Fitch Rates NY State Empire State Dev Corp $1.5B PIT Bonds 'AA-'; Outlook Stable

Fitch Ratings assigns an 'AA-' rating to $1.5 billion Empire State Development Corporation (New York State Urban Development Corporation) state personal income tax (PIT) revenue bonds (general purpose), consisting of

--$501,510,000 series 2009C,

--$224,120,000 series 2009D (federally taxable),

--$775,615,000 series 2009E (federally taxable-Build America Bonds).

The bonds are scheduled to sell the week of Nov. 16, 2009 through negotiation, and the par amounts are subject to change. Fitch also affirms the 'AA-' rating on approximately $16.8 billion outstanding PIT revenue bonds issued by New York state agencies. The Rating Outlook is Stable.

Underlying the 'AA-' rating on the PIT bonds is the importance of the PIT to state finances (historically about 60% of tax receipts), the ample portion of PIT set aside for debt service, the trapping of funds if appropriation is not made, and the 2 times (x) additional bonds test (ABT). Due to these strengths, the rating on PIT bonds is equal to that assigned to the state of New York's general obligation (GO) debt despite the appropriation requirement. The temporary PIT rate increase included in the state's fiscal 2010 enacted budget bolsters the PIT revenue stream in the current economic downturn. However, based on downwardly revised revenue estimates released with the midyear update to the state's financial plan on Oct. 30, 2009, revenues are still expected to fall 5% in fiscal 2010. Debt service coverage remains strong.

Although payment of debt service on PIT bonds is subject to appropriation, each month an amount equal to 25% of estimated available PIT revenue (i.e. receipts after refunds) is deposited into the revenue bond tax fund from the withholding portion of the tax. After retention of 125% of financing agreement payments for PIT bonds due in the succeeding month, excess moneys are transferred to the state's general fund. Should amounts in the revenue bond tax fund be insufficient, the state comptroller is required to transfer from the general fund without the need for further appropriation. If no appropriation is made, deposits to the revenue bond tax fund are trapped and cannot be used (except for GO debt, if necessary), depriving the state of the moneys in excess of debt service. The 35% interest subsidy to be received from the U.S. Treasury for the 2009E Build America Bonds is expected to be deposited to the credit of the state and is not pledged as security for the bonds.

Available PIT revenue, as defined in statute, rose from $30.6 billion in fiscal 2007 to $36.6 billion in fiscal 2008. This reflected legislative action that, effective April 1, 2007, eliminated the prior deduction of deposits to the school tax relief fund in the definition of available PIT receipts for bond purposes. The state repeatedly lowered the forecast for PIT revenues over the course of fiscal 2009, and revenues came in at $36.8 billion, basically flat to fiscal 2008. Even with the temporary PIT rate increase, which establishes two new brackets and a top rate of 8.97% as compared to the prior 6.85%, fiscal 2010 revenues are projected to fall to $35 billion, a 5% decline from fiscal 2009, reflecting a large projected decline in state personal income. The new tax rates will be in effect for tax years 2009 through 2011.

Debt service coverage is substantial even with the deterioration in revenue performance. For additional parity bonds to be issued, historical revenue bond tax fund receipts must cover future maximum annual debt service (MADS) on all PIT bonds by at least 2x. MADS coverage under this test will be about 4.9x after this sale. PIT bonds are the primary financing vehicle for the state and substantial additional issuance is expected in the coming years.

New York's 'AA-' GO rating is based on the state's substantial wealth and resources and broad economy and also recognizes concerns regarding the outsized role that the financial services industry plays in the state's economy and revenue system. State net tax-supported debt levels have been relatively stable as a percentage of personal income and are expected to remain above average but still in the moderate range; pensions are well funded.

Strong financial planning and reporting practices, including quarterly financial plan updates, allow the state to stay abreast of changing conditions. Based on downwardly revised revenue estimates in the midyear financial plan update, the state must now address a $3.2 billion budget gap for the current fiscal year, which ends on March 31, and a projected $6.8 billion shortfall for the coming fiscal year. In addition, as revenues have underperformed estimates this year, the state has taken proactive measures to ensure cash adequacy, moving scheduled payments to later in the year while still meeting statutory payment deadlines. More aggressive cash management measures will be necessary in the absence of timely action to address the current-year gap, with December and March projected to be tight months for cash.

The Stable Outlook reflects the expectation that the state will be able to address the budget shortfall in a manner consistent with the current rating level. The performance of volatile personal income tax revenues as well as the extent of actual financial services industry losses, and the ultimate shape that the industry takes, remain major uncertainties.

For more information on the State of New York, see Fitch Research 'Fitch Affirms New York State GOs at 'AA-'; Outlook Stable' dated Nov. 4, 2009, available on the Fitch Ratings web site at www.fitchratings.com.

Considerations for Taxable/Build America Bonds Investors

The following sector credit profile is provided as background for investors new to the municipal market.

State Appropriation-Backed Bonds:

A U.S. state government's overall credit quality is reflected in the rating for its GO full faith and credit pledge, the broadest security that a state can provide to the repayment of its long-term borrowing. In cases where bond payment requires annual or biennial legislative appropriation, this lesser long-term commitment to repayment generally is reflected in a lower rating than the GO rating. Such debt is typically rated one notch below the GO rating. If concerns about non-appropriation are heightened, for example in cases where there is not clear essentiality for the project being funded, such debt can be rated two or more notches below the GO rating. Conversely, if the risk of non-appropriation is judged to be effectively eliminated, for example through a mechanism that traps substantial operating funds if appropriation is not made, the appropriation debt can be rated on par with the GO credit.

State GO ratings generally fall within the two highest rating categories of 'AAA' or 'AA', with a few outliers. The top tier ratings reflect states' inherent strengths: states generally have broad economic and tax base resources and all possess sovereign powers under a federal government system, with substantial, although varying, control over revenue raising and spending. Given these inherent strengths, in only a few instances have economic concentration and long-term structural decline or the inability or unwillingness to address large financial challenges led to ratings below the 'AA' category. For additional information on State ratings, see U.S. State General Obligation Bond Rating Criteria dated April 25, 2008.

Additional information is available at www.fitchratings.com.

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