S&P Global Ratings, one of the three big credit rating agencies, has lowered Buffalo's financial outlook to “negative” from “stable,” reflecting its assessment of where the city is headed.
The downward outlook primarily is due to budget uncertainties such as $65 million in revenue from the federal government for Covid-19 aid and $11 million in unpaid casino funds the city has been counting on from the Seneca Nation. But the outlook could be returned to “stable” if the city receives the "one-shot" revenue of federal pandemic relief and about $23 million in withheld state aid.
Meanwhile, the city's bond rating remained A+ (the highest are AAA and AA), but S&P warned it could be lowered “should the city's fiscal 2021 budget performance remain challenged and financial results require another deficit borrowing to maintain liquidity and reserves,” wrote S&P credit analyst Lauren Freire in the Feb. 8 report.
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The credit rating affects interest rates and the city's ability to borrow.
Buffalo borrowed $25 million to close out the $509 million 2019-20 budget.
S&P – also known as Standard & Poor's – said specifically that its negative outlook for Buffalo reflects “uncertainty in the timing of revenue included in the fiscal 2021 budget for state and federal aid as well as unpaid casino revenue, which could create budget gaps if revenue falls short of expectations.”
"People are hurting, and it addresses fundamentally where the most vulnerable are," said Rep. Brian Higgins, a Democrat.
Buffalo is expected to receive an estimated $324 million in federal aid under President Biden's proposed stimulus bill, based on calculations from the House Committee on Oversight and Reform, which is drawing up the part of the $1.9 trillion proposal focused on aid to states and localities.
But even if Buffalo were to receive “significant" one-shot revenue from the state or federal government, concerns around future revenue generation remain, according to S&P.
The negative outlook also is based on “the city's history of negative operating results in three of the last four years, resulting in a weakened reserve position.”
The city repeatedly used millions in fund balance – also called reserves – to fill budget gaps over the years. But the practice has depleted the fund balance.
Still, S&P could upgrade the outlook if the one-time revenue leads to a strong surplus, and the city can restore and maintain the depleted portion of the reserves "while insulating its financial position," Freire wrote.
The City of Buffalo would receive an estimated $324 million. The Erie County government would get an estimated $180 million, while Niagara County would get $41 million.
After the report was released, Mayor Byron W. Brown responded that he was "confident that the ‘negative’ future outlook will be upgraded to ‘stable’ once our federal and state aid payments are received. I will continue to work with all of the rating agencies the City does business with to increase their awareness of our growing economy, strong fiscal policies that promote growth, and strategic investments designed to secure Buffalo’s financial future.”
University Council Member Rasheed N.C. Wyatt, chairman of the Common Council's Finance Committee, said Thursday that he was “definitely concerned” about the lowered financial outlook from S&P.
“We’re getting a one-shot stimulus, and we don’t know if it’s going to be $300 million. I think we have to be a little more conservative and more insightful in our projections because we can’t assume we’re going to get that amount,” Wyatt said. “So how do we generate additional revenues or cut expenses that don’t hurt the quality of life for our residents?”
Meanwhile, Moody’s Investors Service also released a report earlier this month in which the city’s credit rating and outlook remained “A1” and “stable." The report said that Buffalo benefits from oversight through the Buffalo Fiscal Stability Authority and from a growing local economy that has seen a recent increase in valuations driven by ongoing construction and a recent reassessment.
However, in September Fitch downgraded Buffalo’s credit rating to "A" from "A+," while also revising the city's rating outlook downward to "negative" from "stable." The ratings downgrade reflected Fitch's concern that the city's financial resilience is merely adequate and that its budgeted revenue assumptions are overly optimistic.
The S&P and Moody’s reports will be discussed Tuesday by the Finance Committee.
