NY Local Governments

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OCTOBER 21, 2013

U.S. PUBLIC FINANCE

SPECIAL COMMENT

Strong Local Fiscal Management and State Oversight Help Mitigate Sluggish Economy, Tax Cap, and Rising Fixed Costs

Key Credit Drivers of New York Local Governments
Summary Opinion

Table of Contents:
SUMMARY OPINION DESPITE RECENT DOWNGRADES, MOST RATINGS REMAIN STABLE CREDIT DRIVER #1: SLOW ECONOMIC GROWTH ACROSS THE STATE, CHALLENGES VARY BY REGION UPSTATE REGION EXPERIENCES LONGTERM ECONOMIC TRANSFORMATION DOWNSTATE SUFFERS REAL ESTATE MARKET DECLINES, TAX APPEALS; WEALTH AND INCOME LEVELS REMAIN HIGH CREDIT DRIVER #2: LIMITED REVENUE GROWTH DUE TO STATEWIDE PROPERTY TAX CAP AND WEAKNESS OR VOLATILITY IN OTHER SOURCES CREDIT DRIVER #3: DIFFICULTY MANAGING RISING PERSONNEL COSTS CREDIT DRIVER #4: STRONG MANAGEMENT PRACTICES GENERALLY RESULTING IN SUFFICIENT RESERVE LEVELS AND FAVORABLE DEBT PROFILES CREDIT DRIVER #5: STATE OVERSIGHT THAT HELPS STABILIZE OR IMPROVE FINANCIAL OPERATIONS 1 2 3 3

Five key factors drive our assessment of New York local government credit. Three of these drivers put downward pressure on credit quality, but they are mitigated by two fundamental strengths. We expect the vast majority of New York local government ratings to remain resilient, although downgrades are likely to continue to outpace upgrades. The key pressures facing New York local governments 1 are: » Relatively slow economic growth across the state, although specific weak points vary by region; Limited revenue growth due to the statewide property tax cap and weakness or volatility in other revenue sources; and Difficulty managing labor costs including pensions and other post retirement benefits

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However, two fundamental strengths enable most of them to manage the challenging credit environment effectively: » » Strong management practices, generally resulting in sufficient reserves and favorable debt profiles; and State oversight that helps stabilize and improve financial operations for the most stressed governments

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Analyst Contacts:
NEW YORK +1.212.553.1653

Robert Weber +1.212.553.7280 Assistant Vice President - Analyst [email protected] Geordie Thompson +1.212.553.0321 Vice President - Senior Credit Officer [email protected]
» contacts continued on the last page

1

We do not address New York City (Aa2 stable) itself in this report due to its size and unique characteristics.

U.S. PUBLIC FINANCE

Despite Recent Downgrades, Most Ratings Remain Stable
We maintain underlying ratings on over 1,000 local governments in New York. The distribution of the ratings is skewed slightly lower than for the nation as a whole (Exhibit 1). The vast majority of New York local government ratings apply to debt secured by a general obligation pledge. Unless otherwise noted, all references to ratings in this report apply to GO debt.
EXHIBIT 1

New York Rating Distribution Slightly Lower Than Nation
NY 35% 30% 25% 20% 15% 10% 5% 0% Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Speculative Grade National

Source: Moody’s Investors Service

New York local governments have felt the effects of the recession and weak recovery, as evidenced by downgrades outpacing upgrades since the beginning of 2010 (Exhibit 2). Still, the vast majority of ratings have not changed over this time frame.
EXHIBIT 2

New York Downgrades Outpace Upgrades Since 2010
Upgrades 70 60 50 40 30 20 10 0 2008 2009 2010 2011 2012 2013 H1 Downgrades

Source: Moody’s Investors Service

Eight New York local governments have experienced downgrades of three notches or more since 2008, but the number of such downgrades remains well below that of several states including Michigan, California, and Minnesota (Exhibit 3). The main driver of these multi-notch downgrades was the inability or unwillingness of management to make budgetary adjustments in a challenging operating environment.

