BUFFALO FISCAL STABILITY AUTHORITY DRAFT TAB 1

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1 BUFFALO FISCAL STABILITY AUTHORITY TAB 1

2 BUFFALO FISCAL STABILITY AUTHORITY Governance Committee Meeting Minutes August 15, 2017 The following are the minutes from the meeting of the Governance Committee (the Committee ) of the Buffalo Fiscal Stability Authority (the BFSA or the Authority ) held on Tuesday, August 15, 2017 in the first-floor conference room of the Buffalo Market Arcade Complex. The meeting was called to order at 12:42 PM. Committee Members Present Chair R. Nils Olsen, Jr. Secretary George K. Arthur Committee Member Excused Interim Vice-Chair Jeanette T. Jurasek Additional Directors Present Director Frederick G. Floss Staff Present Executive Director Jeanette M. Robe Principal Analyst/Media Contact Bryce E. Link Administrative Assistant Nikita M. Fortune Senior Analyst II/ Manager of Technology Nathan D. Miller Additionally Present None Opening Remarks Committee Chair Olsen called the meeting to order. The agenda included: Review various policies of the BFSA and consider recommending the approval of the policies to the full board, and; Review various reports of the BFSA and consider recommending approval of the reports to the full board, and; Review the form of the annual Board self-evaluation and request submission to the directors for completion which ultimately will be filed with the Authorities Budget Office. Committee Chair Olsen called a roll of the Committee members. A quorum was present. The meeting commenced. 1

3 Approval of Minutes Committee Chair Olsen introduced Committee Resolution No : Approving Minutes and Resolution from December 7, Director Arthur offered a motion to approve Committee Resolution No Chair Olsen seconded the motion. Committee voted 2 to 0 to approve. Policies Review Chair Olsen advanced the agenda to review various policies and reports to be presented by Executive Director Robe. Ms. Robe stated there were no substantial changes to the BFSA policies and procedures from what was approved last year but offered to review them individually if the Directors wanted. Secretary Arthur made a motion to take the policies collectively for approval. Committee Chair Olsen seconded the motion. The committee voted 2-0 to approve. Chair Olsen noted for the record that The Lobbying Policy does not preclude Directors from speaking with individuals in Albany or Buffalo regarding matters under the purview of the authority. Ms. Robe stated the annual Board of Directors self-evaluation as approved by the ABO has been provided and should be sent back to the BFSA office. The results will be discussed at the September Governance Committee meeting before the documents are sent to Albany for filing. Secretary Arthur made a motion to approve the distribution of the board self-evaluation forms. Chair Olsen seconded the motion. The Committee voted 2-0 to approve the motion. Adjournment Chair Olsen noted there was no new business to discuss. Secretary Arthur motioned for adjournment and Chair Olsen seconded the motion; carried 2-0. Meeting 12:50PM. adjourned at 2

4 BUFFALO FISCAL STABILITY AUTHORITY GOVERNANCE COMMITTEE RESOLUTION NO APPROVING MINUTES AND RESOLUTION FROM AUGUST 15, 2017 BE IT RESOLVED that the Buffalo Fiscal Stability Authority s Governance Committee approves the minutes of its meeting on August 15, BE IT FURTHUR RESOLVED that the Buffalo Fiscal Stability Authority s Governance Committee ratifies and affirms Resolution No that was approved on said date. This resolution shall take effect immediately. Approved September 25, 2017 Frederick G. Floss, Committee Chair Pro Tem

5 BUFFALO FISCAL STABILITY AUTHORITY TAB 2

6 BUFFALO FISCAL STABILITY AUTHORITY Audit, Finance and Budget Committee Meeting Minutes June 16, 2017 The following are the minutes from the meeting of the Audit, Finance and Budget Committee (the Committee ) of the Buffalo Fiscal Stability Authority (the BFSA ) held on Friday, June 16, 2017, in the first-floor conference room of the Buffalo Market Arcade Complex. The meeting was called to order at 12:57 PM. Committee Members Present Committee Chair R. Nils Olsen via video Director Frederick G. Floss Additional Directors Present Interim Vice-Chair Jeanette T. Jurasek Mayor Byron W. Brown (proxy Estrich) County Executive Mark C. Poloncarz (proxy Cornell) Committee Member Excused Director Frank B. Mesiah Staff Present Executive Director Jeanette M. Robe Principal Analyst/Media Liaison Bryce E. Link Senior Analyst II/Manager of Technology Nathan D. Miller Administrative Assistant Nikita M. Fortune Opening Remarks Director Floss welcomed the attendees to the June 16, 2017, meeting of the Audit, Finance and Budget Committee of the BFSA. He called the roll of the members and, finding a quorum present, the meeting commenced. Approval of Minutes Chair Olsen introduced Committee Resolution No. AFB 16-04: Approval of March 8, 2017 Meeting Minutes, and asked for a motion to approve. Chair Olsen offered a motion to approve the resolution. Director Floss seconded the motion. The Committee voted 2-0 to approve Resolution No. AFB Review of the BFSA Budget and Financial Plan Director Floss advanced the agenda to the BFSA s fiscal year ( FY ) Budget and Financial Plan. The document was approved to be posted on the BFSA s website and a copy provided to all City of Buffalo ( City ) public libraries for the public to review at the March 8, 2017 Audit, Finance and Budget Committee meeting. The BFSA did not receive any public comments regarding the preliminary budget and there have been no changes made to the document. 1

7 Director Floss asked BFSA Executive Director Jeanette Robe if she had any comments regarding the BFSA budget document. Ms. Robe stated the BFSA held the expenses tightly with a modest 1.3% increase in operating expenses. Director Floss requested a motion to forward the BFSA Budget and FY Financial Plan to the full Board with a recommendation for approval. Ms. Donna Estrich entered the meeting at 12:59PM. Subdivision 1 of 3853 of the BFSA Act reads: The Mayor and the County Executive shall serve as ex officio members. Every director, who is otherwise an elected official of the City [of Buffalo] or County [of Erie], shall be entitled to designate a single representative to attend, in his or her place, meetings of the Authority and to vote or otherwise act in his or her behalf. Such designees shall be residents of the City of Buffalo. Written notice of such designation shall be furnished prior to any participation by the signal designee. Interim Vice-Chair Jurasek asked about the staffing level of the BFSA being reflected in the financial plan as five full time employee positions are listed although there are currently 4 full-time and 1 parttime employee. Ms. Robe stated a part-time position is not reflected for the Comptroller position because it is unclear when the position will be vacated and it will need to be filled as a full-time position. Interim Vice-Chair Jurasek also confirmed that the current staffing levels are meeting the BFSA s needs at this time. Interim Vice-Chair Jurasek asked if having first lien on the Erie County sales tax that makes the BFSA bonds so attractive. Ms. Robe confirmed that the intercept provision attributes to the BFSA having a higher bond rating than the City and the provisions makes the bonds very attractive to investors. Monies are set aside for BFSA operations and for debt; the difference is remitted to the City and the Buffalo City School District regardless of whether the BFSA is in a control or an advisory status. Chair Olsen made a motion recommending the Full Board approve the Budget and Financial Plan as reviewed. Director Floss seconded the motion. The Committee voted 2-0 to approve. Adjournment Director Floss asked if there was additional business to be considered by the Committee. Hearing none, he asked for a motion to adjourn. Chair Olsen offered a motion to adjourn. Director Floss seconded the motion. The Committee voted 2-0 to adjourn the meeting. The Committee 1:04PM. adjourned at 2

8 BUFFALO FISCAL STABILITY AUTHORITY AUDIT, FINANCE & BUDGET COMMITTEE RESOLUTION NO APPROVING MINUTES AND RESOLUTIONS FROM JUNE 16, 2017 BE IT RESOLVED that the Buffalo Fiscal Stability Authority s Audit, Finance and Budget Committee approves the minutes of its meeting on June 16, BE IT FURTHUR RESOLVED that the Buffalo Fiscal Stability Authority s Audit, Finance and Budget Committee ratifies and affirms Resolution No that was approved as of said date. This resolution shall take effect immediately. Approved September 25, 2017 Jeanette T. Jurasek, Committee Chair Pro Tem

9 BUFFALO FISCAL STABILITY AUTHORITY (A Component Unit of the City of Buffalo, New York) FINANCIAL STATEMENTS JUNE 30, 2017

10 BUFFALO FISCAL STABILITY AUTHORITY (A Component Unit of the City of Buffalo, New York) Table of Contents June 30, 2017 Independent Auditors Report Management s Discussion and Analysis Financial Statements Statement of Net Position Statement of Activities Balance Sheet Governmental Funds Reconciliation of the Governmental Funds Balance Sheet to the Statement of Net Position Statement of Revenues, Expenditures, and Changes in Fund Balances Governmental Funds Reconciliation of the Governmental Funds Statement of Revenues, Expenditures, and Changes in Fund Balances to the Statement of Activities Notes to Financial Statements Required Supplementary Information (Unaudited) Schedule of the Authority s Proportionate Share of the Net Pension Liability - New York State and Local Employees Retirement System Schedule of Contributions - New York State and Local Employees Retirement System Schedule of Funding Progress for Other Postemployment Benefits Supplementary Information Schedule of Administrative Expenditures General Fund Compliance Reports Independent Auditors Report on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards Independent Auditors Report on Compliance with Section 2925(3)(f) of the New York State Public Authorities Law

11 INDEPENDENT AUDITORS REPORT The Board of Directors Buffalo Fiscal Stability Authority We have audited the accompanying financial statements of the governmental activities and each major fund of Buffalo Fiscal Stability Authority (the Authority), a component unit of the City of Buffalo, New York, as of and for the year ended June 30, 2017, and the related notes to the financial statements, which collectively comprise the Authority s basic financial statements as listed in the table of contents. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. Opinions In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities and each major fund of the Authority as of June 30, 2017, and the respective changes in financial position for the year then ended in accordance with accounting principles generally accepted in the United States of America.

12 Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that management s discussion and analysis and other required supplementary information, as listed in the table of contents, be presented to supplement the financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquires of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the financial statements, and other knowledge we obtained during our audit of the financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Supplementary Information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the Authority s basic financial statements. The accompanying Schedule of Administrative Expenditures General Fund is presented for purposes of additional analysis and is not a required part of the financial statements. The accompanying supplementary information is the responsibility of management and is derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. Such information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the accompanying supplementary information is fairly stated, in all material respects, in relation to the financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated September 25, 2017 on our consideration of the Authority s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, grant agreements, and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Authority s internal control over financial reporting and compliance. September 25,

13 BUFFALO FISCAL STABILITY AUTHORITY (A Component Unit of the City of Buffalo, New York) MANAGEMENT S DISCUSSION AND ANALYSIS JUNE 30, 2017 (UNAUDITED) Introduction The Buffalo Fiscal Stability Authority (the BFSA or the Authority ) is a corporate governmental agency and instrumentality of the State of New York constituting a public benefit corporation created by the BFSA Act (the Act) Chapter 122 of the Laws of 2003, as amended, signed by the Governor on July 3, BFSA has a broad range of financial control and oversight powers over the City of Buffalo (the City) and its nonexempted Covered Organizations including the Buffalo Public School District (the School District), the Buffalo Municipal Housing Authority, the Buffalo Urban Renewal Agency, the Joint Schools Construction Board, and other covered organizations as defined by the Act. The Act provides for the Authority to be in existence until its oversight, control or other responsibilities and its liabilities (including the payment in full of Authority bonds and notes) have been met or discharged, which in no event shall be later than June 30, The Act provides the Authority different financial control and oversight powers depending upon whether the City s financial condition causes it to be in a control period or an advisory period. During a control period the Authority possesses significantly expanded powers, including the power to impose a wage and/or hiring freeze. During an advisory period, the BFSA operates with a reduced set of financial oversight powers and responsibilities. The BFSA transitioned from a control period to an advisory period on July 1, An advisory period shall continue through June 30, 2037, unless a control period is reimposed. A control period may be reimposed in the event of the occurrence of certain events as outlined within the Act. The Act empowered BFSA in the earlier years of its existence to finance a declining percentage of the yearly deficits of the City and Covered Organizations which are part of an approved budget and four-year financial plan. There was no deficit financing required for the fiscal year , the last year BFSA had this power. In its capacity to issue bonds and notes on behalf of the City, the Authority has funded deficits, capital projects, and certain working capital needs of the City and has issued bonds to refund City debt. Revenues to pay Authority debt service and to fund Authority operations are provided by the City s State aid, and the City s and School District's share of Erie County sales tax, on which the Authority has a first lien. BFSA became entitled to the City s share of Erie County sales tax revenues and State aid on July 3, 2003, the effective date of the Act. BFSA became entitled to the School District's share of Erie County sales tax revenues on July 1, 2004 as provided in Chapter 86 of the Laws of 2004, which amended the Act. Pursuant to the Act, the City and the School District have no right, title or interest in these revenues until transferred to the City and the School District by the Authority. The Authority has no independent operating income or taxing power. Overview of the Financial Statements The annual financial statements of the Authority consist of the following components: management s discussion and analysis (this section), financial statements, and notes to financial statements. Management s discussion and analysis of the Authority s financial performance provides an overview of the Authority s financial activities for the fiscal years ended June 30, 2017, 2016, and The overview, which covers the most important financial events of the period, should be read in conjunction with the Authority s financial statements, including the notes to the financial statements. i

14 Government-wide financial statements of the Authority are presented in accordance with Governmental Accounting Standards Board ( GASB ) Statement No. 34, Basic Financial Statements and Management s Discussion and Analysis for State and Local Governments. The government-wide financial statements use the economic resource measurement focus and accrual basis of accounting. These statements are presented to display information about the reporting entity as a whole. The Statement of Net Position presents information on all the Authority s assets and liabilities, with the difference between the two reported as net position. The Statement of Activities presents information showing how the Authority s net position changed during the fiscal year. All changes in net position are reported as soon as the underlying event giving rise to the change occurs, regardless of the timing of the related cash flows. Governmental fund financial statements are presented using the current financial resources measurement focus and the modified accrual basis of accounting. Government fund financial statements are the Balance Sheet and the Statement of Revenues, Expenditures, and Changes in Fund Balances. Under the modified accrual basis, revenue is recognized when it becomes both measurable and available to finance expenditures in the current fiscal period. In addition to these two types of statements, the financial statements include a reconciliation between the government-wide and governmental fund statements. Accompanying notes to the financial statements are an integral part of the financial statements. Financial Highlights and Overall Analysis The most critical factors in the Authority s financial position are its revenues derived from the City s sales tax revenue (since July 1, 2003), the School District s share of Erie County sales tax revenues (beginning July 1, 2004), and the City s State aid, which together provided 99 percent of the Authority s revenue from 2015 to The Act granted the Authority a first lien and perfected security interest in net collections from sales and use taxes authorized by the State and imposed by Erie County (the County). Sales taxes are imposed by the County, collected by the State, and remitted to the Authority, usually several times each month. After provision for Authority debt service deposits and operating expenses, the remaining funds are remitted immediately to the City or the School District. The State legislation also provided that all State aid appropriated as local government assistance for the benefit of the City is payable to the Authority to use for debt service requirements and operating expenses, with the remaining funds to be remitted to the City. The amount of BFSA sales tax revenues to be collected depends upon various factors, including the economic conditions within the County, which has experienced numerous cycles of growth and recession. In addition, in the past the State has enacted amendments to the Tax Law to exempt specific goods and services from the imposition of sales tax. The Act requires the County to impose the local sales tax at a rate of no less than 3.0 percent for the period ending June 30, Pursuant to State statutory authority, Erie County currently imposes sales tax at the rate of 4.75 percent. New York State has reauthorized the additional 1.0 percent sales tax rate, above the general State authorization, in Erie County every year since January 1978, but is under no obligation to continue to do so. The additional 1.0 percent sales tax currently expires on November 30, 2020, absent future reauthorization. The County is required to allocate to the cities and towns within the County the first $12.5 million of any net collections from the additional 1.0 percent of sales and compensating use taxes authorized by Section 1210(i)(4) of the State Tax Law as long as the County maintains the 1.0 percent sales tax. This allocation resulted in additional City tax revenues delivered to BFSA of approximately $5.7 million annually in 2017, 2016, and 2015; the School District does not share in this additional sales tax revenue. ii

15 Sales tax revenue for the years ended June 30, 2017, 2016, and 2015 were $125,815,507, $123,609,076, and $120,524,217. The increase from 2016 to 2017 was $2,206,431, or 1.8%, while the increase from 2015 to 2016 was $3,084,859, or 2.6%. The increase in sales tax revenue is attributed primarily to inflationary increases and modest economic growth. The Authority also received State aid for the years ended June 30, 2017, 2016, and 2015 in the amounts of $161,335,236, $162,199,039, and $161,285,233, respectively. State aid decreased $863,803 (0.5%) from 2016 to 2017 and increased $913,806 (0.6%) from 2015 to The fluctuation in state aid is due solely to changes in the amounts of Efficiency Grant funds drawn down on behalf of the City of Buffalo; the recurring annual State aid allocation for New York State Aid and Incentives to Municipalities (AIM) remained the same each year at $161,285,233. Investment income, which accounts for the remaining Authority revenue, totaled $1,192,289, $2,075,946, and $2,335,723 for the years ended June 30, 2017, 2016, and 2015, respectively, which primarily is derived from interest on the City s general obligation bonds described below. As principal is repaid on the outstanding long-term debt, the amount of interest earnings decreases. Included in revenue in 2016 was $2,515,920 representing transfers from the City of Buffalo; the majority of that was $2,484,185 for unspent proceeds from the 2006A bond. The other significant element in the Authority s financial position is its long-term debt. From 2004 through 2007, the Authority issued a total of $109,515,000 in long-term bonds (Series 2004A, 2005A, 2006A, and 2007A) to provide for deficit financing as well as to finance the City s cost of various City and School District capital projects. The City, in return, issued a series of its own general obligation long term bonds, privately placed with the Authority, evidencing the obligations of the City for the 2005A, 2006A, and 2007A bonds. On July 7, 2005 the Authority refunded $47,015,000 of City serial bonds by issuing $46,705,000 in 14-year bonds (the 2005B series), and $360,000 in 2-year taxable bonds (the 2005C Series). The City issued its own 13.5-year premium bonds privately placed with the Authority in the amount of $48,157,000. On December 21, 2015, the Authority refunded $7,200,000 of outstanding Series 2005A and $12,160,000 of outstanding 2006A bonds by issuing $14,170,000 in Series 2015A revenue bonds. The Authority has not subsequently issued debt. The statement of net position shows total net position of $1,381,713 at June 30, 2017, as compared to $4,328,604 at June 30, 2016 and $84,676 at June 30, The decrease of $2,946,891 from 2016 to 2017 is attributed to a transfer to the City of $2,580,885 due largely to an adjustment made to mirror bonds receivable associated with the issuance of a refunding bond in 2015 and the corresponding reduction in the total amount of principal due on such bond. In 2015, the City transferred $2,515,920 to the Authority in unspent bond proceeds which directly reduced the amount of the refunding bond. The increase of $4,243,928 from 2015 to 2016 represents changes due to the refunding of the 2005A and 2006A bonds which closed in December 2015 and included the transfer of $2,515,920 from the City. The differences in assets and liabilities are from a combination of several factors. The Authority made principal payments on outstanding bonds payable of $7,150,000 in 2017 which resulted in the decrease in total liabilities of $7,824,328 from $51,729,506 in 2016 to $43,905,178 in The Authority made principal payments on bonds payable totaling $8,780,000 in 2016 and repaid an additional $5,190,000 in connection with the 2015 refunding bond, resulting in a decrease in total liabilities of $14,391,118 from $66,120,624 in 2015 to $51,729,506 in Total assets decreased $10,617,780 from 2016 to 2017 as the Authority received principal payments from the City on outstanding notes receivable of $8,567,650 and investments decreased by $1,662,995 resulting from the overall decrease in bonds payable. Total assets decreased $10,352,096 from 2015 to 2016 as the Authority received principal payments from the City on outstanding notes receivable of $8,093,515, investments decreased $1,904,424 due to the overall decrease in bonds payable, and due from other governments decreased $310,820. In past years, the Authority received funds from the State which the City can only use for specified purposes; no such funds were received by the Authority during 2017, 2016, or The Authority retains those funds until the conditions have been met. The Authority did not release any such funds in 2017, 2016, or iii

