NEW YORK--()--Fitch Ratings has affirmed the following Buffalo Fiscal Stability Authority, New York (the authority) revenue bonds:
--$77 million sales tax and state aid secured bonds at 'AA+'.
The Rating Outlook is Stable.
The bonds are payable from authority revenues which consist of the city and school district share of sales tax revenues levied by Erie County, and state aid revenues which are paid to the authority pursuant to the Buffalo Fiscal Stability Authority Act (the Act).
KEY RATING DRIVERS
SOLID LEGAL PLEDGE: The authority is a bankruptcy-remote, statutorily defined issuer. A tight legal framework with first perfected security interest in the pledged revenues protects bondholders.
STRONG COVERAGE LEVELS: Very strong debt service coverage levels are somewhat offset by an economically sensitive revenue stream derived partially from a below-average economic base. Debt service declines rapidly beginning in the current fiscal year, further enhancing coverage levels.
LEVERAGING RISK LIMITED: The authority's debt limits are statutorily defined and there are no immediate plans for future authority debt issuance primarily because the City of Buffalo (the city) has been issuing debt on its own.
STABLE RATING: Given the broad coverage, there isn't any likely pressure on the rating in the next few years.
The City of Buffalo (rated 'A+' by Fitch) is the second largest city in the state and is located along the eastern shore of Lake Erie, near Canada. The authority was formed in 2003 pursuant to the Act to provide financial control and oversight functions as well as a bankruptcy-remote funding vehicle for the city.
ROBUST SECURITY STRUCTURE
Erie County currently levies a 4.75% local sales tax of which 3% is distributed to local governments and school districts pursuant to a formula which is based in part on population of the respective governments. The state collects sales tax revenues and distributes them to the state comptroller, who then pays the revenues directly to the authority via the authority's bond trustee. The city and school district receive residual revenues monthly after appropriate transfers for the payment of authority debt service and operating requirements. The state, county, and city covenant not to impair bondholder rights as long as authority debt is outstanding.
The county has covenanted to maintain the local sales tax rate of 3% through June 30, 2037 (no bond of the authority may mature later than this date). In addition, any change in local tax law cannot result in coverage below 2.0 times (x) maximum annual debt service (MADS) on all outstanding authority bonds.
Pledged revenues continue to provide very strong coverage. Coverage on current year debt service from sales tax receipts alone of $113 million was 5.56x in calendar 2012, and when state aid revenues are included coverage equaled a high 13.49x. Debt service declines beginning in 2013 such that coverage on MADS in 2013 based on 2012 revenues increases to 6.07x from sales tax only and 14.74x from combined revenues, and continues to improve as debt service drops further in future years. All outstanding debt is fully amortized by 2025.
The 2010 census indicates a 30,000 decline in population for the city, resulting in a reduced distribution of the percentage of sales tax revenues to the city going forward. However, sales growth has offset the decline in share, minimizing the impact of this change. State aid to the city also was cut beginning in 2010 (down 2.3% in 2010, 1.65% in 2011, and 2% for 2012), but again, this is mitigated by the high coverage from the combined revenue sources.
The additional bonds test for senior debt is strong, requiring 3.0x coverage of MADS from sales tax revenues alone. The Act permits the authority to have outstanding at any one time no more than $175 million in bonds and $145 million in cash flow notes. There is currently $77 million in bonds outstanding (to date the authority has issued $156 million in bonds). There are no immediate plans to issue additional debt as the city has successfully issued general obligation debt in the markets since 2008.
SHIFT IN CONTROL STATUS
On July 1, 2012, the authority shifted from a hard control status to an advisory status as the city met several required milestones, including successfully issuing debt on its own and achieving three years of balanced operations (excluding transfers).
Day-to-day operations have not changed notably since this transition as the authority is still actively engaged. The authority could potentially revert to a hard control status if the city or school district violates the terms of the advisory status. Fitch considers the authority's control status to be credit neutral to its rating.
HEALTHCARE GROWTH HELPS OFFSET WEAK SOCIOECONOMIC BASE
The city's economy has historically been driven by its proximity to Canada and a large manufacturing presence. The city has experienced chronic population declines over the past few decades, including an 11% loss in 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.
Socioeconomic indicators are sub-par with per capita income levels at 63% and 72% of the state and national means, 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, and is currently a high 10.9% as of October 2012.
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 future.
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.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria