OREANDA-NEWS. Fitch Ratings assigns the following ratings to Suffolk County, NY (the county) bonds and notes:

--$107,320,000refunding serial bonds - 2015 series C 'A';

--$51,385,000 public improvement serial bonds - 2015 series B 'A';

--$100,000,000 tax anticipation notes (TANs) - 2015 (series I) 'F1'.

The Rating Outlook on the bonds is Stable.

The bonds and notes are expected to be sold through competitive sale on Oct. 14.

The series C bonds are being issued to refund portions of outstanding 2005 refunding series, series 2007A and series 2008B bonds for debt service savings. The series B bonds will fund various capital projects in the county. The TANS are being issued to provide cash flow in anticipation of collections of taxes on assessments levied, or to be levied by the county for 2015 or any of the three preceding years.

SECURITY

The bonds and notes are general obligations of the county with a pledge of its faith and credit and ad valorem tax, subject to the 2011 state statute limiting property tax increases to the lesser of 2% or an inflation factor (the tax cap law). This limit can be overridden annually by a 60% vote of the county legislature.

KEY RATING DRIVERS

CHALLENGED FINANCIAL PROFILE: The county's financial profile will continue to be challenged by a large negative general fund reserve position (GAAP basis) due in part to persistent operating deficits and revenue volatility caused by a high dependence on economically sensitive sales tax receipts.

IMPROVING LIQUIDITY: County liquidity has improved with the 2015 RAN issue representing a $30 million (35%) decrease from the 2014 issue; an additional $10 million decrease is projected in 2016.

NARROW COVERAGE OF NOTE REPAYMENT: Projected coverage by revenues expected to be received by the 2016 TAN repayment date is narrow.
STRONG ECONOMIC PROFILE: The county benefits from a broad and wealthy economy and tax base characterized by below-average unemployment rates and high wealth levels.

MANAGEABLE LONG-TERM LIABILITIES: The sizable and wealthy tax base results in a manageable debt burden, and debt amortization is above average. Capital needs are moderate and state pension plans are well funded.

RATING SENSITIVITIES
FINANCIAL PERFORMANCE: The county has been reducing its reliance on one-shots in recent years. Reversal of this trend, especially in a positive economic environment, would be considered a credit negative by Fitch and would lead to a downgrade.
CREDIT PROFILE

Suffolk is among the wealthiest counties in the state and nation, benefiting from its proximity to New York City and a well-educated work force. The county encompasses the eastern two-thirds of Long Island including the Hamptons and Fire Island. The county's population of approximately 1.5 million is the largest of any county in the state outside of New York City. Between 2000 and 2010, county population increased by a total of 5.2%. The total growth rate from 2010 to 2014 was a modest 0.5% and a slow rate of growth is expected to continue into at least the near future.

WEAKER FINANCIAL PERFORMANCE IN 2014

On an audited GAAP basis for 2014 (year-end Dec. 31) the county reported a combined general fund and police district deficit after transfers of $19.2 million (negative 0.83% of spending) compared to a surplus of $128.5 million(4.7% of spending) in 2013.

Sales tax revenues for 2014 were budgeted to increase by 2.8% but the growth rate was slower than anticipated at 1.4%, resulting in a $19 million shortfall. The sales tax shortfall was offset by lower than expected employee expenses and savings of $13 million generated by the 2014 declaration of a fiscal emergency.

The audited GAAP combined unrestricted fund balance decreased to a negative $315.2 million (negative 11.8% of spending) from negative $303.3 million (negative 11.1% of spending) in 2013.

USE OF RESERVES IN 2015 BUDGET
The 2015 budget contains recurring revenues and savings including the third consecutive police district property tax increase. Although less reliant on one-off transactions, the budget does rely on a $59.8 million pension amortization and the use of $22.5 million from the assessment stabilization reserve fund (ASRF). The pension deferral amount is a decrease from previous years and about $20 million less than the county is permitted to amortize.

A referendum was approved on the November 2014 ballot which authorizes the county to borrow from the ASRF through 2017 to provide tax relief. All amounts borrowed from the ASRF will be repaid by 2029, with payments commencing in 2018.

The ASRF provides funding to the county's sewer funds for stabilization of sewer rates and fees in addition to infrastructure and capital improvements within the sewer districts. Funding from 1/4 percent of the county's sales tax revenues are deposited in the county water protection fund with 25% transferred to the ASRF.

The 2015 budget assumes sales tax growth of 2.35% (adjusted down from 4.87%) from actual 2014 sales tax revenues. As of Sept. 12, 2015, the county has received the sixteenth of twenty-seven sales tax distributions to be received in 2015. To meet estimated sales tax projections, a 4.7% sales tax growth would be required for the remainder of 2015, which Fitch considers optimistic. Using that assumption, the county is projecting a combined general fund and police district budget surplus of $5.5 million.

