Budget pressures triggered Buffalo’s first rating downgrade in 16 years.
Fitch Ratings downgraded New York State’s second largest city to A-plus from AA-minus Monday citing “overly optimistic revenue assumptions” and “weak operating performance” during the past few years amid deficit struggles. It assigned a stable outlook.
“Revenue growth prospects have slowed in recent years and the use of reserves has diminished the city's fiscal resources and its capacity to respond to cyclical economic stress,” Fitch analyst Shannon McCue wrote. “Management does have the independent legal ability to increase revenues but limited expenditure flexibility.”
McCue noted that Buffalo’s unrestricted general fund balance totaled $52 million or roughly 11% of spending in the 2018 fiscal year compared to nearly $116 million or 24% of spending in 2015. The city recorded large operating deficits in 2017 ($33.8 million) and 2018 ($22.9 million) stemming in large part from misses on revenue estimates, according to McCue.
Unaudited results for fiscal 2019 indicate that Buffalo’s revenues fell short of budgeted expectations despite healthy sales tax collections that exceeded budget assumptions by 3%, McCue noted. The city lowered its revenue assumption for the 2020 fiscal year adopted budget and has implemented expenditure reductions in an effort to align revenues with spending growth expectations. McCue said some of the revenue projections are “optimistic” including a 6% increase in sales tax collections driven in part by internet sales taxes that were not previously taxed.
“Currently available reserves provide a substantially weaker but adequate financial cushion against what would likely be moderate revenue volatility in a typical economic downturn,” McCue said. “Fitch's view of the city's financial resilience incorporates its midrange level of inherent budget flexibility mostly evident in its legal ability to increase revenues above the state tax cap.”
Mayor Byron Brown said a surplus is expected for the final 2019 budget and noted that the 2020 spending plan is structurally balanced without drawing on any reserves. The city’s four-year fiscal plan assumes property tax levy increases up to the state tax cap and also includes one-time revenue actions like the selling of city-owned capital assets. Mayor Brown said improved efficiencies such as consolidating Buffalo’s police and fire headquarters into a new facility will reduce operating costs on a recurring basis.
“I believe there are assertions in the Fitch report that do not accurately assess Buffalo's financial position,” said Brown, who was first elected in 2005. “We will continue to work to educate all the rating agencies about how the city is controlling costs and generating new revenues with the expectation that we will be given higher ratings in the near future."
The last Buffalo downgrade occurred in June 2003 when Moody’s lowered the city to a near-junk level Baa3 as the city grappled with significant fiscal stress. Former Gov. George Pataki created a fiscal control board that year that facilitated positive changes which led to rating upgrades. The Buffalo Fiscal Stability Authority moved into an advisory role in 2012 after the city achieved predetermined benchmarks.
“The city's bond rating — even with Fitch's shift — remains stable, is still very strong, and indicates that Buffalo's municipal bonds remain a very good investment,” Brown said. “We feel very comfortable with the city’s fiscal position and it is a very strong fiscal position.”
In April 2018 both Moody's and S&P Global Ratings revised Buffalo's outlook to stable from positive. S&P rates the city A-plus and Moody's rates it A1.