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SPECIAL COMMENT: KEY CREDIT DRIVERS FOR NEW YORK LOCAL GOVERNMENTS

U.S. PUBLIC FINANCE

EXHIBIT 3

Multi-Notch Downgrades 2008-2013 Q2
State Number of Downgrades

CA* MI MN IL AL PA NY
*California is overrepresented due to a change in law which caused all rated tax allocation bonds in California to be downgraded to below investment grade. Source: Moody’s Investors Service

104 27 11 10 9 9 8

Credit Driver #1: Slow Economic Growth Across the State, Challenges Vary by Region
The pace of economic recovery in New York has been uneven, with each region experiencing its own set of economic drivers. For the purpose of generalizing economic trends, we split New York into two distinct regions: “Downstate” (the area around New York City and much of the Hudson Valley) and “Upstate” (the balance of the state).

Upstate Region Experiences Long-term Economic Transformation
Upstate New York has a long history of decline in industry and population, and relatively weak wealth and income indices, particularly in the major cities (Exhibits 4 and 5). The area suffered during the Great Recession, but upstate tax base valuations have remained relatively stable because the region did not experience significant real estate value increases during the boom. Economic activity has started to pick up in some metropolitan areas, including Albany (A1 stable) and Rochester (Aa3 stable). In these cities, as well as in Buffalo (A1 stable), a strong higher education presence has brought stability to the economy. Rochester has long benefited from the presence of two major universities and, for many years, maintained a relatively stable manufacturing presence anchored by the Eastman Kodak Company and the Xerox Corporation (Baa2 stable). Although Kodak has significantly downsized over the years, and filed for bankruptcy in early 2012, the company has spun off many high-tech firms in the area that have contributed to the local economy.
EXHIBIT 4

Long-term Change in Rank Among Top U.S. Cities by Population
Rank 1920 1930 1940 2010

New York Buffalo Rochester Syracuse
Source: U.S. Census Bureau

1 11 23 37

1 13 22 40

1 14 23 41

1 72 100 170

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EXHIBIT 5

Upstate New York Cities Maintain Weak Demographics
City Per Capita Income (% of U.S. median) Median Family Income (% of U.S. Median) Median Home Value (% of U.S. median) Poverty Rate (2000) Unemployment (July2013)

Buffalo Syracuse Utica Schenectady Troy
Source: Census Bureau

69.4 70.3 70.6 79.1 77.8

61.2 66 67.6 72.8 77.2

35.5 45.1 46.3 62.5 77.9

26.6 27.3 24.5 20.8 19.1

10.2 8.9 8.9 8.4 9.2

Despite the long-term declines in many of the major upstate cities, the surrounding communities have fared reasonably well. For example, the population of Monroe County (Baa1 negative) has increased even though the city of Rochester’s population has declined. The Southern Tier of New York is on the Marcellus Shale, which has large natural gas reserves that have attracted energy companies to the region. New York has a moratorium on natural gas extraction, but cities like Elmira (A2 negative) have benefitted economically from drilling in bordering Pennsylvania (Aa2 stable). However, drilling activity has declined recently because of lower natural gas prices, so it’s not clear how long the economic activity around natural gas exploration will last.

Downstate Suffers Real Estate Market Declines, Tax Appeals; Wealth and Income Levels Remain High
New York City is the economic engine of the downstate region. The city is highly dependent on employment in the financial services sector, which has tended to be volatile. Despite the weakness in the financial sector following the economic downturn, the city has recovered all of the private sector jobs lost during the downturn. The service sector has grown and so has the construction industry as homes and businesses are repaired following Hurricane Sandy. Despite the city’s relatively strong recovery, portions of the metro area continue to experience the trend of declining property values that began at the onset of the economic downturn (Exhibit 6). Homeowners and businesses in the downstate counties are among the highest-taxed in the country, and tax appeals by residential and commercial taxpayers have pressured some municipalities. Much of the wealth generated in New York City is reflected in suburban communities in the Counties of Westchester (Aaa negative), Nassau (A2 stable), and Suffolk (A2 negative). That socioeconomic strength, as well as strong commercial activity, has buoyed the credit quality of downstate local governments, as a high-income, wealthy populace typically has supported property tax increases to sustain a high level of governmental services. This also helps explain why many of the downstate populations have among the highest tax burdens in the country, a potential hurdle to maintaining local government budgetary balance in a weakened economy.

