[April 23, 2015]

Fitch Rates State University of New York's Ser 2015A Dormitory Revs 'A+'; Outlook Stable

Fitch Ratings has assigned an 'A+' rating to approximately $286.4 million of Dormitory Authority of the State of New York (DASNY), dormitory facilities revenue bonds series 2015A issued on behalf of the State University of New York (SUNY, or the system).

The fixed-rate bonds are expected to sell the week of April 27 via negotiation. Bond proceeds will be used to refund approximately $313.5 million of outstanding debt and pay associated costs of issuance.

At the same time, Fitch affirms the 'A+' rating on $440 million of SUNY's outstanding series 2013A dormitory facilities revenue bonds and the 'AA-' rating on SUNY's outstanding dormitory facilities lease revenue bonds (the prior lien bonds) issued by DASNY ($1.16 billion outstanding, of which about $331.5 million is expected to be refunded with series 2015A bond proceeds).

The Rating Outlook is Stable.

SECURITY

Dormitory facilities revenue bonds are solely payable from and secured by dormitory gross rents, fees, and charges derived from the operation of SUNY's dormitory facilities, which are assigned by SUNY to DASNY and deposited into a dormitory facilities revenue fund. The bonds will have a subordinate lien on dormitory revenues and the dormitory facilities revenue fund junior to SUNY's existing prior lien bonds. The bonds feature a 1.2x additional bonds test.

Prior lien bonds are a general obligation (GO) of SUNY, payable from all sources legally available to SUNY.

KEY RATING DRIVERS

STABLE CREDIT CHARACTERISTICS: SUNY's role as the primary provider of public higher education in the State of New York (GOs rated 'AA+' with a Stable Outlook by Fitch); a diverse funding base; historically strong state capital support; and solid debt service coverage provided by residential facility charges support the ratings on dormitory revenue bonds. Counterbalancing the above strengths is SUNY's consistently negative annual operating performance on a full accrual basis.

HEALTHY DEMAND TRENDS: Steady student demand, driven by a large and diverse student population and relatively affordable tuition charges, partially offset SUNY's weaker operating performance. Moreover, strong demand for on-campus housing across SUNY's 25 residential campuses continues to provide for healthy coverage of dormitory-related debt service.

OPERATING PRESSURES: Risks associated with SUNY's significant exposure to the healthcare industry via its three medical centers, ongoing OPEB liabilities and related costs, and softened state operating support over the past few years (although state funding has begun to improve) continue to pressure the system's overall operating performance.

MANAGEABLE DEBT BURDEN: Despite a somewhat high overall debt burden and ongoing capital needs, revenue pledged to dormitory-related debt continues to grow and provide sound debt service coverage. Moreover, the bulk of SUNY's outstanding debt is comprised of state-supported bonds that support academic and athletic facilities projects.

RATING SENSITIVITIES

SUNY's GENERAL CREDIT: The rating on dormitory-related revenue bonds is sensitive to shifts in SUNY's general credit characteristics. Any change to the system's 'AA-' GO rating would likely affect the rating on the bonds.

DEMAND FOR HOUSING: Maintenance of stable enrollment and corresponding demand for on-campus housing should ensure sound debt service coverage from rents and fees associated with residential facilities and mitigate concern over SUNY's operating pressures, including the state's healthcare environment.

CREDIT PROFILE

Established in 1948, SUNY is a state-wide system composed of four university centers (Albany, Binghamton, Stony Brook and Buffalo), four health sciences centers (two of which are part of the university centers at Stony Brook and Buffalo, and two of which are separate health science centers at Brooklyn and Syracuse), 13 university colleges, two specialized colleges, eight colleges of technology, and five statutory colleges. In addition, the system also includes 30 community colleges.

The system is among the largest in the U.S., with fall 2014 headcount enrollment of over 221,000 and almost 194,000 full-time equivalents (excluding community college enrollment). While selectivity varies by campus, SUNY's overall undergraduate acceptance rate was a fairly selective 51% for fall 2014, based on 309,522 applications. 30.7% of accepted students chose to enroll. Headcount enrollment has remained fairly flat over the past several years, although increased slightly in each of the past two fall enrollment cycles. Management anticipates another slight increase for fall 2015.

HOUSING OPERATIONS GENERATE SOUND DEBT SERVICE COVERAGE

SUNY finances its capital projects in two distinct ways. Educational and athletic facilities are funded with proceeds of either educational facilities bonds - backed by direct state appropriations - or bonds issued under the state personal income and/or sales tax credits. Residential facilities are funded with dormitry revenue bonds payable from the revenues derived from the residential facilities, with the GO of SUNY further supporting the now-closed prior lien dormitory bonds. Dormitory facility revenue bonds issued under the current resolution do not carry the GO pledge of SUNY.

The system anticipates that income from residential facilities will continue to be more than sufficient to cover pro forma debt service on the dormitory revenue bonds. Occupancy remains strong, averaging 96.1% over the past five fiscal years (2010-2014). Occupancy was 96% in fiscal 2014 based on 72,213 beds. Coverage, net of facility operating expenses, averaged a healthy 1.65x between fiscal 2010 and 2014; 1.45x in fiscal 2014. Incorporating pro forma maximum annual debt service (MADS) of about $136.7 million (fiscal 2016), coverage remains adequate at 1.38x based on fiscal 2014 net dormitory facilities revenues of $189.2 million.

