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After siphoning reserves, Buffalo faces budgetary reckoning

The City of Buffalo is expecting a surplus of about $1 million to close the books on the 2018-19 budget year, thanks to New York State advancing $7.5 million of $17 million in Seneca Nation casino funds owed the city.

But though the anticipated advance lets the city turn a potential deficit into a surplus, the turnaround may not be enough to reverse a recent downgrade in Buffalo's bond rating despite Mayor Byron W. Brown's suggestion that it might.

It also might not be enough to avert budget cuts if city leaders don't want to raises taxes to replenish the depleted reserves that led to the downgrade.

In a telephone interview with The Buffalo News days after the downgrade earlier this fall, Brown called the rosier surplus outlook "new information" that Fitch Ratings did not have when it downgraded the city to A+ from AA.

However, a Fitch representative said last week that the company did, indeed, know about the $7.5 million advance, but that it wasn't enough to prevent the ratings slide. Fitch will revisit Buffalo's credit picture this month after the final audited numbers for 2018-19 budget are released by Friday in the Comprehensive Annual Financial Report. But it's unlikely Fitch will change the downgrade immediately because the credit rating agency looks at a number of factors in making its determination, and some of those other factors still don't look good.

"We became aware of the ($7.5 million advance) during the review process, and it's included in the final report that we released," said Fitch analyst Shannon McCue. "When we look at credit, we look at a variety of factors. That ($7.5 million) was one of the factors. It's a little more involved than if they just had a surplus in 2019."

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The city's fiscal picture will become clearer with release of the Annual Financial Report, which includes an independent auditor's review. But the "variety of factors" McCue referred to includes the city's repeated use of reserves to fill budget gaps over the years. The city's two other credit rating agencies – Moody's and Standard & Poor's – as well as the city's Control Board have had similar concerns.

Fitch's Sept. 20 report speaks to the fact that the city had cumulative budget deficits from 2016 to 2018, but "it looks like things will begin to stabilize in (the 2019-20 fiscal year)," McCue said. Still, there are some "unknowns for 2020," McCue said, including another $11 million in Seneca Nation revenue that Brown and the Council included in the current 2019-20 budget and a 6% increase in sales tax revenue driven in part by internet sales taxes, which were previously not taxed.

Even though the A+ rating is still favorable and "well above investment-grade levels," McCue said, Fitch cited the fact that the "use of reserves has diminished the city's fiscal resources and its capacity to respond to cyclical economic stress" as among the reasons for the downgrade. The agency also warned that "a failure to return to structural balance could result in negative rating action."

Brown said he talked to Fitch representatives and expressed his "strong disagreement" with the rating shift, but City Comptroller Barbara Miller-Williams said the downgrade was "justified" and could have been worse.

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"If it's based on historically what has happened in the last two or three years, if you look at the direction that we were going, I think they were justified in why they downgraded us. I wish I did not have to say that. I'm just glad they did not take it any lower," she said during a recent meeting with The Buffalo News editorial board.

The recent downgrade, she added, "literally brought us in line with" the A1 rating from Moody's and A+ from Standard and Poor's, both of which cited Buffalo's structurally imbalanced budgets and repeated reliance on reserves to make ends meet when they lowered the city's fiscal outlook from "positive" to "stable" in April 2018.  

In addition to red flags from the credit rating agencies, the Control Board has expressed concern over the administration's repeated draw on the fund balance to balance budgets and fill budget gaps.

For instance, on June 30, 2016 – the end of the 2015-16 budget year – the city reported a total fund balance of about $150 million, including about $42 million in a savings account that can be used to fill budget gaps. But the city used about $35 million of that to fill a gap in the 2016-17 budget and about $7 million in savings – plus approximately $16 million from another account – to close a hole in the 2017-18 budget.

The result was that as of the beginning of the 2018-19 budget year on July 1, 2018, the fund balance had dropped to about $92 million and the savings account was depleted. While a $92 million fund balance may sound like a nice cushion, it includes a variety of funds, some of which can only be tapped for specific purposes. In its Sept. 23 report, the Control Board said having a zero balance in the savings account – the account used to fill budget gaps – is "an indicator of fiscal pressure" and that the city is under levels recommended by the Government Finance Officers Association and should consider a fund balance replenishment program.

By using millions in fund balance to balance budgets, Brown had frozen or cut property taxes every year since taking office in 2006, until the 2018-19 budget increased property taxes and user fees for the first time in the Brown era. The mayor – while labeling the city's fiscal position "strong" and its  credit rating "solid" – has said that was all part of a strategic plan of  "using reserves and keeping revenues low to stimulate growth and investment in the City of Buffalo."

But now the city has to find a way to replenish the fund balance, including the savings account. The Brown administration did not respond to requests for comment on its plans to accomplish that.

"We balance budgets every year, however, we've gone through our (savings)," said Council Majority Leader David A. Rivera, adding that he and Council leadership met with Brown recently to talk about the city's finances.

"How do we replenish the (savings)?" Rivera said. "If you interview (Brown), he'll tell you, 'I'd rather keep the taxes down than have money in our surplus.' "

"And he's used this method over a number of years where he's kept taxes down at the expense of the surplus. Now we're at the point where there is no surplus," Rivera said.

Rivera said he brought up the notion of a surplus policy in which the city would keep enough money to cover its operating costs for at least 60 days. It would involve replenishing the fund balance a little at a time until the account reached that level.

"I think the credit rating agencies will look at that favorably," the majority leader said.

Council President Darius G. Pridgen pointed out the city's ability to raise taxes is limited by the state's 2% cap on how much the levy – the amount raised through property taxes – can increase.

"For instance, the taxpayer isn't going to see a 10% tax increase across the board ... because you still have to be within the 2% tax cap," he said.

Rivera said officials will have a better idea of what steps the city needs to take once the annual financial report comes out by the end of the week.

"It will tell us where we're trending, if we're meeting expectations in revenues, if we're meeting expectations on new revenues," Rivera said. "It will tell us if we need to make some changes, if we need to make some cuts. It will give us a better picture of where we're going."

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