16 Cash and investments totaled $7,091,017, $8,817,426, and $10,759,875 at June 30, 2017, 2016, and 2015, respectively. These amounts include funds for the future repayment of debt and restricted State aid in the amounts of $6,174,997, $8,107,107, and $10,002,951 at June 30, 2017, 2016, and 2015 respectively. State aid was paid to BFSA in prior years for targeted purposes awaiting the City s request for disbursement. As of June 30, 2015, the majority of this restricted State Aid had been requested by the City, with a balance of $242,529 at June 30, 2017 and Additionally, cash and investments included $0, $29,130 and $1,996 of accrued interest to be paid to the City at June 30, 2017, 2016 and 2015, respectively, for the investment of such debt service reserves in accordance with outstanding agreements. Remaining cash and investments represents cash available for BFSA operating expenses. Interest expense increased from 2016 to 2017 by $615,381. The increase was due to the unusually low expense in 2016 due to the premium amortization for the 2005A and 2006A bonds that were refunded in The premium amortization that was offset against interest expense in 2016 was $1,569,830. Interest expense decreased from 2015 to 2016 by $1,703,413. This decrease was primarily due to the premium amortization for the 2005A and 2006A bonds as noted previously. Operating expenses reported in the governmental fund statements totaled $647,689, $667,216, and $667,587 for the years ended June 30, 2017, 2016, and Total operating expenses decreased $19,527, or 2.9%, from 2016 to 2017, and decreased $371, or 0.1%, from 2015 to The changes year to year are minor and fluctuations are discussed below. Staff expenses for the years ended June 30, 2017 and 2016 were as follows: Increase/ Percentage (Decrease) Change Wages $ 373,516 $ 383,206 $ (9,690) -2.5% Other staff-related expenses 8,929 9,390 (461) -4.9% Total direct staff expenses 382, ,596 (10,151) -2.6% Staff benefits: ERS contributions 58,453 63,973 (5,520) -8.6% Payroll taxes 27,512 28,676 (1,164) -4.1% Health insurance (net of employee contributions) 72,559 70,670 1, % Total staff benefits 158, ,319 (4,795) -2.9% Total staff expenses $ 540,969 $ 555,915 $ (14,946) -2.7% Staff expenses decreased $14,946, or 2.7%, from 2016 to The primary reason for the decrease is a change in personnel and a decrease in pension expense resulting from a reduction in the employer contribution rate. The Authority had one position which temporarily became part time in October 2016, one position was elevated in April 2017 with a salary increase reflected, and a general inflationary salary increase was granted to employees, resulting in the overall decrease to direct staff expenses in The increase in health insurance expense is related to an increase in premiums. Other staff expenses have minor changes. The Authority employed five salaried staff members (one partially part-time) during the year ended June 30, 2017 and five salaried staff members during the year ended June 30, iv

17 Staff expenses for the years ended June 30, 2016 and 2015 were as follows: Increase/ Percentage (Decrease) Change Wages $ 383,206 $ 365,916 $ 17, % Other staff-related expenses 9,390 9,649 (259) -2.7% Total direct staff expenses 392, ,565 17, % Staff benefits: ERS contributions 63,973 63, % Payroll taxes 28,676 27, % Health insurance (net of employee contributions) 70,670 69,438 1, % Total staff benefits 163, ,986 2, % Total staff expenses $ 555,915 $ 536,551 $ 19, % Staff expenses increased $19,364, or 3.6%, from 2015 to The primary reason for the increase is the change in personnel. The Authority had one position filled for a greater portion of 2016 as compared to 2015, one position was elevated in mid-2015 with the full salary increase reflected in 2016, and a general inflationary salary increase was granted to employees, resulting in the increase to direct staff expenses in The increase in health insurance expense is related to an increase in the premium. Other staff expenses have minor changes. The Authority employed five salaried staff members during the year ended June 30, 2016 and between four to five salaried staff members during the year ended June 30, The next largest category of expenses was for professional fees. The following charts indicate the amount expended for professional fees for the years ended June 30, 2017, 2016, and Increase/ Percentage (Decrease) Change Legal fees $ 7,100 $ 5,673 $ 1, % Other professional fees 33,083 46,520 (13,437) -28.9% Total professional fees $ 40,183 $ 52,193 $ (12,010) -23.0% Increase/ Percentage (Decrease) Change Legal fees $ 5,673 $ 12,970 $ (7,297) -56.3% Other professional fees 46,520 54,776 (8,256) -15.1% Total professional fees $ 52,193 $ 67,746 $ (15,553) -23.0% Other professional fees decreased $13,437, or 28.9%, from 2016 to 2017 due to less expenditures as the Authority required fewer services. Legal fees decreased $7,297, or 56.3%, from 2015 to 2016 due to the level of legal services required. Other professional fees decreased $8,256, or 15.1%, due to less expenditures in 2016 as the Authority had less need for additional consultants and the 2015 expenditures were higher than the prior year. In 2015 the Authority incurred $17,826 of expenses with its financial advisor pertaining to debt-related issues. v

18 Directors of the Authority do not receive any compensation for their services but are reimbursed for any Authority-related expenses. Meeting expenses are incurred in connection with holding public board and committee meetings throughout the year. Meeting expenses for the years ended June 30, 2017, 2016, and 2015 were as follows: Increase/ Percentage (Decrease) Change Facilities expenses - Public Board Meetings $ 6,319 $ 5,092 $ 1, % Increase/ Percentage (Decrease) Change Facilities expenses - Public Board Meetings $ 5,092 $ 5,284 $ (192) -3.6% Meeting expenses increased from 2016 to 2017 by $1,227, or 24.1%. This increase is primarily due to the number of BFSA board meetings which increased in 2017 compared to Meeting expenses decreased from 2015 to 2016 by $192, or 3.6%. This decrease is minor. Other expenses include various items necessary for the running of the Authority s offices, and are as follows for the fiscal years ended June 30, 2017, 2016, and 2015: Increase/ Percentage (Decrease) Change Office services including postage and delivery $ 5,560 $ 5,758 $ (198) -3.4% Rent 42,640 38,865 3, % Telephone and data processing 8,361 7, % Office supplies 2, , % Equipment 743 1,123 (380) -33.8% Total Other Expenditures $ 60,218 $ 54,016 $ 6, % Increase/ Percentage (Decrease) Change Office services including postage and delivery $ 5,758 $ 3,657 $ 2, % Rent 38,865 42,063 (3,198) -7.6% Telephone and data processing 7,406 9,351 (1,945) -20.8% Office supplies % Public noticess - 1,010 (1,010) % Equipment 1,123 1,287 (164) -12.7% Total Other Expenditures $ 54,016 $ 58,006 $ (3,990) -6.9% In total, other expenses have remained relatively consistent over the last three fiscal years. During 2016, the Authority signed a lease for office space with the landlord and received one month free rent during that year. Debt Service Fund The Authority issued $14,170,000 of Sales Tax and State Aid Secured Bonds, Series 2015A, in December The proceeds of this bond were used to refund BFSA s outstanding 2005A and 2006A Series bonds and to pay costs of issuance. Net interest cost of the issue was percent. This resulted in a net present value savings of $1,348,700 on this transaction. No debt was issued during the fiscal year ended June 30, vi

19 Contacting the Authority's Financial Management This financial report is designed to provide taxpayers, investors, and creditors with a general overview of the Authority s finances and to demonstrate its accountability for the money it receives. If you have questions about this report or need additional financial information, contact Jeanette M. Robe, Executive Director, Buffalo Fiscal Stability Authority, 617 Main Street, Market Arcade Building - Suite 400, Buffalo, New York vii

20 BUFFALO FISCAL STABILITY AUTHORITY (A Component Unit of the City of Buffalo, New York) Statement of Net Position June 30, 2017 (With comparative totals as of June 30, 2016) Assets Cash and cash equivalents $ 743,519 $ 806,933 Investments 6,347,498 8,010,493 Notes receivable - City of Buffalo due within one year 5,902,359 6,293,597 Due from other governments 13,661,749 13,998,893 Prepaid expenses 25,087 10,049 Notes receivable - City of Buffalo 18,546,427 26,722,839 Capital assets, net (Note 5) 1,242 2,857 Total assets 45,227,881 55,845,661 Deferred Outflows of Resources Deferred outflows of resources related to pensions 123, ,782 Liabilities Accounts payable 17,221 10,591 Accrued liabilities 449, ,852 Due to the City of Buffalo - sales tax 12,533,557 12,587,755 Long-term liabilities Due within one year: Bonds 5,520,000 7,150,000 Due beyond one year: Bonds and related premiums 24,496,909 30,495,315 Other postemployment benefits 701, ,751 Net pension liability 186, ,242 Total liabilities 43,905,178 51,729,506 Deferred Inflows of Resources Deferred inflows of resources related to pensions 64,680 64,333 Net Position Net investment in capital assets 1,242 2,857 Restricted 6,648,187 8,286,424 Unrestricted (5,267,716) (3,960,677) Total net position $ 1,381,713 $ 4,328,604 See accompanying notes. 3

21 BUFFALO FISCAL STABILITY AUTHORITY (A Component Unit of the City of Buffalo, New York) Statement of Activities For the year ended June 30, 2017 (With comparative totals for June 30, 2016) Expenses General and administrative $ 752,740 $ 1,151,532 Distributions City of Buffalo - general operations 243,728, ,418,093 City of Buffalo School District 43,389,176 42,362,699 Interest expense 839, ,729 Total expenses 288,709, ,156,053 General revenues State aid 161,335, ,199,039 Sales tax 125,815, ,609,076 Interest and other income 1,192,289 2,075,946 Total general revenues 288,343, ,884,061 Transfer (to) from the City of Buffalo (2,580,885) 2,515,920 Change in net position (2,946,891) 4,243,928 Net position - beginning 4,328,604 84,676 Net position - ending $ 1,381,713 $ 4,328,604 See accompanying notes. 4

22 BUFFALO FISCAL STABILITY AUTHORITY (A Component Unit of the City of Buffalo, New York) Balance Sheet - Governmental Funds June 30, 2017 (With summarized comparative totals as of June 30, 2016) Total Debt Governmental Funds General Service Assets Cash and cash equivalents $ 669,039 $ 74,480 $ 743,519 $ 806,933 Investments - 6,347,498 6,347,498 8,010,493 Due from other governments 13,126,116 24,984,419 38,110,535 47,015,329 Prepaid expenses 25,087-25,087 10,049 Total assets $ 13,820,242 $ 31,406,397 $ 45,226,639 $ 55,842,804 Liabilities and Fund Balances Accounts payable $ 2,659 $ 14,562 $ 17,221 $ 10,591 Accrued liabilities 37, , , ,852 Due to the City of Buffalo 12,517,756 15,801 12,533,557 12,587,755 Total liabilities 12,557, ,830 13,000,279 13,146,198 Fund Balances Nonspendable: Prepaid expenses 25,087-25,087 10,049 Restricted: Debt service - 30,963,567 30,963,567 41,318,998 State-mandated initiatives 669, , ,319 Unassigned 568, , ,240 Total fund balances 1,262,793 30,963,567 32,226,360 42,696,606 Total liabilities and fund balances $ 13,820,242 $ 31,406,397 $ 45,226,639 $ 55,842,804 See accompanying notes. 5

23 BUFFALO FISCAL STABILITY AUTHORITY (A Component Unit of the City of Buffalo, New York) Reconciliation of the Governmental Funds Balance Sheet to the Statement of Net Position June 30, 2017 Total fund balances - governmental funds $ 32,226,360 Amounts reported for governmental activities in the statement of net position are different because: Capital assets used in governmental activities are not financial resources and are not reported as assets in governmental funds. 1,242 The Authority's proportionate share of the net pension liability as well as pension-related deferred outflows and deferred inflows of resources are recognized on the government-wide statements and include: Deferred outflows of resources related to pensions 123,690 Net pension liability (186,826) Deferred inflows of resources related to pensions (64,680) (127,816) Certain liabilities are not due and payable currently and therefore are not reported as liabilities of the governmental funds. These liabilities are: Bonds and related premiums (30,016,909) Other postemployment benefits (701,164) (30,718,073) Net position - governmental activities $ 1,381,713 See accompanying notes. 6

24 BUFFALO FISCAL STABILITY AUTHORITY (A Component Unit of the City of Buffalo, New York) Statement of Revenues, Expenditures, and Changes in Fund Balances - Governmental Funds For the year ended June 30, 2017 (With summarized comparative totals for June 30, 2016) Total Debt Governmental Funds General Service Revenues State aid $ 161,335,236 $ - $ 161,335,236 $ 162,199,039 Sales tax 125,815, ,815, ,609,076 Interest and other income 456 1,191,833 1,192,289 2,075,946 Total revenues 287,151,199 1,191, ,343, ,884,061 Expenditures Bond issuance costs ,310 General and administrative 489, , ,897 Distributions City of Buffalo - general operations 243,509, , ,728, ,418,093 City of Buffalo School District 43,389,176-43,389,176 42,362,699 Employee benefits 158, , ,319 Debt service Principal - 7,150,000 7,150,000 8,780,000 Interest - 1,317,516 1,317,516 2,207,953 Total expenditures 287,546,779 8,685, ,232, ,816,271 Excess revenues (expenditures) (395,580) (7,493,781) (7,889,361) (8,932,210) Other financing sources (uses) Operating transfers 280,765 (280,765) - - Transfers (to) from the City of Buffalo - (2,580,885) (2,580,885) 2,515,920 Proceeds from advance refunding ,706,367 Payment to escrow agent (19,360,000) Other financing sources (uses) 280,765 (2,861,650) (2,580,885) (1,137,713) Net change in fund balances (114,815) (10,355,431) (10,470,246) (10,069,923) Fund balances - beginning 1,377,608 41,318,998 42,696,606 52,766,529 Fund balances - ending $ 1,262,793 $ 30,963,567 $ 32,226,360 $ 42,696,606 See accompanying notes. 7

25 BUFFALO FISCAL STABILITY AUTHORITY (A Component Unit of the City of Buffalo, New York) Reconciliation of the Governmental Funds Statement of Revenues, Expenditures, and Changes in Fund Balances to the Statement of Activities For the year ended June 30, 2017 Total net change in fund balances - governmental funds $ (10,470,246) Amounts reported for governmental activities in the statement of activities are different because: Capital outlays are reported in governmental funds as expenditures. In the statement of activities, the cost of the assets is allocated over estimated useful lives as depreciation expense. This is the amount by which depreciation expense exceeds capital outlays. (1,615) Pension expense is recognized when paid on the fund statement of revenues, expenditures, and changes in fund balances and actuarially determined on the statement of activities. These differences are: 2017 contributions 58, accrued contribution 13, accrued contribution (13,449) 2017 net pension expense (95,476) (37,023) Payments of long-term liabilities are reported as expenditures in the governmental funds, and as a reduction of debt in the statement of net position. 7,150,000 In the statement of activities, certain expenses are measured by the amounts earned during the year. In the governmental funds these expenditures are reported when paid. These differences are: Amortization of bond premiums 478,406 Other postemployment benefits (66,413) 411,993 Change in net position - governmental activities $ (2,946,891) See accompanying notes. 8

