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MOODY'S ASSIGNS Aa3 RATING TO ERIE COUNTY IDA'S (NY) $284 MILLION SCHOOL FACILITY REVENUE BONDS (CITY SCHOOL DISTRICT OF THE CITY OF BUFFALO PROJECT), SERIES 2010A&B; OUTLOOK IS STABLE

19 May 2011

Aa3 RATING AND STABLE OUTLOOK AFFECT $1.1 BILLION OF OUTSTANDING DEBT, INCLUDING CURRENT ISSUE

Buffalo (City of) NY
Primary & Secondary Education
NY

Moody's Rating

ISSUE

RATING

School Facility Revenue Bonds, Series 2011A

Aa3

  Sale Amount

$174,690,000

  Expected Sale Date

05/25/11

  Rating Description

Revenue

 

School Facility Refunding Revenue Bonds, Series 2011B

Aa3

  Sale Amount

$117,745,000

  Expected Sale Date

05/25/11

  Rating Description

Revenue

 

Opinion

NEW YORK, May 19, 2011 -- Moody's Investors Service has assigned a Aa3 rating with a stable outlook to the Erie County Industrial Development Agency's (NY) $170 million School Facility Revenue Bonds (City School District of the City of Buffalo Project), Series 2011A and $114 million School Facility Refunding Revenue Bonds (City School District of the City of Buffalo Project), Series 2011B. Concurrently, Moody's has affirmed the Aa3 rating and stable outlook on $1 billion aggregate outstanding Series 2003, Series 2004, Series 2007A, Series 2008A, and 2009A debt issued under this program.

SUMMARY RATINGS RATIONALE

The rating reflects the city school district's obligation to make installment payments to the Erie County Industrial Development Agency (ECIDA) to pay debt service, sound state aid intercept mechanics which provide for timely payments to bondholders, and a flow of funds that provides full segregation of debt service 30 days before annual principal and interest payment. The rating additionally factors anticipated healthy coverage of maximum debt service from pledged revenues, given the district's high reliance on state operating aid and the fact that all projects have been approved for 95% state building aid reimbursement. The rating and outlook also reflects New York State's Aa2 general obligation rating with a stable outlook, given projected 100% funding of debt service from state aid which is subject to annual appropriation by the state, and mechanics which require payment to the trustee directly from the state. Proceeds of the 2011A bonds will fund construction of and improvements to school facilities of the Buffalo City School District (a component of the City of Buffalo, rated A2 with a positive outlook). Proceeds of the Series 2011B bonds will refund all or a portion of the Series 2003 Bonds with an estimated net present value savings of 7% and no extension of maturity. The savings from the a full refunding reflects the release of the Series 2003 Debt Service Reserve Fund (DSRF) as well as a termination payment related to terminating the investment agreements which the DSRF was invested.

STRENGTHS:

-Coverage during the interceptable period is strong.

WEAKNESSES:

-State has been cutting aid to school districts and is projected to decline the next two years.

DETAILED CREDIT DISCUSSION

STATE APPROVES SPECIAL LEGISLATION FOR OVERHAUL OF BUFFALO CSD FACILITIES

In 2000, the Buffalo Schools Act enabled a ten-year comprehensive redevelopment program for the Buffalo City School District (the CSD). Series 2011A bonds will fund completion of phase V of this program, consisting of reconstruction of 7 school facilities and continuation of ongoing technology and energy upgrades and telecommunications improvements throughout the district. Debt service for Phase V will be paid largely by state school building aid (expected to be 95% of approved costs). Officials expect issuance to finance the full program, including anticipated final phase V projects, to be $1.45 billion.

Each issuance under this program is separately secured and enjoys a parity lien on state aid receipts of the district. As with past series, there is no additional bonds test. It is important to note that prior issuances under this program (Series 2003, Series 2004, Series 2007A and Series 2008A) benefited from DSRF; there is no DSRF associated with the current issue. However, the state aid intercept mechanics have been adjusted for the current series to ensure that sufficient state aid will be subject to intercept prior to debt service payment dates, mitigating this relative weakness. Given the fact that this is an installment sale agreement between the ECIDA and the CSD, and is supported predominantly by non-property tax sources, the debt is not legal indebtedness of the City of Buffalo and is not factored into its legal- and Moody's-calculated adjusted debt burden.

INTERCEPT MECHANICS OFFSET RISK OF NON-APPROPRIATION BY CSD AND ABSENCE OF DSRF

All state aid (state building and operating aid) will flow directly to the State Aid Depository Fund. Each July 15th the CSD will provide to the trustee a "state aid payment certificate" which will delineate the percent of debt service to be deducted from state aid during the collection period (the aid-rich period between December 1st and March 31st during which time approximately 60% of annual state aid is typically received). Excess aid will be forwarded to the CSD General Fund monthly after funding of the Bond Fund and any deficiencies in prior series' DSRFs. In the event state aid is insufficient to fund that month's payment, the difference will be added to the following month's required segregation such that by March 31st, the May 1st principal and interest and the November 1st interest payments will be fully segregated. For the prior series, in the event of non-appropriation by the CSD, the resulting deficiency in the Bond Fund as of April 1st would trigger notification of the State Comptroller to intercept all payable state aid for the benefit of bondholders. This intercept, along with funds available in the DSRF, provide satisfactory debt service coverage.

