Suffolk County, N.Y.’s general obligation bonds were downgraded to A-plus from AA-minus by Fitch Ratings two weeks before its $60 million competitive offering.
The county plans to auction public improvement serial bonds on June 6, with the proceeds to be used for capital projects.
Fitch analysts said the GO bonds were downgraded because of the county’s diminished liquidity and financial flexibility.
“Persistent operating deficits due in large part to over-estimation of sales tax revenues, the use of non-recurring revenues, and increased fixed costs have led to significantly reduced reserve levels and structural imbalance,” Fitch said in a report.
The rating change affects around $1.3 billion of GO bonds. Fitch also downgraded $520 million of Suffolk’s tax anticipation notes to F1 from F1-plus.
Fitch assigns all of the bonds a negative outlook, which reflects Fitch’s concern about the Long Island county’s ability to execute the first phase of a budget mitigation plan Suffolk has approved and is implementing to address its structural imbalance.
The initial phase includes recurring new revenue sources and expenditure reductions along with one-time savings totaling about $100 million.
Moody’s Investors Service has assigned the new bonds an A1 rating, also citing narrow liquidity, and affirmed its ratings on the $1.3 billion of outstanding GOs. The outlook remains negative.
Moody’s lowered the county’s rating to A1 from Aa2 in March, following County Executive Steve Bellone’s declaration of a fiscal emergency.
“Future rating reviews will consider management’s ability to implement meaningful gap closuring measures in the coming months,” Moody’s analysts said.
Suffolk County has a large and diverse tax base, both rating agencies said, along with a manageable debt position, but is challenged by its high reliance on economically sensitive revenues, including those from sales taxes.
Standard & Poor’s rates the county’s outstanding GO bonds at AA, and has placed the bonds on negative watch. The outlook has been negative since May 2011.
The placement on credit watch indicates that there is a one in two chance that S&P will lower the rating one or more notches within 90 days.
As of Wednesday afternoon, Standard & Poor’s had not yet assigned a rating to the new GOs.
