buffalo fiscal stability authority agenda ~ april 14, 2020 ... · − letter from the city...

BUFFALO FISCAL STABILITY AUTHORITY Agenda ~ April 14, 2020 Special Meeting of the Board ~ 1:00 PM Virtual Meeting via Conference Call

Board Meeting ~ 1:00 PM Opening Remarks − Roll Call of DirectorsReview of City of Buffalo Financing for the 2020 Capital Program

− Financial Analysis – BFSA Report to the Board− BFSA Report on the Final 2020 Capital Budget and 2020-2024 Capital Plan− Bond Rating Report – Moody’s− Bond Rating Report – S&P− Bond Rating Report – Fitch− Letter from the City Comptrollers’s Office− Citizens Planning Council’s Recommendation Letter

OTHER BUSINESS AND ANNOUNCEMENTS Note: Meetings may be rescheduled based on Directors availability

Upcoming Event Date Location

Audit, Finance and Budget Committee ~ 12:30 PM (Tentative)

Board Meeting ~ 1:00 PM Wednesday, May 20, 2020 To be determined

Buffalo Fiscal Stability Authority

Report on the City of Buffalo’s Proposed 2020 Capital Borrowing

Purpose:

As per Section 3859 of the Buffalo Fiscal Stability Authority Act (the “BFSA Act”), during an

advisory period the Buffalo Fiscal Stability Authority (the “BFSA”) shall review and comment

on the terms of any proposed borrowing, including the prudence of each proposed issuance of

bonds or notes. This report is intended to assist the Board of Directors in meeting its statutory

obligation.

Background:

The BFSA Act provides the BFSA with the power and authorization to issue bonds, notes, or

other obligations on behalf of the City of Buffalo (the “City”), pursuant to certain limitations.

From 2004 to 2007, the BFSA issued debt on behalf of the City for various purposes including

deficit financing, annual capital needs, refunding of outstanding bonds, and cash flow needs. In

response to the lifting of the wage freeze and in contemplation of transitioning into an advisory

period, the BFSA permitted the City Comptroller to issue debt on behalf of the City beginning in

2008. It is noted the issuance of debt by the City was one provision required to be met in order

for the BFSA to transition into an advisory period. The BFSA transitioned into an advisory

period effective July 1, 2012. Since 2008, the City has issued its own debt for capital needs.

The BFSA’s current bond ratings are AAA by Fitch Ratings (“Fitch”) and Aa1 by Moody’s

Investors Service (“Moody’s”), as compared to the City’s bond ratings of A+ by Fitch

(September 2019), A+ by Standard and Poor’s Rating Services (February 2020) and A1 by

Moody’s (February 2020). The spread between the bond rating for Fitch accounts for a four step

difference on the bond rating scale and a three step difference for Moody’s. Due to the favorable

bond rating of the BFSA, the BFSA would be able to obtain a lower interest rate than the City for

the issuance of long-term debt.

In September 2019, the City was downgraded by Fitch from AA- to A+ having been cited for

weak operating performance in recent years due to overly optimistic revenue projections and the

use of reserves. Both Moody’s and S&P reaffirmed their respective ratings in February 2020.

In March 2020, the bond market became volatile as investors were selling investments for

liquidity purposes. The City Comptroller’s Office determined it was unknown if a successful

bond sale would occur and would therefore proceed in issuing a one-year short-term bond

anticipation note (BAN). The bond anticipation notes have been rated MIG 1 by Moody’s and

SP-1+ by S&P, representing the highest ratings available for short-term debt. S&P also

reaffirmed the long-term rating in it’s April 6, 2020 report. A schedule of projects being funded

with this BAN is included as Appendix A.

On August 1, 2019, the City Comptroller’s Office issued its annual report providing the

authorized borrowing limits for the maximum amount of capital debt that the City may incur

over the next five years as outlined in the City Comptroller’s Capital Budget and Debt

Management Policy. This policy requires the City to issue less debt than is retired annually and

was developed in response to the City’s debt burden which continues to be considered above

average as cited by various rating agencies.

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2

The following annual recommended debt limits have been provided by the City Comptroller for

the City of Buffalo and the Buffalo City School District (the “District”); it excludes debt issued

on behalf of enterprise funds:

2020 25,300,000$

2021 25,400,000$

2022 26,000,000$

2023 28,000,000$

2024 28,000,000$

City

The incremental increase of the recommended debt limit is due to the increased amount of

principal reductions on outstanding debt.

The Buffalo City School District continues to use proceeds from various refundings of JSCB

debt over the last several years to pay for the capital needs of the District and there will not be a

District component to the City’s 2020 capital borrowing.

The Internal Revenue Service’s requirements for tax-exempt bonds require that at least 50% of

total bond proceeds be expended within 18 months, and 90% within three years of issuance. The

following chart lists the total par amount borrowed by the City, total proceeds, and the amount

and percentage of unspent proceeds as of February 29, 2020 for the last four years bonds were

issued. Information for 2019 is also included, although this was a short-term borrowing and is

not subject to the spend-down requirements:

Year of Par Total Unspent Bond % of Balance

Capital Amount of Proceeds of Proceeds as of Unspent Encumbered as of

Borrowing Borrowing Borrowing February 29, 2020 Proceeds February 29, 2020

2019* $ 22,070,653 $ 22,365,076 $ 15,158,029 67.8% $ 4,190,518

2018 $ 20,300,000 $ 22,038,556 $ 4,830,194 21.9% $ 2,344,795

2017 $ 24,360,000 $ 28,702,244 $ 2,164,287 7.5% $ 527,737

2016 $ 25,770,000 $ 30,686,270 $ 1,933,471 6.3% $ 669,819

2015 $ 29,088,985 $ 33,771,244 $ 189,520 0.6% $ 52,623

* City issued a one-year bond anticipation note

The City is reporting compliance with the three year spend-down regulation on those respective

outstanding bonds subject to such regulations. The balance of total unspent bond proceeds in the

schedule above excludes encumbrances; while such amounts have been committed, the cash

disbursement has not yet occurred. Five years after a project commences, the City closes the

project and all unspent proceeds are transferred to the debt service fund for future debt service

payments.

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3

Proposed Structure:

Initially the City intended to sell a bond in late April 2020 in the par amount of $46,362,607,

consisting of the rollover of the 2019 BAN of $20,519,600 and those projects approved for

financing pursuant to the final approved 2020 capital budget of $25,843,007. The 2020 stock

market crash began on Monday, March 9, 2020; this event resulted in significant volatility in the

bond market. The City assessed the liquidity issues occurring in the market and due to the

resulting uncertainty in the City’s ability to successfully sell a bond due to overall market

conditions, it was decided that a bond anticipation note would be sold. The amount was resized

to include the rollover amount associated with the upcoming 2019 BAN maturity, and a

determination of what 2020 projects required immediate financing. It is possible the City could

issue another BAN in the fall of 2020 if additional funding needs are identified with a maturity to

coincide with maturity of this BAN in late April 2021.

Total principal to be paid on the 2019 BAN will be $1,551,053 and interest of $363,858. The

final underwriter fee was $2,207 and costs of issuance was $36,635.

The amount of BANs to be rolled forward from last year is $20,519,600. New money

borrowings consist of $14,280,000. Authorized and unissued debt in total is $30,102,598; this

does not include tax increment financing as authorized by Common Council in the amount of

$10,000,000. A schedule of authorized but unissued debt is included as Attachment B.

The proposed structure is as follows:

Par amount: $34,799,600

Final maturity April 28, 2021

Estimated costs of issuance: $53,750

Estimated underwriter fee: City did not provide

Estimated interest rate: City did not provide

Due to the volatility in the market and the limited number of recent sales, the City was not able

to provide an estimate for an interest rate or the underwriter fee. The principal to be paid down

in 2021 is $3,920,141.

In 2019, the City Comptroller’s Office initiated a bond anticipation note/bond program which

subsequently was revised based on BFSA’s recommendations. The program developed included

the issuance of short-term debt for most projects in the initial year, expected to be the majority of

the new projects being sold, and would be rolled into long-term debt at which time it was

appropriate. It was expected that the 2020 sale would consist of a mix of both a BAN and a bond

to address the needs of the City. It appears this program has since been abandoned; the new City

Comptroller was unable to provide comment as the strategy was developed prior to her term.

DRAFT

4

Recommendations:

Last year, the then acting Comptroller solidified a BAN/Bond program intended to provide for

additional time for project costs to be solidified in addition to addess other issues that the City

was encountering related to financing projects. We recomment the Comptroller’s Office develop

a strategy and plan for future debt issuances that addresses both the needs of the City and the

changes in the overall bond market.