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EXHIBIT 6

Downstate Tax Base More Volatile than Upstate
Downstate 20% 15% Upstate

Annual Change (%)

10% 5% 0% -5% -10% 2006 2007 2008 2009 2010 2011 2012

Source: Moody’s Investors Service

Credit Driver #2: Limited Revenue Growth Due to Statewide Property Tax Cap and Weakness or Volatility in Other Sources
New York local governments face revenue constraints because of the statewide property tax cap and reliance on economically volatile revenues. The cap, which went into effect on January 1, 2012, limits annual tax levy growth to the lower of 2% or the rate of inflation, subject to certain adjustments. The New York State comptroller recently announced that the levy growth cap for municipalities with fiscal years beginning January 1, 2014 will be 1.66% and for those that begin March 1, 2014, the limit will be 1.7%. Local governments whose fiscal years begin later in 2014 could face growth limits that are more constrained. While the law curbs increases in the revenue source over which local governments have the greatest control, it also has provisions that allow local governments to exceed the limit. Counties and cities can override the cap with a 60% vote of the legislative body. Approximately 32% of counties and 30% of cities voted for overrides in fiscal 2013, significantly more than in fiscal 2012, the first year of the cap. Despite an exemption for debt service, school district operations are more constrained by the cap because their budgets are subject to a public vote each year, and an override of the cap requires 60% voter approval. This has resulted in fewer overrides for school districts: for fiscal 2014, 28 out of 675 (4.1%) school districts attempted to exceed the cap; only 10 of those succeeded. In fiscal 2013, 48 (7.1%) attempted an override and 29 succeeded. Some local governments increase the levy beyond 2% or CPI (see Exhibit 7) by utilizing one or more of the various exceptions the law allows. Growth in annual required contributions (ARCs) to the state pension plan, a notable exception to the cap, has driven the actual limit for most school districts above 2% for fiscal 2014. Given these and other exemptions, the actual limit on the levy will vary by issuer and by year.

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SPECIAL COMMENT: KEY CREDIT DRIVERS FOR NEW YORK LOCAL GOVERNMENTS

U.S. PUBLIC FINANCE

EXHIBIT 7

Tax Cap Calculation
Base Last year's tax levy

+ Inflationary Factor + Tax Base Growth Factor + Pension Factor
Source: New York State Comptroller

Lesser of CPI or 2% New Growth/Additions to Properties Pension contribution growth exceeding 2%

Slow or no growth in state aid, sales tax and mortgage tax revenues continues to pressure local governments to either raise property tax revenues or cut expenditures. State aid for school districts is expected to grow over the next two years, but aid to municipalities is expected to stay flat. Sales tax and mortgage tax growth remains volatile with some areas faring worse than others. Primary revenue sources for school districts are property tax and state aid, although the breakdown between the two sources depends heavily on the demographics of the district. Overall, school districts are more dependent on state aid than are the other local government sectors. The volatility in state aid has made annual budgeting a challenge for many school districts during the economic recovery. State aid for many districts remains below peak levels of a few years ago. State aid for education increased 4% in fiscal 2013 and another 4% in fiscal 2014. While funding levels remain below the peak of 2008, the increases have provided some financial relief for school districts. Local government dependence on sales tax revenues varies widely, from virtually none for school districts to as much as 50% for counties, cities, towns and other local governments. This economicallysensitive revenue source declined annually in 2008 and 2009, but has rebounded overall in the past 3 years. Border communities like Niagara County (Aa3) have experienced strong sales tax revenue growth as the weakened US dollar has helped increase local retail activity. Sales tax revenues have not grown as robustly in much of the state: Dependence on this volatile revenue source will be a challenge for many.

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SPECIAL COMMENT: KEY CREDIT DRIVERS FOR NEW YORK LOCAL GOVERNMENTS

U.S. PUBLIC FINANCE

EXHIBIT 8

County Sales Tax Collections Remain Volatile
10% 8% 6% 6.6% 3.5% 1.2% 1.3% 6.2% 3.6% 7.7% 5.3% 5.1% 5.5% 4.1% 4.2% 3.5% 3.3% 2.3% 5.5% 5.9% 4.6%

% Change Year-Over-Year

4% 2% 0% -2% -4% -6% -8% -10% Q1 Q2

-1.8%

-6.8%-6.3%

-7.4% Q2

-7.9% Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2013 Q3

Q3

Q4

Q1

2008

2009

2010

2011

2012

Source: Department of Taxation and Finance, Office of Tax Policy Analysis, Sales Tax Cash Distribution Database; additional calculations by the Office of the State Comptroller. Numbers not adjusted for tax rate or tax law changes. Does not include collections in New York City.

