Fitch Rts Erie County, NY GOs 'AA-'; Rating Outlook Negative.

Business Editors

NEW YORK--(BUSINESS WIRE)--Dec. 10, 2003

Fitch Ratings assigns an underlying 'AA-' rating to Erie County, NY's $36.4 million general obligation (GO) bonds. The bonds consist of $17.1 million pension serial bonds, series 2003C (federally taxable) and $19.3 million public improvement serial bonds, series 2004A.

The bonds are scheduled for negotiated sale with Roosevelt and Cross Inc. during the week of Dec. 15. These are full faith and credit general obligations of the county payable from an unlimited ad valorem tax on all taxable property within the county. The bonds are expected to carry municipal bond insurance from an insurance company rated 'AAA' by Fitch. Additionally, Fitch affirms the 'AA-' rating on the county's $357.5 million outstanding general obligation (GO) bonds. Bond proceeds will provide financing for various capital projects. The Rating Outlook is Negative.

The 'AA-' rating reflects Fitch's expectation that the county will continue to effectively manage budgetary risks within its control, including those presented by current economic conditions. Fund balance levels are expected to fall slightly at the close of fiscal 2003, however remain adequate and contingency accounts have been retained in support of the Erie County Medical Center (ECMC) and other budget expenditures.

Unemployment rates have risen but are below state and national averages. The longer term economic outlook for the Buffalo-Niagara region should benefit from closer coordination of development efforts among various levels of government however, the current fiscal crisis at the city of Buffalo could potentially affect future private investment.

The Negative Rating Outlook reflects the decline in the county's strong liquidity levels following delays in state payments in both fiscal 2002 and 2003 and significant mid-year increases in non-discretionary state-mandated social service funding during fiscal 2002. In response, the county increased its RANs borrowing to $90 million in fiscal 2003 from $43 million in 2002. Without note financing in 2002, the county would have reported an audited negative cash position. In response to the downward liquidity trend, the county continues to manage government expenditures and maintain strong financial management policies governing expense items within the county's control.

Fitch continues to recognize the benefits of multi-year forecasting and solid contingency levels (14.3% of audited 2002 expenditures) as key credit strengths. While reserves are expected to decline by approximately $4 million in fiscal 2003, the county has made positive strides towards its sale of assets of the ECMC and recouping cumulative advances made to the ECMC as well as stabilizing future subsidies. With the sale expected in the first quarter of 2004, the county's cash position should increase significantly and RANs borrowing should decline for fiscal 2004. Maintenance of the current rating level is contingent upon successful implementation of budgeted expenditure cuts in 2004, no further erosion of reserve levels and realization of expected liquidity enhancements.

Erie County remains western New York's economic, cultural, and governmental center. Buffalo, the county seat, is under severe financial pressure and is facing close monitoring by a state control board although details have not been finalized. While county officials have reportedly not witnessed any stagnation in economic development efforts countywide, future economic prospects may be at risk.

New jobs within Erie County continue to shift toward services and other sectors in the wake of the massive manufacturing sector losses sustained in the 1970s and 1980s. Ongoing economic development projects include the redevelopment of Buffalo's downtown and waterfront, expansion of regional and cross-border trade opportunities, and building on current strengths in life sciences, communications, and technology. Per capita income growth slightly lagged the state and nation over the past decade, but outpaced other major upstate urban centers.

Capital plans totaling $385 million through 2009 are manageable and are focused primarily on the maintenance and renovation of already built public infrastructure. Cost control efforts over a protracted period have resulted in some deferral of expense for road maintenance, building modernization, fleet replacement, and technology improvements.

While tobacco securitization proceeds are programmed to address a sizable portion of these needs, the county has not included residual payments of approximately $3.5 million in the 2004 due to the trapping mechanism in the tobacco bond structure. The county is using its tobacco settlement proceeds to partially offset its debt service expenses and keep such costs below the policy of 5% of operating expenditures. While Fitch considers this practice a use of non-recurring revenue for a recurring expense it is not expected to affect credit, as long as it is limited in duration and does not preclude the county from addressing its capital needs.