26 BUFFALO FISCAL STABILITY AUTHORITY (A Component Unit of the City of Buffalo, New York) Notes to Financial Statements 1. Summary of Significant Accounting Policies Reporting Entity The Buffalo Fiscal Stability Authority (the Authority) is a corporate governmental agency and instrumentality of the State of New York (the State) constituting a public benefit corporation created by the Buffalo Fiscal Stability Authority Act (the Act), Chapter 122 of the Laws of 2003, as amended from time to time. Although legally separate from and independent of the City of Buffalo (the City), the Authority is a component unit of the City for financial reporting purposes and, accordingly, is included in the City s financial statements. The Act provides for the existence of the Authority through June 30, The Authority is governed by nine directors, with seven appointed by the Governor. One of the seven must be a resident of the City. One director is appointed following the recommendation of the State Comptroller; one director is appointed on the joint recommendation of the temporary president of the Senate and the Speaker of the Assembly. The Mayor of the City and the County Executive of Erie County, New York serve as ex-officio members. The Governor also designates the chairperson and vice-chairperson from among the directors. The Authority has power under the Act to monitor and oversee the finances of the City and covered organizations - City of Buffalo School District (the District), the Joint Schools Construction Board, Buffalo Urban Renewal Agency, Buffalo Municipal Housing Authority, and any governmental agency, public authority, or public benefit corporation which receives or may receive money directly, indirectly, or contingently from the City. The Authority is empowered to issue bonds and notes for various City purposes, defined in the Act as financeable costs. The Act authorizes the issuance of bonds, notes, or other obligations in amounts necessary to pay any financeable costs and to fund reserves to secure such bonds. The aggregate principal amounts of such bonds, notes, or other obligations outstanding at any one time excluding refunding bonds of the City or the Authority cannot exceed $175,000,000. The Authority may also issue bonds, notes, or other obligations to pay the cost of issuance of such borrowings, to establish debt service reserves, or to refund or advance refund any outstanding notes of the City. The Authority may issue cash flow borrowings which do not count toward the above limit, but are limited to $145,000,000 of aggregate principal amounts outstanding at any one time. The Act provides the Authority different financial control and oversight powers depending upon whether the City s financial condition causes it to be in a control period or an advisory period. The Act defined and established a control period to be in effect as of the date of the Act and continue until specific conditions were met regarding the stability of the City s finances. In May 2012, the Authority determined such conditions had been met and resolved to enter into an advisory period effective July 1, An advisory period shall continue through June 30, 2037, unless a control period is reimposed. A control period may be reimposed if the Authority determines at any time that a fiscal crisis is imminent or that any of the certain events, as outlined in the Act, have occurred or are likely to occur. 9

27 The Act provides broad monitoring responsibility over the City s finances during a control period, including the requirements for the City to provide annually a financial plan for four years to be approved by the Authority. The Act also allows the Authority to establish a maximum level of spending; impose a wage or hiring freeze; review and approve or disapprove any contracts, settlements, debt issuances, or collective bargaining agreements entered into by the City or covered organization; and may require the City to explore certain actions regarding merger of services with the County of Erie. Under an advisory period, the Authority s monitoring responsibilities continue to exist, however the Authority is not required to approve the various items as noted above, but will publicly comment on such items. The Authority receives all sales tax revenues designated for the City and the District, and State aid to be paid to the City. State aid includes all general purpose local government aid, emergency financial assistance to certain cities, emergency financial assistance to eligible municipalities, supplemental municipal aid, and any successor or new aid appropriated by the State as local government assistance for the benefit of the City. The Authority is also entitled to receive all other aid, rents, fees, charges, payments, and other income to the extent such amounts are pledged to bondholders of the City. The Authority maintains amounts it deems necessary for its operations and debt service requirements with the excess transferred to the City as frequently as practicable. On occasion, the Authority has been directed by the State to retain certain State aid amounts for the City s future use. Basis of Presentation Government-wide Statements: The statement of net position and the statement of activities display financial activities of the overall Authority. These statements are required to distinguish between governmental and business-type activities. Governmental activities generally are financed through taxes, intergovernmental revenues, and other nonexchange transactions. Business-type activities are financed in whole or in part by fees charged to external parties. The Authority does not maintain any business-type activities. The statement of activities presents a comparison between direct expenses and program revenues for each function of the Authority s governmental activities. Given the specific nature of the Authority s purpose, its only function is displayed as monitoring of City finances. Fund Financial Statements: The fund financial statements provide information about the Authority s funds. The emphasis of the fund financial statements is on major governmental funds, each displayed in a separate column. The Authority reports the following major funds: General fund. This is the Authority s primary operating fund. It accounts for all financial resources except those required to be accounted for in another fund. Debt service fund. This fund is used to account for resources that are restricted, committed, or assigned to expenditure for principal and interest payments on long-term debt obligations of governmental activities on behalf of the City. Financial resources that are being accumulated for principal and interest payments maturing in future years are also included in this fund. The financial statements include certain prior year summarized comparative information in total but not by separate governmental activities and major funds. Such information does not include sufficient detail to constitute a presentation in conformity with accounting principles generally accepted in the United States of America. Accordingly, such information should be read in conjunction with the Authority s financial statements for the year ended June 30, 2016, from which the summarized information was derived. 10

28 Basis of Accounting and Measurement Focus The government-wide statements are reported using the economic resources measurement focus and the accrual basis of accounting. Revenues are recorded when earned and expenses are recorded at the time liabilities are incurred, regardless of when the related cash flows take place. Nonexchange transactions, in which the Authority receives value directly without giving equal value in exchange, include State aid and sales taxes. Revenue is recognized in the fiscal year for which taxes and State aid are earned or designated. Revenue from grants and donations is recognized in the fiscal year in which all eligibility requirements have been satisfied. Governmental funds are reported using the current financial resources measurement focus and the modified accrual basis of accounting. Under this method, revenues are recognized when measurable and available. The Authority considers all revenues reported in the governmental funds to be available if they are collected within sixty days after year end, with the exception of amounts determined by statute as State general purpose aid. By law, although designated for the current fiscal year, the amount is typically paid by the State in less. December. Expenditures are recorded when the related fund liability is incurred, except for principal and interest on general long-term debt and claims and judgments, which are recognized as expenditures to the extent that they have matured. Capital asset purchases are reported as expenditures in governmental funds. Proceeds of long-term liabilities and equipment and property purchased under capital leases are reported as other financing sources. Interest expense is recognized on the accrual basis in the government-wide financial statements. In the governmental fund statements, interest expenditures are recognized when funds are deposited in the debt service fund. The Authority receives sales tax revenue several times each month, and receives interest earnings from time to time as investments mature. Funds for debt service are required to be set aside from revenues on a monthly basis. The Authority also withholds, as necessary, amounts which in its judgment are required for operations and operating reserves. Residual sales tax revenue and investment earnings are then transferred to the City. No revenues are generated from operating activities of the Authority; therefore, all revenues are defined by the Authority as non-operating revenues. Revenues are received in the general and debt service funds. Expenditures of the Authority that arise in the course of providing the Authority s oversight and debt issuance services, such as payroll and administrative expenses, are considered operating expenses, and are accounted for in the general fund. Expenditures related to debt issuance are considered non-operating expenses, and are accounted for in the debt service fund. Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents include cash on hand, demand deposits, and commercial paper with original maturities of three months or 11

29 Investments The Authority s investment policy complies with the State Comptroller s guidelines for Public Authorities. Investments consist primarily of government obligations stated at fair value on a recurring basis as determined by quoted prices in active markets. Capital Assets Assets are capitalized at historical cost if their value is greater than $500 and has a useful benefit in excess of one year. Contributed assets are recorded at fair value at the time received. Depreciation is provided in the government-wide statements over estimated useful lives of five years using the straight-line method. Maintenance and repairs are expensed as incurred; significant improvements are capitalized. Bond Premiums Premiums received upon the issuance of debt are included as other financing sources in the governmental fund statements when issued. In the government-wide statements, premiums are recognized with the related debt issue and amortized on a straight-line basis as a component of interest expense over the life of the related obligation. Pensions The Authority participates in the New York State and Local Employees Retirement System (ERS) as mandated by State law. ERS recognizes benefit payments when due and payable in accordance with benefit terms; investment assets are reported at fair value. On the government-wide statements, the Authority recognizes net pension liability, deferred outflows and deferred inflows of resources, pension expense, and information about and changes in the fiduciary net position on the same basis as reported by the defined benefit pension plan. Equity Classifications Government-Wide Statements Net investment in capital assets - consists of capital assets, net of accumulated depreciation, reduced by outstanding balances of any related debt obligations attributable to the acquisition, construction, or improvement of those assets. Restricted consists of restricted assets reduced by liabilities and deferred inflows of resources related to those assets if their use is constrained to a particular purpose. Restrictions are imposed by external organizations such as federal or state laws or by the terms of the Authority s bonds. Unrestricted the net amount of assets, deferred outflows of resources, liabilities, and deferred inflows of resources that are not included in the determination of net investment in capital assets or the restricted component of net position and, therefore, are available for general use by the Authority. Interfund Balances The operations of the Authority at times include transactions between funds. These transactions may be temporary in nature, such as with interfund borrowings. Permanent transfers of funds include resources for required debt service payments. 12

30 In the government-wide statements, the amounts reported on the statement of net position for interfund receivables and payables, if any, represent amounts due between different fund types (governmental activities and fiduciary funds). Eliminations have been made for all interfund receivables and payables between the funds. Governmental Fund Statements The Authority considers restricted resources to have been spent first when expenditures are incurred for purposes for which both restricted and unrestricted fund balances are available. Restricted fund balances result from reserves created primarily by enabling legislation to preserve resources for future expenditures as required by budgetary regulations or bond instruments. Earnings on invested resources are required to be added to the reserves. Nonspendable fund balances represent resources that cannot be spent because they are not expected to be converted to cash and include prepaid expenses. Fund balance restrictions consist of the following: Debt service - used to accumulate resources for a sinking fund in connection with the requirements of the related bond agreements. State-mandated initiatives used to accumulate money provided by the State through aid and incentives for municipalities that is held by the Authority on behalf of the City. These funds are required to be used by the City for maintaining, stabilizing, or reducing the real property tax burden; investing in technology or other efficiency and productivity initiatives that permanently minimize or reduce the City s operating expenses; supporting economic development or infrastructure investments that are necessary to achieve economic revitalization and generate growth in the real property tax base; or minimizing or preventing reductions in City services. The money will be disbursed by the Authority when requested by the City for the aforementioned initiatives. 2. Transactions with and on Behalf of the City The Act and other legal documents of the Authority establish various financial relationships between the Authority, the City, and the District. The resulting financial transactions between the Authority, the City, and the District include the receipt and use of revenues as well as Authority debt issuances to fund financeable costs of the City. The receipt and remittance of revenues in 2017 include: The receipt and remittance to the City of sales tax revenues. Revenues of $125,815,507 were recorded, of which $75,022,307 was or will be paid to the City and $43,389,176 was designated for the District. The balance was retained for Authority operations and to provide for a debt service sinking fund. State aid of $161,335,236 was received during No amounts were accrued at June 30, Distributions paid or accrued to the City in 2017 totaled $243,728,012, which includes $75,022,307 of sales tax receipts, $168,487,148 of State aid and other revenue, and interest receipts of $218,

31 3. Cash and Investments Investment management is governed by State laws in accordance with the Act and as established in the Authority s written policies. Cash resources must be deposited in FDIC-insured commercial banks or trust companies located within the State. Policies permit the Executive Director to use demand accounts and certificates of deposit. Permissible investments include obligations of the United States Treasury and its Agencies, repurchase agreements, obligations of the State or its localities, and commercial paper of any bank or corporation provided it has the highest rating of two independent rating agencies. Collateral is required for demand and time deposits and certificates of deposit not covered by Federal Deposit Insurance. Obligations that may be pledged as collateral are obligations of the United States and its agencies and obligations of the State and its municipalities and school districts. Custodial credit risk is the risk that in the event of a bank failure the Authority s deposits may not be returned to it. At June 30, 2017, the Authority s bank deposits were fully collateralized by FDIC coverage and securities held by the pledging institution s trust department in the Authority s name. The Authority s cash and investments at June 30, 2017 consist of the following: Fair Cost Value Cash $ 74,480 $ 74,480 Money Market 644, ,000 U.S. Treasury SLGS 1,383,122 1,397,347 Federal National Mortgage Association Discount Notes 1,428,128 1,467,879 Federal Home Loan Mortgage Corporation Medium Term Notes 1,587,464 1,616,316 Federal Home Loan Banks 1,863,207 1,890,995 $ 6,980,401 $ 7,091,017 The risk and type of investments presented above generally indicate activity and positions held throughout the year. Maturities are generally short term with certificates of deposits issued with 30 day maturities and commercial paper due within 45 days of purchase. 4. Due from Other Governments Due from Other Governments: New York State: May and June sales tax receipts $ 13,126,116 use on specific capital projects. Accrued interest due from the City 535,633 $ 13,661,749 Due from the City: Mirror bond 2005A (1/15/2025), interest at 5.0% inclusive of premium of $447,669 $ 5,333,917 Mirror bond 2005B&C (1/15/2019), interest at 5.0% inclusive of premium of $240,623 1,365,623 Mirror bond 2006A (1/15/2020), interest at 5.0% inclusive of premium of $47,687 5,761,136 Mirror bond 2007A (1/15/2023), interest at 5.0% inclusive of premium of $339,722 11,988,110 24,448,786 Amount due within one year $ 5,902,359 18,546,427 During 2017, the 2005A and 2006A bonds were called for partial redemption of $96,700 and $2,484,185, respectively. The total proceeds of $2,580,885 were received by the Authority and transferred to the City for 14

32 Amounts to be received from the City, net of bond premiums of $1,075,701 on the remaining mirror bonds are as follows: 5. Capital Assets Years ending June 30, Principal Interest 2018 $ 5,902,359 $ 1,168, ,677, , ,840, , ,021, , ,119, , ,811, ,083 $ 23,373,085 $ 3,411,143 Balance Retirements/ Balance July 1, 2016 Increases Reclassifications June 30, 2017 Furniture, fixtures, and computers $ 70,377 $ 517 $ (2,496) $ 68,398 Accumulated depreciation 67,520 2,132 (2,496) 67,156 $ 2,857 $ (1,615) $ - $ 1,242 Depreciation of $2,132 has been allocated to general and administrative expense. 6. Long-Term Liabilities Amounts July 1, June 30, Due in 2016 Increases Decreases 2017 One Year Series 2005B&C bonds maturing September 2019 with interest at 5.0% over the life of the bonds. $ 4,660,000 $ - $ 2,675,000 $ 1,985,000 $ 860,000 Series 2007A bond maturing September 2023 with interest ranging from 4.5% to 5.5% over the life of the bond. 16,095,000-2,010,000 14,085,000 2,110,000 Series 2015A refunding bond maturing September 2025 with interest ranging from 3.0% to 5.0% over the life of the bond. 14,170,000-2,465,000 11,705,000 2,550,000 34,925,000-7,150,000 27,775,000 5,520,000 Premiums: 2005B 868, , , A 405,077-55, , A 1,446, ,637 1,293,109 2,720, ,406 2,241,909 - $ 37,645,315 $ - $ 7,628,406 $ 30,016,909 $ 5,520,000 15

33 Debt Service Requirements Years ending June 30, Principal Interest 2018 $ 5,520,000 $ 1,140, ,685, , ,440, , ,690, , ,960, , ,480, ,225 $ 27,775,000 $ 3,450,250 Lease Obligation The Authority has an operating lease agreement for office space. Rental expense totaled $42,640 for the year ended June 30, Future minimum annual rental payments required under the lease are: 7. Pension Plan 2018 $ 43, , , $ 10, ,480 The Authority participates in ERS, which is a cost-sharing, multiple employer, public employee retirement system. ERS provides retirement benefits as well as death and disability benefits. New York State Retirement and Social Security Law governs obligations of employers and employees to contribute and provide benefits to employees. ERS issues a publicly available financial report that includes financial statements and required supplementary information. This report may be obtained from the New York State and Local Retirement System at Benefits: ERS provides retirement, disability, and death benefits for eligible members, including automatic cost of living adjustments. In general, retirement benefits are determined based on an employee s individual circumstances using a pension factor, an age factor, and final average salary. The benefits vary depending on the individual s employment tier. Pension factors are determined based on tier and an employee s years of service, among other factors. Contribution Requirements: No employee contribution is required for those hired prior to July ERS requires employee contributions of 3% of salary for the first 10 years of service for those employees who joined from July 1976 through December Participants hired on or after January 1, 2010 through March 31, 2012 are required to contribute 3% of compensation throughout their active membership. Participants hired on or after April 1, 2012 are required to contribute a percentage ranging from 3% to 6% each year, based on their level of compensation. The Comptroller annually certifies the rates used, expressed as a percentage of the wages of participants, to compute the contributions required to be made by the Authority to the pension accumulation fund. For 2017, these rates ranged from 13.1% %. A liability to ERS of $13,867 is accrued based on the Authority s legally required contribution for employee services rendered from April 1, 2017 through June 30, Net Pension Liability, Pension Expense, and Deferred Outflows and Deferred Inflows of Resources At June 30, 2017, the Authority reported a liability of $186,826 for its proportionate share of the net pension liability. The net pension liability was measured as of March 31, 2017, and the total pension liability was determined by an actuarial valuation as of April 1, The Authority s proportion of the net pension liability was based 16

34 on the ratio of its actuarially determined employer contribution to ERS s total actuarially determined employer contributions for the fiscal year ended on the measurement date. At the March 31, 2017 measurement date, the Authority s proportion was %, an increase of % from its proportion measured as of March 31, For the year ended June 30, 2017, the Authority recognized pension expense of $95,476. At June 30, 2017, the Authority reported deferred outflows and deferred inflows of resources as follows: Deferred Outflows of Resources Deferred Inflows of Resources Differences between expected and actual experience $ 4,682 $ 28,371 Changes of assumptions 63,826 - Net difference between projected and actual earnings on pension plan investments 37,317 - Changes in proportion and differences between Authority contributions and proportionate share of contributions 3,998 36,309 Authority contributions subsequent to the measurement date 13,867 - $ 123,690 $ 64,680 Contributions subsequent to the measurement date will be recognized as a reduction of the net pension liability in the year ending June 30, Other amounts reported as deferred outflows and deferred inflows of resources will be recognized in pension expense as follows: Actuarial Assumptions Years ending June 30, 2018 $ 23, , , $ (28,380) 45,143 The actuarial assumptions used in the April 1, 2016 valuation, with update procedures used to roll forward the total pension liability to March 31, 2017, were based on the results of an actuarial experience study for the period April 1, 2010 to March 31, These assumptions are: Inflation - 2.5% Salary increases - 3.8% Cost of living adjustments 1.3% annually Investment rate of return - 7.0% compounded annually, net of investment expense, including inflation Mortality - Society of Actuaries Scale MP-2014 Discount rate - 7.0% The long-term expected rate of return on ERS pension plan investments was determined using a buildingblock method in which best estimate ranges of expected future real rates of return (expected return, net of investment expenses and inflation) are developed for each major asset class. These ranges are combined to produce the long-term expected rate of return by weighting the expected future real rates of return by the target asset allocation percentage and by adding expected inflation. 17

