OREANDA-NEWS. Fitch Ratings has assigned an 'F1' rating to the following Suffolk County, NY notes:

--$410,000,000 tax anticipation notes (TANs) for 2016 taxes.

The notes are expected to be sold through negotiated sale on Dec. 9.

The TANs are being issued to provide cash flow in anticipation of collection of real property taxes or assessments for the county's fiscal year commencing Jan. 1, 2016.

In addition, Fitch has affirmed the following ratings:

--Approximately $1.4 billion of outstanding general obligation bonds at 'A'.

The Rating Outlook on the bonds is Stable.

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

ADEQUATE COVERAGE OF NOTE REPAYMENT: The 'F1' short-term rating reflects adequate note repayment coverage from projected 2016 revenues and continued demonstrated strong market access.

DECLINE IN CASH-FLOW BORROWING: Reflecting some improvement in liquidity, short-term borrowing has decreased over the past few years and an additional $10 million decrease is projected in 2016. Despite the lower borrowings, Fitch expects the county to be reliant on cash flow borrowing for the next several years.

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.

STRONG ECONOMIC FUNDAMENTALS: 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 supports a manageable debt burden with above-average amortization. Capital needs are moderate and state pension plans are well funded.

RATING SENSITIVITIES

FINANCIAL PERFORMANCE: The 'A' long-term rating and Stable Outlook reflect Fitch's expectation that despite significant expenditure reductions over the last several years combined with increased recurring revenues and reduced reliance on one-shots, the county's GAAP operations and reserves will continue to be weak. A trend of surplus operations, elimination of non-recurring revenues to balance the budget, and an increase in reserves could result in improved ratings.

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.

NARROW NOTE REPAYMENT COVERAGE

Cash flow is projected to provide narrow coverage of 1.4x on the current TAN issue at maturity in July 2016. With consideration of borrowable balances, coverage improves slightly to 1.6x. Fitch believes the county's cash flow projections are reasonable; historically, actual coverage for repayments for the most part has been better than projections.

DECLINING CASH FLOW BORROWINGS

The county issues short-term revenue anticipation notes (RANs) annually and TANs twice each year. Proceeds fund operations in anticipation of state and federal aid and delinquent and current property tax receipts.

Note par has declined over the past few years. Note borrowing in 2013 equaled $625 million or a high 19.2% of budgetary expenses. Note issuance for 2015 was $565 million (16.8% of budgetary expenses). For 2016, total note issuance is projected to decline by $10 million to $555 million. Additionally, in 2015, $410 million of TANs were paid off a month earlier than in 2014.

Fitch views as a positive credit consideration the decline in cash flow borrowing and continued strong market access, but expects the county's reliance on cash flow borrowings to continue for the next several years.

2015 SALES TAX WEAKER THAN PROJECTED

The 2016 adopted budget assumes 2015 sales tax growth of 0.74% (adjusted down from 4.87% in the 2015 adopted budget) from actual 2014 sales tax revenues. As of November 12 the county had received the twentieth of twenty-seven sales tax distributions to be received in 2015. To meet estimated sales tax projections, a 2.53% sales tax growth would be required for the remainder of 2015. With that assumption, the county is projecting a combined general fund and police district budget deficit of $12.8 million or 0.58% of combined expenses. If the sale of the Foley nursing home property is not finalized by year-end, the deficit would be higher by approximately $10 million.

The 2015 budget contained recurring revenues and savings including the third consecutive police district property tax increase. Although less reliant on one-off transactions, the budget did 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 authorized 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. Funds 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.

2016 ADOPTED OPERATING BUDGET

The $3.4 billion (total operating expenditures and other financing uses) 2016 budget represents an increase in revenues of 2.55% and a 1.75% increase in spending from the 2015 budget. The 2016 budget projects sales tax growth of 3.68% over the 2015 estimated results. As a result of weak sales tax performance to date, the county has reduced the 2015 sales tax estimate to approximately $1.3 billion, which is a 0.74% increase over 2014 actual results. Fitch believes given the recent weak performance of sales tax, the projection for 2016 is somewhat aggressive.

Initiatives that balance the 2016 budget include recurring revenues and savings but the budget still relies on a number of non-recurring revenue items. As in 2015, the largest measures are the amortization of the 2016 pension payment totaling $45 million and a $28.2 million transfer from the ASRF. The budget also includes $14.4 million for disputed payments related to the master tobacco settlement agreement, but the actual amount is questionable and will not be known until April after the state's fiscal year-end. Additionally, $5 million from the sale of county-owned vacant land parcels is incorporated in the budget.

For the fourth consecutive year, the budget includes a police district property tax increase (2.9%) which will generate about $14.6 million. New recurring revenues total about $49.7 million and include increased fees on motor vehicles registrations ($14.8 million), a tax map verification fee ($24.7 million), new fees and fines for the False Alarm Registration Program ($7.2 million) and $3 million in various parks, health department consumer affairs and public work fees and fines. None of the above requires state legislative approval. The false alarm fee requires county legislative approval, which is expected to be voted on within the next 2 weeks.

The county has made some progress in its goal toward structural budgetary balance with recurring revenues and cost reductions. Headcount has been reduced by about 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.

STRONG ECONOMIC FUNDAMENTALS

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 August 2015 county unemployment rate was 4.7% compared to 5.0% and 5.2% for the state and nation, respectively. Year-over-year unemployment was down from 5.3% in August 2014, due to employment outpacing labor force growth.

MANAGEABLE LONG-TERM LIABILITIES

The county's debt ratios at $3,794 per capita and 2.1% 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 (72% of principal is retired within ten years).

The county participates in well-funded New York State pension plans. As of March 31, 2015, the state and local employees' plan and the state and local police and fire plan had funded ratios of 92% and 93%, respectively. Using Fitch's more conservative 7% discount rate assumption the plans' funding levels would still be sound at an estimated 87% and 88%, 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 provided 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.