For the current issue, should the CSD fail to appropriate for installment payments or complete the "state aid payment certificate" by November 1st, the succeeding April 1st Series 2011A&B payment due date would be moved to November 15th, triggering the state aid intercept to begin as of December 1st, ensuring that the majority of state aid received during the year would be available for intercept to fund the May 1st debt service payment. This change in the timing of the state aid intercept mitigates the absence of a debt service reserve for this issue, given ample coverage during the collection period (see below).

SCHOOL DISTRICT OBLIGATED TO MAKE INSTALLMENT PAYMENTS EQUAL TO PRINCIPAL AND INTEREST

ECIDA has no taxing authority and bondholder security is derived from an installment sale agreement between the CSD and ECIDA under which the CSD will make annual payments equal to the annual debt service requirement. These payments are subject to annual appropriation by the CSD (although state aid intercept mechanics offset the risk of non-appropriation as discussed above) and state aid pledged to the bonds is subject to annual appropriation of by the state. However, Moody's fully anticipates that state aid, which totaled $692.1 million in fiscal 2010 (on a cash flow basis) compared to maximum annual debt service of $110.5 million, will continue to be made given the fact that the CSD is the second largest school district in New York State and relies on state aid for approximately 80% of its operating revenue. State aid to the CSD has increased at an average annual rate of 8.8% over the past five years, although Foundation Aid, the largest component of operating aid to the CSD, was frozen for fiscal 2010 and is supported by federal stimulus aid.

Fiscal 2010 state aid provided ample coverage (6.3x) of post-issuance maximum annual debt service (MADS). Coverage during the four-month collection period was healthy at 3.5x MADS. Projected 2011 state aid is expected to provide 6.1x MADS coverage (3.9X coverage during the collection period) based on pro-forma cash flows. State aid disbursements are, however, subject to change and to delay in the event of state cash flow limitations. However, Moody's believes that these coverage levels provide adequate cushion despite current pressure on the state budget. The July 15th state aid payment certificate can be modified subsequently in the event state cash flow disbursements are altered. Although there is no additional bonds test, given planned issuance only for projects approved for state building aid reimbursement (currently 95%), Moody's expects state aid would increase commensurate with additional issuance, and debt service coverage will remain strong.

DEBT SERVICE COVERAGE NOT EXPECTED TO BE MATERIALLY DILUTED BY COMPETING CLAIMS ON STATE AID

Moody's does not expect that competing claims on state aid would materially dilute debt service coverage. Only Revenue Anticipation Notes (RAN) issued by the City of Buffalo on behalf of the CSD have a priority claim on state aid, which could dilute coverage in a worst case scenario, should a RAN borrowing require segregation as early as March. However, given an improved liquidity position, the city has not had to issue cash flow notes since 2007. Further, from 2005 through 2007, cash flow borrowing was issued through the Buffalo Fiscal Stability Authority (BFSA, revenue bonds rated Aa2). Unlike city-issued RANs, BFSA notes are secured by sales tax and state aid to the city, not the CSD, and as such do not compete with the current transaction's claim on state aid. Officials do not anticipate the need for cash flow borrowing during fiscal 2011.

Moody's believes declining enrollment or alteration of reimbursement rates and/or timing of payments by New York State could also cause coverage levels to fall. Additionally, the CSD has $142.5 million of debt outstanding with security enhanced by a competing claim on state aid to cover annual principal and interest in the event of default. This includes $116.6 million outstanding G.O. debt subject to 99-B intercept ($32.3 million issued through the Dormitory Authority of the State of New York) and $25.9 million of debt issued through the Municipal Bond Bank Agency. In the event these intercepts are triggered, coverage of the current program could be diluted, but is expected to remain satisfactory.

WHAT COULD MAKE THE RATING GO UP:

-Improvement in New York State's General Obligation rating.

WHAT COULD MAKE THE RATING GO DOWN:

-Downgrade of the General Obligation rating of New York State

-Deteriorating coverage levels.

KEY STATISTICS

Security: Special limited obligations of the Erie County IDA payable from Installment purchase payments from the City of Buffalo CSD

FY10 MADS coverage: 6.3x

FY10 MADS coverage (collection period): 3.5x

FY11 projected MADS coverage: 6.1x

FY11 projected MADS coverage (collection period): 3.9x

FY12 projected MADS coverage: 6x

FY12 projected MADS coverage (collection period): 3.7x

The principal methodology used in this rating was State Aid Intercept Programs and Financings published in February 2008.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings and public information.

Moody's Investors Service considers the quality of information available on the credit satisfactory for the purposes of assigning a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts

Robert Weber
Analyst
Public Finance Group
Moody's Investors Service

Jessica A. Lamendola
Backup Analyst
Public Finance Group
Moody's Investors Service

Geordie Thompson
Senior Credit Officer
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


Moody's Investors Service
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MOODY'S ASSIGNS Aa3 RATING TO ERIE COUNTY IDA'S (NY) $284 MILLION SCHOOL FACILITY REVENUE BONDS (CITY SCHOOL DISTRICT OF THE CITY OF BUFFALO PROJECT), SERIES 2010A&B; OUTLOOK IS STABLE
No Related Data.
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