35 Investment Asset Allocation Best estimates of arithmetic real rates of return for each major asset class and ERS s target asset allocations as of the applicable valuation dates are summarized as follows: Discount Rate Long-Term Expected Target Real Rate of Asset Class Allocation Return Domestic equities 36% 4.6% International equities 14% 6.4% Private equities 10% 7.8% Real estate 10% 5.8% Inflation-indexed bonds 4% 1.5% Bonds and mortgages 17% 1.3% Short-term 1% (0.3)% Other 8% 4.0%-5.9% 100% The discount rate projection of cash flows assumed that contributions from plan members will be made at the current member contribution rates and that contributions from employers will be made at statutorily required rates, actuarially determined. Based on those assumptions, ERS s fiduciary net position was projected to be available to make all projected future benefit payments of current plan members. Therefore, the long-term expected rate of return on pension plan investments was applied to all periods of projected benefit payments to determine the total pension liability. The following presents the Authority s proportionate share of its net pension asset (liability) calculated using the discount rate of 7.0% and the impact of using a discount rate that is 1% higher or lower than the current rate. At Current 1.0% Decrease Discount Rate 1.0% Increase Authority's proportionate share of the ERS net pension asset (liability) $ (596,684) $ (186,826) $ 159, Postemployment Benefits Other than Pensions (OPEB) The Authority maintains a single-employer defined benefit healthcare plan (the Plan) providing for lifetime cost sharing of medical, dental, and vision premiums to eligible retirees and spouses. The Plan does not issue a publicly available financial report. Eligibility is based on covered employees who retire from the Authority, are over age 55, and have a minimum of ten years of service. The required contribution is based on projected pay-as-you-go financing requirements, with no current funding of actuarially-determined liabilities. For the year ended June 30, 2017, there were no retirees of the Authority receiving benefits. 18

36 The Authority s annual OPEB expense is calculated based on the annual required contribution (ARC) of the Authority. The Authority has elected to calculate the ARC and related information using the projected unit credit cost method permitted by GASB. The ARC represents a level funding that, if paid on an ongoing basis, is projected to cover the normal cost each year and to amortize the unfunded actuarial liability over 10 years. The following table summarizes the Authority s annual OPEB for the year ended June 30, 2017: Annual required contribution Normal cost $ 92,413 Amortization of unfunded actuarial accrued liability 12,084 Interest on net OPEB obligation 25,391 ARC adjustment (63,475) 66,413 Contributions made - Increase in net OPEB obligation 66,413 Net OPEB obligation - beginning of year 634,751 Net OPEB obligation - end of year $ 701,164 The Authority s annual OPEB cost, the percentage of annual OPEB cost contributed to the plan, and the net OPEB obligation for the past three years were as follows: Percentage of Annual Annual OPEB Net OPEB Year ended June 30, OPEB Cost Cost Contributed Obligation 2017 $ 66,413 0% $ 701, ,376 0% 634, ,613 0% 568,375 As of June 30, 2015, the most recent alternative measurement method date, the actuarial accrued liability for future benefits was $337,694, all of which is unfunded. The annual payroll of employees eligible to be covered by the Plan was $361,360, and the ratio of the unfunded actuarial accrued liability to the covered payroll was 93%. The projection of future benefit payments for an ongoing plan involves estimates of the value of reported amounts and assumptions about the probability of occurrence of events into the future. Examples include assumptions about future employment, mortality, and the healthcare cost trend. Amounts determined regarding the funded status of the Plan and ARC of the Authority are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future. Projections of benefits for financial reporting purposes are based on the Plan as understood by the Authority and Plan members and include the types of benefits provided at the time of each valuation and the historical pattern of sharing benefit costs between the Authority and Plan members. The methods and assumptions used include techniques that are designed to reduce the effects of short-term volatility in actuarial accrued liabilities and the actuarial value of assets, consistent with the long-term perspective of the calculations. 19

37 The following assumptions were made: Retirement age for active employees Employees are expected to retire, on average, at age 62 with ten years of service Marital status 100% of future retirees will be married, with male spouses three years older than female spouses Mortality RP2000, mortality table for males and females projected 10 years Turnover Standard turnover assumptions - GASB 45 Paragraph 35b Payroll growth 4% payroll growth rate Healthcare cost trend rate Initial rate of 8%, reduced to an ultimate rate of 4.7% after ten years; dental plan 3.5% reduced to 3% after year 2; vision plan 3% Health insurance premiums 2015 health insurance premiums used as the basis for calculation of the present value of total benefits to be paid Discount rate 4% Amortization method 10 years, level percentage of payroll 20

38 BUFFALO FISCAL STABILITY AUTHORITY (A Component Unit of the City of Buffalo, New York) Required Supplementary Information Schedule of the Authority's Proportionate Share of the Net Pension Liability New York State and Local Employees' Retirement System As of the measurement date of March 31, Authority's proportion of the net pension liability % % % Authority's proportionate share of the net pension liability $ 186,826 $ 303,242 $ 62,198 Authority's covered payroll $ 386,979 $ 354,794 $ 334,762 Authority's proportionate share of the net pension liability as a percentage of its covered payroll 48.28% 85.47% 18.58% Plan fiduciary net position as a percentage of the total pension liability 94.70% 90.70% 97.90% Data prior to 2015 is unavailable. The following is a summary of changes of assumptions: Inflation 2.5% 2.7% Salary increases 3.8% 4.9% Cost of living adjustments 1.3% 1.4% Investment rate of return 7.0% 7.5% Discount rate 7.0% 7.5% 21

39 BUFFALO FISCAL STABILITY AUTHORITY (A Component Unit of the City of Buffalo, New York) Required Supplementary Information Schedule of Contributions New York State and Local Employees' Retirement System June 30, Contractually required contribution $ 58,035 $ 67,365 $ 62,469 $ 75,625 $ 53,237 Contribution in relation to the contractually required contribution (58,035) (67,365) (62,469) (75,625) (53,237) Contribution deficiency (excess) $ - $ - $ - $ - $ - Authority's covered payroll $ 386,979 $ 354,794 $ 334,762 $ 348,621 $ 306,554 Contributions as a percentage of covered payroll 15.00% 18.99% 18.66% 21.69% 17.37% Data prior to 2013 is unavailable. 22

40 BUFFALO FISCAL STABILITY AUTHORITY (A Component Unit of the City of Buffalo, New York) Required Supplementary Information Schedule of Funding Progress for Other Postemployment Benefits June 30, 2017 Unfunded UAAL as a Actuarial Actuarial Actuarial Actuarial Percentage Valuation Value of Accrued Accrued Funded Covered of Covered Date * Assets Liability Liability (UAAL) Ratio Payroll Payroll 6/30/2012 $ - $ 116,194 $ (116,194) 0% $ 319,377 36% 6/30/2015 $ - $ 337,694 $ (337,694) 0% $ 361,360 93% *Alternative Measurement Method 23

41 BUFFALO FISCAL STABILITY AUTHORITY (A Component Unit of the City of Buffalo, New York) Supplementary Information Schedule of Administrative Expenditures - General Fund For the years ended June 30, General and administrative Board functions Public meeting expenses $ 6,319 $ 5,092 Staff expenses Wages 373, ,206 Professional development 2,848 3,714 Parking 5,219 4,861 Payroll processing fees , ,596 Central services Postage, printing, and dues 4,024 3,909 Rent 42,640 38,865 Telephone and data processing 8,361 7,406 Insurance 1,537 1,849 Office supplies 2, ,476 52,893 Administrative Professional fees and consultants 33,082 46,520 Legal fees 7,100 5,673 Equipment 743 1,123 40,925 53,316 Total general and administrative 489, ,897 Employee benefits New York State and Local Employees' Retirement System contributions 58,453 63,973 Social security and medicare taxes 27,512 28,676 Medical insurance net of employee contributions 72,559 70,670 Total employee benefits 158, ,319 Total general and administrative expenditures and employee benefits - general fund $ 647,689 $ 667,216 24

42 INDEPENDENT AUDITORS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS The Board of Directors Buffalo Fiscal Stability Authority We have audited, in accordance with the auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statements of the governmental activities and each major fund of Buffalo Fiscal Stability Authority (the Authority), a component unit of the City of Buffalo, New York, as of and for the year ended June 30, 2017, and the related notes to the financial statements, which collectively comprise the Authority s basic financial statements, and have issued our report thereon dated September 25, Internal Control over Financial Reporting In planning and performing our audit of the financial statements, we considered the Authority s internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Authority s internal control. Accordingly, we do not express an opinion on the effectiveness of the Authority s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the entity s financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. Compliance and Other Matters As part of obtaining reasonable assurance about whether the Authority s financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. 25

43 Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the Authority s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Authority s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. September 25,

44 INDEPENDENT AUDITORS REPORT ON COMPLIANCE WITH SECTION 2925(3)(f) OF THE NEW YORK STATE PUBLIC AUTHORITIES LAW The Board of Directors Buffalo Fiscal Stability Authority We have audited, in accordance with auditing standards generally accepted in the United States of America, the financial statements of the governmental activities and each major fund of Buffalo Fiscal Stability Authority (the Authority), a component unit of the City of Buffalo, New York, as of June 30, 2017, and the related notes to the financial statements, which collectively comprise the Authority s basic financial statements, and we have issued our report thereon dated September 25, In connection with our audit, nothing came to our attention that caused us to believe that the Authority failed to comply with 2925(3)(f) of the New York State Public Authorities Law regarding investment guidelines during the year ended June 30, However, our audit was not directed primarily toward obtaining knowledge of such noncompliance. Accordingly, had we performed additional procedures, other matters may have come to our attention regarding the Authority s noncompliance with the above rules and regulations. The purpose of this report is solely to describe the scope and results of our testing. This communication is not suitable for any other purpose. September 25,

45 MANAGEMENT LETTER September 25, 2017 The Audit, Finance and Budget Committee, Board of Directors, and Management Buffalo Fiscal Stability Authority In planning and performing our audit of the financial statements of the governmental activities and each major fund of Buffalo Fiscal Stability Authority (the Authority), a component unit of the City of Buffalo, New York, as of and for the year ended June 30, 2017, in accordance with auditing standards generally accepted in the United States of America, we considered the Authority s internal control over financial reporting (internal control) as a basis for designing audit procedures that are appropriate in the circumstances for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Authority s internal control. Accordingly, we do not express an opinion on the effectiveness of the Authority s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity s financial statements will not be prevented, or detected and corrected, on a timely basis. Our consideration of internal control was for the limited purpose described in the first paragraph and was not designed to identify all deficiencies in internal control that might be material weaknesses. In addition, because of inherent limitations in internal control, including the possibility of management override of controls, misstatements due to error or fraud may occur and not be detected by such controls. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. INFORMATIONAL POINT Upcoming changes due to GASB Statement No. 75 GASB Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other than Pensions (OPEB), replaces GASB Statement No. 45 and is effective for the Authority s year ending June 30, This statement will require recognition of the Authority s total OPEB liability in the statement of net position, rather than the current method of recognizing only an amortized portion of the unfunded actuarial accrued liability for OPEB. For defined benefit OPEB plans, this statement also identifies the methods and assumptions that are required to be used to project benefit payments, discount projected benefit payments to their actuarial present value, and attribute that present value to periods of employee service. Additional note disclosures and required supplementary information are also required. This communication is intended solely for the information and use of the Authority s management; Audit, Finance and Budget Committee; and Board of Directors. It is not intended to be, and should not be, used by anyone other than these parties. specified

46 COMMUNICATION WITH THOSE CHARGED WITH GOVERNANCE September 25, 2017 The Audit, Finance and Budget Committee and Board of Directors Buffalo Fiscal Stability Authority We have audited the financial statements of the governmental activities and each major fund of Buffalo Fiscal Stability Authority (the Authority), a component unit of the City of Buffalo, New York, for the year ended June 30, Professional standards require that we provide you with information about our responsibilities under generally accepted auditing standards and Government Auditing Standards, as well as certain information related to the planned scope and timing of our audit. We have communicated such information to you in our engagement letter dated February 20, Professional standards also require that we communicate to you the following information related to our audit. Significant Audit Findings Qualitative Aspects of Accounting Practices Management is responsible for the selection and use of appropriate accounting policies. The significant accounting policies used by the Authority are described in Note 1 to the financial statements. No new accounting policies were adopted and the application of existing policies was not changed during We noted no transactions entered into by the Authority during the year for which there is a lack of authoritative guidance or consensus. Estimates Accounting estimates are an integral part of the financial statements prepared by management and are based on management s knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ significantly from those expected. The most sensitive estimates affecting the Authority s financial statements were: Timing of the recognition of sales tax revenue and payments accrued to the City of Buffalo Accrual of interest income and expense and bond premium amortization Accrual of other postemployment benefit obligation (OPEB) and related disclosures Net pension liability and related disclosures Management s process for determining the above estimates is based on firm concepts and reasonable assumptions of future events. We evaluated the key factors and assumptions used to develop these estimates in determining that they are reasonable in relation to the financial statements taken as a whole.

47 Footnote Disclosures Certain financial statement disclosures are particularly important because of their significance to financial statement users. The most important disclosures affecting the financial statements are reflected in Note 4 Due from Other Governments, Note 6 Long-Term Liabilities, Note 7 Pension Plan, and Note 8 Postemployment Benefits Other than Pensions. These disclosures present the existing receivables from the City s mirror bonds, obligations of the Authority on behalf of the City of Buffalo, the actuarially determined net pension liability for the Authority s participation in the New York State and Local Employees Retirement System, and the actuarial accrued liability and net obligation for the Authority s other postemployment benefits. The financial statement disclosures are neutral, consistent, and clear. Difficulties Encountered in Performing the Audit We encountered no difficulties in dealing with management in performing and completing our audit. Corrected and Uncorrected Misstatements Professional standards require us to accumulate all known and likely misstatements identified during the audit, other than those that are trivial, and communicate them to the appropriate level of management. Management has taken responsibility for and agreed to all such adjustments suggested during our audit. Disagreements with Management For purposes of this letter, a disagreement with management is a financial accounting, reporting, or auditing matter, whether or not resolved to our satisfaction, that could be significant to the financial statements or the auditor s report. We are pleased to report that no such disagreements arose during the course of our audit. Management Representations We have requested certain representations from management that are included in the management representation letter dated September 25, Management Consultations with Other Independent Accountants In some cases, management may decide to consult with other accountants about auditing and accounting matters, similar to obtaining a second opinion on certain situations. If a consultation involves application of an accounting principle to the Authority s financial statements or a determination of the type of auditor s opinion that may be expressed on those statements, our professional standards require the consulting accountant to check with us to determine that the consultant has all the relevant facts. To our knowledge, there were no such consultations with other accountants. Other Audit Findings or Issues We generally discuss a variety of matters, including the application of accounting principles and auditing standards, with management each year prior to retention as the Authority s auditors. However, these discussions occurred in the normal course of our professional relationship and our responses were not a condition to our retention. 2

48 Other Matters We applied certain limited procedures to management s discussion and analysis and other required supplementary information (RSI) regarding OPEB and pensions. Our procedures consisted of inquiries of management regarding the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the financial statements, and other knowledge we obtained during our audit of the financial statements. We did not audit the RSI and do not express an opinion or provide any assurance on the RSI. We were engaged to report on certain supplementary information accompanying the financial statements that is not RSI, which includes the schedule of administrative expenses general fund. With respect to this supplementary information, we made certain inquiries of management and evaluated the form, content, and methods of preparing the information to determine that the information complies with accounting principles generally accepted in the United States of America and the information is appropriate and complete in relation to our audit of the financial statements. We compared and reconciled the supplementary information to the underlying accounting records used to prepare the financial statements or to the financial statements themselves. Restriction on Use This information is intended solely for the use of the Audit, Finance and Budget Committee; Board of Directors; and management of the Authority. It is not intended to be, and should not be, used by anyone other than these specified parties. 3

49 BUFFALO FISCAL STABILITY AUTHORITY Annual Report of the Buffalo Fiscal Stability Authority Fiscal Year Ended June 30, 2017 September 25, 2017

50 Buffalo Fiscal Stability Authority Authority Directors and Staff as of June 30, 2017 Directors R. Nils Olsen, Jr., Chair Jeanette T. Jurasek, Interim Vice-Chair George K. Arthur, Secretary Frederick G. Floss Dottie E. Gallagher-Cohen Frank B. Mesiah Byron W. Brown (ex officio) Mark C. Poloncarz (ex officio) Vacant Staff Jeanette M. Robe, CPA Executive Director Nikita M. Fortune, BA Administrative Assistant Bryce E. Link, MPA Principal Analyst/Media Contact/Treasurer Nathan D. Miller, BS Senior Analyst II/Manager of Technology Robert L. Miller, CPA Comptroller Contact Market Arcade Building 617 Main Street, Suite 400 Buffalo, New York Phone: Media: Fax: Web: ii

51 Annual Report of the Buffalo Fiscal Stability Authority Table of Contents Introduction... 1 Background... 1 Mission Statement... 4 BFSA Governance and Administration... 4 Summary of Accomplishments in Progress Towards Fiscal Stability... 6 Multi-Year Financial Planning... 8 Monitoring Fiscal Health Reports and Recommendations Issued by the BFSA during Workforce Summary and Trends Providing a More Cost-Effective Financing Framework Structural Reform and Savings Opportunities Collective Bargaining Agreements Efficiency Funding Additional BFSA Operational Information: Legal Matters Annual Internal Controls Review/Governance Financial Statements Budget Health Insurance Plans Leases Cumulative Financial Impact of BFSA and the BFSA Act BFSA Reports on the Budgets and Financial Plans of the City of Buffalo and the Covered Organizations Overview City of Buffalo Buffalo City School District... Error! Bookmark not defined. Buffalo Urban Renewal Agency... Error! Bookmark not defined.95 Buffalo Municipal Housing Authority... Error! Bookmark not defined. Appendix: A. BFSA Authorizing Statute.A1-A42 iii