Additionally, Fitch notes that SUNY had previously built up the cash balance in the dormitory income account, which had a balance of $179.8 million as of April 17, 2015, up from $120.1 million at fiscal-year end 2008. This represented about 15.4% of total pro forma dormitory facilities debt outstanding (approximately $1.16 billion). The income account had received dormitory revenues before the new dormitory facilities revenue bond resolution (series 2013A and 2015A bonds) was established, and the account was the source of bond repayment for the senior lien debt. SUNY no longer deposits dormitory facilities revenues into the dormitory income account. Instead, it now directly deposits the revenues into a dormitory facilities revenue fund, which is held by the state's Commissioner of Taxation and Finance. Money in this fund is applied directly to the trustee for payment of debt service first for the prior lien bonds and then to bonds issued under the open resolution.

Fitch views the management of SUNY dormitory facilities favorably as each campus' housing operation is expected to be self-supporting and rates must be set sufficient to cover debt service, operating expenses, and to maintain reserve requirements. Each campus prepares its own housing budget, 10-year capital plan, and establishes room rates, which on average increased 4.4% over the past five years system-wide.

STABLE SUNY FINANCIALS, BUT PRESSURES REMAIN

Overall, SUNY's revenue base remains large and diverse. As calculated by Fitch, fiscal 2014 operating revenue totaled $9.8 billion, with the largest components being state operating appropriations (comprising 31.4% of revenues), healthcare operations (25.5%), and student-generated revenues (21%). The state's budgetary challenges affected state operating appropriations in recent years, with annual declines from fiscal 2008-2011. However, funding was held relatively flat in fiscal years 2012 and 2013, with slight increases in fiscal 2014 and 2015. Management advised that SUNY's individual campuses were able to manage lower funding levels without having a significant impact on student programs.

While legislative approval is required for the expenditure of tuition revenues, which limits SUNY's financial flexibility, the legislature approved a five-year rational tuition increase plan in 2011. SUNY increased resident undergraduate tuition by $300 per year since fall 2011, with another $300 (4.9%) increase implemented for fall 2015. However, tuition for in-state residents remains very affordable compared to other state university systems, at just $6,470 for undergraduate students for the upcoming 2015-2016 academic year. Room and board charges average approximately $12,000.

SUNY's operating margin has remained negative but relatively stable over the past several years, partly attributed to ongoing tuition increases. SUNY's operating margin averaged negative 5.1% on a GAAP-basis over the past five fiscal years, and was negative 5.3% in fiscal 2014. SUNY's balance sheet resources provide a modest financial cushion. Available funds (cash and investments less certain nonexpendable restricted net assets) totaled $2.24 billion at fiscal year-end 2014, covering operating expenses ($10.33 billion) and outstanding debt (approximately $9.69 billion) by a low 21.7% and 23.1%, respectively.

Fitch also measures SUNY's liquidity cushion excluding educational facilities, personal income tax and sales tax bonds ($7.54 billion outstanding as of June 30, 2014) which are paid by the state or from state personal income tax and/or sales tax receipts. Based on this metric, available funds cover debt by a stronger 104%. In addition, SUNY's discreetly presented component units, including related foundations, auxiliary service corporations, and student housing corporations, held approximately $1.95 billion of total investments as of June 30, 2014.

SUNY expects to issue and spend approximately $110 million-$160 million in additional dormitory revenue bond proceeds annually over the next five years to fund residence hall renovations and construction. Based on the consistent demand for on-campus beds and the self-supporting nature of SUNY's housing system, Fitch believes this level of added leverage should be manageable for the system. All dormitory revenue bonds are fixed-rate fully amortizing debt.

Financial performance of the system's healthcare operations, primarily at its academic health centers in Brooklyn and Syracuse, remains pressured. SUNY continues to review various strategies to improve performance at both hospitals, including development of a sustainability plan for SUNY Downstate Medical Center, which includes a restructuring of University Hospital of Brooklyn. Fitch notes positively SUNY's pending sale of the property of the financially struggling Long Island College Hospital (LICH), which had been a part of SUNY Downstate since 2011. SUNY was finally able to cease operating the emergency department at LICH in Oct. 2014, and the sale transaction is expected to close over the next four years. Concern over SUNY's reliance on healthcare operations (25.5% of fiscal 2014 revenues) is partly mitigated by its strong enrollment profile, which drives steady demand for on-campus housing and solid coverage of dormitory-related debt service.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (June 16, 2014);

--'U.S. College and University Rating Criteria' (May 12, 2014);

--'Fitch Rates State University of New York's Series 2013A Dormitory Revs 'A+'; Outlook Stable (Aug. 1, 2013);

--'Fitch Rates New York State's $325MM GO Bonds 'AA+'; Outlook Stable' (March 6, 2015).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. College and University Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748013

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=983521

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