Lower reserves, coronavirus give Buffalo a second downgrade in a year
Diminished reserve levels that were compounded by the COVID-19 pandemic drove Buffalo’s second credit downgrade in a one-year span.
Fitch Ratings lowered New York State’s second largest city one notch to A from A+ Wednesday citing “substantially” weakened reserves largely caused by the virus-induced recession. It also revised the city’s credit outlook to negative from stable.
“The city has used up a lot of its reserves,” said Fitch analyst Shannon McCue. “They have had overly aggressive revenue estimates.”
Buffalo’s reserve balances have declined “significantly” since Fitch last upgraded the city in 2016, McCue said. The city’s unrestricted general fund balance totaled $51 million, or 10.5% of all spending in 2019 compared to $113.6 million, or 24.5% of spending in 2016.
McCue said shutdown orders resulting from the pandemic during the spring hampered Buffalo’s revenue collections for fiscal 2020 that ended June 30. This resulted in a projected year-end deficit of up to $30 million, which equates to roughly 6% of general fund spending.
Buffalo issued $25 million of cash-flow deficiency anticipation notes on June 30 with a December 2021 maturity date to help plug the budget gap and maintain its reserves including a $39 million rainy day fund.
Mayor Byron W. Brown, who was first elected in 2005, said he strongly disagreed with Fitch's downgrade noting that Buffalo’s fiscal outlook was on a positive trajectory prior to pandemic. He said before the virus’s outbreak in March the city was projecting a $5 million surplus for the end of fiscal 2020
"Our economy was strong, and city revenues were projected to grow," Brown said in a statement. “Using the financial strains we are facing now, strains that every city and state across the nation are confronting, as a reason to downgrade our credit rating and shift our outlook makes no sense.”
McCue said while Buffalo’s reserves provide an “adequate” financial cushion to address some headwinds in fiscal 2021, “overly optimistic” revenue assumptions create potential for a further erosion of the city’s fund balance.
Fitch also lowered Buffalo's debt rating one notch on Sept. 24, 2019 marking the city’s first credit downgrade in 16 years following a rebound from near bankruptcy in the mid-2000s. The new lower Fitch rating is one notch below Moody’s Investors Service, which rates Buffalo at A1 and S&P Global Ratings, which rates it at A-plus. Moody's and S&P both assign stable outlooks.
S&P credit analyst Lauren Freire said Buffalo's budgetary flexibility is "weak" and compounded by an elevated level of fixed costs. She last met with Buffalo officials in April just as the city was beginning to address new pressures on revenues and expenditures driven by the pandemic.
"Since our conversation with Buffalo in April, the state has articulated options for shoring up its own budgetary pressures in response to the pandemic," Freire said. "We continue monitoring how these actions and Buffalo’s own budget modifications affect its operations."
Buffalo's $519 million 2021 budget assumes a $19 million reduction in sales tax collections and $65 million of federal disaster relief that hasn’t yet been appropriated by Congress. The city’s contingency plan if the federal aid doesn’t arrive is to issue up to $52 million in 10-year deficit bonds, which would be subject to approval by the state legislature, and creating $13.3 million in expenditure savings.
The Buffalo Fiscal Stability Authority, which was first created by former New York Gov. George Pataki in 2003, might have a “stabilizing effect” on the city’s financial operations as it seeks to recover from the economic downturn, according to McCue. The authority previously had a nine-year state control period on Buffalo finances until moving to an advisory role in 2012 after the city achieved predetermined benchmarks.
McCue noted that under New York’s Fiscal Stability Act, the BFSA could re-impose fiscal controls on Buffalo if unable to adopt a balanced budget or it fails to pay debt service.