BUFFALO FISCAL STABILITY AUTHORITY Agenda ~ April 2, 2019 Special Meeting of the Board ~ 1:00 PM Market Arcade Building, 617 Main Street, 4th Floor Conference Room Buffalo, New York 14203

Board Meeting ~ 1:00 PM

Opening Remarks

− Roll Call of Directors

TAB 1

Review of City of Buffalo Financing for the 2019 Capital Program

− Financial Analysis – BFSA Report to the Board

− PFM Memorandum re: City of Buffalo’s Proposed Bond Anticipation Note / Bond

Program

− PFM Memorandum re: Sensitivity Analysis of Proposed Bond Anticipation Note / Bond

Program

− Submission from the City Comptroller’s Office

Privilege of the Floor

OTHER BUSINESS AND ANNOUNCEMENTS

Note: Meetings may be rescheduled based on Directors availability

Upcoming Event Date Location

Audit, Finance and Budget Committee ~

12:30 PM (Tentative)

Board Meeting ~ 1:00 PM

Wednesday, May 20, 2019 To be determined

BUFFALO FISCAL STABILITY AUTHORITY

TAB 1

Buffalo Fiscal Stability Authority

Report on the City of Buffalo’s Proposed 2019 Capital Borrowing

Purpose:

As per Section 3859 of the Buffalo Fiscal Stability Authority Act (the “BFSA Act”), during an

advisory period the Buffalo Fiscal Stability Authority (the “BFSA”) shall review and comment

on the terms of any proposed borrowing, including the prudence of each proposed issuance of

bonds or notes. This report is intended to assist the Board of Directors in meeting its statutory

obligation.

Background:

The BFSA Act provides the BFSA with the power and authorization to issue bonds, notes, or

other obligations on behalf of the City of Buffalo (the “City”), pursuant to certain limitations.

From 2004 to 2007, the BFSA issued debt on behalf of the City for various purposes including

deficit financing, annual capital needs, refunding of outstanding bonds, and cash flow needs. In

response to the lifting of the wage freeze and in contemplation of transitioning into an advisory

period, the BFSA permitted the City Comptroller to issue debt on behalf of the City beginning in

2008. It is noted the issuance of debt by the City was one provision required to be met in order

for the BFSA to transition into an advisory period. The BFSA transitioned into an advisory

period effective July 1, 2012.

The BFSA’s current bond ratings are AAA by Fitch Ratings (“Fitch”) and Aa1 by Moody’s

Investors Service (“Moody’s”), as compared to the City’s bond ratings of AA- by Fitch, A+ by

Standard and Poor’s Rating Services and A1 by Moody’s. The spread between the bond ratings

account for three steps on the bond rating scale and, as such, the BFSA would be able to obtain a

lower interest rate than the City for the issuance of long-term debt.

Since 2008, the City has issued its own debt for capital needs. It is noted the BFSA can borrow

long-term debt at a lower rate compared to the City due to its higher bond rating. The City is not

proposing to enter into a long-term borrowing in 2019 and is planning on issuing a short-term

bond anticipation note (“BAN”).

The City has not yet received ratings for the proposed 2019 borrowing and has performed the

calculations assuming a Moody’s Investment Grade (MIG) 1 rating, which is the best quality

rating available by Moody’s for municipal notes and represents the most recent rating issued to

the City.

Borrowing Structure and Terms:

On August 1, 2018, the City Comptroller’s Office issued its annual report providing the

authorized borrowing limits for the maximum amount of capital debt that the City may incur over

the next five years as outlined in the City Comptroller’s Capital Budget and Debt Management

Policy. This policy provides for the City to issue less debt than is retired annually and was

developed in response to the City’s debt burden which continues to be considered above average

as cited by various rating agencies.

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The annual maximum amount of new capital debt for 2019 was $23.2 million. The City’s total

proposed BAN sale is $22.1 million, consisting fully of projects to be paid for by the General

Fund; of this amount $5.8 million is financing for projects authorized prior to the current year

and $16.3 million is for projects authorized in the 2019 Capital Plan. A list of those projects

included in the bond sale is included as Attachment A.

The following annual recommended debt limits have been provided by the City Comptroller for

the City of Buffalo and excludes any amount provided to the Buffalo City School District (the

“District”) or debt issued by enterprise funds:

2019 23,200,000$

2020 25,300,000$

2021 25,400,000$

2022 26,000,000$

2023 28,000,000$

City

The incremental increase of the recommended debt limit is due to the increased annual amount of

principal reductions on outstanding debt. The Comptroller’s Office noted that any unused

proceeds applied against a bond refunding is reflected within the recommended annual debt

limits.

