Fitch Rates Buffalo Fiscal Stability Authority (NY) Rev Bonds ‘AAA’; Outlook Stable

NEW YORK

Fitch Ratings has assigned an ‘AAA’ rating to the following Buffalo Fiscal Stability Authority, New York (the authority) revenue bonds:

–$18.475 million sales tax and state aid secured bonds series 2015A.

The bonds are scheduled for negotiated sale in late November or early December. Proceeds will be used to refund outstanding bonds issued by the authority.

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 rating is driven by very high and improving 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 (GO bonds 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 (GO bonds 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 drops 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. Sales tax receipts for year-to-date 2015 are unchanged from the equivalent prior year period.

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. After this refunding there are currently $39 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.

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 2010-2014. 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.

HEALTHCARE GROWTH HELPS OFFSET WEAK SOCIOECONOMIC BASE

The city and county’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.

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. Socioeconomic indicators for the county are below average with per capita income levels at 86% and 99% of the state and national means, respectively. Poverty rates are more than double the statewide average. The county’s 5.7% unemployment rate in July 2015 is comparable to 5.6% for the state and 5.5% for the nation.

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 various downtown and waterfront projects which, if successful, should further enhance employment opportunities. The city has historically benefitted 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.

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

Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to fewer than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by Jan. 20, 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, IHS Global Insight, and Zillow Group.

Applicable Criteria

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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