April 1 (The following statement was released by the rating agency)
Fitch Ratings assigns an 'A+' rating to the following
city of Buffalo, New York (the city) obligations:
--$7,560,000 refunding (serial) bonds - 2013.
Proceeds will be used to refund the refunding serial bonds - 2004-A for present
value savings. The bonds are scheduled for negotiated sale the week of April 9.
In addition, Fitch affirms approximately $92.4 million of the city's outstanding
limited tax general obligation (LTGO) bonds and $131.9 million of the city's
outstanding unlimited general obligation (ULTGO) bonds at 'A+'.
The Rating Outlook is Stable.
The current issue and the series 2011E, F, G, and the 2012A, B, C and D bonds are general
obligations of the city for which it has pledged its full faith and credit, subject to the 2011
state statute limiting property tax increases to the lesser of 2% or an inflation factor (the
tax cap law). This limit can be overridden by a 60% majority vote of the city common council.
The city has pledged its full faith and credit and unlimited taxing power for debt service on
outstanding GO bonds issued prior to these bonds. No exemption is made under the
tax cap law for debt service on outstanding GO debt; however, the
constitutionality of this provision has not been tested.
The bonds are further secured by a semi-annual segregation and deposit with the
trustee of first available property taxes to pay all debt service for the
subsequent six months. The bonds also benefit from a New York state intercept,
which requires the state comptroller to withhold subsequent state aid payments
in the event of a default by the city.
KEY RATING DRIVERS
SOUND FISCAL FOUNDATION: The Buffalo Fiscal Stability Authority (BFSA) a
state-imposed oversight entity in place since 2003, helped the city restore a
sound fiscal foundation, resulting in much improved reserve levels.
SWITCH FROM HARD TO SOFT CONTROL: BFSA recently transitioned from a control
period to an advisory period, reflecting fundamental financial improvement.
Fitch expects the city to maintain the financial discipline previously required
FUND BALANCE DRAWS: The city is budgeting for a notable decline in fund balance
for the third year in a row, due to increased salary and pension costs. The
city's four-year forecast projects large draws ending in fiscal 2014.
Maintenance of adequate reserves could be a challenge in the out years.
ECONOMIC GROWTH DESPITE DOWNTURN: The economic base is diverse and continues to
experience commercial and residential development despite the continued economic
BELOW AVERAGE SOCIOECONOMIC INDICATORS: Socioeconomic indicators are weak with
below average income levels, high individual poverty rates, and high
ELEVATED UNFUNDED OPEB LIABILITY: An elevated burden of unfunded other
post-employment benefit (OPEB) liabilities is notable.
NO RATING DISTINCTION FOR LT DEBT: The bonds are rated on parity with
outstanding debt as the city may exceed the property tax cap in any one year
with 60% approval of the common council.
RESTORATION OF STRUCTURAL BALANCE: The rating is sensitive to the city's
ability to reduce its reliance upon use of budgeted reserves for operations in
fiscal 2014 and beyond.
Buffalo is located in upstate New York near the Canadian border and is the
second largest city in the state. The city benefits from cross-border tourism,
and retains a fairly large manufacturing presence. Population has experienced
chronic declines over the past few decades, including an 11% loss in the past
decade, and now stands at about 260,000 residents.
ECONOMIC GROWTH DESPITE DOWNTURN
The city has a deep and diverse economic base that benefits from its proximity
to Canada with consistent tax base growth for the past five years. Notable
economic anchors include Buffalo-Niagara Medical Campus (BNMC), Erie County
Medical Center Corporation, Kaleida Health, and the State University of Buffalo.
In particular, BNMC, which employs roughly 12,000 people, has over $500 million
in new projects planned and is expected to add 4,000 new employees in the near
Numerous other economic development projects are in various stages, including a
casino and other downtown and waterfront projects which, if successful, should
further enhance employment opportunities. The city has also recently seen
spending growth by residents of nearby Canadian provinces.
BELOW AVERAGE SOCIOECONOMIC PROFILE
Socioeconomic indicators are below average with per capita income levels at 63%
and 72% of the state and national levels, respectively. Poverty rates are more
than double the statewide average, and the city's unemployment rate has been
persistently above the state and national averages over the past decade.
While the regional economy has experienced some service sector employment
growth, the increase has not been sufficient to counter declines in the
manufacturing sector, resulting in overall employment declines.
