New York State's recently approved property tax cap will likely put greater pressure on local finances and ratings, particularly of school districts, Moody's Investors Service said in a report Tuesday.
Effective Jan. 1, local governments and school districts will be limited to annual tax increases of no more than 2% or the inflation rate, whichever is less.
"While the cap will not directly prompt rating downgrades, the new restriction on the taxing powers of local entities only adds to their weakened finances," said Moody's analyst Robert Weber, author of the report.
Weber added that school districts are especially vulnerable, citing state-imposed limits on general fund reserves and a requirement for voter approval of budgets.
While each school district in the state must adopt a contingency budget, the new law requires that such a budget cannot include an increase in property tax revenue over the previous year. That, said Weber, could trigger use of reserves.
Also, if a school district's budget includes a tax increase beyond the cap, the new law requires that at least 60% of voters approve it.
School district debt service is exempt from the limits the cap imposes.
The cap will also affect municipalities, though less so than school districts, "especially given the growing expenditure pressures of the past three years coupled with relatively flat local tax revenues," Weber said.
Counties already strained could face additional pressure, the report said. They include Monroe, whose general obligation bonds are rated A3 with a stable outlook, Nassau, and Rockland, both A1 with a negative outlook.
While New York City is exempt from the property tax cap, other major cities could be affected, including Buffalo, rated A2 with a positive outlook, Aa3-rated Rochester, A1-rated Syracuse, and Yonkers, which is rated A2 with a stable outlook.
Municipalities already under stress, according to Moody's analysts, include the cities of Newburgh, rated Ba1, and Glen Cove, rated Baa3 with a negative outlook, as well as the towns of Colonie, rated Baa1, Fishkill, which carries a Baa3 with a negative outlook, and East Greenbush, which is rated Ba1 with a stable outlook.
"We are always monitoring local governments. For as long as it exists, we will have to incorporate the idea of the cap," said Moody's vice president and senior credit officer Geordie Thompson.
Moody's rates the state's GOs Aa2. Standard & Poor's and Fitch Ratings each rate them AA.