This Ain’t Your Father’s Buffalo: Upstate City Shines as Nassau Sinks

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Buffalo and Nassau County aren’t just far apart from each other on a map of New York — their finances are moving in opposite directions.

As the northwestern city of Buffalo readies a $35.7 million general obligation refunding expected to price this week, the board that oversees its fiscal health is preparing to loosen its controls as the city has generated eight years of surpluses and balanced budgets.

Meanwhile on Long Island, local officials have sued the Nassau County Interim Finance Authority in a bid to block its takeover of the county’s finances last month.

Nassau and Buffalo have been out of step with each other before: In 2003, Bond Buyer headlines proclaimed “Nassau County, N.Y., Gets Upgrade, Plans Return to Market” and “Buffalo Gets a Double Downgrade; Moody’s, S&P Put City Just Above Junk.”

Today Buffalo’s ratings are in the single-A category with positive outlooks from two rating agencies while Moody’s Investors Service last week put Nassau’s A1 rating on review for possible downgrade because of the county’s legal challenge to NIFA. The authority took over the county’s finances last month after making a determination that the 2011 deficit exceeded a 1% statutory trigger.

Buffalo Comptroller Andrew SanFilippo said his city’s road to recovery has been a painful one, but that it’s finally paying off.

“We’re doing a lot right,” he said. “We’ve put in place a lot of measures that are both prudent fiscal practices as well as budget management initiatives.”

When the Buffalo Fiscal Stability ­Authority was created in 2003 to help restore the city’s finances, it had to sell deficit bonds to keep the government afloat. Today Buffalo has large fund balances and a rainy-day fund. It produces four year financial plans and quarterly budget reports.

“Our financial performance is probably better than any comparable municipality in the state,” SanFilippo said. “It’s been painful. We’ve had significant cuts over the years but we’re able to sustain anticipated or potential cuts in state aid.”

A conservative practice of understating revenue and overstating expenditures has added to “strong budget performance,” he said.

When Moody’s downgraded the city in 2003 to Baa3 with a negative outlook, it had $465 million of debt outstanding compared to $265.6 million and an A2 rating with positive outlook today.

Last week, state Comptroller Thomas DiNapoli announced that SanFilippo would be joining his office, citing the upstate official’s work on improving Buffalo’s finances.

“As Buffalo comptroller, he worked to turn the city around and restore fiscal stability,” DiNapoli said in a press release.

With the city still under “hard control,” it needs to get BFSA approval to sell new- money bonds on its own, but it did not need approval for the refunding. Control board approval for new-money deals is likely to be a thing of the past as the city appears at least preliminarily to have met key measures required for the oversight agency to go to advisory status.

“They are on track to do that,” said BFSA principal analyst Bryce Link.

One of the key requirements is for the city and three covered organizations to have completed three years of balanced budgets. The control board is still reviewing 2010 results. If those results are verified and other measures are met, the board would vote on changes to its oversight status.

The city has built up its reserves since the BFSA was created so that it ended fiscal 2010 with a $110.4 million unreserved fund balance, including a $34 ­million rainy-day fund. The fund balance was 24.5% of total expenditures.

“That is something we cite as a strength,” said Fitch Ratings analyst Ann Flynn. She said the University of Buffalo and the 120-acre Buffalo Niagara Medical Campus — which has expanded in recent years and has further expansion plans — help stabilize the city’s economy.

“There’s been some stability in the economy and the base, which has been certainly a positive for them,” Flynn said. “Income levels are below average, market value per capital is weak, but the housing market is stable and there continues to be diversification in the property tax base.”

Buffalo did not experience a housing bubble and subsequently did not have to deal with the effects of a housing bust, she said. The city has some large labor contracts that have expired and remain unsettled.

“We’re looking to see how they end up and where they settle,” Flynn said. “They believe they have reserves set aside to cover any kind of retroactive payments.”

Fitch rates Buffalo’s bonds A-plus with a positive outlook. Standard & Poor’s rates the city’s outstanding debt A-minus with a stable outlook.

Buffalo’s bonds will be offered in two series: Series 2011A, with an expected par value of $12.9 million, will refund general improvement bonds; Series 2011B, with an expected par of $22.9 million, will refund bonds issued for city schools. The bonds will be offered to retail and institutional investors on the same day, most likely Thursday. Last week the deal was on the day-to-day schedule.

Sterne, Agee & Leach Inc. will lead manage the deal.

Hawkins Delafield & Wood LLP is bond counsel and Government Finance Associates Inc. is financial adviser.

J. Chester Johnson, chairman of GFA, said the deal has been in the works for a while.

“When the market was in decent shape in the fall we were looking at this and then the market deteriorated toward the end of the year,” he said. “We were out of the money and then as the market started to get a little better it came back.”

The refunding is expected to generate in excess of $2 million of present-value savings. Both series will be issued as serial bonds with maturities from 2011 to 2020.

“You’ve seen more deterioration on the long end of the market than you have with the mid-range of going only out for 10 years,” Johnson said.

Some of the longer maturities may have bond insurance from Assured Guaranty.

“Where the demand exists for uninsured versus insured will determine which maturities will be insured,” Johnson said. “It’s strictly going to be a demand factor.”

He said the bonds would likely appeal to money managers and trust departments that deal with high-net-worth individuals but also some institutional and retail investors.

Buffalo has sold $254 million of new-money bonds since 2001, according to Thomson Reuters. More than half of that, $153.2 million, was issued in the two years before the control board was created. The city issued $18 million of new-money bonds in 2004 and then didn’t issue any for the three following years as the control board took over that role.

The city returned to the bond market on its own in 2008 with a single $30.9 million issue and subsequently issued new-money debt over the following two years. The BFSA sold $109.5 million of bonds from 2004 through 2007, according to Thomson Reuters.

Buffalo does not need permission from the control board to refund bonds, but has only done so once — $10.3 million in 2004 — since the BFSA was established.

The city had an estimated population of 273,335 in 2009, according to U.S. Census data. Median family income was $30,376, compared to $51,425 nationally.

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