Additionally, the Citizens Planning Council recommended an amendment to the City Charter to

move the calendar of the start of the capital fiscal year from January 1 to October 1 to provide

the City Comptroller’s Office three additional months to finalize the bond sale and improve the

likelihood of a prompt start of construction. This recommendation is consistent with the those

made by BFSA last year, and we reiterate the same item this year.

DRAFT

APPENDIX A

CITY OF BUFFALO

PROJECTS TO BE SOLD - APRIL 2020

Project Date of Authorization Oustanding BANs Principal Payment New Money The Notes

Fire Apparatus - Purchase 02/16/16 1,048,865$ 62,865$ -$ 986,000$

LaSalle Seawall 02/16/16 - - 300,000 300,000

Streets Vehicles 02/21/17 856,000 46,000 - 810,000

Improvements to Niagara Street 02/20/18 920,000 55,000 - 865,000

Allendale Theatre 02/20/18 310,000 20,000 - 290,000

Broadway Market Rehabilitation 02/20/18 500,000 30,000 - 470,000

Crane Branch Library 02/20/18 347,000 20,000 - 327,000

East Side Transfer Station 02/20/18 1,400,000 85,000 - 1,315,000

Museum of Science 02/20/18 400,000 25,000 - 375,000

Fire Apparatus - Purchase 02/19/19 - - 920,000 920,000

Fire ARV Vehicles 02/19/19 280,000 50,000 - 230,000

Roadway Improvements 02/19/19 6,237,387 367,387 - 5,870,000

Broadway Market Fire Alarm 02/19/19 267,000 15,000 - 252,000

City Hall Improvements 02/19/19 1,500,000 90,000 - 1,410,000

Crane Branch Library 02/19/19 - - 110,000 110,000

Downtown Ball Park 02/19/19 500,000 30,000 - 470,000

Ed Saunders/Gloria Parks 02/19/19 130,000 10,000 - 120,000

Fire Buildings- Various 02/19/19 1,117,588 64,988 - 1,052,600

Gates Circle Lampstands 02/19/19 149,000 24,000 - 125,000

History Museum 02/19/19 171,000 10,000 - 161,000

Kleinhans Boiler Room 02/19/19 100,000 5,000 - 95,000

Marcy Casino Stairs 02/19/19 175,100 10,100 - 165,000

Mead Resource Center 02/19/19 300,000 20,000 - 280,000

Niagara Branch Library 02/19/19 423,613 25,613 - 398,000

Police Garage Roof 02/19/19 900,000 55,000 - 845,000

Police Shooting Range 02/19/19 1,100,000 65,000 - 1,035,000

Riverside Rink 02/19/19 200,000 10,000 - 190,000

DRAFT

Zoo Cooling Tower 02/19/19 224,000 14,000 - 210,000

Parks Vehicles Purchase 02/19/19 123,600 4,600 - 119,000

Parks Improvements - Various 02/19/19 772,500 43,500 - 729,000

Tree Removal and Planting - Various 02/19/19 618,000 113,000 - 505,000

Demolition of Properties 02/19/19 1,000,000 180,000 - 820,000

Technology Upgrades 02/18/20 - - 1,800,000 1,800,000

Police Cars - Purchase 02/18/20 - - 1,000,000 1,000,000

Entertainment District (Match) 02/18/20 - - 1,000,000 1,000,000

Infrastructure Improvements CW 02/18/20 - - 4,500,000 4,500,000

Downtown Ball Park 02/18/20 - - 500,000 500,000

Engine 25 Construction 02/18/20 - - 525,000 525,000

Fire Buildings - Various 02/18/20 - - 200,000 200,000

Machnica Center HVAC 02/18/20 - - 75,000 75,000

Zoo Cooling Tower 02/18/20 - - 250,000 250,000

Cazenovia Park Pathway (Abbott/Porter) 02/18/20 - - 50,000 50,000

Parks Improvements Various 02/18/20 - - 200,000 200,000

Parks Vehicles Acqiuisition 02/18/20 - - 180,000 180,000

Tree Rehabilitation Program 02/18/20 - - 670,000 670,000

Demolitions 02/18/20 - - 500,000 500,000

Augspurger Parking Ramp 02/18/20 - - 500,000 500,000

Turner Parking Ramp 02/18/20 - - 1,000,000 1,000,000

22,070,653$ 1,551,053$ 14,280,000$ 34,799,600$

DRAFT

APPENDIX B

City of Buffalo, NY

Authrorized and Unissued Projects

Year No

Date

Passed Item No. Purpose for which Authorized

Original

Budget Authorization

Authorization

after April

2020 BAN Sale

2014 4 02/18/14 352 Court Street Imp. 802,500 802,500 652,500

2014 13 02/18/14 360 Broadway Garage Improvements 400,000 400,000 400,000 1,052,500

2016 2 02/16/16 355 Bailey Avenue Bridges Reconstruction 2,180,000 2,180,000 1,680,000

2016 5 02/16/16 357 Ohio Street Lift Bridge Reconstruction 369,000 369,000 369,000

2016 8 02/16/16 360 South Park Loop Bridge Reconstruction 530,000 530,000 530,000

2016 19 02/16/16 371 Museum of Science Front Entrance Restoration 535,000 535,000 535,000

2016 26 02/16/16 376 LaSalle Seawall Construction 1,448,000 1,448,000 987,000 4,101,000

2017 5 02/21/17 17-190 Animal Shelter 500,000 500,000 500,000 500,000

2018 6 02/20/18 18-247 Construct Improvements Allendale Theatre 310,300 310,300 300

2018 10 02/20/18 18-251 Crane Branch Library Building 347,750 347,750 750

2018 23 03/06/18 18-352 Public Art Restoration 208,000 208,000 208,000

2018 A1 04/03/18 18-505 Shoshone Pool Restoration 370,000 370,000 370,000 579,050

2019 9 02/19/19 19-171 City Hall Improvements 2,300,000 2,300,000 800,000

2019 11 12/10/19 19-182 Crane Branch Library 535,000 535,000 425,000

2019 16 02/19/19 19-185 Fire Engine 25 Design 412,412 412,412 412,412

2019 27 02/19/19 19-187 Riverside Rink 2,060,000 2,060,000 1,860,000

2019 30 03/05/19 19-268 Buffalo and Erie County Naval & Military Park 110,000 110,000 110,000 3,607,412

2020 3 02/18/20 20-177 Fire Apparatus - Aerial Ladder 575,000 575,000 575,000

2020 4 02/18/20 20-178 Fire Apparatus - Pumper/Engine 1,300,000 1,300,000 1,300,000

2020 5 02/18/20 20-179 Acquisition of DPW Vehicles 1,375,000 1,375,000 1,375,000

2020 6 02/18/20 20-180 Entertainment District Improvements 2,000,000 2,000,000 1,000,000

2020 7 02/18/20 20-181 Infrastructure Improvements CW 7,408,007 7,408,007 2,908,007

2020 11 02/18/20 20-182 City Hall Council Chambers Lighting 1,100,000 1,100,000 1,100,000

2020 12 02/18/20 20-183 City Hall Improvements 100,000 100,000 100,000

2020 14 02/18/20 20-185 Engine 25 Construction 7,205,129 7,205,129 6,680,129

DRAFT

2020 15 02/18/20 20-186 Fire Buildings - Various 500,000 500,000 300,000

2020 19 02/18/20 20-187 History Museum 319,500 319,500 319,500

2020 24 02/18/20 20-188 Machnica Community Center HVAC System 255,000 255,000 180,000

2020 26 02/18/20 20-189 MLK Casino Kitchen Facilities and Waste Containment Area350,000 350,000 350,000

2020 28 02/18/20 20-190 Police Shooting Range 400,000 400,000 400,000

2020 35 02/18/20 20-192 Buffalo Naval Park Hanger Building 175,000 175,000 175,000

2020 36 02/18/20 20-193 Cazenovia Ice Rink Improvements 1,800,000 1,800,000 1,800,000

2020 37 02/18/20 20-194 Cazenovia Park Pathways 300,000 300,000 250,000

2020 38 02/18/20 20-195 Parks Improvements Various 600,000 600,000 400,000

2020 40 02/18/20 20-197 Skateboard Park at Ralph C. Wilson Jr. Centennial Park 250,000 250,000 250,000

2020 42 02/18/20 20-199 Demolitions 1,000,000 1,000,000 500,000

2020 44 02/18/20 20-201 Mohawk Parking Ramp 300,000 300,000 300,000 20,262,636

40,730,598 40,730,598 30,102,598

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1

BFSA Summary City of Buffalo 2020 Adopted Capital Budget and 2020-2024 Capital

Improvements Program

The following is an update to the report concerning the City of Buffalo’s 2020 Capital Budget

(“Capital Budget”) and Five-Year Capital Improvements Plan (“CIP” or “Capital Plan”)

provided to the Board of Directors at the board meeting held December 12, 2019. The City of

Buffalo adopted the 2020 Capital Budget on December 10, 2019, during a scheduled session of

the Common Council (the “Council”) and subsequently approved a budget modification in the

amount of $4.1 million on February 4, 2020.