2016 RECOMMENDED OPERATING BUDGET

The county executive submitted the 2016 Recommended Operating Budget to the county legislature on Sept. 18, 2015. The $3.4 billion (total operating expenditures and other financing uses) 2016 budget represents an increase in spending of 1.7% from the 2015 budget. The 2016 budget assumes sales tax growth of 2.75% from estimated 2015 sales tax revenues.

Initiatives that balance the 2016 budget include recurring revenues and savings along with non-recurring revenue items. As in 2015, the largest measures are the amortization of the 2016 pension payment totaling $45 million and a $32.8 million transfer from the ASRF.

For the fourth consecutive year, the budget includes a police district property tax increase (2.9%) which will generate about $14 million in recurring revenue. In addition, increased fees on motor vehicles registrations, tax map verifications for mortgages and refinancings and the implementation of a false alarm fee are expected to generate approximately $41 million in on-going revenue. None of the increased fees require state legislative approval.

The county has made some progress in its goal toward structural budgetary balance with recurring revenues and cost reductions. Headcount has been reduced by 1,189 positions since 2012, all county health centers will have been converted to federally qualified centers, the county nursing home facility has been closed and union contracts have been settled with health care cost savings to the county. However, rating stability will depend on continued reduced reliance on non-recurring measures while economic conditions remain stable to improving.

IMPROVING LIQUIDITY

The county has historically issued annual cash flow notes in anticipation of receipt of delinquent and current property taxes (DTANs and TANs, respectively). However, due to limited financial flexibility and a narrowing cash position in 2012 and 2013 the amount of these borrowings increased and revenue anticipation notes (RANs) were issued.

The county issued $625 million in cash flow notes in 2013, growing from $600 million in 2012 and $520 million in 2011. Cash flow borrowing in 2013 was a high 19.2% of 2013 budgetary expenses. Reflecting improved liquidity, the county's cash flow borrowing in 2014 decreased to $595 million and is projected to be $565 million and $555 million in 2015 and 2016, respectively. The 2015 RAN issue was a $30 million reduction from the April 2014 issue. The RAN issue for 2016 is projected to decline another $10 million to $45 million. Additionally, in 2015, $410 million of TANs were paid off a month earlier than in 2014.The trend is mildly positive, but Fitch expects the county's reliance on cash flow borrowings to continue for the next several years.

NARROW CASH FLOW COVERAGE FOR NOTE REPAYMENT

Cash flow provides narrow coverage of 1.3x on the TANs at maturity in September 2016. With consideration of borrowable balances, coverage improves to 2.0x. Fitch believes the county's cash flow projections are reasonable; historically, actual coverage for repayments has generally been better than projections.

STRONG SOCIOECONOMIC CHARACTERISTICS

The county benefits from a broad, diverse economy and close proximity to New York City. Income levels are well above average with 2013 per capita income totaling 131% of the nation. Full market value at $255.4 billion is down about 19% from 2008, but market value per capita of $170, 000 remains strong. The county's unemployment rate remains lower than the rates for New York State and the nation. The June 2015 county unemployment rate was 4.6% compared to 5.2% and 5.5% for the state and nation, respectively. Year-over-year unemployment was down from 5.1% in June 2014, due to employment outpacing labor force growth.

MANAGEABLE LONG-TERM LIABILIITES

The county's debt ratios at $3,943 per capita and 2.3% of market value are in the moderate range, with the latter reflecting the wealthy tax base. Debt service represents a modest 6.0% of total governmental fund spending.

Debt ratios should remain stable given manageable capital needs and rapid amortization (75.2% of principal is retired within 10 years).

The county participates in well-funded New York State pension plans. As of March 31, 2014, the state and local employees' plan and the state and local police and fire plan had funded ratios of 88% and 89%, respectively. Using Fitch's more conservative 7% discount rate assumption the plans' funding levels would still be sound at an estimated 84% and 85%, respectively.

County pension payments in 2014 made up a moderate share (5.8%) of government fund spending. The county has taken advantage of the ability granted by the state to amortize most of the increase in annual pension payments for 2012 and 2013 over 10 years and for 2014 and 2015 over 12 years. This amortization option provides some near-term budget relief but will make future-year budgeting for these payments more challenging.

The moderate pension liability is somewhat offset by a sizable unfunded actuarial accrued liability for other post-employment benefits (OPEB) of $5.1 billion as of Dec. 31, 2014, or 2.0% of market value. The county continues to fund its OPEB liability on a pay-as-you-go basis as there is no authority under present state law to establish a trust account or reserve fund for this liability. Carrying costs for debt service, pension and OPEB equaled a moderate 15.6% of 2014 total government fund spending, with the county's amortization of part of the pension payment somewhat offsetting rapid debt repayment.