Fitch Affirms Buffalo Fiscal Stability Authority (NY) Rev Bonds at 'AAA'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the 'AAA' rating on the following Buffalo Fiscal Stability Authority, New York (the authority) revenue bonds:

--$34.925 million sales tax and state aid secured bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from authority revenues which consist primarily 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 Act (the Act).

The authority is subject to a total limit of $300 million for bonds and notes outstanding. Within this limit, additional bonds may be issued as senior bonds if city and school district tax revenues for the 12 consecutive months not more than three months prior to authorization are at least 3x the amount of annual debt service, including debt service on the bonds to be issued.

The bonds have a debt service reserve fund equal to maximum annual debt service (approximately $8.9 million) which is currently being met with surety bonds.

ANALYTICAL CONCLUSION

The affirmation of the 'AAA' rating is based on the very strong legal structure which insulates bondholders from any operating risk of the city of Buffalo. As the structure is a securitization specifically authorized by state law, the rating is not limited by the city of Buffalo's 'A+'/Stable IDR.

KEY RATING FACTORS

Strong Legal Framework: The bankruptcy-remote, statutorily defined nature of the issuer and a bond structure involving a first-perfected security interest in the authority's revenues are key credit strengths. Payment of the city and school district tax revenue to the authority is not subject to city, county or state appropriation. Statutory covenants prohibit action that would impair bondholders.

Robust Coverage: City and school district tax revenues alone provide very high coverage levels. Fitch expects these revenues to remain highly resilient to an economic downturn.

Low Leverage Risk: The authority's debt limits are statutorily defined and there are no near-term plans for new debt issuance primarily because the city of Buffalo has been issuing debt on its own. Practical limitations exist because the city relies heavily on residual pledged revenues for its operating budget.

Improving Economy: A significant portion of pledged revenues is derived from an economic base with a weaker socioeconomic profile. Nonetheless, the city is showing signs of economic expansion, with several major new developments on the horizon.

RATING SENSITIVITIES

While the Authority's revenues are vulnerable to downside risk, Fitch believes the bonds are well protected from a potential rating downgrade by both the conservative additional bonds test (ABT) and practical considerations that limit potential additional leverage.

CREDIT PROFILE

The authority was created in 2003 pursuant to the Buffalo Fiscal Stability Authority Act (the Act) to provide financial control and oversight functions as well as a bankruptcy-remote funding vehicle for the city. The authority will continue to exist until its oversight, control or other responsibilities and liabilities (which includes all outstanding bonds) have been met or discharged, which cannot be later than June 30, 2037.

The city is the second largest city in the state and is located along the eastern shore of Lake Erie, near Canada. The city's estimated 2015 population is approximately 258,071. The city and Erie County's economy has historically been driven by its proximity to Canada and a large manufacturing presence.

The city has experienced significant population declines in the past; however, population declines have eased since 2010.

The sales tax revenues supporting the bonds are collected across the county, whose socioeconomic indicators are more comparable to state and national norms than the weak figures for the city. However, county wealth indicators still trail averages for the state and the U.S. In addition, poverty rates are more than double the statewide average.

Notable economic anchors include Buffalo-Niagara Medical Campus (BNMC), Erie County Medical Center Corporation, Kaleida Health, and the State University at Buffalo. In particular, BNMC, which employs approximately 12,000 people, has several new projects currently under construction; these are expected to add roughly 5,000 new employees in the near future.

Numerous other economic development projects are in various stages, including several downtown and waterfront projects, which, if successful, should further enhance employment opportunities. The city has historically benefited from spending by residents of nearby Canadian provinces. New York state has targeted the city for major investment, and significant development in the solar energy industry has also begun.

Strong Legal Framework Protects Bond Repayment

The 'AAA' rating is based on the very strong legal structure which insulates bondholders from any operating risk of the city. The rating reflects the bankruptcy-remote, statutorily defined nature of the issuer, the bond structure involving a first perfected security interest in pledged revenues, and statutory covenants prohibiting action that would impair bondholders. The county currently levies a 4.75% local sales tax of which 3% is distributed to local governments and school districts pursuant to a formula based in part on population of the respective governments. Of the 4.75% sales tax rate, 1.75% is subject to biennial renewal by the state legislature, with the next renewal expected prior to Nov. 30, 2017. This has routinely been renewed in the past. The county is required to allocate to cities and towns within the county the first $12.5 million of net collections from the additional 1% of the local sales tax as long as the county maintains the 1% sales tax. This resulted in additional city tax revenues of approximately $5.7 million annually from fiscal 2014 through fiscal 2016.

Sales tax revenues are remitted to the state of New York 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 county has covenanted to maintain the local sales tax rate at 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 2x maximum annual debt service (MADS) on all outstanding authority bonds.

Security Structure Resilient Through Downturns

MADs coverage on the authority's bonds from city and school district's fiscal 2016 tax revenue alone was a very high 14x. To evaluate the sensitivity of the dedicated revenue stream to cyclical decline, Fitch considers both revenue sensitivity results (using a 1% decline in national GDP stress scenario) and the largest consecutive decline in actual collected revenue since fiscal 2004. Fitch's analytical sensitivity tool (FAST) generates a 1% scenario decline in city and school district tax revenues. The largest actual cumulative decline in historical city and school district tax revenues is a moderate 4% in fiscal 2009 that was due to the recession. Fitch's coverage calculations and sensitivity analysis excludes state aid given the very strong coverage levels provided by city and school district tax revenues. Including state aid, pledged revenues covered MADs in excess of 30x in fiscal 2016.

Fitch considers the scenario results consistent with an 'aaa' assessment. With issuance up to the ABT city and school district tax, revenue alone could tolerate a 67% decline before MADS coverage falls to 1.0x. This level of tolerance is equivalent to 67x the FAST results and 19x the largest historical decline in the review period. Fitch believes issuance to the ABT is highly unlikely given the city has been issuing debt on its own, and its reliance on residual revenue for its operations. In addition, management represented that they have no near-term debt issuance plans.

Moderate Revenue Stream Growth Prospects

Net of tax rate adjustments, the authority's city and school district tax revenues have grown at a rate approximating inflation over the last decade (2004 to 2014). Fitch believes future revenue growth is likely to be in line with historical performance - around the rate of inflation - based on significant development occurring within the region which should help stem population declines, and the revenue streams ability to capture that development.

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

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

Applicable Criteria

U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)

https://www.fitchratings.com/site/re/879478

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013261

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https://www.fitchratings.com/regulatory

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Contacts

Fitch Ratings
Primary Analyst
Nicole Wood
Director
+1-212-908-0735
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Michael D'Arcy
Director
+1-212-908-0662
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Nicole Wood
Director
+1-212-908-0735
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Michael D'Arcy
Director
+1-212-908-0662
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com