The counties collect and remit sales tax revenue to their respective local governments through sharing arrangements for which the counties have ultimate authority. Some counties, including Dutchess (Aa1 negative) and Orleans (A1), have capped the nominal amount of sales tax they will share with their cities and towns to levels that do not allow for additional growth. In Onondaga County (Aa1 stable), a new 10-year sales tax agreement with Syracuse (A1 negative) eliminates the minimum sales tax funding level and allows for the city to share in future growth of sales tax. Hurricane Sandy exacerbated local government spending pressures and caused a disruption to economic activity in the Fall of 2012, temporarily depressing sales tax revenues. Data for the first six months of 2013 show sales tax receipts have rebounded substantially, however, in the affected downstate areas as rebuilding has driven robust retail activity. This is a common phenomenon of natural disasters of Sandy’s magnitude, one also illustrated the prior year when upstate counties affected by Hurricane Irene and Tropical Storm Lee experienced sales tax growth in 2012. Overall, the downstate counties have experienced significant growth in sales tax revenue while receipts are flat to declining upstate. In addition to the storm effect, this reflects the long-term strength of the downstate economy over the upstate economy.

Credit Driver #3: Difficulty Managing Rising Personnel Costs
Local governments in New York face constraints to limiting growth in wages and pension and healthcare costs. Considering the volatility in sales tax revenues and cap on growth in property tax revenues, the ability to manage rising personnel costs is a crucial determinant of credit quality in the state. Wages. Issuers in New York face serious hurdles to controlling wages because of the Triborough Amendment of the State’s Taylor Law. Enacted in 1982, the amendment requires continued payment of step and longevity salary increases after the expiration of a labor contract. This creates a disincentive for collective bargaining units to settle for small or no salary increases, since the amendment upholds the provisions of the previous contract. Several employee contracts with Buffalo, for example, remain unsettled, including some that expired in 2004.

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SPECIAL COMMENT: KEY CREDIT DRIVERS FOR NEW YORK LOCAL GOVERNMENTS

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Pensions. Pension costs continue to grow rapidly. Almost all local government employees participate in one of three state-run multi-employer cost sharing plans: the New York Police and Fire Retirement System (PFRS), New York Employee Retirement System (ERS) and New York Teachers Retirement System (TRS). The median adjusted unfunded pension liability for New York cities, counties and school districts is a moderate 0.76 times fiscal 2011 operating revenues. Required local government pension contributions have grown dramatically over the past three years, largely due to weak investment performance during the recession. The Comptroller recently announced that pension contributions for all municipalities will decline for 2014, but we expect the 2015 required contributions to begin increasing again. The state has provided some long-term budgetary relief to local governments by adding a new pension tier increasing contribution rates and the retirement age for employees in that tier. The new tier only applies to new employees, however, so local governments will not realize savings for many years and local governments will continue to face pressure from growing pension continuations for the foreseeable future. The state has allowed local governments to amortize a portion of their annual pension contribution since 2010, a practice that some have chosen to undertake. The number of local governments participating in the pension amortization program has increased over the past three years from 57 (1.5% of all local governments) in 2011 to 171 (4.6%) in 2012 to 188 (4.7%) in 2013. By deferring current year operating expenses into later years local governments incur higher long-term costs to avoid near-term budgetary relief. This practice can exacerbate existing budgetary pressures, especially for the most financially stressed municipalities.

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SPECIAL COMMENT: KEY CREDIT DRIVERS FOR NEW YORK LOCAL GOVERNMENTS

U.S. PUBLIC FINANCE

Health care, Health care costs, including other post employment benefits (OPEB), have continued to increase at a rate faster than inflation. It can be difficult for local governments to curb these increases through reduced benefits or larger employee contributions because the Triborough Amendment also applies to healthcare benefits. The increasing cost of health care has impacted county-owned nursing homes as well. Counties receive significant state subsidies for nursing homes in the form of Intergovernmental Transfers (IGTs), which must be matched by the county. Many county-owned nursing homes are operating at a deficit, despite the IGT matching funds, and require subsidies from their counties’ general operations. These transfers from General Funds represent an additional stress for counties, especially for those that have not adequately budgeted for them. Cost overruns at Rockland County’s nursing home, for example, led to approximately $15 million in annual unbudgeted expenditures; the county continues to book a growing receivable that it is likely not to collect. To relieve themselves of these additional financial burdens, many counties, including Albany (Aa3), Cattaraugus (Aa3), Orange, Rockland, Suffolk and others, are looking to either close or sell their nursing homes, although this often proves more difficult or time-consuming than management expects.