The Buffalo City School District continues to use proceeds from various refundings of JSCB

debt over the last several years to pay for the capital needs of the District and there will not be a

District component to the City’s 2019 capital borrowing.

The Internal Revenue Service’s requirements for tax-exempt bonds require that at least 50% of

total bond proceeds be expended within 18 months, and 90% within three years of issuance. The

following chart lists the total par amount borrowed for the City, total proceeds, and the amount

and percentage of unspent proceeds as of February 28, 2019 for the last four years:

Year of Total Unspent Bond % of

Capital Amount of Proceeds of Proceeds as of Unspent

Borrowing Borrowing Borrowing February 28, 2018 Proceeds

2018 $ 20,300,000 $ 22,038,556 $ 5,871,237 26.6%

2017 $ 24,360,000 $ 28,702,244 $ 2,073,161 7.2%

2016 $ 25,770,000 $ 30,686,270 $ 2,260,175 7.4%

2015 $ 29,088,985 $ 33,771,244 $ 769,135 2.3%

The City is reporting compliance with the three-year spend-down regulation on all outstanding

bonds prior to 2015. The above schedule reflects encumbrances within the use of proceeds.

Total encumbrances as of February 28, 2019 for the 2015, 2016, 2017 and 2018 bonds were

approximately $86,500, $128,000, $1.1 million and $7.5 million, respectively.

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Proposed Structure:

Amount to be issued: $22,070,653

Principal reduction in 2020: $1,551,053

Estimated costs of issuance: $32,028

Estimated underwriter fee: $7,645

Assumed interest rate: 1.78%

For 2019, the City Comptroller’s Office is proposing to issue a one-year bond anticipation note to

finance the 2019 capital program. The intent is to refinance the projects by reissuing a BAN

annually for a total period of three to five years. A project may not be financed through short-

term debt beyond five years; therefore, any remaining projects would need to be bonded at the

conclusion of five years or paid in full. It is assumed that the annual capital program on a go-

forward basis will also be financed initially with BANs with bonds being sold in 3 to 5 years.

The 2019 BAN will be sold competitively.

Financial Analysis:

The Comptroller’s Office has reported that on average there has been $1.2 million of unspent

bond proceeds resulting from each bond sale which must be used towards the future payment of

debt service. Reducing this amount would provide additional capacity for the City to bond other

projects. The Comptroller’s Office further reports that it has conservatively estimated 3% of

bond proceeds would remain unspent under the new program. Based on the last three actual

bonds sold, the amount of increased capacity under these assumptions is approximately $400,000

annually.

The City has estimated that based on current interest rates, there would be savings to the City in

the first 3 years of the program of $377,010. Beyond that, costs would be higher annually with a

net total increased cost of $54,256 over the 13-year program consisting of 3 years of short-term

borrowing and the subsequent issuance of a 10-year bond. It is noted that costs of issuance

would be incurred annually for each BAN issuance; costs are currently estimated at

approximately $32,000 and the underwriter fee is estimated at $7,644 (0.035%).

The most significant risk facing the City with respect to this program is that interest rates could

increase substantially and the City does not secure low rates that are currently available. Please

refer to the sensitivity analysis provided by PFM for additional discussion involving the impact

of interest rates. Significant changes in the interest rate market or to the City’s bond rating would

have a more substantial impact.

