OREANDA-NEWS. Fitch Ratings has assigned the following ratings to Nassau County, NY general obligation (GO) debt:

--Approximately $98,000,000 general improvement bonds, 2017 series B 'A';

--Approximately $45,000,000 bond anticipation notes (BANs), 2017 series A (Federally Taxable) 'F1.'

In addition, Fitch has affirmed the following ratings:

--Approximately $2.2 billion in outstanding GO bonds at 'A';

--Approximately $222 million in outstanding Nassau Health Care Corporation (NHCC) county-guaranteed bonds at 'A';

--Approximately $7.3 million in outstanding Nassau Regional Off-Track Betting Corporation (NROTBC) revenue bonds series 2005 at 'A-'; and

--The county's Issuer-Default Rating (IDR) at 'A'.

The Rating Outlook is Stable.

The bonds and BANs are scheduled to be sold through competition on June 6. Bond proceeds will fund various capital projects, pay a portion of maturing 2016 series B BANs, and pay costs of issuance. BAN proceeds will finance various sewer system improvements. The BANs are due Dec. 14, 2018.

SECURITY

The notes carry the county's faith and credit and taxing power, subject to a 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

The county's legal ability to raise revenues from a diverse and wealthy base and demonstrated ability to quickly reduce spending, in conjunction with a moderate liability burden, keep the rating solidly investment grade. However, aggressive budgeting practices and a policy choice to maintain minimal operating reserves are unusual for a Fitch-rated local government and keep the county's IDR well below the 'AA' average for the sector.

Economic Resource Base

Nassau County is located just east of New York City, with a population of approximately 1.4 million that has remained steady since 2000. Growth prospects are limited as the county is built out, but there are modest re-development opportunities.

Revenue Framework: 'a' factor assessment

Dependence on sales and property taxes is expected to continue to yield modest revenue growth given limited prospects for economic expansion. The county has unlimited independent legal ability to control property tax rates, although property tax levy increases above the lower of CPI or 2% require a supermajority (60%) vote of the county legislature.

Expenditure Framework: 'a' factor assessment

Despite generous terms of labor contracts relative to historical revenue growth and management's limited ability to control the ultimate outcome of labor negotiations, the county has demonstrated an ability to reduce its workforce and other spending when needed and additional savings appear possible. Carrying costs for debt, pensions, and other post-employment benefits (OPEB) are sizable.

Long-Term Liability Burden: 'aa' factor assessment

The county's long-term liability burden is moderate. New York State pensions in which the county participates are well-funded but the OPEB liability is considerable and the county has taken minimal steps to control its growth.

Operating Performance: 'bbb' factor assessment

Fitch expects the county to continue to manage its performance consistent with historical results and throughout economic cycles -- keeping minimal reserves, with a mix of recurring and non-recurring solutions involving staffing reductions, asset sales, and minor recurring revenue increases to address budget gaps. The county expects it will no longer need to use bond proceeds for operating costs. The presence of a control board whose approval is required for all borrowing reinforces this expectation.

RATING SENSITIVITIES

OPERATING MARGINS: The 'A' rating and Stable Outlook incorporate Fitch's expectation that the county's financial operations will continue to generate roughly break-even results and minimal reserves with reduced reliance on non-recurring items and deferrals as the economic recovery continues. Improved margins and the accumulation of a meaningful level of reserves during periods of economic recovery, along with the expected elimination of reliance on debt and other non-recurring items to fund recurring expenses, could result in rating improvement. Increased reliance on such funding or a trend of annual deficits of more than a minimal amount could result in a downgrade.

CREDIT PROFILE

Economic indicators show diversity and strength, including market value per capita of over $150,000, per capita personal income at 161% of the U. S., and a poverty rate of less than one-half the U. S. average. Top taxpayers include a mix of utilities, corporate facilities, and retail. The unemployment rate is consistently below state and national averages, although employment growth is generally slower than the national rate. The latter may be influenced by demographic trends, as the proportion of residents over age 64 exceeds the U. S. average.

Revenue Framework

The county's major operating funds (general and police district) rely on sales tax revenues (32% of 2015 combined revenues), whose growth over time reflects the county's slow economic growth. Small increases in property tax revenue (also 32% of 2015 combined revenues) have been due to modest policy actions, as taxable assessed value has continued to decline despite increases in market value.

