Fitch Rates Suffolk County, NY's GO Bonds 'A'; Outlook

Negative

NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'A' rating to the following Suffolk County,
NY (the county) bonds:
--$62,320,000 public improvement serial bonds - 2013 series A.
The bonds are expected to be sold through competitive sale on June 4. The bonds are being issued to
fund various capital projects and some small liability payments.
In addition, Fitch affirms the following ratings:
--Approximately $1.4 billion of general obligation bonds at 'A';
--$105 million of outstanding tax anticipation notes
(TANs) at 'F1';
--$410 million of outstanding tax anticipation notes (TANs) at 'F1';
--$115 million of outstanding revenue anticipation notes (RANs) at 'F1';
--$37,000,000 of bond anticipation notes (BANs) at 'F1'.
The Rating Outlook on the bonds is Negative.
SECURITY
The bonds 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 is characterized by structural
imbalance, a large accumulated deficit, and limited financial flexibility. Weak liquidity levels,

resulting in increased use of cash-flow borrowing, heighten Fitch's concern.

BUDGET DEFICIT INCREASES IN 2012: The Negative Outlook reflects the increase in 2012 of the
already large cumulative budget deficit which is unlikely to improve in 2013.
MITIGATION PLAN PROVIDES SOME RELIEF: Budget mitigation has yielded expenditure
reductions and some new sources of recurring revenues. Fitch views this progress positively, but is
concerned that a number of gap-closing measures are of a non-recurring nature.
RELIANCE ON SHORT-TERM BORROWING: Market access remains critical given the county's high
reliance on cash flow borrowing due to weak liquidity levels.
STRONG ECONOMIC INDICATORS: The county benefits from a broad and wealthy economy and tax
base characterized by below-average unemployment rates and high wealth levels.
MANAGEABLE DEBT BURDEN: The sizable and wealthy tax base results in a manageable debt
burden with above-average amortization. Capital needs are moderate.
RATING SENSITIVITIES
WEAKNESS IN FINANCIAL OPERATIONS: Fitch's concerns about the county's ability to attain
stable financial operations and build reserves, much less reduce its large accumulated deficit, will
continue to pressure the county's rating.
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 growing population totals
approximately 1.5 million, the largest of any county in New York State outside of New York City.
BUDGET DEFICIT INCREASES IN 2012
Preliminary unaudited numbers for 2012 (year-end Dec. 31) indicate a general fund budget
operating deficit of $95.9 million ($100.9 million when the police district is added), worse than the
$63.2 million previously estimated. The cumulative general fund balance deficit on a GAAP basis at
the end of 2012 is estimated to be $155.5 million ($158 million combined).
In addition to lower sales and property tax receipts and short-term costs associated with Super
Storm Sandy, approximately $56.3 million of the decline in fund balance is attributable to timing
issues that increase the 2012 deficit but benefit the 2013 operating budget.
These timing issues include the $19.3 million sale of land in the town of Yaphank and a $37 million
correction officers' arbitration award. The land sale was due to close in 2012 but was delayed
because of litigation. Positively, the sale closed on May 20, 2013. The county included both BAN
note proceeds and expenses associated with the arbitration award in the 2013 adopted budget. The
2012 financials will reflect the costs, since the award was made in 2012. The actual payment will be
made in 2013, using $37 million in recently-issued BANs. When adjusted for the timing issues, the
cumulative general fund deficit at the end of 2012 is approximately $99.2 million.
On a preliminary unaudited GAAP basis, the general fund balance at Dec. 31, 2012 totaled a

negative $326.3 million, an increase from negative $166.7 million at Dec. 31, 2011. The unrestricted
general fund balance totaled a negative $398 million, or a large 18.0% of 2012 general fund
expenditures.
FISCAL CHALLENGES CONTINUE IN 2013; BUDGET SHORTFALL LIKELY
The 2013 adopted budget was balanced and includes a 4.8% increase in operating revenues and
other financing sources over the 2012 adopted budget with a modest 1% increase in spending.
Budgeted 2013 sales tax revenues are $1.3 billion. To achieve this, sales tax revenues will need to
increase by 4.3% from 2012 actual receipts. Because 2012 sales tax receipts were adversely affected
by Sandy, this appears reasonable, if slightly optimistic. The county has received 26.7% of budgeted
sales tax revenues to date, representing a growth rate of 4.7% over the same time period last year.
The balanced budget is predicated in part on the successful completion of some one-off transactions.
Fitch views negatively the county's reliance on these measures, especially given the tax-supported
funds' solidly negative unrestricted fund balance. In addition, Fitch is concerned that these items
may not be realistic given that they have already been repeatedly deferred and remain stalled due to
litigation and/or delayed state approval.

The two major non-recurring items to balance the 2013 budget are the sale to a private operator of
the county-owned, financially pressured Foley Nursing Facility (the nursing home), and the
sale/leaseback of county-owned buildings.
Impediments to the sale of the nursing home could not be resolved, therefore, it will not be sold and
a resulting transfer of $12.25 million to the general fund from the nursing home fund will not occur.
However, the county reports the facility is currently in the process of being closed - patients are
being moved and staff has been reduced. The county anticipates the closure will be completed by the
end of June. Positively, closure of the nursing home will generate annual recurring savings of $8
million to $10 million.
The sale/leaseback of the county-owned Dennison Building would provide $70 million in one-time
revenues. The measure requires state legislature approval. The measure was not included on the
state legislature's March agenda but the county expects approval by the end of June, when the
session ends.
Other items negatively affecting the 2013 budget include the delay in implementation of additional
red light cameras, with the county now projecting revenues of $6.5 million compared to a budget of
$12 million. Additionally, as a result of the continuing effect of Sandy, the county budget office is
presently projecting property tax collections will be $20 million less than the adopted budget.