The specific Council amendments targeted projects within the various Council districts, and the

budget modification approved in February increased the overall capital budget from $42.6

million as originally adopted to $46.7 million. In total, $2.7 million was reallocated from the

citywide infrastructure line with $300,000 being allocated to phase II of the Mead Library

project in the Lovejoy district and $2.4 million, representing $300,000 for each of the remaining

eight Council Districts, for infrastructure repairs. The Common Council also rescinded $856,000

for street vehicles and increased the current year Capital Budget by the same amount, for a total

of $1.4 million of new debt to be sold for street vehicles. The Council made this change due to

the fact that a resolution for this item had not been previously completed and it was more

efficient to issue a single resolution for the vehicles, as opposed to having two resolutions that

each partially funded the vehicles. There is no change in regard to the vehicles that are intended

to be purchased by this action. These actions did not result in a change to the total amount of the

Capital Budget as originally proposed by the Mayor. In addition, there was no change to the

amount approved for the parking fund, $1.8 million, and $10.0 million for the issuance of a tax

increment financing (“TIF”) bond in support of the Main Street Improvement District. Specific

changes made by the Common Council to the 2020 Capital Budget included:

• A reallocation in the amount of $300,000 from citywide infrastructure repairs to the

following project:

o Lovejoy District - Mead Library Phase II - $300,000.

• The assignment of citywide infrastructure projects of $2.4 million to Council District

specific projects:

o Delaware District - $300,000 right of way improvements;

o Ellicott District - $300,000 district wide infrastructure improvements;

o Fillmore District - $300,000 street paving;

o Masten District - $300,000 district wide infrastructure improvements;

o Niagara District- $300,000 district wide infrastructure improvements;

o North District - $300,000 right of way improvements;

o South District - $300,000 right of way improvements; and

o University District - $300,000 district wide infrastructure improvements.

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2

The balance remaining as authorized for citywide improvements is $5.0 million.

The Capital Budget modification as approved by Common Council on February 4, 2020, is for

the planning and construction of the Engine #25 Fire Station. It increased the Capital Budget by

$4.1 million from $42.6 million to $46.7 million. It is anticipated the City will rescind $0.4

million in prior-year authorized and unissued projects in regard to the Engine #25 project to

correct the duplication of certain costs. The budget modification was necessary from a timing

perspective as New York State Finance Law would not permit the issuance of a construction

bond until a full year after the bond for planning was sold. If this had occurred construction

would be delayed by approximately a year between the design and construction phase. The final

budget for this project, including planning, design and construction, is $7.2 million.

The total amount of financing for capital projects funded by the General Fund is capped by the

City Comptroller at $25.3 million for 2020. Therefore, as consistent with the past several years,

not all projects will be able to be financed.

The Administration has worked with the City Comptroller to determine that the amount of the

2020 financing will be $34.8 million, consisting of $13.0 million of projects approved in 2020,

$1.3 million of projects previously authorized in prior years, and $20.5 million rolled over from

the 2019 bond anticipation note maturing on April 29, 2020. Total remaining authorized but

unissued projects will total $30.1 million after the note sale, which excludes the authorized TIF

borrowing discussed previously.

The following chart summarizes by fiscal year the City Comptroller’s recommended maximum

bond sale amount, the annual projects under the Capital Plan as proposed by the Mayor, and the

remaining difference.

Year

2021 $25,400,000 $25,860,000 ($460,000)

2022 $26,000,000 $26,450,000 ($450,000)

2023 $28,000,000 $28,400,000 ($400,000)

2024 $28,000,000 $28,450,000 ($450,000)

Total $107,400,000 $109,160,000 ($1,760,000)

Debt Cap Mayor’s Proposal Difference

The City Comptroller’s recommended debt limit is $107.4 million over the next four years, while

the total amount of projects included in the four out-years of the 2021-2024 Capital Plan is

$109.2 million, leaving a shortfall in available financing of $1.8 million.

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3

After financing is concluded in April 2020, it is projected that total authorized but unissued

projects to be funded by the General Fund, and subject to the Comptroller’s debt cap, will total

$29.8 million. It is expected that the total of authorized projects will be reduced further once the

Common Council rescinds $0.4 million of prior-year authorization for Engine House #25,

reducing the total of unfinanced projects to $29.4 million. Currently, the City has included

approximately $16.4 million of total authorized projects in the subsequent years of the Capital

Plan. The 2020 financing is under capacity by $12.5 million which should increase the debt cap

next year; after taking this into consideration there is approximately $0.5 million of projects that

are not included in the Capital Plan and related financing plan which is a manageable amount.

DRAFT

U.S. PUBLIC FINANCE

CREDIT OPINION3 February 2020

Contacts

Robert Weber +1.212.553.7280VP-Senior [email protected]

CLIENT SERVICES

Americas 1-212-553-1653

Asia Pacific 852-3551-3077

Japan 81-3-5408-4100

EMEA 44-20-7772-5454

Buffalo (City of) NYUpdate to credit analysis

SummaryThe City of Buffalo (issuer rating and GOLT rating: A1 stable) benefits from a growing localeconomy that has seen a recent increase in valuations following a reassessment. After yearsof structurally imbalanced operations and reserve declines, the city's financial positionreturned to growth in 2019 which is expected to continue through 2020. The city benefitsfrom state oversight through the Buffalo Fiscal Stability Authority (BFSA, Aa1 stable) anda requirement to set aside property tax revenue with the trustee until debt service is fullyfunded before property taxes can be used for other purposes. These strengths are balanced bya below average wealth and income profile and an above average fixed cost burden.

Credit strengths

» Improving local economy and expected continued tax base growth

» Solid reserve and liquidity position

» State oversight board provides third-party supervision of city's finances

» Trustee-held biannual set aside of debt service

Credit challenges

» Reliance on state aid revenues that are subject to cuts and delays

» Large outstanding receivables

» Elevated debt, pension, and OPEB burden

Rating outlookThe stable outlook reflects the expectation that reserves and liquidity will remain soundgiven the recent stabilization in operations. Additionally, the presence of the Buffalo FiscalStability Authority provides significant oversight of operations.

Factors that could lead to an upgrade

» Continued improvement in reserves and liquidity

» Continued growth in tax base

» Reduction in long-term liabilities

DRAFT

http://www.surveygizmo.com/s3/1133212/Rate-this-research?pubid=PBM_1211477

https://www.moodys.com/credit-ratings/Buffalo-City-of-NY-credit-rating-800004472

MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE

Factors that could lead to a downgrade

» Reduction in reserves or liquidity

» Material tax base contraction

» Significant increase in debt burden

Key indicators

Exhibit 1

Buffalo (City of) NY 2015 2016 2017 2018 2019

Economy/Tax Base

Total Full Value ($000) $6,905,105 $7,042,598 $7,885,192 $8,671,988 $9,917,512

Population 259,517 258,989 259,574 256,304 256,304

Full Value Per Capita $26,608 $27,193 $30,377 $33,835 $38,694

Median Family Income (% of US Median) 59.4% 60.0% 59.0% 59.0% 59.0%

Finances

Operating Revenue ($000) $1,203,443 $1,211,138 $1,242,317 $1,273,352 $1,330,088

Fund Balance ($000) $347,900 $348,313 $291,499 $269,535 $294,891

Cash Balance ($000) $405,834 $438,724 $378,049 $303,498 $319,649

Fund Balance as a % of Revenues 28.9% 28.8% 23.5% 21.2% 22.2%

Cash Balance as a % of Revenues 33.7% 36.2% 30.4% 23.8% 24.0%

Debt/Pensions

Net Direct Debt ($000) $1,212,809 $1,143,970 $1,062,073 $992,630 $926,262

3-Year Average of Moody's ANPL ($000) $1,478,427 $1,317,032 $1,535,066 $1,652,116 $1,799,517

Net Direct Debt / Full Value (%) 17.6% 16.2% 13.5% 11.4% 9.3%

Net Direct Debt / Operating Revenues (x) 1.0x 0.9x 0.9x 0.8x 0.7x

Moody's - adjusted Net Pension Liability (3-yr average) to Full Value (%) 21.4% 18.7% 19.5% 19.1% 18.1%

Moody's - adjusted Net Pension Liability (3-yr average) to Revenues (x) 1.2x 1.1x 1.2x 1.3x 1.4x

Source: Audited financial statements, Moody's Investors Service

ProfileBuffalo is located in western New York on the Canadian border. The city is an important regional hub. According to the 2017 AmericanCommunity Survey, the city had 259,574 residents, making it the second largest city by population in the state after New York City.

