Why Rochester, N.Y., Won an Upgrade

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Rochester, N.Y., appears to have turned a fiscal corner even as it manages through the decline of two large employers that once formed the bedrock of the city's economy and identity.

Eastman Kodak and Xerox Corporation once anchored Rochester's economy, but they've both scaled back as technological disruption weakened their market positions, leading to job and population losses for New York State's third-most populous city.

Rochester responded with economic development initiatives and improved budgetary practices that S&P Global Ratings cited when upgrading the city's general obligation bonds one notch to AA-minus in early July.

"They have good management that has supported their financial flexibility," said S&P analyst Rahul Jain. "They are pretty conservative in the way they are budgeting for revenues."

Rochester's upgrade came just over three years after State Comptroller Thomas DiNapoli forecast that the city would experience fiscal stress due to growing budget gaps, 25.8% of the population living in poverty and a 9.8% unemployment rate. From 2001 to 2011 the city's revenues increased at an annual rate of 3.6% while its expenditures rose at an annual rate of 3.7%, DiNapoli noted.

Rochester had 210,656 residents as of the 2010 Census. It's population was well over 300,000 for much of the mid-20th Century.

"To get an upgrade shows we are moving in the right direction," said Rochester Mayor Lovely Warren, who first took office in 2014 after previously serving as city council president. "We have been very fiscally prudent."

The city last week priced $22.6 million in series I 2016 general obligation bonds to refund GO bonds issued in 2006.

The city also issued $56.9 million of series II 2016 bond anticipation notes with proceeds used to redeem bonds maturing on Aug. 5. The BAN sale also is aimed at providing original financing for government facilities and road enhancements.

Jain said just before the bond sales that Rochester has benefited from a revaluation process undertaken in the past year, which resulted in a 9.6% increase in total market value to $6.7 billion for the 2017 fiscal year.

"They are trying to increase market values," said Jain. "They should be looking at an uptick in property tax revenue in the next year."

Property values in Rochester increased at only an average annual rate of 1.9% from 2001 through 2011, according to DiNapoli's March 2013 report.

Director of Finance Charles Benincasa said the revaluation process, which is undertaken every four years, combined with increased efforts to generate revenue from new economic development, bodes well for the future.

"It reflects a lot of positive things going on in the city," said Benincasa, who was city treasurer for 13 years before Warren appointed him director of finance in December 2013. "It's going to help us a lot as we rebuild our city."

Moody's Investors Service analyst Cristin Jacoby noted in a June 30 report affirming Rochester's Aa3 credit rating that the city's population dropped 13% from 1980 to 2015. Jacoby said that population losses have slowed in recent years and the revaluation will be major boost.

"That will help them have increased property values to match expenditures," said Jacoby of the revaluations. "The tax base growth is absolutely a positive."

Rochester's property values have grown the last three years, including a 1.8% uptick in 2016, according to Moody's.

Despite population losses, city officials are optimistic about rising interest in a revamped downtown professional area. The city also benefits from stable institutions such as the University of Rochester, the city's largest employer with 20,000 full-time positions, according to Moody's.

S&P views Rochester's liquidity as "very strong" with an ability to seek market access if needed. The city has available cash at 42.9% of total governmental fund expenditures, according to Jain. The majority of the city's funds are held in commercial deposits and money market funds that are not considered aggressive, Jain said.

Jain noted that Rochester has been transitioning from traditional manufacturing into more high-value advanced manufacturing.

He said the city's win in a recent competition to locate within city limits the federal Photonics Manufacturing Institute, part of an initiative to leverage the science and application of light for practical purposes such as robotics, manufacturing, medical imaging and more, should position Rochester well over the long-term.

Rochester's healthcare and educational sectors provide "a stable employment base" along with supermarket giant Wegmans and human resources provider Paychex having headquarters just outside the city, according to Jain.

Jacoby said the city's strong management in recent years has helped with budgeting.

Rochester achieved an operating surplus of more than $5 million, which city officials attributed largely to increased revenues from charges for services, stronger property tax revenue and higher-than-expected operating grants. Jacoby said the city's actual sales tax revenue in 2016 of $143.7 million beat the $142.8 million that was budgeted.

"Their cash and reserves have been relatively stable," said Jacoby. "They have created very strong reserves in recent years."

Benincasa stressed that finding efficiencies in government has been major focus in recent years, which has generated key savings.

He said Rochester a sound approach to borrowing and is slated to pay back 82% of debt within 10 years. The city is anticipating issuing roughly $49.7 million of debt through fiscal 2018 to finance $172.7 million in capital spending over the same period.

"We have very conservative debt practices," said Benincasa. "We have repaid an amortization of our debt."

Mayor Warren has focused heavily on a $130 million development of Rochester's waterfront with a new marina, businesses and residential housing that is expected to add 1,000 jobs over the next three years. She hopes the project will also boost tourism from cruise ships that sail down the St. Lawrence Seaway and serve as a symbol of Rochester's resurgence.

"It's going to increase property taxes as well as sales taxes," said Warren. "We have a lot of momentum."

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