Fitch Rates Buffalo Fiscal Stability Authority, New York Sales Tax Bonds 'AA-'.

NEW YORK -- Fitch Ratings assigns an 'AA-' rating to the Buffalo Fiscal Stability Authority's (BFSA) sales tax and state aid secured bonds as follows:

-- $28,040,000 series A.

The series A bonds are scheduled to price via negotiation the week of May 23 with Lehman Brothers, Inc. as underwriter. Bond proceeds will provide capital funds for the city. Fitch affirms the 'AA-' rating on the BFSA's $72.5 million outstanding parity bonds, $47 million of which priced earlier this month, and the 'F1+' rating on $34 million outstanding bond anticipation notes. The Rating Outlook is Stable.

The 'AA-' rating incorporates elements of both municipal and structured finance credit analysis. BFSA is a bankruptcy-remote issuer, and the bond structure grants a first-perfected security interest in City of Buffalo and Buffalo School District sales tax revenues as well as state aid, providing strong debt service coverage even under stress tests. Statutory and contractual covenants prohibit actions by New York State (the state), Erie County (the county), or the city that impair bondholder rights. The primary credit concern is the right of the state, county, or city to alter the tax structure; however, this risk is somewhat mitigated by non-impairment covenants of all three entities. Furthermore, despite the city's weak economic indicators, including high unemployment levels, declining population, and stagnant tax base expansion, pledged revenue growth has been steady, providing strong bondholder protections.

Modeled after the Nassau County Interim Finance Authority's structure, BFSA was formed to provide a bankruptcy-remote funding vehicle for the city, as well as financial control and oversight functions. BFSA receives the city and school district's share of sales and compensating use taxes authorized by the state and imposed by the county. BFSA also receives all general purpose state aid appropriated by the state as local government assistance for the benefit of the city.

BFSA's bonds are secured by the city and school district's portion of the local sales tax (currently 4%, less the 1% earmarked for county purposes) and state aid, which are BFSA's primary assets. The state, county, and city covenant not to impair bondholder rights as long as authority debt is outstanding. Specifically, the county covenants to maintain the local sales tax rate of 3% through June 13, 2037, when the authority will be disbanded. In addition, any change in the local tax law cannot result in coverage below 2.0 times (x) maximum annual debt service (MADS) on BFSA bonds.

Stress tests show that pledged revenues provide very strong coverage. Coverage of estimated MADS for the total debt program from fiscal 2004 receipts is 6.20x, and coverage from sales tax receipts alone is a solid 2.72x. Total BFSA revenues would have to decline 8.37x annually through fiscal 2027 to hit the 2.0x coverage minimum. Given the steady average annual growth of sales tax and state aid revenues since 1990 of 2.1% and 2.4%, respectively, coverage is likely to remain adequate, despite the below-average economic base. The additional bonds test for senior debt is strong, requiring 3.0x coverage of MADS from sales tax revenues alone.

The indenture limits total senior bonds outstanding to $300 million, and the BFSA act limits cash flow notes outstanding to $145 million.