Detailed credit considerationsEconomy and Tax Base: State's second largest city is a regional economic hubThe city's tax base will continue to expand over the near-to-medium term given ongoing development and improving home values. Arecent city-wide reassessment resulted in an increase in assessed value of over 70%.

In recent years, the city has benefited from significant development driven by development along the waterfront, continued expansionof the Buffalo Niagara Medical Campus and a solar products manufacturing facility. These major projects, combined with improvinghome values, have driven assessed value and full value growth.

Tesla, which opened a 1.2 million square foot solar panel production facility in 2017, has been slow to create the jobs that were initiallypromised. The company faces significant state fines if it does not reach its employment goals by April 2020. Positively, the companyrecently announced it would begin hiring hundreds of new employees. The factory was the centerpiece of the governor's BuffaloBillion initiative which has been the subject a corruption case. The facility is the largest solar manufacturing facility in the WesternHemisphere. The Buffalo Niagara Medical Campus continues to be an economic driver for downtown Buffalo. Since its major additionsin 2017, over 130 start up companies have been founded at the campus. The medical campus will remain a primary driver of tax base

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

2 3 February 2020 Buffalo (City of) NY: Update to credit analysis

DRAFT


growth in the near-term. In 2019, M&T Bank announced its plans to establish a high-tech hub within the city and hire 2,500 newemployees over the next few years.

The city's wealth and income profile is below average, but has shown signs of stability and improvement. Full value per capita is47% of the national rate, median family income is 59% of the national median and the poverty rate is twice the national rate. Whileunemployment is half of what it was in 2009 this is entirely because the number of people in the labor force has declined despitethe percentage of persons of working age remaining the same. Positively, according to 2017 American Community Survey the city'spopulation grew from 2016 to 2017 for the first time in decades.

Financial Operations and Reserves: Reserves expected to improve driven by conservative budgetingThe city's financial position has begun to stabilize as management right-sizes the city's budget and stops drawing on reserves.Management does not expect to draw on fund balance in fiscal 2020.

The operating funds consist of the City General Fund, the City Debt Service Fund, the BOE General Fund, and the BOE Debt ServiceFund. In fiscal 2019, the city as a whole outperformed expectations with an increase in reserves of over $27 million. Available operatingfunds balance increased due to a solid surplus in the Board of Education (BOE) general fund. The BOE surplus was driven by higher thanexpected state aid and county sales tax revenues on the revenue side, and lower health insurance costs on the expenditure side, as thedistrict converted to a traditional method of self-insurance for health care. Fiscal 2019 ended with $294.9 million in available operatingfunds balance representing 22% of revenue.

Exhibit 2

Reserves and liquidity are stabilizing at a healthy level($ millions on left axis, % of operating revenues on right axis)

0%

5%

10%

15%

20%

25%

30%

35%

40%

0

50

100

150

200

250

300

350

400

450

FY 2015 FY 2016 FY 2017 FY 2018 FY 2019

% o

f R

eve

nu

es

$ M

illions

Available Op Fund Balance Total Op Fund Balance Available Op Fund Balance % of Rev Net Cash % of Rev

Source: Moody's Investors Service, audited financial statements

The city's 2020 budget did not include an appropriation of fund balance, and management does not expect to draw on fund balance atthe end of the year. The city is still experiencing a $10 million shortfall in revenue from prior years resulting from the Seneca Nation'simpasse over gaming revenue with New York State, of which the city gets a portion. Positively, the state has advanced a portion of thisrevenue to the city. Additionally, during the current fiscal year a significant judgement came down against the city requiring paymentof $4.5 million which it has funded with excess funds budgeted for pensions. The city's management team projects that as long as thestate continues to advance casino funds the city will end the year with a modest surplus.

The BOE's 2020 budget included a $10 million appropriation of fund balance, which as of the district's first quarter projections hadbeen reduced to a $9.4 million use of reserves. While the second quarter results are not yet public, management estimates that the useof reserves has declined significantly since the end of the first quarter. If the favorable trends in sales tax revenue, medicaid revenue,unfilled positions and health insurance continue it's likely that the district will be able to eliminate the appropriation altogether and endthe year with a surplus.

One of the city's enterprise funds, the Solid Waste and Recycling Fund, has historically suffered from imbalanced budgets resultingin financial support from the city's General Fund. This has resulted in an $18.4 million long-term receivable in the city's general fundthat is not considered available fund balance. However, the Solid Waste and Recycling Fund realized a $5.3 million operating surplus in


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2019, its first surplus in a decade. The surplus resulted from increased rates and tighter expense management. While the receivable diddecline slightly in 2019, management expects to be able to pay down a larger portion of the long-term receivable in fiscal 2020. Theremainder of the city's enterprise funds will likely remain healthy given conservative budgeting.

LIQUIDITYAt the end of fiscal 2019, the city held $319.6 million in cash and investments, representing a robust 24.0% of operating fund revenues.Liquidity will likely move in step with fund balance moving forward.

Debt and Pensions: Elevated long-term liabilities to remain manageableThe city's debt burden, which is high at 9.3% of full value and 0.7x operating revenue, will remain above average given the significantamount of debt issued for the BOE. Approximately $690 million in bonds issued by the City School District of the City of Buffalothrough the Erie County Industrial Development Agency (enhanced Aa2 stable) are included in the city's debt burden. These bondsdo not carry a general obligation pledge and are entirely backed by state aid due to the BOE. Given that the BOE is funded primarilythrough state aid, we include the Erie County IDA debt in our calculation of the city's overall net direct debt, but subtract it fromadjusted debt burden.

Adjusted for the Erie County IDA debt, the city's debt burden, including the most recent Series 2020A issuance, is a more moderate2.3% of 2020 full value and 0.18x operating revenue. In the near future, the city plans to issue over $25 million in additional new debtand $12 million to take out existing BANs.

DEBT STRUCTUREAll debt is fixed rate and amortizes over a twenty year period, consistent with the life of the assets being financed. All generalobligation debt is secured by a general obligation pledge as limited by New York State’s legislative cap on property taxes (Chapter97 (Part A) of the Laws of the State of New York, 2011) as well as the pledge of its faith and credit. The bonds issued through the ErieCounty IDA are considered special obligations of the authority backed by installment purchase payments from the City School District.

DEBT-RELATED DERIVATIVESThe city is not party to any interest rate swaps or other derivative agreements

PENSIONS AND OPEBThe city's pension liabilities are high relative to the tax base, but manageable relative to operations. Meanwhile, the city's otherpost employment benefits, primarily retiree health care (OPEB) liabilities are high relative to both the tax base and operations. Bothpensions and OPEB liabilities will continue to place pressure on future budgets. However, management is actively managing its pensionand OPEB costs. Favorably, the city and the BOE do not expect to defer any portion of their annual pension contributions in 2020, andthe BOE has been able to decrease health insurance costs over the past four years.

The city participates in the New York State and Local Employees Retirement System (ERS), the New York State and Police and FireRetirement System (PFRS), and the New York State and Local Teachers Retirement System (TRS), all of which are multi-employer,defined benefit retirement plan sponsored by the State of New York (Aa1 stable).

The table below summarizes the town's 2018 pension and OPEB contributions and unfunded liabilities.


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https://www.moodys.com/credit-ratings/Erie-County-Industrial-Dev-Agy-NY-credit-rating-269657


Exhibit 3

Unfunded pension and OPEB liabilities and related fixed costs are high

Amount ($ thousands) % of Operating Revenues Discount Rate

Operating Revenue 1,330,088

Reported Unfunded Pension Liability 50,877 3.83% 7.13%

Moody's Adjusted Net Pension Liability 1,841,054 138.42% 3.99%

Reported Net OPEB Liability 3,549,273 266.84%

Moody's Adjusted Net OPEB Liability 3,605,323 271.06%

Pension Contribution 76,084 5.72%

Pension Tread Water Gap (37,723) -2.84%

OPEB Contribution 113,586 8.54%

Net Direct Debt 924,632 69.52%

Debt Service 133,579 10.04%

Total Fixed Costs 323,249 24.30%

[1] A positive pension tread water gap reflects a pension contribution less than the amount required to prevent the unfunded liability from increasing if all plan assumptions are realized. Anegative tread water gap reflects a contribution greater than the amount required to keep the unfunded liability from increasing if all assumptions are realized.Source: Moody's Investors Service, audited financial statements and offering documents

To the extent that the multi-employer pension plans in which the city participates experience returns on assets that fall short of theplan discount rate, the town's required pension contribution will increase. The city's fiscal 2019 adjusted net pension liability (ANPL),under our methodology for adjusting reported pension data, was $1.8 billion, representing a high 18.6% of full value but a moremanageable 1.38x operating revenue. Favorably, the city's 2019 pension contributions significantly exceeded the tread water amount –the amount required to prevent the unfunded liability from increasing, assuming all plan assumptions about returns are realized. Giventhat the total liability includes the pension obligations of both the city and the school district, the unfunded liability is not as great asan outlier as it appears to be relative to its peers.