The most recent monthly unemployment figure (not seasonally adjusted) for
December 2012 was 10.3%, an increase over the 10.1% recorded a year prior. The
increase is mainly attributable to an increase in the labor force over the past
year, as the employment figure has remained relatively stable. The 10.3% for
December 2012 remains well above the state rate of 8.2% and the U.S. rate of
7.6% for the same period.
FINANCIAL OPERATIONS IMPROVED DURING BFSA CONTROL PERIOD
The city experienced financial pressures early in the past decade, resulting in
chronic fiscal imbalance and ultimately a strain on liquidity. Consequently, in
2003, state lawmakers created the BFSA to facilitate financial reforms within
the city. From inception, the authority operated as a hard control board, and as
such its powers included the ability to invalidate union contracts, impose wage
and hiring freezes, and approve budgets and debt issuances.
The authority moved to an advisory role on July 1 as the city had achieved
predetermined benchmarks. The hard control period can be reimposed if certain
fiscal conditions are not maintained. Fitch looks favorably on management's
plans to codify many of the policies required by the BFSA so that best practices
remain in place regardless of the nature of the oversight board.
The city achieved operating surpluses every year from fiscal 2003 through
fiscal 2010. During this period, the general fund unreserved fund balance
improved from $9.7 million or 2.6% of expenditures and transfers out to over
$110 million or 24.5%.
DEFICIT OPERATIONS IN FY 2011 and 2012
The city recorded a $12.8 million net operating deficit after transfers (2.8% of
spending) in fiscal 2011, and a larger $16.3 million net operating deficit after
transfers (3.5% of spending) in fiscal 2012. The planned fund balance draws were
driven by a reduction in tax rates, a decrease in state aid, and increased
salary and pension costs. Fitch notes that both deficits partially resulted from
the city prudently reserving funds for the resolution of several unsettled labor
The fiscal 2012 unrestricted general fund balance (the sum of the unassigned,
assigned and committed fund balance under GASB 54) declined to $77.7 million or
a still adequate 16.6% of spending. The unrestricted fund balance includes the
city's policy mandated rainy day fund (equal to a minimum of 30 days of total
general fund expenditures or approximately $35 million). The rainy day fund may
be used for certain unforeseen events with approval from various government
ADDITIONAL FUND BALANCE DRAWS PROJECTED
The city's fiscal 2013 budget includes an $11.5 million fund balance draw,
reducing the unrestricted fund balance to approximately 13% of expenditures. The
budget includes 2% growth in sales tax revenues, a $7.4 million increase in
pension payments, and an $18.7 million spin-up payment from the state. The
spin-up is the acceleration of a March 2014 payment from the state to June 2013,
so the city benefits from the payment in fiscal 2013 while the state is
unaffected, as the payment remains within its 2014 fiscal year. State aid is
expected to revert to approximately its prior level in fiscal 2014.
The city's four-year financial plan features additional fund balance
appropriations, though these are much smaller beginning in fiscal year 2014.
These appropriations were approved before the change in status of BFSA and
should not cause BFSA to revert to its prior hard control status. Management
plans to continue its policy of maintaining or reducing tax rates through fiscal
year 2014, which will present a budgetary challenge. The ability of the city to
meet its goals of reducing its reliance upon budgeted reserves and restore
structural budgetary balance will be important credit considerations. As
projected in the financial plan, unrestricted fund balance could be drawn down
below $54 million or less than 11% of expenses and transfers, levels which Fitch
believes could impair the city's ability to stay at its current rating level.
MODERATE DEBT & PENSION BURDENS WITH HIGH OPEB LIABILITY
The city's overall debt burden is elevated, but manageable at $1,630 per capita
and 6.3% of market value. Total debt outstanding has declined consistently since
fiscal 2002. Future debt needs are modest with annual issuance below the amount
of debt amortized, and principal amortization is strong with 93% retired in 10
Buffalo's long-term liabilities related to employee benefits are notably high.
Employees participate in well-funded state-sponsored defined benefit pension
plans, and the city has made all required pension payments to the state.
Payments have been increasing and are expected to rise again for fiscal 2013.
As of July 2010, the city's other post-employment benefits (OPEB) liability
totaled $1.6 billion or a very high 24% of market value. The city currently
funds its liability on a pay-go basis. Total carrying costs for debt, pension
and OPEB claimed a high 27.3% of governmental fund spending (net of capital