Moody's Investors Service has changed the outlook on New York State to positive, and affirmed the Aa2 rating on New York's $3.5 billion of General Obligation Bonds. Moody's has also affirmed the ratings on all outstanding appropriation-backed and G.O.-related bonds as well as various state intercept programs.

The positive outlook reflects improvements in the state's economy, governance, financial position and fiscal outlook that, if continued, would allow the state to improve its reserves and draw closer to structural balance.

New York's Aa2 general obligation rating reflects the relative strength and recent resilience of its economy; governance constraints including a history of late budgets and limited executive authority to reduce appropriations; a financial position that has improved but remains below average; a moderate combined debt and pension burden; and sound debt management and frequently updated financial forecasting. The rating incorporates notable improvements in the state's economy, governance, financial position, and budgetary balance over the past three fiscal years, as well as remaining risks, including weakness in the financial services sector, continued revenue volatility, and relatively low fund balance and liquidity positions.

STRENGTHS:

* Broad-based, mature, and wealthy state economy that attracts a highly-educated and global workforce, and has shown above-average resilience during the recovery

* Long track record of closing annual budget gaps, and more recently, with more structurally balanced solutions

* Accumulated rainy day reserves have remained stable for 10 consecutive years, providing cash flow flexibility, although at comparatively low levels

* State pension system is well funded compared to other states and unfunded liability is modest, placing state's fixed costs at the 50-state median relative to total revenues

* Recent reversal of history of political gridlock, reflected in timely budgets, implementation of spending controls and move toward structurally balanced budgets.

CHALLENGES:

* Revenue volatility stemming from the state's dependence on the financial services sector and income taxes, posing risks to budgetary balances, liquidity, and financial stability

* Relatively low fund balances provide minimal protection against revenue volatility

* Above-average state tax-supported debt burden partly reflects a past record of deficit-related bonding

Outlook

The positive outlook reflects improvements in the state's economy governance, financial position and fiscal outlook that, if continued, would allow the state to improve its reserves and draw closer to structural balance.

WHAT COULD MAKE THE RATING GO UP

* Positive GAAP fund balances to improve liquidity and offset risk related to volatile personal income tax collections

* Continued adherence to spending controls

* Continued achievement of timely adoption of budgets

* Further movement toward structurally balanced budgets

WHAT COULD MAKE THE RATING GO DOWN

* Economic downturn resulting in lower revenues and larger budget gaps

* Decline in reserves and liquidity measures reflected in GAAP balances or a return to large payment deferrals to manage cash flow

* Return to reliance on deficit financing or other non-recurring budget solutions to fund current operations

* Depletion of Rainy Day Fund without plans to replenish

* Sharp increase in debt issuance leading to increased debt ratio measures or significant deterioration in pension funding levels

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