New York State law does not permit local governments to pre-fund OPEB benefits as they accrue. Therefore, the city's OPEB costswill likely grow as the number of retirees covered increases, and to the extent that healthcare costs rise. The city's fiscal 2019 adjustednet OPEB liability, under our methodology for adjusting reported OPEB data, was $3.6 billion, representing a high 36.4% of full valueand 2.71x operating revenue. Positively, management has been actively addressing the OPEB liability over the past several years byrequiring current employees to increase the amount they pay for health care costs and eliminating OPEB entirely for some collectivelybargaining groups. The city's ability to actively manage these long-term unfunded liabilities will be key credit drivers moving forward.

Fiscal 2019 fixed costs, comprised of debt service, pensions contributions and OPEB contributions, represented a high but manageable24.3% of operating revenues. However, a low return on assets in the state run pension plans and future escalation of OPEB costs couldmaterially increase fixed costs going forward.

Management and Governance: strong budget management; oversight from BFSAManagement for the city is strong, with informal reserve policies, formally adopted “Rainy Day” Funds, and a policy to not issue moredebt than what is being retired annually. Management is also required to submit its budgets and four year financial plans to BFSA forreview as well as conduct quarterly financial reporting. In addition, pursuant to the state enabling legislation, the city is required to setup a debt service reserve fund, to be funded with first-in property tax revenues, for the payment of debt service.

New York Cities have an Institutional Framework score of A, which is moderate. Institutional Framework scores measure a sector'slegal ability to increase revenues and decrease expenditures. New York Cities operate within a state-imposed property tax cap, whichlimits the ability to increase their operating levy by the lesser of 2% or CPI (before adjusting for exemptions and rollovers). However,this cap can be overridden at the local level, without voter approval. Unpredictable revenue fluctuations tend to be moderate, orbetween 5-10% annually. Across the sector, fixed and mandated costs are generally greater than 25% of expenditures. New York Statehas public sector unions and the additional constraint of the Triborough Amendment, which limits the ability to cut expenditures.Unpredictable expenditure fluctuations tend to be moderate, or between 5-10% annually.


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Rating methodology and scorecard factorsThe US Local Government General Obligation Rating Methodology includes a scorecard, a tool providing a composite score of a localgovernment’s credit profile based on the weighted factors we consider most important, universal and measurable, as well as possiblenotching factors dependent on individual credit strengths and weaknesses. Its purpose is not to determine the final rating, but rather toprovide a standard platform from which to analyze and compare local government credits.

Exhibit 4

Buffalo (City of) NY

Rating Factors Measure Score

Economy/Tax Base (30%) [1]

Tax Base Size: Full Value (in 000s) $10,733,849 Aa

Full Value Per Capita $41,352 A

Median Family Income (% of US Median) 59.1% Baa

Notching Factors:[2]

Regional Economic Center Up

Outsized Unemployment or Poverty Levels Down

Finances (30%)

Fund Balance as a % of Revenues 22.2% Aa

5-Year Dollar Change in Fund Balance as % of Revenues -13.5% Ba

Cash Balance as a % of Revenues 24.0% Aa

5-Year Dollar Change in Cash Balance as % of Revenues -12.7% Ba


Other Analyst Adjustment to Finances Factor: Up

Management (20%)

Institutional Framework A A

Operating History: 5-Year Average of Operating Revenues / Operating Expenditures (x) 0.9x Ba


State Oversight or Support Up

Debt and Pensions (20%)

Net Direct Debt / Full Value (%) 8.6% Baa

Net Direct Debt / Operating Revenues (x) 0.7x A

3-Year Average of Moody's Adjusted Net Pension Liability / Full Value (%) 16.8% Ba

3-Year Average of Moody's Adjusted Net Pension Liability / Operating Revenues (x) 1.4x A


Unusually Strong or Weak Security Features Up

Other Analyst Adjustment to Debt and Pensions Factor (specify): Down

Scorecard-Indicated Outcome A1

Assigned Rating A1

[1] Economy measures are based on data from the most recent year available.

[2] Notching Factors are specifically defined in the US Local Government General Obligation Debt methodology.

[3] Standardized adjustments are outlined in the GO Methodology Scorecard Inputs publication

Source: US Census Bureau; audited financial statements; Moody's Investors Service


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Summary:

Buffalo, New York; GeneralObligation; School State Program

Primary Credit Analyst:

Lauren Freire, New York (1) 212-438-7854; [email protected]

Secondary Contact:

Nora G Wittstruck, New York (1) 212-438-8589; [email protected]

Table Of Contents

Rationale

Outlook

Related Research

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT FEBRUARY 3, 2020 1

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Summary:

Buffalo, New York; General Obligation; SchoolState Program

Credit Profile

US$9.155 mil gen imp rfdg serial bnds ser 2020A due 04/01/2025

Long Term Rating A+/Stable New

Buffalo GO

Long Term Rating A+/Stable Affirmed

Rationale

S&P Global Ratings assigned its 'A+' long-term rating and stable outlook to Buffalo, N.Y.'s series 2020A general

improvement refunding bonds and affirmed its 'A+' long-term rating and underlying rating (SPUR), with a stable

outlook, on the city's general obligation (GO) debt.

Security and the use of proceeds

The city's faith-and-credit GO pledge secures the bonds, including the statutory authorization to levy ad valorem taxes

on all real property in the city, subject to applicable statutory limitations.

We understand the city will use series 2020A bond proceeds to refund certain maturities of series 2010A and 2010B

bonds for savings.

Credit overview

We think the city's economy, despite its lower economic metrics, is well positioned to continue expanding. In fiscal

years 2017 and 2018, the city drew considerably on reserves, leaving unassigned fund balance depleted. Positively, this

trend reversed in fiscal 2019 when the city added to fund balance, primarily due to an advance in casino revenue from

the state. For fiscal 2020, changes in revenue-collection procedures and other processes and savings on overtime costs

should contribute to reserve stabilization. We, however, view the city's ongoing challenges with rising expenses as

potentially pressuring the rating during the next few fiscal years, particularly due to high fixed costs and revenue

sources primarily from economically sensitive sources.

The rating also reflects our opinion of the city's:

• Weak economy, with market value per capita of $42,239 and projected per capita effective buying income at 69.1%

of the national level, that benefits from access to a broad and diverse metropolitan statistical area (MSA);

• Very strong financial management, with strong financial policies and practices under our Financial Management

Assessment (FMA) methodology;

• Adequate budgetary performance, with operating results that could deteriorate during the next few fiscal years

compared with fiscal 2019, which closed with balanced general fund operating results and at the total


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governmental-fund level;

• Weak budgetary flexibility, with available fund balance in fiscal 2019 of 10.5% of operating expenditures, as well as

limited capacity to reduce expenditures and raise revenue due to consistent and ongoing resistance;

• Very strong liquidity, with total government available cash at 44.9% of total governmental-fund expenditures and

5.8x governmental debt service, and access to external liquidity we consider strong;

• Strong debt-and-contingent-liability position, with debt service carrying charges at 7.7% of expenditures and net

direct debt that is 33.4% of total governmental-fund revenue, as well as low overall net debt at less than 3% of

market value and rapid amortization, with 74.9% of debt scheduled to be retired within 10 years, but a large pension

and other-postemployment-benefit (OPEB) obligation and the lack of a plan to sufficiently address the obligation;

and

• Strong institutional framework score.

Weak economy

We consider Buffalo's economy weak. The city, with an estimated population of 254,121, is in Erie County in the

Buffalo-Cheektowaga-Niagara Falls MSA, which we consider broad and diverse. The city has a projected per capita

effective buying income at 69.1% of the national level and per capita market value of $42,239. Overall, market value

has grown by 3.6% during the past year to $10.7 billion in fiscal 2020. County unemployment was 4.4% in 2018.

After years of population loss and employment decreases emblematic of regional economies in the Rust Belt, Buffalo's

economy improved recently due to leading employer diversification and expansion. Since the recession, the economy

has experienced continued property wealth and employment growth, reflected in strengthened economic

fundamentals. Furthermore, unemployment is at its lowest level since before the recession.