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53 Introduction This annual report summarizes the actions, accomplishments and progress of the Buffalo Fiscal Stability Authority (the BFSA ) since its inception in This is the fourteenth such annual report with the focus of this report on the period from July 1, 2016 through June 30, 2017, and complements the information reported in prior annual reports. Since 2003, the City of Buffalo (the City ) and its non-exempt covered organizations, including the Buffalo City School District, the Buffalo Urban Renewal Agency, the Buffalo Municipal Housing Authority, and the Joint Schools Construction Board (collectively, the Covered Organizations ), have operated under the requirements of the Buffalo Fiscal Stability Authority Act. The information as presented within this annual report is historical in nature and is not intended to project the BFSA s expectations of future events. Please note that within the section titled BFSA Reports on the Budgets and Financial Plans of the City of Buffalo and the Covered Organizations, information related to future projections over the next four fiscal years as made by management of the City and Covered Organizations are discussed. Since the BFSA was created in 2003, the financial impact from the BFSA s actions on the City of Buffalo and its Covered Organizations has totaled approximately $457.7 million. Of this amount, $240.4 million is attributed directly to savings achieved through the wage freeze which was implemented in April 2004 and lifted on July 1, 2007, and continues to generate annual savings. The financial impact and related savings were created through the exercise of extraordinary powers granted to the BFSA by New York State (the State ), and through the cooperation of the City of Buffalo and its Covered Organizations. For details of the BFSA s actions and related savings, please see Tables 1-3 beginning on page 30 of this report. This report has been prepared pursuant to the requirements of New York State s Public Authorities Accountability Act of 2005 and the Public Authorities Reform Act of Background In May 2003, the State declared a state of fiscal crisis with respect to the City as a result of a State Comptroller s report on the City of Buffalo s financial condition and a subsequent determination by the State Legislature (the Legislature ) that the City was faced with a severe fiscal crisis that could not be resolved without State assistance. Declaring the maintenance of a balanced City budget a matter of overwhelming State concern, on July 3, 2003, the Governor signed into law Chapter 122 of the Laws of 2003 of the State, as amended from time to time (the BFSA Act ), creating the BFSA. The BFSA is a corporate governmental agency and instrumentality of the State constituting a public benefit corporation with a broad range of financial control and oversight powers over the City. As per the BFSA Act, and subsequent resolution by the BFSA, the City is understood to include certain non-exempt Covered Organizations, as defined above. 1

54 The BFSA Act, adopted with unanimous bipartisan support in the Legislature, included the following provisions to return the City of Buffalo to fiscal stability: Established BFSA as a fiscal control agency over the City and the Covered Organizations; Required the annual development of a four-year financial plan for the City and Covered Organizations, and vested the BFSA with the power to ensure compliance with that plan; Granted the BFSA the power to provide deficit financing assistance to the City over a four-year period beginning in and for the subsequent three fiscal years, provided that recurring actions were taken to close increasing percentages of the structural budget gap each year; Established the legal basis for creation of a highly rated borrowing structure to reduce City borrowing costs and provide short-term budgetary assistance; and Empowered BFSA to impose financial control mechanisms if the City and its Covered Organizations are unable to adopt a balanced financial plan and/or operate in accordance there with. The BFSA Act provides that the BFSA shall have different financial control and oversight powers depending upon whether the City s financial condition causes it to be in a control period or an advisory period. Pursuant to the BFSA Act, an advisory period may not begin until the BFSA has determined that (a) for each of the three immediately preceding City fiscal years, the City has adopted and adhered to budgets covering all expenditures, other than capital items, the results of which did not show a deficit, without the use of any BFSA assistance as provided for within the BFSA Act, and; (b) the City Comptroller and the State Comptroller jointly certify that securities were sold by the City during the immediately preceding City fiscal year in the general public market and that there is substantial likelihood that such securities can be sold by the City in the general public market from such date through the end of the next succeeding City fiscal year in amounts that will satisfy substantially all of the capital and cash flow requirements of the City during that period in accordance with the four-year plan then in existence. On May 29, 2012, the BFSA made a determination that all provisions of the BFSA Act with respect to transitioning into an advisory period had been met and resolved to enter into an advisory period effective July 1, An advisory period shall continue through June 30, 2037, unless a control period is reimposed. Under the BFSA Act, the BFSA began its existence during a control period, meaning that the BFSA commenced operations with its maximum authorized complement of financial control and oversight powers. During a control period, BFSA retains significant powers to protect the integrity of the financial condition of the City and the Covered Organizations. Among them are the powers to: (i) review and approve or disapprove contracts, including collective bargaining agreements to be entered into by the City or any Covered Organization, binding or purporting to bind the City or any Covered Organization; (ii) to approve or disapprove the terms of borrowings by the City and Covered Organizations; (iii) to approve, disapprove or modify the City s 2

55 financial plans and take any action necessary in order to implement the financial plan should the City or any Covered Organization fail to comply with any material action necessary to fulfill the plan, including issuing binding orders to the appropriate local officials; (iv) to set a maximum level of spending for any proposed budget of the City or any Covered Organization; (v) to impose a wage or hiring freeze, or both, with respect to employees of the City or any Covered Organization; (vi) to review the operation, management, efficiency and productivity of the City and any Covered Organization; and (vii) upon a determination that no condition exists which would permit imposition of a control period to terminate the control period. During an advisory period, BFSA is empowered, among other things to: (i) review the operation, management, efficiency and productivity of City operations and of any Covered Organization s operations, and to make reports and recommendations thereon; (ii) to review and comment on the budget, financial plan and financial plan modifications of the City and any Covered Organization; (iii) to audit compliance with the City and any of the Covered Organization s financial plans; (iv) to review and comment on the terms of any proposed borrowing, including the prudence of each proposed issuance of bonds or notes by the City; (v) to assess the impact of any collective bargaining agreement to be entered into by the City or any Covered Organization; (vi) to certify revenues included in the financial plan; and (vii) to re-impose a control period if the BFSA determines at any time that a fiscal crisis is imminent or if the City meets certain statutorily defined conditions. Such statutorily defined conditions include the following: (a) the City shall have failed to adopt a balanced budget, financial plan or budget modification as required by the BFSA Act; (b) the City shall have failed to pay the principal of or interest of any of its bonds or notes when due; (c) the City or the Buffalo City School District shall have incurred an operating deficit of one percent or more in the aggregate results of operations of any major fund during its fiscal year assuming all revenues and expenditures are reported in accordance with generally accepted accounting principles, subject to the provisions of the BFSA Act; (d) the chief fiscal officer s certification at any time, at the request of the BFSA or on the chief fiscal officer s initiative, which certification shall be made from time to time as promptly as circumstances warrant and reported to the BFSA, that on the basis of facts existing at such time such officer could not make the certification described in subdivision one of Section 3851 of the BFSA Act; or (e) the City shall have violated any provision of the BFSA Act. During an advisory period, the BFSA must also make a determination as to whether or not the financial plan is complete and compliant with the BFSA Act. In the event a financial plan is found not to be complete and compliant, a revised financial plan is required to be submitted in accordance with the instructions of the BFSA. In the event that the revised financial plan continues to be found incomplete and non-compliant, the BFSA shall provide notice to the City and various State Officials as required by the BFSA Act. 3

56 Mission Statement The BFSA s Mission Statement is as follows: Created by the State of New York as a public benefit corporation, it is the mission of the Buffalo Fiscal Stability Authority to provide financial oversight over the budgets, financial plans and capital plans of the City of Buffalo and its Covered Organizations. BFSA shall undertake such actions as afforded to it under its enabling legislation, as necessary, to assure the financial stability of the City and its Covered Organizations, to preserve the confidence of the investors and bond rating agencies, to uphold essential services to residents, to maintain affordable property taxes, and to protect the economy of both the region and the State as a whole. BFSA Governance and Administration The BFSA is governed by a board of nine directors, seven of which are appointed by the Governor of the State. Of the seven directors appointed by the Governor, one must be a resident of the City, one is to be appointed following the recommendation of the State Comptroller, and one is to be appointed on the joint recommendation of the Temporary President of the Senate and the Speaker of the Assembly. The Mayor of the City and the County Executive serve as ex officio directors. The Governor designates the Chairperson and Vice Chair from among the directors. Five directors constitute a quorum. As of June 30, 2017, there was one vacancy on the Board of Directors and as of the date of this report that vacancy remains. Several of the Directors terms have expired, however the Directors are still serving beyond the expiration date until a new Director is named to replace them. As of June 30, 2017, the following individuals served on BFSA s Board of Directors: R. Nils Olsen, Jr., Chair Former Dean (from 1998 to 2007) and retired Professor of Law of the University at Buffalo Law School Jeanette T. Jurasek, Ph.D., Interim Vice-Chair Former President of Medaille College George K. Arthur, Secretary Former President of the City of Buffalo Common Council Dottie E. Gallagher-Cohen President and CEO of the Buffalo Niagara Partnership Frederick G. Floss, Ph.D. Professor of Economics and Finance and Co-Director of Center for Economic Education, Buffalo State College, former Executive Director of the Fiscal Policy Institute, and former Vice President for Academics with United University Professions 4

57 Frank B. Mesiah Former President of the Buffalo Chapter of the NAACP and former Regional Administrator with the NYS Department of Labor Byron W. Brown (ex officio) Mayor, City of Buffalo Mark C. Poloncarz (ex officio) County Executive, Erie County BFSA maintains two standing committees. The first of these is the Audit, Finance and Budget Committee which is chaired by Chair Olsen with Director Floss and Director Mesiah constituting the remaining committee members. The second committee is the Governance Committee and is chaired by Chair Olsen with Secretary Arthur and Interim Vice-Chair Jurasek constituting the remaining members of the committee. At June 30, 2017, BFSA had the following staff members: Jeanette M. Robe, CPA (Executive Director) Former Deputy Comptroller with the City of Buffalo and former Senior Manager with Deloitte and Touche LLP, Buffalo, New York Nikita M. Fortune, B.A. (Administrative Assistant) Former Safe Routes to School Coordinator for GoBike Buffalo and former Common Council Deputy Chief of Staff Bryce E. Link, M.P.A. (Principal Analyst/Media Contact/Treasurer) Former BFSA Analyst, Senior Analyst and former Budget Fellow with the State Division of the Budget s Expenditure Debt Unit Nathan D. Miller, B.S. (Senior Analyst II/ Manager of Technology) Former BFSA Financial Analyst, Executive Assistant/Office Manager Robert L. Miller, CPA (Comptroller) Former Chief Financial Officer with CVF Technologies Corporation and former Vice President/Controller with Pratt & Lambert United, Inc. 5

58 Summary of Accomplishments in During , the BFSA continued to provide fiscal oversight over the City and the Covered Organizations. As previously noted the BFSA is operating under an advisory period and, as such, provides assistance largely through recommendations as opposed to direct actions. The BFSA held seven board meetings during ; in addition, the BFSA held three Audit, Finance and Budget Committee meetings and three Governance Committee meetings. During such meetings, the BFSA approved several reports with recommendations to the City and Covered Organizations, which are summarized within this section. Additionally, the BFSA held numerous discussions concerning specifically the Buffalo Municipal Housing Authority (the BMHA ) and the Buffalo City School District (the District ). Additional information related to these discussions are summarized within this section. This was the fifth year the BFSA operated under an advisory period; prior to July 1, 2012, the BFSA had operated for nine consecutive years within a control period. The City and the Covered Organizations continue to benefit from savings resulting from actions the BFSA took during the nine-year control period. A summary of the cumulative impact of such BFSA actions is included on page 30. Progress Towards Fiscal Stability In 2003, the BFSA was created as a result of the City of Buffalo facing a severe financial crisis. The City had utilized 92% of the maximum legal real property tax levy, had bond ratings one level above non-investment grade, was at risk of losing access to the credit markets, and was facing a structural budget imbalance. Since 2003, the City has made progress towards fiscal stability, although it is noted that the City and Covered Organizations continue to face financial challenges, some significant. These challenges are discussed in detail within this report and are included in the individual reports within the section titled BFSA Reports on the Budgets and Financial Plans of the City of Buffalo and the Covered Organizations beginning on page 34. Certain key indicators of the fiscal progress of the City and the District include the following: - The City s fund balance has increased since creation of the BFSA. At July 1, 2003, the City s total fund balance was $36.0 million and unreserved, undesignated/unassigned fund balance was $8.3 million. As of June 30, 2016, the City s total fund balance was $149.5 million, and unassigned fund balance was $41.9 million. In addition, in 2007 the City established a Rainy-Day Fund, currently at $36.3 million, which is included in the balance for total fund balance and can be utilized during unforeseen fiscal emergencies. The increase in fund balance and establishment of the Rainy-Day Fund are two indicators of the strengthening in the City s financial position. 6

59 It is further noted that from July 1, 2003 to June 30, 2010, total fund balance steadily increased. Beginning with fiscal year (FY) 2011, the City reported a deficit. The twoyear deficit for FY 2011 and FY 2012 was $29.1 million. The City reported a surplus in FY 2013 and fund balance had increased to $165.8 million, an increase of $52.2 million on a year-to-year basis; the surplus was largely due to one-time, non-recurring revenues. For the year ended June 30, 2014, the City reported a deficit of $19.4 million and fund balance had decreased to $146.4 million. For the year June 30, 2015, the City recorded a $4.8 million surplus with fund balance reaching $151.2 million and then decreased by $1.7 million to $149.5 million as of June 30, 2016, which is the last fiscal year reported on. The Financial Plan includes the substantial use of unassigned fund balance ($32.4 million of $41.9 million, or 77 percent of available unassigned fund balance) over the course of the four years, which is demonstrative of budgetary pressures facing the City. In 2007, the City established a Rainy-Day Fund, representing funds set aside for unanticipated revenue shortfalls or unexpected expenditures, thus providing the City a safety net. The Rainy-Day Fund is established at 30 days of General Fund expenditures. At June 30, 2016, the amount of this fund was $36.3 million, a decrease of $900,000 from the prior year. The decrease is attributed to the decrease in actual total expenditures from FY 2015 to FY The Rainy-Day Fund is maintained throughout the financial plan. The District s fund balance at June 30, 2003 totaled $33.5 million. Unreserved, undesignated/unassigned fund balance totaled $4.6 million, which represented 1.1% of actual FY expenditures. The BFSA reported that this was a significant threat to the District and was symptomatic of the financial crisis. The District s fund balance position has improved since 2003; however, the remaining available levels are indicative of financial pressures currently facing the District. Total fund balance peaked at $235.7 million at June 30, 2011, but was reduced to $191.1 million by June 30, 2015 due to four consecutive fiscal years with deficits; a surplus was reported for the fiscal year ended June 30, 2016 at $12.2 million. A deficit of $43.0 million has been projected by the District for the fiscal year ended June 30, Unassigned fund balance at June 30, 2016 totaled $55.5 million representing 6.9% of actual FY expenditures. The remaining $147.8 million is comprised of nonspendable/restricted fund balance of $25.5 million, and assigned fund balance of $122.3 million. Assigned fund balance represents funds set aside for management s intended purposes and includes amounts set-aside for the subsequent year s budget and capital needs ($9.8 million and $7.8 million respectively), other postemployment benefits ($42.7 million), encumbrances ($4.4 million) and prior years claims ($57.7 million). The amount set-aside for prior years claims included $54.7 million reserved for settling expired collective bargaining agreements. In October 2016, the District settled a long outstanding labor contract with the Buffalo Teachers Federation ( BTF ) and subsequently modified the budget to utilize $40.5 million of the total $54.7 7

60 million reserved for settling collective bargaining agreements with the remaining $17.2 million budgeted for use in In 2003, the City had utilized 92% of the City s available Constitutional Taxing Limit, which provided for a remaining tax levying margin of $12.5 million. This amount was considered to be dangerously low and without intervention and relief the City could have potentially fully utilized the available balance for the maintenance of services. Since 2003, the City has been able to decrease the proportion used of the Constitutional Taxing Limit and increase the available tax margin. As included within the Adopted Budget, the City is utilizing 61 percent of the available Constitutional Taxing Limit and has a remaining taxing margin of $61.5 million. - The City s bond ratings have increased from Baa/BBB- to A1/A+ from Moody s Investors Service and Standards and Poor s Rating Services, respectively. Fitch Ratings ( Fitch ) has increased the City s bond ratings to AA- in 2016 from the rating of A+ since 2010, which was the initial year that Fitch rated the City. Additional background related to the City s bond ratings is located in the Providing a More Cost-Effective Financing Framework on page 20. Multi-Year Financial Planning The multi-year financial planning process represents the core of BFSA s financial oversight and is one of the most critical components to the fiscal stability of the City and the Covered Organizations. With BFSA s assistance, the City and Covered Organizations have developed and maintained a comprehensive financial planning process that has helped to address structural budget gaps as well as to recognize and prepare for future fiscal challenges. The Mayor is required to submit the annual four-year financial plan to the BFSA by May 1 of each year; the financial plan is to include the City and Covered Organizations. During , the BFSA monitored implementation of the Financial Plan of the City and its non-exempt Covered Organizations. The Financial Plan included the adopted annual budgets for the City and the Covered Organizations, as required, along with financial projections for the subsequent three fiscal years. There were two Financial Plan modifications submitted to BFSA during the year; one was submitted by the City and impacted only the fiscal year while the second modification was submitted by the District and effected all four years of the Financial Plan. The modification submitted by the City reflected increased appropriations in the amount of $4.1 million for judgments and claims and were funded through the use of assigned fund balance; the total amount of fund balance assigned for judgments and claims at June 30, 2015 was $14.0 million. 8