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APPENDIX A

Project Date

Authorized

Authorized

Amount

Amount of Previous

Borrowing

The Notes

1 Fire Apparatus - Purchase 2/16/2016 $ 2,478,233 $1,429,368 $1,048,865 2 Streets Vehicles 2/21/2017 856,000 0 856,000 3 Improvements to Niagara Street 2/20/2018 1,840,000 896,847 920,000 4 Allendale Theatre 2/20/2018 310,300 0 310,000 5 Broadway Market Rehabilitation 2/20/2018 500,000 0 500,000 6 Crane Branch Library 2/20/2018 347,750 0 347,000 7 East Side Transfer Station 2/20/2018 1,400,000 0 1,400,000 8 Museum of Science 2/20/2018 400,000 0 400,000 9 Fire Alternate Response Vehicle 2/19/2019 280,000 0 280,000 10 Roadway Improvements 2/19/2019 6,237,387 0 6,237,387 11 Broadway Market Fire Alarm 2/19/2019 267,000 0 267,000 12 City Hall Improvements 2/19/2019 2,300,000 0 1,500,000 13 Downtown Ball Park 2/19/2019 500,000 0 500,000 14 Ed Saunders/Gloria Parks 2/19/2019 130,000 0 130,000 15 Fire Buildings- Various 2/19/2019 1,117,588 0 1,117,588 16 Gates Circle Lampstands 2/19/2019 149,000 0 149,000 17 History Museum 2/19/2019 171,000 0 171,000 18 Kleinhans Boiler Room 2/19/2019 100,000 0 100,000 19 Marcy Casino Stairs 2/19/2019 175,100 0 175,100 20 Mead Resource Center 2/19/2019 300,000 0 300,000 21 Niagara Branch Library 2/19/2019 423,613 0 423,613 22 Police Garage Roof 2/19/2019 900,000 0 900,000 23 Construction of Police Shooting Range 2/19/2019 1,100,000 0 1,100,000 24 Riverside Rink 2/19/2019 2,060,000 0 200,000 25 Zoo Cooling Tower Improvements 2/19/2019 224,000 0 224,000 26 Parks Vehicles 2/19/2019 123,600 0 123,600 27 Parks Improvements - Various 2/19/2019 772,500 0 772,500 28 Tree Removal and Planting - Various 2/19/2019 618,000 0 618,000 29 Demolition of Properties 2/19/2019 1,000,000 0 1,000,000

$25,775,857 $2,326,215 $22,070,653

 

March 26, 2019 

 

 

Memorandum   To:   Buffalo Fiscal Stability Authority (“BFSA”) 

From:   PFM Financial Advisors LLC  

Re:   Proposed Bond Anticipation Program ‐ City of Buffalo (“the City”) 

 The City has indicated that it is planning to institute a Bond Anticipation Note (“BAN”) / bonds program to fund capital projects. BFSA had previously been told that the program would involve the City issuing 1‐year BAN that would be rolled for two additional years, and then in the 4th year the remaining principal would be bonded out for 10 years.  (This cycle would be repeated each year going forward.) These assumptions are also built into the supporting cash flows provided to BFSA as an attachment to the City’s March 21, 2019 letter on the 2019 Capital Plan.  However, in the letter, the City states that it may issue BANs for “up to five years and issue bonds once the cost of the projects are firmly established”.  In addition to the inconsistent communication, which seems to indicate uncertainty surrounding the City’s plan, there are other concerns related to a multi‐year BAN program.   A BAN / bond program can be beneficial in resolving problems raised by the City, but a 3‐5‐year BAN /bond program raises concerns about market access and interest rate risks when the BANs are eventually bonded out longer term.  I believe the rating agencies will share this concern.   The City cites 4 reasons for utilizing a BAN / bond program.  It is proposing this program to:   1. Better manage the capital process given the limited time between when the budget is approved and 

the drafting of the bond resolutions; 2. More easily correct mistakes before the projects are bonded long‐term; 3. Reduce or eliminate unspent bond proceeds and the associated exposures (I assume  interest cost); 

and 4. Reduce the debt capacity tied up by unspent proceeds which limits the City’s ability to fund needed 

projects.  

I don’t think that rolling BANs for several years is necessary to resolve the City’s issue of the limited time frame between budget approval and drafting of the bond resolutions.  It is difficult to get an accurate picture of the capital funding needs in a short period of time.  However, issuing 1‐year BANs for new capital projects should provide enough time to more accurately determine the actual financing need. The idea of rolling the entire BAN for an additional 2, 3, or 4 years for all projects seems extreme.  The City listed 29 projects to be funded in 2019, which is a reasonable number to be able to manage over the year. The two projects with the  largest  percentage  of  bond  proceeds  are  for  roadway  improvements  (29.6%)  and  City  Hall improvements (7.1%). Although the list of projects does not detail what each involves, looking at the period of probable usefulness (“PPU”) of the project can be helpful.  Both of these projects have a 10‐year PPU, so the  idea  that  it would  take 3‐5 years  to  finalize a project  that  is only “good”  for 10 years doesn’t seem reasonable.    Rather than rolling the entire BAN  issue, a more reasonable program would be a 1‐year BAN with all or certainly the majority of projects bonded out the following year.   This 1‐year period should give the City time to more exactly determine the project financing needs, and  issue bonds based on a more accurate 

 