Operating resources have in the past included proceeds of bonds issued for employee termination pay (accumulated vacation and sick leave) and tax refunds. The county does not expect to issue bonds for either purpose in 2017 or thereafter. The county is responsible for paying refunds to taxpayers who successfully appeal their assessments for underlying jurisdictions, which creates an unusual burden for a local government. Officials have been working to reduce the financial impact of this arrangement.

Fitch anticipates that the impact will be further alleviated this year, as a new disputed assessment fund has been implemented to handle commercial appeals. The county now requires commercial taxpayers who file appeals to deposit the projected amount of disputed taxes into a dedicated fund, reducing assessed value (AV) by the amount under appeal. Successful appeals are expected to be repaid from the fund, not from county resources.

Historical revenue growth has been slower than national CPI growth. Fitch expects this trend to remain consistent as the economy continues to mature.

New York State law requires property tax revenue increases be limited to the lesser of CPI or 2% annually, unless a supermajority of the local governing body vote for a larger increase. This exception provides substantial legal flexibility to raise revenues without state or voter approval. Any increase in the sales tax rate would require state approval, and maintenance of the existing local portion of the sales tax rate is subject to biennial state approval. Fitch considers such approval pro forma.

Expenditure Framework

Typical of local governments, public safety is one of the county's main spending items at almost 40% of the total. New York State requires counties to share in Medicaid spending, although the state now covers all annual spending increases. Health and social services spending equaled about 26% of spending in 2015, but this percentage has been declining given the state Medicaid cap.

The county generally agrees to long-term labor contracts for its employees that include fairly generous terms given slow revenue growth expectations. For example, current contracts extend from April 1, 2014 to Dec. 31, 2017 and call for cumulative cost of living increases of 12.75%. For the Civil Service Employees Association, which includes about one-half of county employees, 0.75% of the increases are deferred until termination at then-prevailing rates. With the current contracts, new employees pay a portion of health care premiums.

Fitch believes pressure to provide sizable salary increases even in downturns is tempered a bit by the Nassau County Interim Finance Authority's (NIFA, the county's control board) ability to impose a wage freeze after 2017, as it did in 2011-2013. Law enforcement and other unions challenged this action, and salary increases in current labor contracts reflect a partial settlement of this challenge.

The pace of spending growth absent policy actions is likely to be modest given the slow-growth environment and limited needs of a relatively affluent population, although the natural pace of spending growth is still likely to be above that of revenues. The county is both deferring some pension costs and repaying prior deferrals that were authorized by the state. In the near term annual pension requirements should be fairly level. Over time they may increase, but the rolling off of deferral repayments should keep annual increases moderate for some time. For 2017, the amount budgeted for repayment of prior deferrals is roughly equal to the current-year deferral.

The collective bargaining framework in New York makes adjustments to personnel spending difficult, although as mentioned above NIFA's powers provide some level of offset. Assuming the county does not revert to issuing bonds for tax refunds, and with the roll-off of NIFA debt in 2025, currently elevated carrying costs (21% of governmental spending in 2015) may decline as a portion of spending over time.

Long-Term Liability Burden

Nearly $900 million of the county's approximately $3.2 billion in outstanding net direct debt (county obligations and NIFA revenue bonds) was issued for tax refunds. Debt issued by NIFA ($784 million, or about 24% of the total), supported by sales tax revenues, is scheduled to be repaid by 2025. The combination of these two leads to rapid amortization. As the tax refund and NIFA debt is repaid and no further such debt is expected to be issued beyond 2017, both direct debt and amortization rates are likely to decline. Capital plans indicate new debt will approximate the amount of GOs amortizing each year. Debt figures for school districts within the county are unavailable, but typically make up a significant portion of an entity's overall debt burden. If school districts were included, Fitch believes overall debt and pension liabilities would likely exceed 10% of personal income.

State pensions in which the county participates are well-funded and reform in 2012 should slow the growth in the liability over time. Pursuant to pension relief programs approved by the state, the county has deferred approximately $300 million in liabilities through 2017. These should all be repaid within 12 years. Additional deferrals should be modest and are scheduled by the state to be discontinued in 2020.