61 The modification submitted by the District was necessary due to the settlement of a labor agreement between the District and the Buffalo Teachers Federation (BTF) and the subsequent incremental costs associated with the labor agreement; in addition to this change the District modified other revenues and expenditures concurrently with the submission of the revised Financial Plan. In total, projected expenditures were estimated to increase by $143.2 million and projected revenues were estimated to increase by $5.2 million. The resulting difference of $138.0 million is the increase in the estimated four-year deficit to the District. Neither the Buffalo Municipal Housing Authority (the BMHA ) nor the Buffalo Urban Renewal Agency ( BURA ) submitted any budget or financial plan modifications during FY. All modifications are discussed in the section subtitled Monitoring Fiscal Health. debt. On May 1, 2017, the City submitted the Financial Plan to the BFSA which included the financial plans of the City and Covered Organizations, as required. The City s Financial Plan included a total cumulative projected baseline deficit of $32.4 million. The City was able to address the deficit by including the use of $32.4 million of unassigned fund balance. The budget gap is $12.2 million which is filled through unassigned fund balance. The projected gap for the remaining three years is a cumulative $20.2 million and is also addressed through the use of fund balance. As previously noted, the District has been faced with a structural imbalance over the last several years with annual deficits occurring annually between 2012 and A $12.2 million surplus was reported in Fund balance declined $32.4 million from 2011 to A $43.0 million deficit has been conservatively projected by the District for the fiscal year ending June 30, A deficit has been budgeted for within the FY Adopted Budget (the Adopted Budget ). The District s Financial Plan includes $3,618.4 million in estimated revenues and $3,718.5 in budgeted appropriations with a resulting budgetary gap of $100.1 million. The District has projected to use $46.0 of fund balance, leaving a total remaining budgetary gap of $54.1 million to be filled through various gap-closing measures. The District s budgeted deficit of $22.0 million is fully funded with the use of fund balance. It is noted the District has retained an amount of unassigned fund balance over the Financial Plan which is compliant with the District s fund balance policy to retain a minimum of 4% of total expenditures. The BMHA s budget estimates $42.8 million in total operating revenue and appropriates $44.6 million for total operating expenses. The Adopted Budget contains a budgeted net loss of $1.8 million prior to debt service. Operating revenues are projected to increase modestly from $44.8 million in 2018 to $45.5 million in 2021, an increase of $2.7 million or 6.3 percent over the Financial Plan. Operating expenses, including debt service, are projected to increase from $44.6 million to $45.2 million, an increase of $0.6 million or 1.3 percent over the Financial Plan. The three out-years of the Financial Plan include net income of $0.2 million, $0.2 million, and $0.3 million for FY 2019, 2020, and 2021, respectively, before the payment of principal on 9

62 The Financial Plan for BURA projected $68.2 million in expenditures over the four years of the Financial Plan. The Financial Plan submitted to BFSA shows expenditures decreasing each year over the Financial Plan through FY 2021 and revenues are projected to decrease in a corresponding manner. BURA s operating budget is largely financed with Community Development grants in addition to a few other smaller federal grants. In addition to the annual allotment approved by Congress, BURA has the option of drawing down prior year funds to fund programs. BURA projected a substantial decrease in the amount of grant funding over the Financial Plan of $3.3 million, or 20%, and adjusted projected expenditures to match what is expected to be received from the U.S. Department of Housing and Urban Development ( HUD ). At the time of the submission of the Budget and Financial Plan, BURA had not yet received the annual award notice. Subsequently such award notice has been received and reflects a positive variance for as originally budgeted of $3.3 million. On a year-to-year basis the total amount awarded from HUD is only being reduced by $87,000, or 0.5%. The BFSA s individual reports on the budgeted and related financial plans of the City and Covered Organizations are included within this report in the section titled BFSA Reports on the Budgets and Financial Plans of the City of Buffalo and the Covered Organizations. On June 16, 2017, the BFSA reviewed the final Financial Plan and found the submission to be complete and compliant with the standards set forth in the BFSA Act. Monitoring Fiscal Health Regular and aggressive monitoring of spending, budgetary processes and cost-savings initiatives are essential to ensuring that the City continues its progress towards fiscal stability. Under the guidance of the BFSA, the City and Covered Organizations have developed a reliable reporting process for revenues, expenditures, cash flow, workforce size and the status of gap-closing measures. This process has yielded a more disciplined approach to fiscal monitoring and has resulted in the identification of necessary budget transfers or modifications, as appropriate, during the fiscal year. During , the BFSA monitored the Financial Plans of the City and its Covered Organizations. Such monitoring was performed through various activities including but not limited to: analysis and reporting on the financial plans, analysis and reporting on quarterly reports, monitoring of actions by entities (e.g., efficiency grants drawdown requests by the City, overtime monitoring, etc...), reviewing proposed collective bargaining agreements and determination of whether such agreements were consistent with the financial plan, and reviewing any proposed budget and financial plan modifications. The BFSA s final evaluation of the City s compliance with its budget for the year ended June 30, 2017 is expected to occur in or around December 2017 after the City Comptroller releases the audited financial statements. 10

63 With respect to the monitoring of quarterly reporting process of the City and its Covered Organizations, the BFSA reviewed the projections to evaluate if revenues had been overestimated or expenditures/expenses had been underestimated, resulting in a need for a budget modification. During FY both the City and the District submitted budget modifications to BFSA. As previously discussed, the increase in budgeted appropriations for the City was for judgments and claims and was funded through the use of assigned fund balance for judgments and claims in the amount of $4.1 million. The District s FY Adopted Budget was modified to reflect an increase in the amount of $5.1 million for additional grant revenue and related grant expenditures, an additional $2.4 in NYS Aid with an increase in budgeted appropriations for nursing services, and $41.5 million for the settlement of the BTF labor contract funded from assigned fund balance for prior year claims as specifically set-aside for labor negotiations. Reports and Recommendations Issued by the BFSA during The BFSA issues reports during the year on various matters involving the City and the Covered Organizations that come before the BFSA during fulfillment of its statutory responsibilities. The following summary provides a description of the reports issued, recommendations provided to the City or Covered Organization as applicable, and the response from the City or Covered Organization as provided to such recommendations as appropriate. City of Buffalo - On December 7, 2016, the BFSA provided a written and verbal report on the City s 2017 Recommended Capital Budget and Capital Improvement Plan. The 2017 Recommended Capital Budget contained twenty-five projects that totaled $23.2 million; financing in connection with the anticipated 2017 bond sale was requested by the Mayor in the amount of $20.8 million towards 2017 capital projects, with $2.4 million proposed to be authorized but unissued. The 2017 Capital Budget included only City capital projects and did not include any amount for the District as District management determined a capital borrowing in 2017 was unnecessary. The Capital Improvement Plan met the requirements of the BFSA that the City develop a full five-year capital improvement program. The BFSA has recommended that the City not include general maintenance functions as part of the Capital Budget. The City did include such general maintenance functions including building demolitions and tree trimmings/maintenance in the 2017 Recommended Capital Budget totaling approximately 12.5 percent of the proposed capital budget. Over the five-year Capital Improvement Plan, such general maintenance functions comprise 14.6 percent, or $15.5 million, of the total plan. 11

64 - On December 7, 2016, the BFSA reported on the City s first quarter operations. At the end of the first quarter, the City was projecting a final $9.3 million deficit which represented a $1.4 million positive budget variance. The BFSA recommended that the City closely monitor sales tax revenue, traffic adjudication revenue and other revenue streams. Sales tax growth has been stagnating and had been curtailed by the decrease in gasoline prices and the weakening of the Canadian dollar against the U.S. dollar and the resulting decrease in consumer shopping by Canadians in WNY. - On December 7, 2016, the BFSA provided a report on the City s 2016 audited financial statements. The presentation on the City s financial statements provided an analysis on revenues, expenditures and other year-end operational metrics, as well as historical trends analyses. The City ended its fiscal year in compliance with the budget. However, the BFSA noted that the Solid Waste and Recycling Fund ended the year with an operating loss of $4.4 million and an accumulated debt of $16.8 million which the City has setaside in General Fund fund balance as a receivable from the Solid Waste and Recycling fund. The BFSA recommends that the City formulate a long-term plan to address the annual deficit and eliminate the cumulative deficit. The BFSA also recommended that the City should look for long-term concessions when negotiating with labor unions. Specifically, the City should be looking for greater employee contributions towards health insurance during employment, as well as requiring future retirees to contribute more towards their health insurance or to eliminate the retiree health insurance benefit all together. - Additionally, on December 7, 2016 the BFSA staff provided a written report reviewing the potential fiscal impact on the City of Buffalo s general fund as it relates to new federal and state labor laws. Focusing on The Final Rule on Overtime and The Minimum Wage Act. - On March 8, 2017, the BFSA provided a written summary report of the final 2017 Capital Budget as approved by the City s Common Council on December 13, The City s total proposed bond sale is $25.6 million, consisting of $22.7 million for City projects to be paid for by General Fund property taxes and $2.9 million of parking bonds. The parking bonds are excluded from the City s total limit, as these bonds are paid for from revenue from the parking ramps. The District did not budget an amount in the 2017 Capital Budget as the District is utilizing savings from bond refundings made in prior years to fund its current year capital needs. - On March 8, 2017, the BFSA provided a written and verbal report on the City s second quarter operations. At the end of the second quarter, the City was projecting a $10.3 million deficit and $0.4 million positive budget variance. The BFSA noted that overtime for Fire department was a significant risk since the department was projecting to be $3.5 million over budget in regards to overtime, largely related to mandated training by the NYS Department of Labor, Public Employee Safety and Health Bureau. In addition, BFSA recommended continuing to monitor specific revenues, including traffic adjudication and miscellaneous property sales. 12

65 - On March 8, 2017, the BFSA presented on the New York State Executive Budget and the potential impact it could have on the City and the District, and included grant opportunities. - On May 15, 2017, the BFSA provided a written report on the City s third quarter operations. At the end of the third quarter the City was projecting a $10.7 million deficit and a $4.3 million positive budget variance. The BFSA raised concerns and recommended close monitoring of sales tax and traffic adjudication revenues, and the amount of overtime expenditures. These concerns were previously raised and discussed at previous board meetings. - On May 15, 2017, the BFSA reported on the City s Proposed Budget and Financial Plan. While no modifications were requested, the BFSA raised several concerns on the City s Financial Plan including the inclusion of uncertain revenues, underestimating overtime for protective services and the continued use of unassigned fund balance to close the current year and out-years budget gaps. - On May 15, 2017, the BFSA reviewed and provided a report in regards to the City Comptroller s proposed 2016 capital borrowing. From 2005 to 2007, capital borrowings were issued by BFSA on behalf of the City. Beginning in 2008, the City s resumed issuing debt in contemplation of the BFSA s eventual transition into an advisory period. The proposed 2017 capital borrowing provides financing for projects approved in 2013, 2015, 2016 and 2017 through the issuance of long-term general obligation bonds in the approximate amount of $24.4 million, with $12.5 million for new projects authorized in FY 2017, $2.8 million for Parking ramps, and the balance of $9.1 million consisting of previously authorized but unissued debt. BFSA s financial advisor structured a theoretical BFSA bond issuance to estimate the savings that could have been achieved if BFSA had issued debt on behalf of the City. The analysis estimated $199,070 in overall debt services savings if BFSA completed the borrowing as compared to the City, due to the higher credit rating of the BFSA, and $175,564 in present value savings. - On May 15, 2017, the BFSA provided an update on the City s use of funding available from New York State Efficiency Grants, and approved the redesignation of a portion of the funds to support several different projects in the City. - On June 16, 2017, the BFSA provided a brief written report on the City s Final Budget and Financial Plan, outlining changes between the proposed and adopted budget. A copy of the BFSA s final report is included in the section titled BFSA Reports on the Budgets and Financial Plans of the City of Buffalo and the Covered Organizations. The BFSA found the City s adopted budget to be complete and compliant with the BFSA Act at this time. 13

66 - During the Fiscal Year, the BFSA reviewed and issued reports on two potential labor agreements impacting the City as follows: o A report was issued on December 7, 2016, related to a collective bargaining agreement with the Crossing Guards. o A report was issued on March 8, 2017, related to a collective bargaining agreement with the Local 17 representing the operating engineer s workforce of the City. In conjunction with the review of such collective bargaining agreements, the related incremental costs to the City were calculated and reviewed. The retroactive costs associated with these labor agreements had been accrued for in past years by the City. The current fiscal year costs (FY ) were fully funded within the current year budget and did not require a budget modification. With respect to prospective costs over the course of the financial plan, the City had budgeted for such incremental costs within the departments for unsettled labor agreements; no financial plan modification was necessary. Buffalo City School District - At the December 7, 2016 meeting, the BFSA provided a written report on the District s first quarter operations. At the end of the first quarter the District was projecting an operating deficit of $54.4 million, which was an increase of $40.4 million over the adopted budget amount of $14.0 million. The significant increase in the operating deficit is attributed to the settlement of a collective bargaining agreement with the Buffalo Teachers Federation. - Additionally, at the December 7, 2016 board meeting the BFSA provided a presentation on the District s FY Audited Financial Statements. The report documented an operating surplus of $12.2 million for the year ended June 30, 2016, and is the first reported surplus in the last five-years for the District. The District had reported an operating deficit the four previous years. - At a special board meeting held February 6, 2017, the BFSA provided a report and presentation on the District s modified Financial Plan that was impacted by the recent collective bargaining settlement with the Buffalo Teachers Federation. The BFSA found the submission to be inadequate as it was unclear how the incremental costs of the BTF labor contract would be funded. As opposed to requiring a revised submission, the BFSA recognized the timing of the New York State budget and related school district funding would occur soon and it was impractical to request a revised submission. Accordingly, the BFSA issued Resolution that clarified what information would need to be submitted by the District to the BFSA for the BFSA to consider the District s Financial Plan to be found complete and compliant with the BFSA act. 14

67 - At the March 8, 2017 board meeting, the BFSA provided a written report on the District s second quarter operations. At the end of the second quarter the District was projecting an operating deficit of $54.6 million. - At the March 8, 2017 board meeting, the BFSA provided a report summarizing the potential impact of Governor Cuomo s State Fiscal Year ( SFY ) Executive Budget as it relates to the Buffalo City School District. - On May 15, 2017, the BFSA issued Resolution No finding that the preliminary Financial Plan was complete pursuant to assurances that the District would submit by June 30, 2017 a final Financial Plan to the BFSA which would address the unfunded projected budgetary gaps through a clearly defined and detailed program of gap-closing actions. - Additionally, at the May 15, 2017, Board meeting, the BFSA provided a written report on the District s third quarter operations. At the end of the third quarter the District was projecting an operating deficit of $43.0 million. - On June 16, 2017, pursuant to the assurances that a final financial plan would be submitted by June 30, 2017, the BFSA found the District s to be compliant with the BFSA Act. - The District s final Financial Plan was submitted to BFSA on June 21, 2017 and was subsequently reviewed by the BFSA on August 15, In addition to the review, a meeting was held with District leadership including the Superintendent, Board President and District Chief Financial Officer to discuss the impact the budget and projected expenditures on various programs of the District. The ability of the District to balance the Financial Plan is heavily reliant on the District s ability to generate budgetary savings and cost reductions as detailed in its deficit reduction plan. The BFSA noted that in the event the District does not receive additional revenues, it is highly likely the District will need to consider cost reduction matters including the reduction or elimination of programs that are intended to address the educational reform issues facing the District. A copy of the final report issued by the BFSA begins on page 70. Buffalo Municipal Housing Authority ( BMHA ) - On July 25, 2016, the BMHA Executive Director Dawn Sanders-Garrett provided a presentation to the BFSA concerning multiple issues facing the BMHA. BMHA had performed a physical needs assessment which included unit occupancy rates, unit turnaround time and a review of the indicators that HUD uses in scoring local housing authorities. 15

68 - On September 21, 2016, the BMHA Deputy Executive Director Modesto Candelario provided a presentation to the BFSA on BMHA s occupancy process and analysis, the Public Housing Assessment System ( PHAS ) and the rental assistance demonstration program ( RAD ). - On December 7, 2016, the BFSA reported on the BMHA s first quarter operations. At the end of the first quarter, net income as reported for the first quarter was approximately $581,000. On a cash basis, a surplus of approximately $642,000 was reported after accounting for the cash payment on debt principal of approximately $300,000 and the non-cash accrual for other postemployment benefits of approximately $360, On March 8, 2017, the BFSA reported on the BMHA s second quarter operations. At the end of the second quarter, revenues exceeded expenses by $0.2 million. FY debt service was $0.9 million; a net operating surplus of $0.4 million was reported. - On May 15, 2017, the BFSA reviewed a tentative Impact Negotiations Memorandum of Agreement between the BMHA and the AFSCME Local 264 representing the managerial, white collar and blue collar units and Local 17-17S representing the operating engineers. The impact negotiations were a result of the BMHA s intent to private certain properties currently managed by BMHA. The BFSA noted the costs of the contract to be approximately $206,000 in the first year with an annual cost thereafter of approximately $25,000. A discussion was held with the Executive Director of BMHA who conveyed the various considerations in determining that privatization was desired by BMHA management. There are various outstanding loans from such properties; the BFSA recommended that the contracts with the selected management companies include provisions for paying down the outstanding loans. - On May 15, 2017, the BFSA reported on the Financial Plan. The BFSA raised several concerns about the BMHA s Financial Plan including the potential reduction to the HUD Operating Subsidy in FY and the threat such a reduction represents to the financial health of the BMHA. Due to the budgeted funding reduction, BMHA anticipates the usage of operating reserves in FY Such a reduction would have a negative impact on the outyears of the Financial Plan. A material concern was the fact that salaries and wages are not projected to increase over the Financial Plan and all labor contracts have expired. Also, due to the current low manpower count, additional pressure is being placed on BMHA management to accomplish what needs to be done with fewer employees. - Additionally, on May 15, 2017, the BFSA reported on the BMHA s third quarter operations. At the end of the third quarter the BMHA was projecting a $1.1 million favorable variance after the payment of debt service for the fiscal year. - On June 16, 2017, the BFSA provided a resolution stating that the Buffalo Municipal Housing Authority s Final Budget and Financial Plan was complete. 16

69 Buffalo Urban Renewal Agency ( BURA ) - At the September 21, 2016 BFSA meeting, Ms. Nona Watson, Executive Director of BURA, provided an overview of the organization which provided a brief history of BURA, a review of their current projects and future plans, and provided a detailed overview of the various programs available to City residents. - On December 7, 2016, the BFSA provided a report on BURA s 2016 Audited Financial Statements and Single Audit Findings, reporting on key revenues, expenditures, personnel service costs and internal control findings. All prior year findings have been resolved and there are no new findings. In addition, it was reported that the outstanding balance of the Section 108 Loan debt of $3.8 million was fully retired during FY 2016, ahead of schedule. - Additionally, on December 7, 2016, the BFSA provided a written report on BURA s first quarter operations. - On March 8, 2017, the BFSA provided a written report on BURA s second quarter operations. - On May 15, 2017, the BFSA provided a written report on BURA s Proposed Budget and Financial Plan. The BFSA found that the BURA financial plan was complete at the time of submission and required no further information from BURA at that time. A copy of this report begins on page Additionally, on May 15, 2017, the BFSA provided a written report on BURA s third quarter operations. - On June 16, 2017, the BFSA provided a resolution stating that the Buffalo Urban Renewal Agency s Final Budget and Financial Plan was complete. Workforce Summary and Trends Workforce costs represent the single largest expenditure category in the City and its Covered Organizations. For the City in , the costs of employee salaries, pensions, health insurance (for active and retired employees) and other benefits accounted for 84.4 percent of total General Fund budgeted appropriations. In the School District, these costs represented 54 percent of total General Fund budgeted appropriations. Both the City and the District s longterm fiscal stability remains directly tied to its ability to manage the size and cost of its workforce. Workforce costs continue to be the primary growing budget category due to increases in both wages and fringe benefits, including health insurance and pension contributions. At June 30, 2017, the City had current labor agreements in place with all labor unions except for two which expired on June 30, 2017, being the Buffalo Firefighters Local 282 and Water Caulkers Local 264. The District has a settled contract with BTF, its largest union, through June 30, 2019; at June 30, 2017, the District has expired contracts with most remaining unions. 17

