Fitch Ratings has taken the following action on Buffalo Fiscal
Stability Authority, New York's (the authority) revenue bonds:
--$48.895 million sales tax and state aid secured bonds upgraded
to 'AAA' from 'AA+'.
The Rating Outlook is Stable.
SECURITY
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
IMPROVED COVERAGE: The upgrade is driven by continued
improvement in debt service coverage levels as sustained revenue
growth has been combined with rapid declines in debt service.
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.
BELOW-AVERAGE ECONOMIC BASE: A significant portion of revenues
come from an economically sensitive revenue stream derived from a
below-average economic base.
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.
RATING SENSITIVITIES
COVERAGE DECLINES: The rating is sensitive to material
reductions in coverage from either large declines in revenues or
increases in debt service from new money issuance or restructuring.
The Stable Outlook reflects Fitch's expectations that such shifts
are not likely.
CREDIT PROFILE
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 (rated 'A' by Fitch) 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.
STRONG COVERAGE WITH NO ANTICIPATED ADDITIONAL BONDS
Pledged revenues continue to provide very strong coverage.
Coverage of current year debt service from sales tax receipts alone
of $121 million was 7.16x in calendar 2014, and when state aid
revenues are included coverage equaled a high 16.68x. Debt service
declined significantly in 2013 and 2014, and after a small increase
in 2015 will drop 36% in 2016, such that coverage in 2016 based on
2014 revenues increases to 11.12x from sales tax only and 25.94x
from combined revenues. Coverage continues to improve after 2016 as
debt service drops further in future years. All outstanding debt is
fully amortized by 2025.
The 2010 census indicates a 30,000 (11%) decline in population
since 2000 for the city, resulting in a reduced share of sales tax
revenues to the city going forward. Population continued to
decline, but more slowly, from 2010-2013. However, sales growth has
offset the decline in share, minimizing the impact of this change.
State aid to the city was cut between 2010 and 2012 but has since
stabilized.
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 $49 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 of the city have not changed notably since
this transition as the authority is still actively engaged. At the
authority's discretion, it could potentially revert to a hard
control status if the city or school district violates the terms of
the advisory status. Challenges at the school district are being
monitored, but there are no active discussions about switching back
to a full control status. The authority's control status is not a
rating factor.
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 the 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. The city's unemployment rate has been persistently above
the state and national averages over the past decade, and is
currently an elevated 7.2% as of November 2014 compared to 5.8% for
the state and 5.5% for the nation. The sales tax revenues
supporting the bonds are collected across the county, whose
socioeconomic indicators are more comparable to state and national
norms.
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 a large expansion project in
process.
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. New York State has targeted
the city for major investment, and significant development in the
solar energy industry has also begun.
Additional information is available at
'www.fitchratings.com'.
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
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=978863
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Fitch RatingsMedia RelationsElizabeth Fogerty, New York,
+1-212-908-0526elizabeth.fogerty@fitchratings.comorPrimary
AnalystEric Friedman, +1-212-908-9181DirectorFitch Ratings, Inc.33
Whitehall St.New York, NY 10004orSecondary AnalystBrendan Scher,
+1-212-908-0686AnalystorCommittee ChairpersonAmy Laskey,
+1-212-908-0568Managing Director