Ongoing investment by New York State and additional investment from other firms and nonprofit entities contributed

to market value increases and supported employment growth. The manufacturing sector has stabilized after years of

employment losses. Meanwhile, Buffalo has diversified into other industries, particularly business and technical

services, education, and health care. Leading private employers include Kaleida Health, Catholic Health, and M&T

Bank. Government employment contributes to the city and region more generally, making up more than 10% of sector

employment regionwide.

With the continued expansion of Buffalo's local economy, the region's real estate market has been among the strongest

nationally with increasing home prices and fewer days on the market. Although the city has experienced significant

full-valuation growth nominally, assessed value has grown modestly by 1.6% since fiscal 2016. The city has completed

its entire reassessment process, and it expects it will use the final roll in fiscal 2021. Due to the state-equalization-rate

trend, we expect revaluation will likely increase the taxable base and, in turn, strengthen economic indicators.

Very strong management

We view the city's financial management as very strong, with strong financial policies and practices under our FMA

methodology, indicating financial practices are strong, well embedded, and likely sustainable.

Buffalo Fiscal Stability Authority (BFSA), which is currently in an advisory mode, provides oversight of the city's

management practices and policies. The city has evolved its budgeting assumptions as unassigned fund balance


Summary: Buffalo, New York; General Obligation; School State Program

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decreased to its current zero balance. Management has revised and lowered certain revenue assumptions while

increasing historically underestimated expenditures. The city continues to create budgets supported by historical trend

analysis and forward financial projections, reinforced by requirements to submit updated five-year financial forecasts

to BFSA annually for approval within adopted guidelines to mitigate identified out-year gaps.

We note that if the city reverts to significant deficits, once again, or demonstrates an inflexibility with budgetary

assumptions, we could revise our view of its revenue and expenditure assumptions; in turn, this would result in our

probably revising the FMA.

Buffalo budgets annually for capital improvements and maintains a comprehensive five-year capital improvement plan

with identified projects, costs, and funding sources. Management monitors performance throughout the year and

provides quarterly reports on budget-to-actual performance to the city council, which may amend the budget

throughout the year, if needed. BFSA holds committees and board meetings at least quarterly to review budgetary

trends.

The comptroller maintains a formal investment-management policy and reviews holdings at least annually. The

comptroller annually submits a report to the mayor showing the maximum amount of capital debt Buffalo may

prudently incur in the next calendar year and each of the four following calendar years without impairing financial

stability. The reserve policy calls for a committed emergency-stabilization fund equal to 30 days' general fund

operating expenditures. We note the city is taking ongoing steps to address various emerging risks, such as

cybersecurity.

Adequate budgetary performance

Buffalo's budgetary performance is adequate, in our opinion. The city had balanced operating results at 0.2% of

expenditures in the general fund and 0.4% across all governmental funds in fiscal 2019. Due to a tight budgeting

environment and sensitive revenue, we expect the city will likely maintain balanced results rather than a strong

performance.

Our assessment of budgetary performance includes adjustments for transfers into and from the general fund and

capital spending paid for with bond proceeds. In addition, we have adjusted for several one-time expenses that

occurred throughout the year. Overall, a casino revenue advance from the state supported positive fiscal 2019

operating results.

Fiscal 2019 revenue increased by 5.4% from fiscal 2018 to $477.7 million. Management mainly attributes the change to

increasing property taxes and the $7.5 million advance of casino revenue. Despite revenue growth, the city missed

several revenue targets with actual revenue coming in underbudget by $16.5 million. Despite the casino revenue

advance, a $10.5 million unfavorable variance occurred in state aid, as did a $7 million unfavorable variance in

miscellaneous revenue, which includes land sales and building and equipment and smaller unfavorable variances

occurring with other revenue.

City expenses were $24 million underbudget. Similar to previous fiscal years, police and firefighter overtime was

underbudget due to new recruit classes and a settled firefighter contract. Personnel attrition and lower pension

contributions generated expense savings, offset by health-insurance-expenditure increases. For Buffalo schools, the



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district had surplus operations in fiscal 2019; it expects breakeven reserves, if not a small use.

Buffalo's adopted fiscal 2020 budget provides $508.7 million of general fund expenditures, a decrease of $4.9 million,

or 1%, over the adopted fiscal 2019 $513.6 million budget. The fiscal 2020 budget includes several untested revenue

streams, such as entertainment surcharge fees and several housing-related fees, including a new

mortgage-default-registration fee. Total untested revenue is $12.7 million; currently, the city has collected a significant

portion of that amount, enough to offset negligible entertainment-fee collections.

In addition, the city is budgeting for the receipt of its share of casino revenue from the Seneca Nation, which has not

paid its share of slot revenue to respective municipalities since 2017. It is unclear if the state will forward the balance

of revenue owed, which could lead to a subsequent negative revenue variance in fiscal 2020.

With the recent completion of its fire contract, Buffalo has budgeted for personal cost savings, particularly due to

concessions gained in employee contributions toward health-care benefits. Currently, budget-to-actual reports include

breakeven results with several revenue streams outpacing budgeted figures. Overall expenses are trending well.

Buffalo's balanced fiscal 2020 four-year financial plan does not include fund-balance use, which we imagine could be

difficult to maintain based on revenue assumptions. The plan includes minimal growth in several miscellaneous

revenue. Historically, however, the city has not met its revenue forecast in some areas. Furthermore, base-line

assumptions for continued economic expansion leave little margin for softening revenue. During the course of the

four-year period, officials are projecting expenses to grow by 3.6% to $243.1 million.

With six possible union contracts expiring by 2021, expense assumptions include possible salary increases for those

departments, which we view positively. However, in our opinion, management might be slightly underestimating other

expenses, such as overtime and fringe benefits, during the plan's life.

If Buffalo cannot achieve its revenue forecast during the next few fiscal years through a combination of increases and

collection improvement, offsetting continued expense growth, we expect budgetary performance will likely remain

adequate or deteriorate to levels we consider weak or very weak, pressuring the rating.

Weak budgetary flexibility

Buffalo's budgetary flexibility is weak, in our view, with available fund balance in fiscal 2019 at 10.5% of operating

expenditures, or $51.5 million. In our view, a limited capacity to reduce expenditures and raise revenue due to

historical resistance to raising local-derived revenue negatively affect budgetary flexibility.

We include committed reserves for emergency stabilization, representing a minimum 30 days' prior fiscal year total

general fund operating expenditures, as available. We understand that if during a fiscal year the city has unexpected

extraordinary operating or capital needs, it could use this fund; management, however, should not use this revenue for

ongoing operations. Since fiscal 2016, the city has spent down $59.2 million of fund balance, resulting in two years of

no unassigned fund balance.

Buffalo's reserve use is a credit concern because it has limited flexibility to absorb expenditure increases without

tapping into the emergency-stabilization fund. The four-year plan does not contain a mechanism to replenish

unassigned fund balance, which we posit could create fiscal stress, particularly since our forecast includes the potential



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for an economic downturn of 20%-25% beginning within the next 12 months.

In our opinion, Buffalo's limited revenue-raising flexibility and significant fixed-cost burden offset strong available

reserves. State aid remains the single-largest operating revenue source, and management expects aid to provide more

than 80% of operating revenue for city schools under the long-term financial plan. In addition, fixed costs continue to

exceed 30% of operating revenue, even as management expects debt-service costs to decrease during the next few

fiscal years. Because OPEB costs are likely to accelerate, fixed costs will likely remain elevated.

Very strong liquidity

In our opinion, Buffalo's liquidity is very strong, with total government available cash at 43.2% of total

governmental-fund expenditures and 5.8x governmental debt service in fiscal 2019. In our view, the city has strong

access to external liquidity if necessary.

In our view, Buffalo's regular debt issuance, including GO debt, demonstrates its strong access to external liquidity. We

do not view investments as aggressive with most city investments in mutual funds and fixed-income securities, and we

also consider BFSA's oversight. The city has two expired contracts; we, however, do not expect a forthcoming

settlement that would materially affect cash. We expect little change in liquidity. Although not expected, if the city

were to experience a significant draw on cash, we could change our view of liquidity.

Strong debt-and-contingent-liability profile

In our view, Buffalo's debt-and-contingent-liability profile is strong. Total governmental-fund debt service is 7.7% of

total governmental-fund expenditures, and net direct debt is 33.4% of total governmental-fund revenue. Overall net

debt is low at 2.4% of market value and about 74.9% of direct debt is scheduled to be repaid within 10 years, which

are, in our view, positive credit factors.

The city has been proactively reducing debt recently, and it expects to continue to do so during the next few fiscal

years. We expect principal amortization to exceed new issuance based on the city's capital plan. BFSA continues to

review all debt issues.

Buffalo also issues debt on behalf of the school district, which is a component unit. This arrangement is common

among New York State's five big cities because constitutional debt limits reflect the district and city's combined debt.