Credit Driver #4: Strong Management Practices Generally Resulting in Sufficient Reserve Levels and Favorable Debt Profiles
New York local governments have a history of strong fiscal and debt management. Even in the currently strained operating environment (Exhibit 9), which has resulted in some draws on reserves to manage financial operations, fund balance levels are close to national medians at all rating levels in all sectors. Local governments have steadily increased property tax levies despite the limit, and many have been willing to at least attempt to exceed the cap. As revenue growth remains stagnant and expenditure growth continues, additional declines in fund balances across the state are likely. Many municipalities will continue to rely on cash flow borrowing for liquidity, especially those that face significant fiscal stress. Some local governments have agreed to consolidate, such as the Village and Town of Seneca Falls, although this remains rare even with strong encouragement and incentives for consolidation from the state. Other local governments have considered regional sharing of services and departments. The regional BOCES have achieved economies of scale by providing educational services that would be costly for individual school districts. As the challenges continue to grow, we expect New York local governments to continue to manage. Most likely they will do so through some combination of state mandate relief (especially for counties), increased flexibility to manage employee contracts, and increased aid to localities.

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U.S. PUBLIC FINANCE

EXHIBIT 9

Expenditure Growth Has Outpaced Revenue Growth Since 2007
Change in Operating Fund Revenues 25% 20% 15% 10% 5% 0% 2007 2008 2009 2010 2011 Change in Operating Fund Expenditure

Source: Moody’s Investors Service

Debt issued by New York local governments is generally restricted for capital spending and largely consists of long-term, fixed-rate bonds that amortize rapidly. The use of variable rate debt by local governments is not generally allowed, per state law, with the exception of New York City and some local authorities. School districts benefit from significant building aid from the state, which offsets debt costs, bringing adjusted overall debt burdens to about the US average for Moody’s-rated districts. Debt burdens for Moody’s-rated cities also remain close to national medians (Exhibit 10). Higher debt burdens at the lower end of the rating scale are reflective of the small size of many New York cities.
EXHIBIT 10

Debt Burden of New York Cities Mirrors Nation
NY Cities 9 8 7 Nation

%

6 5 4 3 2 1 0 Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1

Source: Moody’s Investors Service

Long-term bonds remain the typical form used for debt issuance, but many New York local governments are regular issuers of short-term notes, most commonly for capital spending in the form of bond anticipation notes (BANs). Local governments also borrow for intra-annual cash flow needs, either by issuing tax anticipation notes (TANs), revenue anticipation notes (RANs) or a combination of the two. The market for New York short-term paper has been historically very strong, even for issuers rated in the low investment grade categories. For example, we downgraded Rockland County to Baa3 and left the rating on review for further downgrade in May 2012, but the county went to the

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capital markets for $35 million in GO RANs in June 2012. Despite the county’s significant fiscal stress, the notes were oversubscribed and received an interest rate of 3.75%, a strong indicator of significant market interest in these notes, although the county paid interest rates that were significantly above market. Although most New York local governments issue long-term debt for capital purposes, as financial challenges have mounted, an increasing number are using long-term debt for operating purposes. Many New York local governments borrow regularly to finance successful tax certiorari claims and the payment of tax appeals has contributed to significant budgetary strain for some municipalities. For example, Rockland County, as well as several local governments within the county, increased their annual borrowing for tax certiorari payments after the Mirant Corporation’s successful tax appeal resulted in increased reimbursements and a dramatic decline in assessed valuation. Others have issued debt to finance the costs related to employee separation agreements.

Credit Driver #5: State Oversight That Helps Stabilize or Improve Financial Operations
The state’s oversight of municipalities and history of involvement with those that are facing severe financial strain have contributed to local government stability. The state legally requires school districts to undergo annual audits of their financial statements and all governments must provide unaudited financial information to the state comptroller annually. The state also restricts the extent to which municipalities can finance deficits with debt issuance. The state has a long history of support for local governments facing fiscal crises, starting with the state’s response to the New York City fiscal crisis in the 1970s. It provides local governments with various types of assistance, including the implementation of control boards (Nassau County, Erie, Buffalo), the authorization of deficit financing (Glen Cove, Hempstead Village, East Hampton), or through audit and budget reviews. The result of this history of involvement is a record of no local government Chapter 9 bankruptcy filings in New York (although the state does specifically permit such filings) and no defaults on general obligation debt. To further identify and address local government distress, the New York State Comptroller’s office has recently implemented an early warning system to identify municipalities that are in or near fiscal distress and provide support by request. 2 The comptroller’s office has stated that it will provide training and other non-financial tools to local governments to assist in ameliorating financial stress. While the early-warning system can be useful in outlining strategies for managing financial strain, the comptroller’s office does not require a municipality take any particular course of action. The governor and state legislature recently passed legislation creating a Financial Restructuring Board to assist distressed local governments. The board would be authorized to make recommendations and provide fiscal guidance as well as provide as much as $5 million per government in state grants ($80 million in grant funding is available to municipalities through this program in 2013). The board would also serve as an alternative to arbitration with police, fire and deputy sheriffs collective bargaining groups, if both the municipality and employees agree. While the provisions of new legislation are credit positive for local governments, they must choose to accept the additional oversight and the board has no authority to require a local government to comply with its recommendations.
2