The budget prudently does not contemplate the use of funds from the $49 million tax stabilization
reserve fund. Additionally, the county has budgeted for the 25% of the local cost (about $17 million)
from Sandy, although the federal share will increase to 90% (from 75%) equating to an additional
$6.3 million in revenue to the county in 2013.
Fitch believes further expenditure reductions will need to be implemented to offset the loss of
revenue, and an increase in projected cash flow borrowing in 2013 is likely given slim liquidity
margins. Fitch expects the county's financial operations in 2013 will remain challenged as the
county struggles to achieve on-going budgetary balance.
BUDGET MITIGATION PLAN PROVIDES SOME RELIEF
The county has made some progress in addressing budget deficit as a result of expenditure
reductions and new revenue sources. By far the most significant measure is the amortization of
$60.7 million of the 2013 pension payment, which would provide relief this year but increase costs in
later years.
Other sizeable measures, which Fitch considers to be more structural in nature, include: (1) a
reduction of over 700 full-time employees during 2012 with projected annualized savings of $53.3
million in 2013. In fiscal 2013, the county intends to further reduce employee headcount through the
layoff of approximately 180 nursing home employees and continued employee attrition; (2) $25
million-$30 million in annual savings from the embargo of county department funds as a result of the
declaration of a second fiscal emergency in 2013; and (3) a property tax increase in the police
district which has provided additional revenue of $12.4 million.
CASH FLOW PRESSURE LEADS TO INCREASED SHORT-TERM BORROWING
Fitch views as a credit negative the county's increased reliance on capital market access for liquidity
needs to relieve cash flow pressures.
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, the amount of the borrowings has increased over the last few years
and, since last year the county has issued RANs, which they had not done in over two decades.
The county issued $600 million in cash flow notes in 2012 compared to $520 million in 2011 and
$310 million in 2006. Cash flow borrowings in 2013 are projected to be $605 million, or a high 22%
of 2013 budgetary expenses. As a result of Sandy-related costs and at the time, the delay in the sale
of the county-owned nursing home, the county recently issued $115 million of RANS, an increase
from $85 million in 2012. The county plans to sell $90 million of DTANs in September and $400
million in TANs in December. In the past, projected cash flow borrowings have increased as a result
of below-budgeted revenues and/or delays in realizing non-recurring revenue items.
STABLE ECONOMY/SOME NEGATIVE EFFECT FROM SUPER STORM SANDY
The county benefits from a broad, diverse economy and well above-average economic indicators,
including solid income levels (per capita income in 2012 was 131% of the nation's) and high per
capita market value ($176,000). The county's unemployment rate remains lower than the rates for
New York State and the nation. In March 2013, the county's unemployment rate was 7.1% compared
to 8.1% and 7.6% for the state and nation, respectively. From March 2012 to March 2013,
employment and labor force numbers were positive-trending, posting 1.1% and 0.3% increases,

respectively, much higher than both state and nation growth rates.
In 2012, sales tax revenues were $8.8 million less than budgeted with receipt declines from
projected amounts reported following Super Storm Sandy. Additionally, property tax revenues were
$15.5 million less than the 2012 estimate, of which at least $3 million can be attributed to Sandy.
The county may experience an increase in tax certioraris to reflect decreased property values in the
affected areas due to storm damage. Property tax receipts may decline as a result of higher
delinquencies with a possible loss of approximately $35 million through 2013, which Fitch expects
the county will eventually recover with rebuilding. Positively, the 2012 property tax collections were
strong at 98.3%, in line with previous years.
MANAGEABLE DEBT BURDEN
The county's debt ratios at $4,253 per capita and 2.4% of market value are moderate, with the latter
reflecting the wealthy tax base. Debt service represents a low 4.6% of total government fund
spending.
Debt ratios should remain stable given manageable capital needs and above-average amortization
with 67% retired in 10 years. The county plans on issuing approximately $60 million of GO bonds
during the fall of 2013 for various countywide projects. The 2014-2016 proposed capital
improvement plan (CIP) totals $702.6 million, a $187 million increase from the $515.2 million
adopted 2013-2015 CIP, but has been scaled back to minimize growth in long-term debt obligations.
The plan includes approximately $139 million of projects which may be eligible for reimbursement
by FEMA or other Federal Disaster Funds.
WELL-FUNDED STATE PENSION PLANS
The county participates in New York State pension plans, which are well-funded. Pension payments
in 2011 made up a moderate share (5.4%) of general and police district spending. The county has
taken advantage of the ability granted by the state to amortize most of the increase in annual
pension payments over 10 years. This amortization option provides some near-term budget relief but
will make future-year budgeting for these payments more challenging.
While the 2014 pension contribution will be higher, it will be the final year that employer
contribution rates will reflect the market loss of 2008-2009, with costs expected to decrease going
forward. This reduction will somewhat offset the added expense of the amortization.
The unfunded actuarial accrued liability for other post-employment benefits (OPEB) was $4.6 billion
as of Dec. 31, 2012, or a moderate 1.8% of market value. This amount is expected to increase, as the
county plans to continue to fund its OPEB liability on a pay-go basis and officials have no plans to
alter benefits.
Carrying costs for debt service, pension and OPEB pay-go equaled a manageable 13.1% of 2011 total
government fund spending, with the county's amortization of part of the pension payment somewhat
offsetting rapid debt repayment.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this
action was additionally informed by information from Creditscope, University Financial Associates,
S&P/Case-Shiller Home Price Index, IHS Global Insight, National Association of Realtors.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=792503
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