Fitch Rates Buffalo, NY's LTGOs 'A+'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'A+' rating to the following city of Buffalo, New York (the city) obligations:

--$27.8 million general improvement serial bonds - 2016A;

--$24.9 million general obligation refunding bonds - 2016B.

Proceeds of series A will fund various capital improvements and series B will be used to refund a portion of various outstanding bonds for interest savings. The bonds are scheduled for negotiated sale the week of April 13.

In addition, Fitch affirms approximately $124.40 million of the city's outstanding limited tax general obligation (LTGO) bonds and $81.3 million of the city's outstanding unlimited tax general obligation (ULTGO) bonds at 'A+'.

The Rating Outlook is Stable.

SECURITY

The bonds are general obligations of the city to 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 to debt service on outstanding GO bonds issued prior to 2011. 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.

KEY RATING DRIVERS

SOUND FISCAL DISCIPLINE: The city has maintained a sound fiscal foundation after dropping to low reserve and liquidity levels early last decade. The Buffalo Fiscal Stability Authority (BFSA), a state-imposed oversight entity put in place in 2003, was a key factor in this improvement. Although the BFSA is now in an advisory period, the city has maintained the fiscal discipline established by the authority.

USE OF RESERVES PROJECTED: Declines are projected from the city's current elevated fund balance levels. Fitch believes management will take the necessary steps to prevent reserve declines that would impair financial flexibility.

EXTENSIVE ECONOMIC DEVELOPMENT ACTIVITY: The economic base is benefitting from extensive investment by the University at Buffalo, the Buffalo Niagara Medical Campus, the state of New York, and various private businesses such as SolarCity and IBM.

BELOW-AVERAGE SOCIOECONOMIC INDICATORS: Socioeconomic indicators are weak with below-average income levels, high individual poverty rates, and high unemployment rates.

ELEVATED UNFUNDED OPEB LIABILITY: An elevated burden of unfunded other post-employment benefit (OPEB) liabilities is notable. Overall carrying costs are above average.

OUTSTANDING DEBT RATING PARITY: The 2016A and 2016B 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.

RATING SENSITIVITIES

MAINTENANCE OF SOUND RESERVES: The rating is sensitive to the city's ability to consistently balance operations and maintain reserves consistent with those projected in the current four-year plan.

CREDIT PROFILE

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 also 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 currently totals 258,703 residents.

ECONOMY SHOWING SIGNS OF IMPROVEMENT

The city has a diverse economic base that benefits from its proximity to Canada. Consistent tax base growth has occurred for the past five years, although market value per capita remains low at $27,000. Notable economic anchors include Buffalo-Niagara Medical Campus (BNMC), Erie County Medical Center Corporation, Kaleida Health, and the State University at Buffalo.

After years of decline, the city is showing notable signs of economic expansion. The city estimates $19.5 billion in both completed and ongoing construction projects since 2012. In particular, BNMC, which employs roughly 12,000 people, has over $500 million in new projects currently under construction; these are expected to add 5,000 new employees in the near future. SolarCity, a solar panel manufacturer, is currently building the largest solar manufacturing facility in the western hemisphere, which is expected to create 3,000 jobs.

BELOW-AVERAGE SOCIOECONOMIC PROFILE

Socioeconomic indicators are below average with per capita income levels at 63% and 73% 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, although it is down from past highs.

The most recent monthly unemployment figure of 6.5% in January 2016 was well below the 7.9% recorded a year prior. While an improvement, the local rate remains well above the state rate of 5.5% and the U.S. average of 5.2% for the same period.

IMPROVED FINANCIAL OPERATIONS

The city's financial operations have improved in recent years, after having experienced financial pressures early in the past decade that resulted in chronic fiscal imbalance and ultimately a strain on liquidity. The BFSA, the state fiscal authority, had provided budget oversight from 2003 through 2012 to facilitate financial reforms within the city. The authority moved to an advisory role in 2012 when the city achieved predetermined benchmarks.

A notable outcome of the increased fiscal discipline has again been in the available general fund balance, from $9.7 million or 2.6% of expenditures and transfers in fiscal 2003 to over $115 million or 24% at fiscal 2015 year-end. Fitch looks favorably on management's efforts to codify many of the policies required by the BFSA so that best practices will remain in place regardless of the nature of the oversight board.

DECREASING RELIANCE ON RESERVES

Fiscal 2015 ended with a $4.8 million surplus, handily exceeding the original budget which had assumed flat state aid and property tax levy and a $27.5 million general fund balance appropriation. The improved results were primarily driven by one-time miscellaneous revenue collections and savings from vacant positions and decreased fringe benefit costs related to the state pension contributions.

The fiscal 2016 adopted budget included a $15 million fund balance appropriation and assumed flat property taxes. Sales tax collections are reportedly under budget due to lower gas and energy prices. The city expects to replenish a portion of the fund balance appropriation with savings in pension and health care costs during the year. Based on current results, the city anticipates utilizing approximately $10 million in fund balance by year-end.

The city's four-year financial plan includes annual, albeit declining, use of reserves to fund general fund operations. The plan includes a $10 million general fund balance appropriation for fiscal 2017 and $4.5 million for fiscal 2018. Projected property tax revenue is based on a flat tax rate, although an increase is being considered for fiscal 2017. Reserves would remain in a range consistent with the current rating if actual drawdowns are in line with the planned projections. Fund balance declines materially larger than projected could pressure the current rating.

MODERATE DEBT & PENSION BURDENS WITH HIGH OPEB LIABILITY

The city's overall debt burden is low on a per capita basis at $1,479 but elevated at 5.4% of the city's weak 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 very rapid with 98% retired in 10 years.

Employees participate in two well-funded state-sponsored defined benefit pension plans, and the city has made all required actuarial pension payments to the state. The ratio of the plans' proportionate share net position to pension liability is 98.1%. State-provided annual payment projections show local contributions declining beginning in fiscal 2016.

As of July 2014, the city's other post-employment benefits (OPEB) liability totaled $1.4 billion or a very high 20.6% of market value. The city currently funds its liability on a pay-go basis. The current labor contract for firefighters included a change in health care plans, and a new white-collar contract eliminated post-employment health care for new hires, which should lower OPEB costs. Total carrying costs for debt, pension and OPEB claimed an elevated 25.5% of governmental fund spending in fiscal 2015, largely due to OPEB costs.

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

Fitch recently published exposure drafts of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015 and Exposure Draft: Incorporating Enhanced Recovery Prospects into U.S. Local Tax-Supported Ratings, dated Feb. 2, 2016). The drafts include a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to less than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published in the beginning of the second quarter of 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from CreditScope, Lumesis, IHS, and Zillow Group.

Applicable Criteria

Exposure Draft: Incorporating Enhanced Recovery Prospects into US Local Tax-Supported Ratings (pub. 02 Feb 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=875108

Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942

Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1001703

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Contacts

Fitch Ratings
Primary Analyst
Shannon McCue
Director
+1-212-908-0593
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Arlene Bohner
Senior Director
+1-212-908-0554
or
Committee Chairperson
Steve Murray
Senior Director
+1-512-215-3729
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Shannon McCue
Director
+1-212-908-0593
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Arlene Bohner
Senior Director
+1-212-908-0554
or
Committee Chairperson
Steve Murray
Senior Director
+1-512-215-3729
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com