See New York's Monitoring System for Local Government Financial Stress is Credit Positive

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The legislation also changes the binding arbitration process and makes it more favorable for local governments. Under the new legislation, the binding arbitration process must take into account a municipality’s ability to pay, specifically as it relates to the statewide property tax cap, a 70% weighting in the process. The remaining 30% would be afforded to other statutory criteria such as wage comparison and public interest. The current binding arbitration process does not have any weighting factors and does not factor the tax cap. This change could result in significant additional control over rising expenditures. Recent actions of the New York State Legislature, however, highlight limitations to the state’s willingness and ability to help local governments deal with financial stress. In addition to the rejection of requests for local sales tax increases in the past two years, the state legislature also rejected requests by municipalities to issue deficit financing in 2012, including Long Beach and Rockland County. Both municipalities received legislative approval to issue the deficit reduction bonds in 2013 but Long Beach’s authorization expired before they were able to get to the market and the governor has yet to approve Rockland’s request.

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» contacts continued from page 1

Report Number: 153848

Analyst Contacts:
NEW YORK +1.212.553.1643 Authors Valentina Gomez Robert Weber Dan Seymour Production Associates Masaki Shiomi Ginger Kipps
© 2013 Moody’s Investors Service, Inc. and/or its licensors and affiliates (collectively, “MOODY’S”). All rights reserved. CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. (“MIS”) AND ITS AFFILIATES ARE MOODY’S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND CREDIT RATINGS AND RESEARCH PUBLICATIONS PUBLISHED BY MOODY’S (“MOODY’S PUBLICATIONS”) MAY INCLUDE MOODY’S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY’S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY’S OPINIONS INCLUDED IN MOODY’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS AND MOODY’S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND MOODY’S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODY’S PUBLICATIONS COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY’S ISSUES ITS CREDIT RATINGS AND PUBLISHES MOODY’S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY’S PRIOR WRITTEN CONSENT. All information contained herein is obtained by MOODY’S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided “AS IS” without warranty of any kind. MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY’S is not an auditor and cannot in every instance independently verify or validate information received in the rating process. Under no circumstances shall MOODY’S have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of MOODY’S or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if MOODY’S is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. Each user of the information contained herein must make its own study and evaluation of each security it may consider purchasing, holding or selling. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER. MIS, a wholly-owned credit rating agency subsidiary of Moody’s Corporation (“MCO”), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MIS have, prior to assignment of any rating, agreed to pay to MIS for appraisal and rating services rendered by it fees ranging from $1,500 to approximately $2,500,000. MCO and MIS also maintain policies and procedures to address the independence of MIS’s ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading “Shareholder Relations — Corporate Governance — Director and Shareholder Affiliation Policy.” For Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY’S affiliate, Moody’s Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody’s Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to “wholesale clients” within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to “retail clients” within the meaning of section 761G of the Corporations Act 2001. MOODY’S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail clients. It would be dangerous for retail clients to make any investment decision based on MOODY’S credit rating. If in doubt you should contact your financial or other professional adviser.

Associate Analyst Diana Situ

Valentina Gomez +1.212.553.4861 Analyst [email protected] Tiphany J. Lee Associate Analyst [email protected] +1.212.553.4772

Dan Seymour +1.212.553.4871 Analyst [email protected] Naomi Richman +1.212.553.0014 Managing Director - Public Finance [email protected]

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OCTOBER 21, 2013

SPECIAL COMMENT: KEY CREDIT DRIVERS FOR NEW YORK LOCAL GOVERNMENTS

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