70 The City s liability for its future retiree health insurance costs, representing the long-term other postemployment benefit (OPEB) liability, was required to first be reported at June 30, 2008 under generally accepted accounting principles ( GAAP ). This estimate is required to be revalued by an actuary every two years; the last valuation performed was in connection with year-end June 30, 2015 for the City. The City s OPEB obligation was estimated at $1.5 billion and the District s OPEB liability was estimated at $2.1 billion at June 30, The OPEB liability for the BMHA is $87.8 million at June 30, 2015 and $16.5 million for BURA at June 30, 2014; both amounts are unfunded. The amounts reported on from those two dates reflect the last time a full valuation was completed for each organization. For , the City has increased its budgeted workforce by 10 positions compared to FY Actual filled positions in 2017 increased by 72 to 2,424 as compared to 2,352 at fiscal year-end ( FYE ) The increase in actual employee levels on a year-to-year basis is attributed primarily to two new police recruit classes in FY 2017 to address recent retirements. The District s adopted budget increased budgeted positions by full-time positions on a General Fund basis compared to the fiscal year end. The increase is attributed to the addition of 109 teachers, 10 administrators, 38 white-collar employees, 33 teacher assistants/teaching aides, 1 member of Trades, 14 blue-collar employees, 4 operating engineers, and 3.5 exempt employees. As of June 30, 2017, the District employed 5,327 FTE s on an All Funds Basis, a decrease of 30 employees compared to the originally budgeted amount of 5,283. It is noted that staff levels remain below levels. BMHA s workforce has decreased on a year-to-year basis, decreasing twenty-six positions to a total of 156 filled positions as of June 30, In recent years, BMHA has gone from 236 filled positions in 2012 to 218 positions in 2014, and decreased further to 193 positions at yearend Compared to FYE 2012, the current workforce has been reduced by 80 employees over the last five years. The Adopted Budget includes 175 positions. The reduction in staffing is reflective of reduced federal funding experienced both nationally and regionally. BURA had 43 positions budgeted and 39 filled at the conclusion of the fiscal year. BURA s workforce was reduced from 60 budgeted FTE s at FYE 2012 down to the current 39, a decrease of 21 positions over four years. Employment levels remain significantly below levels when BFSA was created. BURA has adopted a budget and financial plan that maintains 41 positions in each of the financial plan, with 32 classified employees and 9 exempts. The significant decrease in BURA positions has been driven by several factors, including reductions in Federal grant funding, the elimination of programs and corresponding positions that were determined not to be an appropriate use of Federal CDBG funds. The reduction of BURA positions was largely through the elimination of vacant positions and, to a lesser extent, through layoffs. BURA has stated that if there are further reductions in grants from HUD they will need to continue to reduce staff. 18

71 The following chart shows the City s actual number of filled positions from 2003 to 2017: City Workforce Size (number of FTEs) 3,000 2,800 2,600 2,400 2,818 2,638 2,492 2,428 2,345 2,388 2,378 2,457 2,363 2,389 2,369 2,356 2,280 2,361 2,352 2,424 2,200 2,000 Since the inception of the BFSA, the City has eliminated 394 FTE positions and reduced its workforce by fourteen percent. The reduction in the workforce was achieved initially through a collaborative effort and consolidating certain functions with Erie County, including the maintenance of City parks and prisoner detention services. In addition, the City utilized layoffs as well as not filling vacant positions to reduce overall employee levels. Beginning in 2009, the City took back maintenance of City parks and the respective workforce when Erie County returned park services to the City. Erie County returned prisoner detention services back to the City of Buffalo in 2012 for male detainees and in 2015 for female detainees. These positions are in the City s General Fund. The following chart shows the District s actual number of filled positions from 2003 to 2017 for both the General Fund and on a District-wide basis: 19

72 The District has decreased its All Funds full-time workforce from 5,656 at FYE to 5,327 as of June 30, This is a decrease of 329 full-time positions or a decrease of 5.8 percent over the last thirteen years. Projected workforce trends are discussed in the individual entity reports within the section titled BFSA Reports on the Budgets and Financial Plans of the City of Buffalo and the Covered Organizations. Providing a More Cost-Effective Financing Framework Background and Bond Ratings From 2004 through 2007, the BFSA issued debt on behalf of the City for both its capital and cash flow needs, refunded existing City debt at more beneficial interest rates, and provided shortterm budgetary relief through deficit financing. The statutory power to undertake deficit financing expired at the end of the fiscal year. These actions were possible due to BFSA s highly-rated credit as compared to the City s bond ratings, which enabled savings for the City upon issuance of its Declaration of Need. Beginning in 2008, in contemplation of exiting a control period, the BFSA permitted the City to begin to borrow on its own behalf. The BFSA s credit rating is currently AAA by Fitch Ratings ( Fitch ), which reaffirmed its rating in October 2016, and was increased in January 2015 from AA+, and Aa1 by Moody s Investor Service ( Moody s ). The Fitch rating, which is the higher of the two, represents the highest investment grade with minimal risk; whereas Moody s rating reflects a high investment grade and very low risk. Both credit ratings are consistent in that they represent a better credit rating then the City. Pursuant to the BFSA Act, all the City s State aid, along with both the City and District s portions of the local sales tax, are legally revenues of BFSA. The first call on those revenues is to pay any debt service. This intercept and first call provision allows BFSA to maintain a credit rating superior to the City s. The City received a bond rating upgrade in from Fitch Ratings ( Fitch ) to AA- from A+. Prior to this rating increase, Standards and Poor s Rating Services ( S&P ) increased the City s rating in from to A+ from A and reaffirmed this rating in The rating from Fitch is consistent with the bonds ratings from Moody s of A1 and S&P of A+, both of which were also reaffirmed in The City has made significant strides in improving its bond ratings since The financial oversight by the BFSA over the City has been consistently included as a key rationale in the determination that rating upgrades were appropriate. The rating agencies have commented on the financial success the City has had with respect to multi-year financial planning and the adequacy of the City s reserves, for example, but cautions that the overall high debt burden, below average socioeconomic indicators, and the use of reserves over the Financial Plan to fund general City operations, are factors that could potentially negatively impact the ratings. 20

73 Since BFSA was created in 2003, the City s credit rating has improved from BBB- with negative outlook from S&P, and from Baa with negative outlook from Moody s. Beginning in 2010, the City contracted with Fitch to also rate the City s debt. The City s credit ratings in 2003 were perilously close to the non-investment grade by the rating agencies. It is noted that currently the rating outlook from all three rating agencies is stable. A historical overview of bond ratings, by agency, since 2003 is as follows: Moody s, similar to previous four years, affirmed the City s A1 rating with a positive outlook on the City s 2017 general obligation debt, which totaled $24.4 million. Moody s last upgraded the City in 2012 from A2, citing significant improvements of the City s financial operations and liquidity following the augmentation of reserves in each of the last nine years and a trend of structurally balanced operations, despite near-term declines. The A1 rating pointed to the following factors: (1) challenges posed by the city's below average demographic profile, (2) a high debt burden that is expected to gradually moderate, (3) the challenges posed by open employee contracts, (4) the oversight of City operations by the Buffalo Fiscal Stability Authority, which had approved the City's four-year financial plan; (5) the City's improved revenue raising flexibility given modest growth in assessed valuation and improved taxing margin, and (6) additional bondholder security provided by the City's legally required and trustee-held bi-annual set-aside of debt service payments from first property taxes collected. The stable outlook reflects Moody's belief that the city's liquidity and reserve position will remain adequate, evidenced by elimination of the need for seasonal cash flow borrowing in the last eight fiscal years. Prior to the 2012 bond rating upgrade, Moody s upgraded the City s general obligation debt from Baa2 to an A2 rating with a stable outlook in the fiscal year. In 2007, Moody s upgraded the City credit rating from Ba to Baa2, reflecting the city s improved financial profile, stronger financial management controls, and continued advisement provided by the Buffalo Fiscal Stability Authority. S&P reaffirmed the City s A+ bond rating with a positive outlook on the City s 2017 general obligation debt. S&P last upgraded the City s rating from A to A+ in This rating represents a high investment grade, with low risk, similar to the Fitch rating of AA- stable outlook. Both S&P and Fitch have assigned higher credit ratings for the City compared to Moody s. The rational provided to support the A+ rating included: (1) Very strong management conditions, with strong financial management policies and practices and oversight provided by the BFSA; (2) weak debt and contingent liability profile when pension and other postemployment benefits are considered; (3) weak budgetary performance in 2013 after adjusting for nonrecurring revenues and expenditures; (4) adequate budgetary flexibility, with strong reserves; (5) limited revenue and expenditure flexibility; (6) and very strong liquidity. Prior to the bond rating upgrade, S&P last upgraded the City from A- to an A rating with a stable outlook on the City s general obligation long-term debt in the fiscal year. In 2009, S&P upgraded the City credit rating from BBB+ to A-, 21

74 reflecting the city s improved financial profile, stronger financial management controls, and continued advisement provided by the Buffalo Fiscal Stability Authority. Fitch Ratings reaffirmed its credit rating of the City during fiscal year 2017 at A+ with a stable outlook. The stated rating rationale included: (1) the BFSA has assisted the City in restoring a sound fiscal foundation, resulting in much improved reserve levels, (2) BFSA transition from a control period to an advisory period, reflecting fundamental financial improvements, (3) the City s economic base is diverse and continues to experience commercial and residential development, and (4) conservative policies and strong management have contributed to an increase in the City s overall financial flexibility. As noted above, Fitch was first contracted by the City to begin rating the City s debt beginning in 2010, when they issued an A+ stable outlook, which was subsequently upgraded to a AA- stable outlook in March of The following table illustrates credit rating comparisons between BFSA and the City of Buffalo in fiscal year 2017: Moody s S&P Fitch Aaa AAA AAA BFSA's Highest Investment Grade / Highest Investment Grade / Highest Investment Grade / Minimal Risk Minimal Risk Minimal Risk Rating BFSA's Aa1 AA+ AA+ High Investment Grade / Very Rating Very High Investment Grade Very High Investment Grade Low Risk City s Rating A+ AA- Fitch and High Investment Grade / High Investment Grade / Low S& P Low Risk Risk City s Rating - A1 Moody's Upper Medium Grade / Low Risk Baa BBB BBB Moderate Risk Moderate Risk Moderate Risk Ba BB BB Speculative / Substantial Risk Speculative Speculative The BFSA s bond ratings are three steps higher for Moody s and three steps higher for Fitch, based on current ratings. 22

75 Forward Delivery Agreements and Related Investment Earnings In conjunction with issuing debt on behalf of the City, the BFSA previously entered into forward delivery agreements ( FDAs ) to invest the debt-service set asides that are withheld monthly from sales tax receipts as required for annual principal and interest payments. For the year ended June 30, 2017, the BFSA reported a total of $152,949 in investment earnings from funds held in various bond related accounts, from state funds held on behalf of the City and from funds in its own operating accounts. The FDA s provide the City a guaranteed rate of return between 4.48 percent and 5.13 percent, which far exceeded the rate of return the City earned during 2017 of approximately 0.21 percent. The BFSA earned $152,493 from the FDAs during the year ended June 30, The remaining amount of $456 was earned on the AIM funds held by the BFSA and on the operating funds. Review of 2017 Capital Budget and Related Capital Borrowing As previously noted, during the year the BFSA reviewed and reported on the City s 2017 Capital Budget and the accompanying bond sale of $24.4 million, which included a $9.3 million in borrowing for projects authorized in prior year, $12.4 million of projects approved with the 2017 Capital Budget, and an additional $2.7 million approved for Parking Fund capital projects also approved within the 2017 Capital Budget. The Parking Fund bonds are excluded from the City s debt limit. During the period 2012 through 2016, the City Comptroller reduced the annual authorized maximum borrowing between 10 and 15 percent to limit the City from borrowing for projects that were not deemed shovel-ready in order to borrow for what the City was ready to use, to increase efficiencies, and to reduce borrowing costs on funds that would not be utilized in a timely manner. In 2017, the Comptroller did not include this reduction. It is noted that the City has not required a cash flow borrowing since BFSA Debt Issuances and Refundings In December 2015, the BFSA issued a refunding bond to refund the outstanding 2005A and 2006A series. This refunding provided a net present value savings of $1.35 million over the next ten years, which will ultimately be passed along to the City. 23

76 The following table contains a listing of all BFSA debt transactions since the BFSA was created, and amounts outstanding at June 30, 2017: BFSA Debt Table at June 30, 2017 Note (BAN) Issue Date Bond Par Issued Par Issued ($ in thousands) Sales Tax and State Aid Secured Bonds (Series 2004A) Jun-04 $25,745 $0 Bond Anticipation Notes (Series 2004A-1) Sep-04 $84,000 $0 Sales Tax and State Aid Secured Bonds (Series 2005A) Jun-05 $28,030 $0 Sales Tax and State Aid Secured Bonds Refunding (Series 2005B&C) Jul-05 $47,065 $1,985 Bond Anticipation Notes (Series 2005A-1) Jul-05 $90,000 $0 Sales Tax and State Aid Secured Bonds (Series 2006A) Apr-06 $27,270 $0 Bond Anticipation Notes (Series 2006A-1) Apr-07 $60,000 $0 Sales Tax and State Aid Secured Bonds (Series 2007A) Apr-07 $28,470 $14,085 Sales Tax and State Aid Secured Refunding Bonds (Series 2015A) Dec-15 $14,170 $11,705 Total $170,750 $234,000 Structural Reform and Savings Opportunities Bond Par Outstanding $27,775 $0 The identification and implementation of new cost-savings initiatives is critical to the long-term fiscal stability of the City and its Covered Organizations. The City has projected structural budget deficits over the Financial Plan in which expenditures are projected to exceed revenues by 1.6%. The City s Financial Plan includes a cumulative deficit of $32.4 million being reported for the fiscal years. Without reductions in expenditures or an increase in revenues, the City s current budget structure is unsustainable on a long-term basis. Future structural savings need to continue to focus on employee compensation and benefits, in particular with respect to healthcare costs and employee and retiree contributions towards health insurance. Note Par Outstanding For the District s FY Adopted Budget, year four of a school-based budgeting process was implemented. All public schools were provided with baseline staffing levels and were allocated flexible funds on a per pupil basis for students for English Language Learners (ELL) and Special Education Students (SWD). Additionally, schools were given more autonomy to decide the preferred manner of allocating discretionary funds based on the individual school s needs. The fiscal impact of these issues was examined in detail in BFSA s analysis of the District s Financial Plan which is included herein and begins on page

77 Collective Bargaining Agreements The BFSA is required to review any proposed collective bargaining agreement before the agreement is adopted by the governing body of the City or the Covered Organization. The BFSA issues reports on all proposed labor agreements, and requests responses from the City or the Covered Organization to any recommendations that are made by the BFSA. Such reports and related recommendations have been discussed in the section Reports and Recommendations Issued by the BFSA during , beginning on page 11. Efficiency Funding The non-competitive State funds are earmarked specifically for investments in efficiency-related projects and require BFSA approval. There were no reductions to these efficiency incentive grant appropriations in ; it is noted that reductions by New York State did occur previously for a combined decrease of $4.9 million. The total amount available to the City is $20.1 million of which all of these funds have either been spent and reimbursed, in the process of implementation, or have been committed to projects. As of June 30, 2017, the City had received $19.7 million of efficiency grant funding as a combination of advance funding and valid reimbursements of dollars spent, with a remaining authorized project balance of approximately $348,000 remaining. On May 15, 2017, the BFSA approved a request by the City to redesignate New York State Efficiency Incentive Grant funding to increase funding to previously approved projects. This redesignation resulted in reallocating $144,532 from various projects that were completed. The redesignation of funds to ongoing projects included an additional $128,325 for technology upgrades related to the completion of the HANSEN housing inspectors technology and $16,207 for the completion of the City s new Land and Use Planning Study (Green Code). The final reimbursement request was provided to the New York State Division of Budget in August 2017 from the BFSA. Additional BFSA Operational Information: Legal Matters The adoption of the wage freeze by BFSA in April 2004 was the basis for a number of lawsuits as was the subsequent lifting of the wage freeze effective The freeze, effective April 2004, prevented any increase in wages, including increased payments for salary adjustments according to "plan and step-ups or increments. BFSA has successfully defended each case. Currently there are no pending cases involving the BFSA. The New York State Court of Appeals heard the series of wage freeze challenges on February 9, 2011 and rendered a unanimous decision in favor of BFSA on March 29, It was a key decision, in that it overturned earlier decisions made by the NYS Supreme Court and Appellate Court which had both ruled against the BFSA and covered entities. The Court of Appeals found that, Thus, the entire purpose of the statute was to place the City of Buffalo on sound financial ground over the long term. In order to accomplish such purpose, BFSA was empowered to 25