Erie County Industrial Development Agency issues most Buffalo school district debt. Debt service is payable solely

from intercepted state aid, and the bonds are not city obligations.

Pension and OPEB highlights include:

• Our view that pension and OPEB liabilities are a source of credit pressure for Buffalo because costs represent a

large portion of the budget, coupled with our expectation costs will likely increase.

• Buffalo maintains significant OPEB liabilities, funded on a pay-as-you-go basis, which, due to claims-volatility and

medical-cost-and-demographic trends, is likely to lead to escalating costs, as well as create budgetary pressure.

• Although the city has some legal flexibility to alter OPEB, it might not be politically attainable. Furthermore, it is

unable to prefund these costs, increasing budgetary-pressure risk; minimal pension-liability pressure due to strong

plan funding and limited escalating-cost-trajectory risk somewhat offset this risk.



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In our opinion, Buffalo's large pension and OPEB obligation, without a plan in place we think will sufficiently address

the obligation, is a credit weakness.

Buffalo participates in:

• New York State Employees' Retirement System (NYSERS), which is 98.24% funded, with a proportional share of the

net pension liability equal to $17.5 million; and

• New York State Police & Fire Retirement System (NYSPFRS), which is 95.1% funded, with a proportional share of

the net pension liability equal to $56.4 million.

Buffalo's combined required pension and actual OPEB contribution totaled 16.1% of total governmental-fund

expenditures in fiscal 2019: 6.8% represented required contributions to pension obligations and 9.3% represented

OPEB payments. The city funds 100% of its actuarially determined contribution, and fiscal 2019 actual contributions

exceeded our view of minimal-funding progress and static funding.

However, the plan's aggregate cost method essentially creates an open-amortization policy using level-percent pay,

assuming 3.8% payroll growth; we generally view this negatively because the plan will never reach full funding and

costs will increase annually. Furthermore, NYSERS' and NYSPFRS' 7% discount rate could lead to some contribution

volatility. However, the plan's high funding largely mitigates the risk of costs increasing significantly.

Buffalo also provides OPEB to eligible employees, funded on a pay-as-you-go basis. The city's total OPEB liability for

governmental and business-type activities is roughly $1.12 billion. The city recently underwent an actuarial study for

OPEB obligations, and it now reports on a Governmental Accounting Standards Board Statement No. 75 basis. Buffalo

does not have a plan to address these liabilities due partially to some state restrictions.

Strong institutional framework

The institutional framework score for New York cities, other than New York City, is strong.

Outlook

The stable outlook reflects S&P Global Ratings' opinion of Buffalo's recent fiscal 2019 budgetary performance and

expectations that further expense and revenue modifications in fiscal 2020 will likely lead to stabilized reserves at fiscal

year-end. In our opinion, Buffalo maintains very strong liquidity and experiences economic growth and tax base

diversification, particularly due to the pending implementation of reassessments during the two-year outlook, further

supporting the outlook. Therefore, we do not expect to change the rating during the outlook period.

Downside scenario

Would could lower the rating or revise the outlook to negative if Buffalo cannot maintain, at least, breakeven results

during the outlook period, resulting in the use of emergency funds for general operations, or if revenue forecasts were

to become optimistic and actual results were to decrease below expectations.

Upside scenario

We view the rating's upside potential as limited during the outlook period due to Buffalo's recent historical results. We,



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however, could raise the rating if management were to maintain consistent positive operations, resulting in reserves

growing above 15% of operating expenditures. In addition, we expect Buffalo will likely maintain economic growth and

wealth-and-income metrics.

Related Research

• S&P Public Finance Local GO Criteria: How We Adjust Data For Analytic Consistency, Sept. 12, 2013

• Incorporating GASB 67 And 68: Evaluating Pension/OPEB Obligations Under Standard & Poor's U.S. Local

Government GO Criteria, Sept. 2, 2015

• Criteria Guidance: Assessing U.S. Public Finance Pension And Other Postemployment Obligations For GO Debt,

Local Government GO Ratings, And State Ratings, Oct. 7, 2019

• 2019 Update Of Institutional Framework For U.S. Local Governments

Ratings Detail (As Of February 3, 2020)

Buffalo sch serial bnds


Buffalo GO State Credit Enhancement (AGM)

Unenhanced Rating A+(SPUR)/Stable Affirmed

Buffalo GO (BAM)


Buffalo GO


Buffalo SCHSTPR


Buffalo GO


Buffalo GO State Credit Enhancement


Many issues are enhanced by bond insurance.

Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed

to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for

further information. Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating

action can be found on S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column.



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9/20/2019 [ Press Release ] Fitch Downgrades Buffalo, NY's IDR and GO Ratings to 'A+'; Outlook Stable

https://www.fitchratings.com/site/pr/10058886 1/7

Fitch Downgrades Buffalo, NY's IDR and GO Ratings to 'A+';Outlook Stable

Fitch Ratings-New York-20 September 2019: Fitch Ratings has downgraded the following ratings on the city ofBuffalo, New York to 'A+' from 'AA-':

--Issuer Default Rating (IDR);--$65 million of outstanding unlimited tax general obligation (ULTGO) bonds;--$100 million of outstanding limited tax general obligation (LTGO) bonds.

The Rating Outlook is Stable.

SECURITYThe bonds are general obligations of the city for which it has pledged its full faith and credit, subject to the 2011state statute limiting property tax increases to the lesser of 2% or an inflation factor (the tax cap law). This limitcan be overridden by a 60% majority vote of the city common council.

ANALYTICAL CONCLUSION

The downgrade of the IDR and GO ratings to 'A+' from 'AA-' reflects the city's weak operating performance inrecent years driven in part by overly optimistic revenue assumptions, and from shortfalls in gaming revenuesassociated with a contract dispute between the state of New York and the Seneca Nation. Revenue growthprospects have slowed in recent years and the use of reserves has diminished the city's fiscal resources and itscapacity to respond to cyclical economic stress. Management does have the independent legal ability toincrease revenues but limited expenditure flexibility. The city's low long-term liability burden for debt andpensions continues to support the 'A+' rating.

Economic Resource BaseThe city of Buffalo is the second largest city in New York and serves as the seat of Erie County. It is located onthe western border of upstate New York on the shores of Lake Erie near the Canadian border. Cross-bordertourism, and a fairly large manufacturing and healthcare presence help to define the city's economic profile,which is also characterized by its comparatively low income and high poverty and a slowly declining population.The estimated 2018 population of 256,304 has experienced a 1.9% drop since the 2010 Census.

KEY RATING DRIVERS

Revenue Framework: 'a'Fitch expects revenue growth to be relatively flat based on historical and recent trends. The city hasindependent legal ability to raise property tax revenues given that the legislature can override the statutory taxlevy cap with a 60% majority vote.

Expenditure Framework: 'a'

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Fitch expects the natural pace of expenditure growth to outpace revenues absent policy action, consistent withrecent historical results and reflective of the city's low revenue growth environment. Expenditure flexibility issomewhat limited due to elevated carrying costs for debt retiree benefits and requirements for educationfunding; however, management maintains some capacity to cut costs through consolidating governmentfunctions.

Long-Term Liability Burden: 'aaa'The long-term liability burden is low at roughly 6% of total personal income and trending lower in recent years.

Operating Performance: 'a'The city's financial resilience has weakened with significant declines in available general fund reservesfollowing operating deficits in five of the last seven fiscal years through fiscal 2018.. Fitch views the drop inreserves as reducing the city's ability to offset the potential effects of a moderate economic downturn in thecontext of its midrange inherent budget flexibility.

RATING SENSITIVITIESFiscal Balance: Fitch believes the city will continue to face various pressures to align revenues withexpenditures and maintain its strong gap-closing capacity. Further draws on general fund reserves in fiscal2020 would likely lead to additional negative rating action.

CREDIT PROFILE

The city's economy is anchored by Buffalo-Niagara Medical Campus (BNMC), Erie County Medical CenterCorporation, Kaleida Health and the State University at Buffalo. BNMC is a consortium of education andresearch institutions that employs approximately 12,000 people. In April 2019, M&T bank announced plans toadd 1,000 new jobs, including engineers, software developers and other technical positions to expand itstechnology operation in Buffalo. The impact of the economic development activity on revenue growth has beenslower than previous expectations. The city continues to struggle with unemployment that exceeds state andnational rates, persistent job loss, and poverty.

The state of New York had provided Tesla with $750 million in economic development incentives to expand itssolar cell and module facility within the city, which was expected to create over 5,000 new jobs by 2020 andrevise the city's economy. However, Tesla's job creation is substantially below this mark to date and expectedproduction at its solar factory is reportedly well behind schedule. If Tesla falls short on its agreement with NewYork State and is unable to meet its employment obligations, the state has the legal ability to charge penaltiesfor non-compliance.