The OPEB liability is sizable at nearly 5% of personal income and the county has expressed no plans to reduce it.

The county has $313.6 million in outstanding tax refund liability based on unaudited 2016 information, which officials expect to repay from operating sources over the next decade. In addition, pending litigation includes recent property tax refund claims, including suits filed by utilities for which the county estimates refunds could be up to $200 million. There were also several suits filed by town and garbage districts within the county. The county recently reached settlements with two of the towns, with approximately $125 million to be paid from operating resources over the next 10 years. The remaining challenge to the wage freeze calls for retroactive payments estimated at $101 million. Fitch does not incorporate these amounts into its long-term liability burden metric, and they would not have a significant impact if included.

About one-half of NIFA's debt and all of the county-guaranteed Nassau Health Care Corp (NHCC) debt is in variable rate demand bonds supported by letters of credit or liquidity facilities. Nearly all of the VRDBs are swapped to fixed rate, with a variety of counterparties. Fitch rates NIFA's debt 'AAA'/Stable Outlook and does not view this level of counterparty risk as significant to the county's credit quality.

Operating Performance

Despite minimal reserves, the county has demonstrated adequate financial resilience, with modest annual operating surpluses or deficits throughout economic cycles. Fitch expects this trend to continue. Budgeting is somewhat aggressive (for example revenue estimates sometimes include sources that have not yet received required state approval; sales tax revenues often under-perform budget) but shortfalls are addressed in a timely manner, albeit by a mix of recurring and non-recurring means.

The county's financial operations are fairly consistent, and use of non-recurring revenues and deferral of spending items do not appear to be related to the economic cycle. The county took advantage of state pension funding relief related to market losses, as did many other New York localities. Use of bond proceeds to repay tax refunds had been an annual exercise but the county has no plans to continue this practice after reducing borrowings over the last several years due to changes in assessment and appeal procedures. Appeals and required refunds are likely to rise during weak economic periods but Fitch believes these procedural changes make the county less exposed to refund risk going forward. Aggressive budgeting is also consistent.

Audited results for 2015 show a general fund surplus of about $55 million, resulting in an unrestricted fund balance of about 2% of spending, still modest but up from 1% at the end of 2014. Unaudited results indicate another surplus in 2016, bringing the general fund unrestricted balance to about $67 million. Officials expect to use accumulated reserves in the general and other funds to repay $60 million in scheduled tax refunds, ending the prior practice of borrowing for them. Reserves at the end of 2017 are expected to be similar to 2015 levels. Although Fitch views the cessation of borrowing for tax refunds as a positive credit development, the use of already slim reserves for this purpose results in continued concerns that management's actions during the economic recovery of the last few years has yielded little in the way of financial cushion against the next downturn.

The county's 2017 budget ($3 billion in major operating funds) is 3.2% higher than the 2016 adopted budget. Sales tax revenues are budgeted to increase 1.1% over 2016 actuals, and the county reports results through the first quarter are on track to meet this projection.

The county relies on short-term borrowing for a moderate portion of its liquidity needs, generally about 15% of operating fund spending. Fitch views reduced borrowing forecast for 2017 (down $77 million to $300 million) as a positive for credit quality that is offset by the resulting thin liquidity forecast by year-end. The operating cash balance was $212 million at the end of 2016 and is projected by management to be down $134 million to $78 million at year-end 2017.

Fitch views NIFA's use of its oversight board powers is a credit positive. NIFA has taken an active role, rejecting the county's budgets when it believed revenue estimates were optimistic or spending measures insufficient. However, so far NIFA's ability to instill conservatism into the county's financial practices appears limited.

The county focuses on the property tax levy rather than the rate (the state cap is on the levy) and management is notably reluctant to increase the levy more than a marginal amount. This makes finances heavily reliant on sales tax performance. The county's willingness to contain spending growth has been sufficient in recent years, along with minor revenue increases, to offset slow sales tax growth.

The county is exploring a public-private partnership for its sewer system. If successful, Fitch expects the impact to general government operations to be limited to the possible modest reduction in GO debt not currently subsidized by sewer operations.