap estimate through fiscal 2019 was lowered to $8.9 billion, from the $14.2 billion level forecast at mid-year. This figure excludes unidentified actions in the out-years in order to maintain the 2% state operating funds growth cap, which would leave the state with modest surpluses through the plan period.

For fiscal 2016, the state forecasts all funds taxes rising to $74.6 billion, 5% higher than fiscal 2015 figures. State operating funds disbursements rise to $94.3 billion, 2% higher than fiscal 2015 and again matching the state's policy benchmark in place since fiscal 2012. Gap-closing measures in fiscal 2016 include $1.2 billion in trims to local assistance, notably for education and Medicaid, offset by $749 million in new initiatives. Medicaid disbursements rise 3.6%, consistent with the global Medicaid cap in place since fiscal 2012. School aid rises 6.1% (school year basis), above the 1.7% formula target, with funding increases targeted at education reforms.

VOLATILE FINANCE SECTOR ANCHORS WEALTHY ECONOMY

New York's economy is characterized by strong wealth levels and considerable breadth, although there is volatility inherent in the important financial services industry. In contrast to previous downturns, the state's employment decline in the last recession was notably less severe relative to the nation as a whole and relative to the state's experience in prior recessions. Through the downturn, the state's employment experienced only one year of decline, 2.7% in 2009, compared to a 5.6% drop for the U.S. between 2007 and 2010.

New York's employment growth in the recovery has been very steady, ranging from 1.4% to 1.6% annually between 2011 and 2014; the state surpassed its pre-recession employment level in Sept. 2012, and employment is now 4.6% higher than the previous employment peak, in April 2008. In 2014, employment grew 1.6% in New York, compared to 1.9% nationally; steady gains continue in 2015, with May 2015 year-over-year employment up 1.6% in New York, below the 2.2% U.S. growth rate. The state's unemployment rate was below the nation's before and during the recession; however, the state's unemployment rate has exceeded the nation's since 2012. Most recently, May 2015 unemployment was 5.7% in New York, compared to 5.5% nationally.

Measured on a per capita basis, New York's personal income was 122% of the nation's in 2014, ranking it fourth among the states.

ABOVE AVERAGE DEBT AND STRONG PENSIONS

New York's net tax-supported debt is above average but still in the moderate range at 4.9% of personal income as of March 31, 2015, about twice the median for U.S. states rated by Fitch. Most of New York's debt has been issued by state public authorities and secured by appropriations; only about 6% are GOs. While this results in a diffuse debt structure, there is strong centralization and oversight within the Division of the Budget and approval by the Public Authorities Control Board is required for many of these bond issues.

Funding of two major statewide pension systems, covering general employees and police and fire employees, has benefitted from historically strong contribution practices. An optional contribution deferral mechanism authorized in 2010 and used by the state several times since temporarily lowered the state's contributions in return for higher future contributions as deferrals are repaid.

Reported pension funded ratios as of the systems' March 31, 2014 annual report have been sound, at 88.5% for the employees' system and 89.5% for the uniformed employees' system. Using Fitch's more conservative 7% return assumption (compared to the 7.5% level assumed by the plans) would lower the funded ratios to a still sound 83.9% and 84.9%, respectively. As calculated by Fitch in its 2014 state pension report, the burden of net tax-supported debt and adjusted unfunded pension obligations attributable to the state measures 6.1% of personal income, on par with the U.S. state median.

RELATED DEBT

In conjunction with the affirmation of the state's GO rating, Fitch has affirmed the ratings on the following bonds at 'AA+' with a Stable Outlook:

--State Personal Income Tax (PIT) revenue bonds issued by the Dormitory Authority of the State of New York (DASNY), the New York State Environmental Facilities Corporation (EFC), Empire State Development/New York State Urban Development Corporation (ESD), the New York State Housing Finance Agency (HFA), and the New York State Thruway Authority;
--State sales tax revenue bonds issued by DASNY;
--New York Local Government Assistance Corporation (LGAC) senior and subordinate lien bonds;
--New York City Sales Tax Asset Receivable (STAR) Corporation bonds; and
--Thruway Authority Highway & Bridge Trust Fund bonds.

Fitch also has affirmed the ratings on various state appropriation-supported bonds at 'AA' with a Stable Rating Outlook:

--Service contract bonds issued by state agencies;
--DASNY Board of Cooperative Education Services (BOCES) bonds;
--DASNY City University of New York (CUNY) revenue bonds;
--DASNY Department of Health revenue bonds;
--DASNY Fashion Institute of Technology bonds;
--DASNY mental health services facilities improvement revenue bonds;
--DASNY secured hospitals program revenue bonds;
--New York City Transitional Finance Authority state building aid revenue bonds;
--State of New York Municipal Bond Bank Agency (MBBA) special school purpose revenue bonds (prior year claims);
--MBBA special school purpose revenue bonds (prior year claims - The City of New York), 2012 series A; and
--Tobacco Settlement Financing Corporation (state contingency contract secured) asset backed revenue bonds.

Finally, Fitch has affirmed the rating on DASNY's school districts revenue bond financing program revenue bonds at
'AA-' with a Stable Outlook.

The ratings on all of the related debt listed above are directly linked to the state's GO rating.