Revenue FrameworkBuffalo derives its general fund revenue primarily from intergovernmental revenue including state aid, whichincludes the city's portion of state-shared sales tax revenue, mortgage taxes and gaming revenue. Combined,intergovernmental revenue accounted for more than half of general fund revenue and property taxesapproximately 31% of revenues in fiscal 2018.

Fitch expects the natural growth prospects for general fund revenues to be flat in the near term based oncurrent economic and demographic trends. The city's taxable assessed value growth (TAV) has been slow inrecent years, although a recent property value reassessment indicates significant growth in TAV for fiscal 2020-2021 due to improvements in the local economy and housing market price appreciation. Growth in sales taxrevenues, which are remitted to the city by the state, has exceeded the rate of inflation in recent years but aresomewhat sensitive to changing economic conditions.

New York State law requires property tax revenue increases be limited to the lesser of CPI or 2% annually,

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unless a supermajority of the local governing body votes for a larger increase. The ability to override the capprovides substantial legal flexibility to raise revenues. Additionally, the city has the ability to increase other feesand departmental revenue.

The city had a $3.4 million and $7.0 million gaming revenue shortfall (each about 1% of the annual general fundbudget) in fiscal 2017 and 2018, respectively, driven by a dispute by the Seneca Nation. The tribe had agreedto pay the state a 25% share of slot machine revenue under a compact between the state of New York and thetribal nation. The cumulative gaming revenue shortfall through fiscal 2019 is $17 million. An arbitration panelruled that the Seneca Nation must continue to share gaming revenues with the state of New York after losing inthe arbitration proceeding in January 2019. The tribe has filed a lawsuit with the Federal District Court inwestern New York to dispute the arbitration decision. The state will advance $7.5 million to the city to mitigatesome of the local impact of the dispute.

Expenditure FrameworkPublic safety and education are the city's largest expenditure items, accounting for approximately 34% and 15%of fiscal 2018 general fund spending, respectively.

Fitch expects inflationary-based salary and wage increases and other retiree benefit costs to outpace the flatrate of revenue growth. Like most local governments, Buffalo's main cost drivers are contractual salaryincreases and employee benefits, with nearly 3,000 city employees covered by eight collective bargainingagreements. Recent contracts revised various work rules and modified health benefits, which are expected toresult in annual expenditure savings to the city. Several contracts are in negotiations including the police, whitecollar and blue collar labor unions and the city anticipates similar overall results.

The Buffalo Board of Education, a component unit of the city, settled a long-running teacher contract dispute inOctober 2016 with modest salary increases through fiscal 2019. The contract is currently expired and is undernegotiation. The city and school district generally control expenditure growth by utilizing hiring freezes andvacancy management.

The city's flexibility of main expenditure items is limited. Carrying costs for debt service, pension and other post-employment benefits (OPEB) accounted for approximately 23% of general fund expenditures in fiscal 2018.The size of the city's workforce has increased modestly over the last decade, primarily in the area of publicsafety, which Fitch considers more difficult to make cuts to. Very modest flexibility exists in the area of capitalspending with general fund transfers out for such purpose at less than $1 million in fiscal 2018. The citymaintains additional opportunities to consolidate government functions, however, the effectiveness of thesecost saving measures is uncertain.

Long-Term Liability BurdenThe city's long-term liability burden for debt and pensions is low, comprising approximately 6% of the city'spersonal income. The majority of the debt burden (slightly above 3% of personal income) is direct GO debtissued by the city, including school district debt issued on behalf of the Board of Education. The city has modestfuture borrowing plans, largely for infrastructure maintenance for streets and cityscapes, and the rate of cityprincipal amortization is rapid (about 97% in 10 years).

Fitch estimates the city's net pension liability (NPL) at roughly $234 million or more than 2% of personalincome, stemming from its participation in two state-sponsored defined benefit pension plans: the EmployeesRetirement System (ERS) and Local Police and Fire Retirement System (PFRS). The NPL estimate reflectsFitch's standard 6% investment rate of return assumption, which results in a Fitch-adjusted ratio of assets toliabilities of 87% on an aggregate basis.

As of June 30, 2018, the city's OPEB liability totaled $1.2 billion or a very high approximately 13% of personal

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income. The city funds its liability on a pay-go basis. The city eliminated post-employment health care for newhires covered under the white and blue collar labor contracts. The change produces no near-term budgetarysavings, but is expected to reduce the growth in the city's long-term OPEB liability.

Operating PerformanceThe city's operating performance has weakened and provides adequate financial resilience, which reflects asignificant change from recent very strong levels following several years of general fund operating deficits. Thecity's unrestricted general fund balance (the sum of the assigned, unassigned, and committed reserves) totaled$52 million or roughly 11% of spending in fiscal 2018 compared to nearly $116 million or 24% of spending infiscal 2015. Large operating deficits were recorded in both fiscal 2017 ($33.8 million or 7% of spending) andfiscal 2018 ($22.9 million or 5% of spending) stem from overly optimistic revenue projections and theaforementioned shortfall in revenue in casino revenue from the dispute between the state and the SenecaNation.

Currently available reserves provide a substantially weaker but adequate financial cushion against what wouldlikely be moderate revenue volatility in a typical economic downturn. Fitch's view of the city's financial resilienceincorporates its midrange level of inherent budget flexibility mostly evident in its legal ability to increaserevenues above the state tax cap. The city has not exceeded the cap in prior years, relying instead onstreamlining operations to reduce expenditures.

Prior to 2003, the city had a period of significant fiscal stress that led state lawmakers to create the BuffaloFiscal Stability Authority (BFSA) to facilitate financial reforms. The city was able to improve its financialresilience through financial reforms that had a lasting impact on fiscal operations. The authority moved to anadvisory role in 2012, as the city had achieved predetermined benchmarks. Under the Fiscal Stability Act, theauthority has the ability to re-impose fiscal controls in the event of fiscal stress. Fitch does not assume in itsratings that such mechanisms will be invoked but it recognizes the potential benefit to operations and financialperformance stemming from the imposition of an effective state-sponsored remediation plan.

The city's four-year fiscal plan assumes annual tax levy increases up to the state tax cap. The plan assumedsome one-time revenue actions including the sales of city-owned capital assets. The city sold its old policeheadquarters in the spring of 2019, as the city finished its consolidation of police and fire headquarters into anew facility to streamline operations and reduce operating costs on an annual basis. Management continues toactively manage expenditure growth and will likely implement revenue enhancements in the coming years. Ifmanagement is not able to align revenues with expenditures and reserve balances decline further, the currentrating would be pressured.

Unaudited results for fiscal 2019 indicate that revenues fell short of budgeted expectation despite healthy salestax revenue collections that exceeded budget assumptions by 3%. The city has estimated a $7.5 million generalfund deficit driven in large part by the estimates shortfall in gaming revenue from non-payment of the state'srevenue sharing agreement with the Seneca Nation. In order to mitigate the impact to the city, the state hasagreed to advance $7.5 million which will be deducted against any future state distributions of gamingrevenues. The Seneca Nation ceased revenue transfers in June 2017 due to a contract dispute with the state,which has resulted in a $17 million cumulative shortfall through fiscal 2019. In addition, a portion ($7.0 million)of the large $22.9 million revenue shortfall in fiscal 2018 was driven by the gaming revenue shortfall.

The city lowered its revenue assumption for the fiscal 2020 adopted budget and has implemented expenditurereductions to try to align revenues with expenditure growth expectations. The fiscal 2020 budget reflects a 1.4%budget to budget decrease and is balanced without a fund balance appropriation and includes a property taxlevy increase up to the state cap. The budget does assume the receipt of $11 million in tribal revenue in fiscal2020 and a 6% increase in sales tax revenue driven in part by internet sales taxes, which were previously nottaxed. Fitch believes that some of the budgeted revenue assumptions are optimistic. The city has taken steps

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to improve its overall financial operations; however, a failure to return to structural balance could result innegative rating action.

Contact:

Primary AnalystShannon McCueDirector+1-212-908-0593Fitch Ratings, Inc.33 Whitehall StreetNew York, NY 10004

Secondary AnalystAndrew O'HaraAnalyst+1-646-582-4496

Committee ChairpersonMichael RinaldiSenior Director+1-212-908-0833

Financial Statement Adjustments DisclosureIn accordance with Fitch's policies the issuer appealed and provided additional information to Fitch that resultedin a rating action that is different than the original rating committee outcome.

In addition to the sources of information identified in Fitch's applicable criteria specified below, this action wasinformed by information from Lumesis.

Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: [email protected]

Additional information is available on www.fitchratings.comApplicable Criteria U.S. Public Finance Tax-Supported Rating Criteria (pub. 03 Apr 2018)

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