                             March 26, 2019 

financing target. If there were a few projects that were delayed or remained uncertain, they could be rolled for an additional year when the City issued its next new money BAN. If there were a few projects that were clearly overfunded or were cancelled, the bond issue could be downsized for this.  The City  listed 3 projects that were mistakes as another reason to finance with BANs for several years.  I don’t know the nature or magnitude of the mistakes, but dramatically changing a financing plan because of 3 mistakes over what I assume is several years seems unusual.  Correcting mistakes is definitely a positive goal, but as noted above, it seems unreasonable to repeatedly roll all of the projects associated with a BAN for multiple years to provide the ability to accomplish this.   Similarly, unspent bond proceeds cannot be applied to other projects, and so must be used to pay debt service. The City pays interest on unspent bond proceeds, so there is definitely a cost to this, but again, taking 3‐5 years to “finalize” projects is extreme.  Additionally, the City’s letter to BFSA concerning this program is inconsistent with respect to expectations of  unspent  proceeds.    It  states  both  that  “this  approach  should  eliminate  unspent proceeds”  and  “we anticipate the unspent bond proceeds will decrease and conservatively estimate that, as a result, only 3% of each bond issue would go unspent.”   

 The City also states that reducing unspent proceeds will free up debt capacity and allow it to complete more projects. However, there is another way to resolve this. My understanding is that the City has a self‐imposed debt capacity limit that actually reduces the amount of debt that can be outstanding each year, which could be modified.  While prudent use of debt is important, the City doesn’t need to unnecessarily limit its ability to invest in needed capital projects and infrastructure.    In terms of the analysis supporting this program, the City has assumed that there is no change in interest rates in future years, which is not a conservative assumption. Their savings analysis shows that all of the benefit of the BAN / bond program is in the first three years, which makes sense as the entire financing is at a 1‐year interest rate for each of 3 years.  Their breakeven shows that interest rates would need to increase by just 20 basis points for the cost of issuing the 1‐year BAN and then bonding out in 2020 to equal the cost of issuing bonds in 2019.   

 Given current low interest rates, borrowing longer term and locking in the rates makes financial sense and allows issuers to better manage debt service costs. While there is currently an opportunity to achieve short term savings by issuing BANs, a multi‐year BAN program will increase the City’s risk exposure as it issues only short term debt over the next 3‐5 years. A sudden spike or even a gradual  increase  in  interest rates could be very costly for the City.   As described above, I believe that most of the City’s stated reasons for utilizing a multi‐year BAN program could be resolved with a 1‐year BAN / bond program.  A more critical issue is whether the City takes near term savings benefits at the risk of potential interest rate increases or market access limitations in the future.  I hope this is helpful. Please let me know if you have any questions or would like additional information. 

 

March 28, 2019

Memorandum To: Buffalo Fiscal Stability Authority (“BFSA”) From: PFM Financial Advisors LLC Re: Sensitivity Analysis of Proposed Bond Anticipation Note / Bond Program

This sensitivity analysis is a follow-up to PFM’s memo dated March 26, 2019 regarding a proposed Bond Anticipation Note (“BAN”) / bond program by the City of Buffalo (“the City”) to fund capital projects. The program involves the City issuing a 1-year BAN that would be rolled for two additional years, and then in the 4th year the remaining principal would be bonded out for 10 years. This cycle would be repeated each year going forward. The City has also indicated that it may use BANs for as long as 5 years, but since their analysis assumed a 3-year program, we have too.

In our prior memo, we indicated that given current low interest rates, borrowing longer term and locking in the rates makes financial sense and would allow the City to better manage debt service costs. While there is an opportunity to achieve short term savings by issuing BANs, a multi-year BAN program will increase the City’s exposure to interest rate risk. The City provided BFSA with an analysis showing that the BAN / bond program would save almost $400,000 over the first three years compared to issuing serial bonds as it has traditionally done. This is because the entire amount of the debt is being financed at a 1-year rate for 3 years, and then being bonded out at longer term rates. The overall cost of this program on a cash flow basis is $54,256. This analysis also assumes that all future financing is done at current rate levels. If rates are assumed to increase over time, the savings over the first three years remains significant, but the overall cost of the debt service increases. Assuming interest rate increases over current rates of 10 basis points (“bps”) on the second year BAN, 20 bps on the third year BAN, and 40 bps on the bonds, the cost of the BAN / bond program on a cash basis compared to issuing serial bonds increases from approximately $54,000 in the base case to approximately $350,000. If rates increase by 20, 40 and 60 bps respectively, the cost increases to approximately $550,000, and if rates increase by 30, 60, and 100 bps respectively, the cost increases to approximately $945,000. Although the City would benefit in the short term from debt service savings, (and on a present value basis, “up-front” dollars are worth more) it could also be paying significantly more overall if interest rates increase. I hope this is helpful. Please let me know if you have any questions or would like additional information.