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MOODY'S WARNS OF POSSIBLE CREDIT DOWNGRADE

Buffalo's fiscal plight worsened Tuesday when one of the nation's largest credit-rating agencies warned of a possible credit downgrading unless the city can find ways to solve its cash crunch.

The announcement by Moody's Investors Service that it has put Buffalo on its Watchlist raised fears in City Hall that Buffalo's future ability to borrow money could be jeopardized.

"Look, we can't continue to do business the way we've been doing it," Comptroller Anthony R. Nanula said after learning about Moody's announcement. "I've been saying that for some time. Now we have Moody's telling us we need to put together budgets that are balanced without heavy reliance on state aid."

Budget Director James B. Milroy went one step further, expressing concern that unless officials find long-term solutions, Buffalo could ultimately be frozen out of the bond market.

"If we're downgraded, we would be insolvent," said Budget Director James B. Milroy. "It would keep us out of the bond market for two years."

If the city's current Baa2 rating were to drop two more notches, its general obligation bonds become non-investment grade, making it an ineligible investment for many purchasers. It should be noted, however, that in the late 1990s, Buffalo's bond rating was Baa3, one notch lower than its current rating. The lower a municipality's credit rating, the more expensive it becomes to borrow money.

Moody's report noted that state assistance represents about 60 percent of all combined revenues for the city and its school district. It said Buffalo's "weakened cash position" in July was further compounded by the teachers' contract settlement.

Wall Street analysts also noted that the city borrowed $120 million in short-term revenue-anticipation notes four months ago, twice as much as the city borrowed last fall. City officials acknowledged that it was the largest single short-term borrowing in years.

"Our placement of Buffalo's . . . bond rating on Watchlist for possible downgrade reflects the severe cash shortage that will affect the city in mid-November should increased state aid not materialize or expenditure reductions not suffice," the team of Moody's analysts wrote.

Moody's said it expects to complete its review of Buffalo's bond rating within a few weeks, when further details become available on "remedial measures" to address fiscal problems facing the city and its school district. State auditors are finishing a report that is expected to determine the severity of the city's cash flow problems.

Common Council members said they were concerned but not surprised that Wall Street has red-flagged the city's somber fiscal outlook to prospective investors.

"When a city announces that we have a cash-flow problem that could prevent us from making our payroll in November, this isn't all that surprising," Majority Leader Rosemarie LoTempio said of Moody's announcement.

She said city officials have already identified more than $8.5 million in budget cuts and plan to consider other reductions this week.

North Council Member Joseph Golombek Jr. said: "We're in trouble. You hate to sound like Chicken Little, but all the news we're getting is bad. I guess you just have to hope that Gov. (George E.) Pataki won't let the city go bankrupt."

The action came seven months after Moody's and Standard & Poors issued reports suggesting that there were signs that Buffalo's economy was stabilizing.

e-mail: bmeyer@buffnews.com

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