KBRA gives AAA rating to New York bonds, igniting debate over state finance

Today, the Kroll Bond Rating Agency (KBRA) assigned a long-term rating of AAA to the Dormitory Authority of the State of New York’s sales tax revenue bonds. This includes Series 2024B-1 and Series 2024B-2, both of which are tax-exempt, along with Series 2024C, which is federally taxable. The rating indicates a stable outlook, reaffirming the importance of sales tax revenues for the state’s financial operations. This follows an established reliance on these revenues to mitigate potential fiscal issues, thereby ensuring sufficient coverage of bond payments. KBRA's decision was influenced by several factors that contributed to the credit rating. The provisions of the Enabling Act highlight the necessity and importance of sales tax revenues in maintaining current state operations. This consideration helps alleviate concerns regarding the risk of legislative non-appropriation of financing agreement payments. KBRA noted the significance of accumulating funds in the Sales Tax Revenue Bond Trust Fund (STRBTF), which further enhances the stability of cash flow. The agency finds the risk of overleveraging the revenue stream to be minimal due to a robust additional bonds test, indicating that the state is well-positioned to manage its debt obligations. Despite the solid credit rating, there are inherent challenges associated with sales tax receipts that could impact future financial stability. Sales tax revenues can fluctuate due to various cyclical economic conditions, including shifts in demographics, inflationary impacts, and market volatility, as well as unexpected external events like recessions or pandemics. Such factors pose a notable risk to the timely collection of tax revenues, making it increasingly important for state budgeting processes to remain resilient against potential future shocks. In terms of potential rating changes, KBRA has outlined key sensitivities that could result in a downgrade. A noticeable decline in debt service coverage that approaches the critical additional bonds test level of 2.0x could prompt a reassessment of the rating. Furthermore, any state actions aimed at revising the statutes related to sales tax or affecting the revenue bond financing program could jeopardize the income available for financing agreement payments, thus impacting the stability and reliability of these bonds going forward. The assignment of this rating and the stable outlook provide valuable insight for investors considering engagement with the state’s financial instruments.