The State Of New York's Big Four Urban Areas

Outside Of New York City

March 26, 2019

Colloquially known as the Big Five, New York State's largest cities by population are New York City, PRIMARY CREDIT ANALYST

Buffalo, Rochester, Yonkers, and Syracuse. New York City has seen strong economic growth, the Lauren Freire
other four recently experienced a reversal of fortune. Throughout much of the long, slow national New York
economic recovery, these economic centers were on stable financial footing, but high fixed costs, (1) 212-438-7854
stagnant regional economic trends, and flat levels of state aid over the past several years have lauren.freire
@spglobal.com
pressured most of their credit quality. New York State has invested billions of dollars in various
development and employment opportunities in the four cities other than New York City to help SECONDARY CONTACT

diversify its regional economic centers. Therefore, for this article, we will primarily focus on Nora G Wittstruck
Buffalo, Rochester, Yonkers, and Syracuse, and for additional information on New York City, see New York
the report published March 1, 2019, on RatingsDirect. (1) 212-438-8589
nora.wittstruck
@spglobal.com

Key Takeaways
- Economic disparity between the upstate economies and the downstate economies in the
New York City metropolitan statistical area (MSA) has historically led to direct and
indirect state support.

- Lessening state support to Buffalo, Rochester, Yonkers, and Syracuse could pressure
economic and budgetary stability.

- Rochester's credit quality is most likely to withstand economic and state aid declines,
underpinned by continued budgetary balance and growing reserves.

- Each city faces increasing fixed costs associated with labor agreements and growing
pension and other postemployment benefits expenses.

- The economic health of the state relies on the success of cities within each of its regions.

Big Five--A Credit Snapshot

New York City, Buffalo, Rochester, Yonkers, and Syracuse (see table 1) operate their respective
school districts, and include them as component units in their financial statements. Furthermore,
each city anchors its respective economic regions:

- Buffalo for western New York;

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- Rochester in the Finger Lakes region;

- Syracuse for central New York; and

- New York City and Yonkers in the broad New York City-Northern New Jersey metropolitan
statistical area (MSA).

Table 1

New York Big Five Cities Credit Profile

Name Buffalo New York City Rochester Syracuse Yonkers

Rating A+/Stable AA/Stable AA-/Stable A/Negative A/Negative

Amount of GO Debt outstanding as of $171.2 million $38.6 billion $97.3 million N.A.* $269.9 million
June 30, 2018

Economy Weak Strong Adequate Adequate Adequate

Management Very Strong Very Strong Strong Adequate Weak

Performance Weak Strong Strong Weak Weak

Flexibility Weak Strong Very Strong Adequate Weak

Liquidity Very Strong Very Strong Very Strong Strong Strong

Debt and Contingent Liability Position Adequate Very Weak Strong Weak Adequate

Institutional Framework Strong Very Strong Strong Strong Strong

*2018 Audit not available by date of publication.

How Are These Cities Doing?

In addition to significant state investment in regional economic projects, the state has historically
directly supported these cities' operations (see chart 1). The high level of state support
demonstrates the state's commitment to stabilizing these regions.

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The State Of New York's Big Four Urban Areas Outside Of New York City

Chart 1

Mixed Performance Trends Lead To Disparate Credit Quality

With a steady, albeit declining level of state aid for some cities, operating results are mixed,
resulting in fluctuating fund balance levels (see chart 2).

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The State Of New York's Big Four Urban Areas Outside Of New York City

Chart 2

Recent operating trends for Buffalo, Syracuse, and Yonkers show fiscal pressure through reduced
reserves and a trend of weaker performance. For each, actual revenue trends underperformed
with collections below budgeted expectations or as the revenue forecast was aggressive relative
to historical trends. Furthermore, limited tax base growth and flat state aid revenue, combined
with reluctance to raise property taxes, resulted in expenditure growth outpacing that of revenue.
Budgetary imbalances stemmed from consistent growth in public safety costs related to overtime
and unanticipated capital costs, which together eroded fund balance levels. Component unit
school districts also represent a unique credit factor, creating budgetary stress. Increases in
educational costs, teacher pensions, and health care costs pressure district operations, and in
turn negatively affect the cities year-end results. In 2014, because of a cumulative $55 million
budgeting error at the city school district, we lowered our rating on Yonkers over structural
budgetary risks. Despite facing similar cost pressures and expenditure growth, since 2011,
Rochester has emerged as the only city to consistently add to its reserve position.

What separates Rochester from the other cities?

