OREANDA-NEWS. Fitch Ratings has assigned an 'AA+' rating to the following New York State Empire State Development state personal income tax (PIT) revenue bonds (general purpose):

--$922,580,000 series 2016A.

The bonds are expected to sell via negotiated sale during the week of March 7, 2016.

The bonds are issued by the New York State Urban Development Corporation, doing business as Empire State Development.

In addition, Fitch affirms the following ratings:

--$31.7 billion in state PIT revenue bonds issued by various state agencies at 'AA+'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by financing agreement payments to be made by the State of New York, subject to legislative appropriation. Payments are derived from 25% of the state's PIT receipts.

KEY RATING DRIVERS

STRONG STRUCTURE ELIMINATES RISK OF NON-APPROPRIATION: Bond payments require annual state legislative appropriation; however, in the event of non-appropriation the state would be unable to receive PIT revenue deposited in the revenue bond tax fund, up to the greater of 25% of annual PIT receipts or $6 billion. Fitch believes that this structural feature effectively eliminates the risk of non-appropriation.

STATE'S MAJOR REVENUE SOURCE: The PIT makes up about 62% of New York State's tax receipts. The additional bonds test (ABT) prevents overleveraging of the revenue stream and provides adequate offset to the historical volatility in the revenue stream.

GENERAL CREDIT QUALITY OF NEW YORK STATE: As a result of the strengths noted above, the rating on the PIT bonds is equal to that assigned by Fitch to New York's general obligation (GO) debt. Fitch rates New York's GO bonds 'AA+', Rating Outlook Stable.

RATING SENSITIVITIES

The rating on the PIT bonds is sensitive to changes in New York State's GO rating, to which it is linked.

CREDIT PROFILE

Underlying the 'AA+' rating on the PIT bonds is the importance of the PIT to state finances, the set-aside of PIT revenues for debt service, the trapping of funds if appropriation is not made, and the 2x ABT. Debt service coverage continued to be substantial even with deterioration in revenue performance in the last recession and Fitch expects it to remain so. Because of these strengths, the rating on PIT bonds is equal to that assigned to New York's GO debt despite the appropriation requirement.

The PIT revenue stream responds quickly to changing economic conditions, and recovered following a year-over-year drop of 5.7% in fiscal 2010 that would have been steeper if not for enactment of a temporary rate increase. Temporary increases have been extended twice since then; under current tax law, the temporary increases remain in place through 2017. PIT revenues have grown throughout the current economic expansion, with performance affected by broader economic factors and the impact of federal tax law changes. Revenues rose 3.8% in fiscal 2013 and 6.8% in fiscal 2014, reflecting both the impact on state collections of federal tax law changes for calendar 2013 and strong capital markets performance. Fiscal 2015 growth was a lower 1.7%, reflecting the application of temporary PIT credits enacted with the fiscal 2015 budget as well as lower extension payments in early fiscal 2015 linked to the impact of the 2013 federal tax changes noted earlier. PIT receipts in fiscal 2016, which ends on March 31, are estimated to rise 7.7%, reflecting continued solid growth in withholding during 2015 and strong growth in estimated and final payments.

For additional parity bonds to be issued, historical revenue bond tax fund receipts must cover future maximum annual debt service (MADS) on all PIT bonds by at least 2x. MADS coverage under this test is about 3.9x after this bond sale. PIT bonds are one of the state's primary financing vehicles, and substantial additional issuance is expected in the coming years, with the state's current financial plan forecasting MADS coverage dropping to a low of 3.2x in fiscal 2019. In 2013, the state began issuing under a sales tax-backed revenue bond credit (Fitch rates the state's sales tax revenue bonds 'AA+', Outlook Stable). The state plans to issue about $1.2 billion in sales tax revenue bonds annually through fiscal 2019, compared to about $3.8 billion per year under the PIT credit.

Although payment of debt service on PIT bonds is subject to appropriation, each month an amount equal to 25% of estimated available PIT revenue (i.e. receipts after refunds) is deposited into the revenue bond tax fund from the withholding portion of the tax. After retention of 125% of financing agreement payments for PIT bonds due in the succeeding month, excess monies are transferred to the state's general fund. Should amounts in the revenue bond tax fund be insufficient, the state comptroller is required to transfer from the general fund without the need for further appropriation. If no appropriation is made, deposits to the revenue bond tax fund are trapped and cannot be used (except for GO debt, if necessary), depriving the state of the monies in excess of debt service.

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, including on-time budget enactment, consensus revenue forecasting, expenditure growth curbs linked to specific formulas, and avoiding significant reliance on one-time resources. These changes have resulted, in Fitch's view, in more sustainable budgeting compared to earlier fiscal practices, in which the state relied on non-recurring actions to cover persistent structural spending pressures and recession-driven revenue cyclicality.

Recent fiscal management 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. Although the state has built only modest reserves, Fitch believes that, with proactive budget management New York continues to have a margin of flexibility with which 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 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.