Rochester's performance is stronger than Buffalo, Syracuse, and Yonkers. Rochester's good
management policies and practices resulted in sustained strong budgetary performance, bringing
budgetary flexibility to a level we consider very strong at 18% of expenditures. The city
management's ability to maintain revenue and expenditures that lead to budgetary balance and a
stable operating environment is one key to its credit quality. Supporting its strong performance,
the city reassessed its tax base in 2016, resulting in a 9.6% growth in market value, producing a
favorable change in its market value per capita, and improving its ability to support its expenses,

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The State Of New York's Big Four Urban Areas Outside Of New York City

particularly its high fixed costs. Rochester's fiscal discipline to build reserves during periods of
economic expansion and the ongoing work to diversify its manufacturing centers into more
modern employment hubs could create a path toward a more stable and higher rated issuer.

Despite Diverging Budgetary Performance, Similar Cost Pressures Exist

Similar to most mature cities in the Northeast, fixed costs related to health care, pension benefits,
and debt service result in annual growth in expenditures. For Buffalo, Rochester, Syracuse, and
Yonkers, the fixed cost burden is roughly 30% of expenses (see chart 3), allowing only limited
capacity to reduce expenses, particularly given nearly all other expenditures are salary and fringe.
A high fixed cost burden also constrains the ability to address unexpected expenditures. We will
continue to monitor long-term costs related to postemployment benefits, pensions, and debt
service and per our criteria, fixed costs rising close to, or more than 50%, could cap ratings at 'A'.
However, over the long term, lower pension contribution rates as new employees replace those
receiving more generous benefit structures could improve operating flexibility.

Chart 3

What Has The State Done For Them Lately?

As long-standing industries left New York, an effort to transform economic development
throughout the state, the Governor created 10 different Regional Councils to tailor developments
to the specific region. Since then, the state injected significant financial support to facilitate
economic development projects, including one of the most well-known: the Buffalo Billion. The
governor and state pledged substantial monetary resources for Buffalo and the western New York
region focusing on expanding opportunities in advanced manufacturing, including a Tesla battery
plant, life sciences, and tourism.

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Once home to Kodak, Xerox and Bausch & Lomb, Rochester and the Finger Lakes economy evolved
through diversification in its industries. According to the Finger Lakes Regional Economic
Development Council (REDC), significant investments throughout the region leveraged about $440
million in state aid for projects resulting in $3 billion invested in the region since 2012. Significant
investments in advanced manufacturing, high tech electronics, and health care have fueled
regional growth and created high-paying jobs to support a highly educated work force.
Furthermore, in December 2015, the state poured $500 million into this region through its
five-year implementation of the Upstate Revitalization Initiative-providing additional resources for
the Finger Lakes' REDC economic development goals.

In the Syracuse area, the Central REDC continues to receive grant funding to support its ongoing
economic developments. One area of significance is the emphasis on unmanned aircraft systems
(UAS), a 50-mile drone corridor between Onondaga and Oneida Counties. In addition, a portion of
the $500 million in state support awarded to the Central REDC, will help underpin the city of
Syracuse's new economic development plan: the Syracuse Surge.

Finally, Yonkers benefits from its close proximity to New York City. The city focused its
development efforts on high-end residential construction to capture residents who can no longer
afford housing in New York City. Yonkers also advertises its proximity to Times Square (a major
attraction) to lure tourists to its Empire River Casino. Under new ownership, the casino brings
gaming to the New York City MSA and hopes to eventually become an entertainment destination

What Does The Future Hold For These Cities?

After the Amazon HQ2 withdrawal from New York City, state lawmakers and others are
questioning the cost effectiveness of various state business incentives. The Buffalo Billion Tesla
deal creating 700 jobs in exchange for roughly $750 million in taxpayer money sparked similar
inquiries over the state's incentive structure. Depending on the outcome of these discussions,
large economic development projects and state funding supporting them could subside following
years of fanfare of job and economic growth. However, this state support could be slowly eroding.
In the 2020 executive budget, Governor Andrew Cuomo is proposing legislation to reduce local
assistance appropriations by 3% from the general fund and special revenue funds if the annual
estimate for tax receipts in fiscal 2020 falls $500 million or more. Should this happen, the big five,
along with every other municipality in the state, could face an uphill battle to maintain credit
quality. Subsequently, the ability of Buffalo, Rochester, Syracuse, and Yonkers to capitalize on
economic development that generates revenue growth and offsets higher expenditures is key to
maintaining budgetary balance and rating stability. To achieve sustainable fiscal improvement in
these cities, at least in the near term, involves continued reliance on state support.

This report does not constitute a rating action.

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