78 freeze wages and salary increments until the City's growth and stability were renewed. The intent of the statute supports the City's position. Annual Internal Controls Review/Governance The purpose of the internal control structure is to ensure that BFSA has a system of accountability for and oversight of its operations and to assist BFSA in achieving its goals and objectives with minimal risk to the organization s operations. BFSA s Principal Analyst served as the BFSA s Internal Controls Officer for The Internal Controls Officer is responsible for the review of internal control policies and procedures on an annual basis, or more if necessary, and regularly meets with BFSA staff to ensure internal control performance standards are being met and recommendations are being executed. The Internal Controls Officer meets a minimum of once a year with the Governance Committee to report on the procedures performed and findings made in conjunction with the internal controls review. An internal management committee consisting of the Executive Director, Comptroller and Principal Analyst/Internal Controls Officer provides accountability for the internal control processes. In addition, the Executive Director and Comptroller work closely with BFSA s independent auditor who also reviews the internal control structure and performs tests to determine if it is operating effectively, as well as determining if any identified deficiencies have been addressed as necessary and in a timely manner. BFSA follows the guidelines established in the Internal Controls Manual, which describes internal control standards and contains various policies and procedures for areas such as procurement, investments, financial transactions, travel, purchase card reimbursement and general reimbursement policies, and also includes the office technology and facilities management handbook. BFSA is satisfied that the internal control structure and the related policies and procedures provides an adequate system of controls so that errors do not occur without being detected in a timely manner, and assets are adequately safeguarded. BFSA took a series of steps in to reinforce its system of internal controls including: In March 2016, the BFSA reviewed and approved revised Procurement Guidelines, which provides guidelines in regards to the use, awarding, monitoring, and reporting of procurement contracts during the course of BFSA business. In July 2016, the Board of the BFSA reviewed, affirmed or adopted the following policies and procedures of the BFSA: The Prompt Payment Policy, which provides guidelines and timing requirements concerning the payment of vendors for goods and/or services; The Property Disposal Guidelines detailing the BFSA s operative policy on the disposal of personal property; 26

79 The Whistleblower Policy, which provides guidelines and a process for whistleblowers to report illegal or unethical practices by the BFSA, staff members or Directors; The BFSA Bylaws, which provides guidelines and procedures for the operations of BFSA, including formation of committees, board meetings, and other general operations; The BFSA Code of Ethics, which each Director and staff member, excluding the exofficio members, are required to receive, review and sign in affirmation that they have received a copy of the BFSA Code of Ethics and will abide by it. The Code Ethics states the BFSA s position on conflicts of interest, personal integrity, honesty, ethical conduct and public trust; The BFSA Investment Guidelines, which establish a set of basic procedures to meet investment objectives and other specific criteria; The BFSA Mission Statement which identifies BFSA s mission; The Lobbying Contact Policy, which provides a procedure for documenting contact between lobbyist and Directors or staff. The appointment of the Lobbying Contact Officer provides a contact person to oversee the implementation of the Lobbying Contact Policy; The Procurement Report, which provides a summary of all procurement contracts that BFSA was engaged with in excess of $5,000; The Prompt Payment Report, which provides a listing of new contracts entered into during the fiscal year as well as any interest paid to vendors including the reason the payment was late; The Use of Discretionary Funds Policy, which delineates the proper use of the BFSA s discretionary funds, addressing what constitutes a proper discretionary expenditure related to the mission of the BFSA; and Additional governance related BFSA actions included: In July 2016, the BFSA Board received an organizational overview that provided details on the BFSA, as well as employee levels of the City of Buffalo, Buffalo City School District, Buffalo Urban Renewal Agency and the Buffalo Municipal Housing Authority. In September 2016, the Governance Committee met and tallied the results of the Board of self-evaluation. Directors 27

80 In September 2016, the Audit, Finance and Budget Committee received a presentation on the BFSA s Independent Auditor s Report and received the BFSA Annual Report for fiscal year , which the committee recommended for approval to the full board. In September 2016, the Audit, Finance and Budget Committee received the BFSA s Annual Investment Report, which provides an annual update on the investments held by the BFSA, investment earnings and fees paid to trustees. In September 2016, the Audit, Finance and Budget Committee approved a contract with Public Financial Management as Financial Advisors to the BFSA. In September 2016, the Internal Controls Officer met with the Audit, Finance and Budget Committee to report on the results of the internal audits in regards to: o Revenue recognition, recording and transfers process. In September 2016, the Board issued a resolution acknowledging and thanking Mr. Robert L. Miller the BFSA Comptroller for his service. In December 2016, the Board approved the Minority and Women-Owned Business Enterprise Goal Plan. The goal includes an overall 30% participation goal with 15% participation equally by both Minority and Women Business Enterprises, same in total as compared to the prior year goals. The BFSA will continue to seek procurement opportunities with qualified MWBE s. In December 2016, the Board approved the Service Disabled Veteran-Owned Business Enterprise ( SDVOB ) Goal Plan. The goal includes an overall 6% participation goal and The BFSA will continue to seek procurement opportunities with qualified SDVOB s. In December 2016, the Board adopted a 2017 Public Meeting Calendar and publicly posted the scheduled meeting dates on the BFSA website. Also in December 2016, the BFSA Board of Directors received a copy of the BFSA s first quarter operation results for FY On December 7, 2016, the BFSA Board of Directors recognized Chairman R. Nils Olsen and Secretary George K. Arthur for their service as Directors of the BFSA Board. In March 2017, the Audit, Finance and Budget Committee reviewed the BFSA s Preliminary Budget and Financial Plan and approved the posting of the budget for public review and comment. A corrected 2017 Public Meeting Calendar was also provided. 28

81 In March 2017, the Internal Controls Officer met with the Audit, Finance and Budget Committee to report on the results of the internal audits in regards to: o Accounts Payable Recording and Processing; o Business Expenditures, Authorizations, and Payment; and o Petty Cash. In March 2017, the Audit, Finance and Budget Committee approved the engagement of Lumsden & McCormick, LLP as independent auditor of the BFSA for the fiscal year ended June 30, On March 8, 2017, the Board received a copy of the BFSA s second quarter operating results. In April 2017, the BFSA Executive Director, per the guidance of the BFSA board, issued a letter requesting that the City provide an explanation to the benefits the City is receiving for issuing debt on its own, as opposed to allowing BFSA issue the debt on behalf of the City, at a lower cost to the City. The Comptroller provided a response in May of On May 15, 2017, the Board received an update on the City of Buffalo s efficiency grant program and remaining balance. In May 2017, the BFSA received the BFSA s third quarter operating results. In June 2017, the BFSA Board adopted the BFSA s Budget and Financial Plan. On August 15, 2017, the BFSA made the final determination in regards to the District Budget and Financial Plan, determining that the District was compliant with BFSA requirements that required additional details of the deficit closing and cost reductions that the District has submitted. The BFSA provides an opportunity at the end of each public meeting a privilege of the floor, for members of the public to provide comments. The BFSA received public comments at the following meeting: Financial Statements o September 21, 2016 BFSA received a clean, unqualified opinion on its audited financial statements from its independent outside auditor, Lumsden & McCormick LLP. That audit report was reviewed, accepted and approved by the Board at its September 25, 2017 meeting. The audit report along with all previous independent audit reports of BFSA s finances, are available on the BFSA s website. 29

82 Budget BFSA took several actions regarding its budget during the fiscal year: In March 2017, the BFSA s Audit, Finance and Budget Committee authorized by resolution the posting of BFSA s proposed budget and financial plan in at least five separate locations of the Buffalo and Erie County Public Library system. This action complied with regulations of the Office of the State Comptroller that BFSA make available the proposed budget and financial plan for public inspection for at least 30 days before Board approval, and not less than 60 days before the commencement of the next fiscal year, and for a period of not less than 45 days. In addition, the proposed budget and financial plan was posted on BFSA s website. In June 2017, after the public review period had been completed the Board adopted BFSA s budget and financial plan. Health Insurance Plans In , BFSA offered the following employee benefit plan options through the New York State Health Insurance Program: Empire Plan, Independent Health, and Blue Cross Blue Shield. Additionally, dental and vision plans are offered. Leases BFSA is a current party to a lease with the Sinatra and Company Real Estate for its offices in the Market Arcade Building located at 617 Main Street, Suite 400, Buffalo, New York, The monthly amount is currently $3,553; the BFSA expended $42,640 for the fiscal year ended June 30, Cumulative Financial Impact of Actions taken by the BFSA As discussed within this Annual Report, there are various powers provided to the BFSA that, upon action by the BFSA, have resulted in financial impact to the City and Covered Organizations. A cumulative summary of such actions is as follows: 30

83 BFSA Actions Cumulative Financial Impact of BFSA and the BFSA Act (Table 1) Deficit Borrowing Wage Freeze Savings District Subsequent Wage Freeze Savings - through June 30, 2017 Drawdown of Efficiency Grants Subsequent Wage Freeze Impact on Firefighters' Arbitration Award Reduction in Cosmetic Surgery Expenditures City-wide Savings on Debt Issuance Costs Interest Earnings over what the City could have earned Disapproval of BMHA Labor Contracts Refinancing of City Debt 2015A Refunding of outstanding 2005A & 2006A series Participation in JSCB Phase II Bond Pricing Deputy Superintendent's Separation Agreement Subtotal City and Covered Organization Financial Plan Actions Fiscal Year City Financial Plan Actions in District Financial Plan Actions in BURA Financial Plan Actions in Fiscal Year City Financial Plan Actions in District Financial Plan Actions in BMHA Financial Plan Actions in Reduction of Proposed Capital Bond Sale Fiscal Year City Financial Plan Actions in District Financial Plan Actions in BMHA Financial Plan Actions in Fiscal Year City Financial Plan Actions in District Financial Plan Actions in Subtotal Total Impact to Date $26.9 million $57.8 million $168.1 million $19.7 million $14.5 million $10.6 million $5.0 million $3.6 million $2.4 million $1.8 million $1.4 million $1.0 million $0.2 million $312.9 million $2.9 million $37.4 million $2.4 million $22.9 million $19.7 million $1.0 million $6.7 million $4.9 million $21.6 million $4.0 million $5.1 million $16.2 million $144.8 million $457.7 million 31

84 Cumulative Financial impact of BFSA and the BFSA Act (Table 2) Other Actions Credit Related: Improved City credit rating to AA- stable from Fitch (2016) Improved BFSA credit rating to AAA stable from Fitch (2015) Improved City credit rating at A+ stable from S&P (2014) Received rating on BAN from Moody's at MIG I Stable (2013) Improved City credit rating at A1 stable from Moody's (2012) Improved City credit rating at A stable from S&P (2011) Recalibrated BFSA credit rating to Aa1 stable from Moody s (2010) Recalibrated BFSA credit rating to AA+ stable from Fitch (2010) Rated City credit rating at A+ stable level from Fitch (2010) Recalibrated City credit rating to A2 stable from Moody s (2010) Improved City credit rating to A- stable from S&P (2009) Improved City credit rating to BBB+ stable from S&P (2008) Improved BFSA credit rating to AA stable from Fitch (2007) Improved City credit rating to Baa2 stable from Moody s (2007) Improved City credit rating to BBB-stable from S&P (2006) Improved BFSA credit rating to Aa2 stable from Moody s (2006) Improved outlook on City debt from Moody s (2006) Improved outlook on City debt from Standard & Poor s (2003) Debt Related Reduced authorized-unissued City debt by $27.7 million (2005) 32

85 Cumulative Financial impact of BFSA and the BFSA Act (Table 3) Other Actions Labor Related: Reviewed and reported on the labor agreement between the Buffalo Teachers Federation ("BTF") and the Buffalo School District (2017) Reviewed and reported on impact negotiations for BMHA employees of Local 264 (2017) Reviewed and reported on two City of Buffalo labor agreements including Crossing Guards and Local 17 "Operating Engineers" (2017) Reviewed and reported on three City of Buffalo labor agreements including Police Benevolent Association Local 264 "Blue Collar" and Local 2651 "Building Inspectors (2016) Reviewed and reported on a City of Buffalo labor agreement with Local 650 "White Collar" (2015) Reviewed and reported on a CBA between BURA and CSEA 815 (2015) Reviewed and commented on several District labor agreements including Local 264 Food Service Workers and Summer Food Service Workers, Transportation Aides of Buffalo, and a Retirement Incentive with Buffalo Council of Supervisors and Administrators (2015) Reviewed and reported on two City of Buffalo labor issues including an Arbitration Award with the Police Benevolent Association (PBA) (2013) and a CBA with the Local 264T "Caulkers" (2014) Reviewed and commented on one District labor agreements including a retirement incentive for Cafeteria Cook Managers, Local 264 (2014) Reviewed and commented on several District labor agreements, including a retirement incentive for Cafeteria Managers (2012), a CBA for Blue Collar employees (2012), and a MOU with the Buffalo Teachers Federation (2013) Reviewed and reported on two City of Buffalo labor agreements, including a CBA with the Crossing Guards (2012) and the Buffalo Firefighters (2013) Reviewed and reported on a CBA between BMHA and Local 17 - Operating Engineers (2013) Approved a new wage and benefit package with City's Local 17 - Operating Engineers (2012) Implemented new wage and benefit package with BURA's employees (2011) Disapproved a new wage and benefit package with BMHA's Local 17 - Operating Engineers (2011) Implemented new wage and benefit package with BMHA s Exempt Non-Represented employees (2010) Implemented new labor contract with the District s Summer Food Service Workers (2012, 2010 and 2008) Implemented new labor contract with the Districts Substitute Teachers, known as SU/B (2009) Implemented new labor contract with BMHA s Blue, White and Managerial class employees, Local 264 (2009) Implemented new labor contract with the City s Building Inspectors (2009) Implemented new labor contract with Transportation Aides of Buffalo and the District (2009) Implemented new labor contract with the City s Blue-Collar workers (2009) Implemented new labor contract with cooks and food service workers and the District (2008) Implemented new labor contract with the Buffalo Educational Support Team and the District (2008) Implemented new labor agreement with the City s White-Collar workers (2008) Implemented new labor contract with Buffalo Crossing Guards, Inc. (2008) 33

86 BFSA Reports on the Budgets and Financial Plans of the City of Buffalo and the Covered Organizations Overview This section summarizes the financial plans of the City of Buffalo (the City ) and the Covered Organizations which include the Buffalo City School District (the District ) and the Joint Schools Construction Board ( JSCB ), the Buffalo Urban Renewal Agency ( BURA ), and the Buffalo Municipal Housing Authority ( BMHA ). The initial Financial Plan was submitted by the Mayor to BFSA on May 1, 2017 in accordance with the timing requirements of the BFSA Act. The BFSA declared the preliminary Financial Plan to be complete and noted that a full review of the District s Financial Plan would be completed once it was submitted to the BFSA. The District committed to submitting the approved financial plan to the BFSA by June 30, The City s Common Council approved the budget on June 8, 2017 and the City submitted the Adopted Budget to the BFSA on June 10, On June 16, 2017, the BFSA reviewed the modifications to the City s Budget and the BFSA determined that the 2018 Budget and Financial Plan as a whole was complete and complied with the standards set forth in the BFSA Act, and that a final review of the District s Financial Plan will be conducted at the August 2017 BFSA Board meeting. The BFSA s detailed analyses on the financial plans of the City and the Covered Organizations follow in this section. 34

87 City of Buffalo Report on the Adopted Budget and Financial Plan OVERVIEW OF THE ADOPTED BUDGET 35

88 Appendix A The following graphs and charts provide an overview of certain key statistics that are evaluated annually by the Buffalo Fiscal Stability Authority during its review of the City of Buffalo s operations. The explanations for fluctuations from year-to -year are available in the respective Annual Report for that particular year. $420.0 $400.0 $380.0 $360.0 $340.0 $320.0 $300.0 $280.0 $260.0 City Budgeted Appropriations- Excluding Transfers Out (millions of $) $278.9 $310.7 $333.9 $355.6 $377.2 $402.6 $ The chart above provides a historical overview of the City s budgeted expenditures since , which was the year the BFSA was created. The budgeted appropriations represent operating expenditures only and exclude operating transfers out. Over the fifteen-year period, budgeted appropriations less operating transfers out have increased from $278.9 million for fiscal year 2004 to $400.4 million for fiscal year 2018, representing an increase of $121.5 million, or 43.6 percent. On an annual basis appropriations increased from $395.7 million to $400.4 an increase of $4.7 million, or 1.2 percent. The increase in expenditures is reflective of a net impact of increased salaries and fringe benefits for employees from FY 2017 to FY Since FY 2008 the most significant cost drivers have been pension costs, health insurance and salaries. Beginning in January 2016, the City moved to a self-insured health insurance program which held budgeted health insurance costs flat compared to the prior year and is budgeted with a minimal increase in FY 2018, which is attributed to the City being able to take advantage of a savings from moving to a self-insured model. $

89 Appendix A (Continued) $80.0 City Unassigned Fund Balance (millions of $) $70.0 $60.0 $50.0 $40.0 $30.0 $20.0 $10.0 $0.0 $10.2 $56.1 $58.9 $50.0 $5.7 $63.9 $30.7 $41.9 The chart above demonstrates the historical balance of unreserved, undesignated/unassigned fund balance at June 30 for each fiscal year reported. Effective June 30, 2008, the City allocated $30.2 million from its unreserved, undesignated fund balance into a Rainy-Day Fund which has been maintained since 2008 and subsequently increased to $36.3 million. Unreserved, undesignated/unassigned fund balance represents an accumulation of the results of operations from all past years and provides funding that may be appropriated for specific purposes. It fluctuates widely from year-to-year based on the annual operating results, one-time events, and other required uses of fund balance. The Financial Plan utilizes 77 percent of all remaining unassigned fund balance, $41.9 million, to assist in funding the projected budgetary gaps which total $32.4 million. 37

90 Appendix A (Continued) $62.0 $57.0 $52.0 $47.0 $42.0 $37.0 $32.0 $27.0 $22.0 $17.0 $12.0 $7.0 $12.9 $12.7 $17.3 City Property Tax Margin (millions of $) $31.0 $35.6 $41.6 $43.0 $50.3 $61.5 The above chart provides a historical overview of the City s property tax margin capacity. At June 30, 2003, the City had remaining $12.9 million of its constitutional taxing limit. The recent property tax levy for the fiscal year provided a remaining property tax margin of $61.5 million, representing an increase of $48.6 million, or percent, over the last sixteen years. 38

91 Appendix A (Concluded) City Average Full Valuation of Taxable Real Property (billions of $) $7.75 $7.25 $7.30 $7.90 $6.75 $6.25 $5.75 $5.25 $5.77 $5.28$5.31 $5.37 $5.46$5.58 $6.28 $6.08 $6.44 $6.50 $6.54 $6.53 $6.73 $ The above graph depicts the City s Average Full Valuation of Taxable Real Property and Special Franchises on a historical basis over the last sixteen years. The total average assessed property value has increased from $6.5 billion in 2013 to $7.9 billion in 2018, representing an increase of approximately $1.4 billion over the last five years. As a point of reference the total average full valuation of taxable real property value was $5.31 billion for fiscal year 2004, which has increased by nearly $2.6 billion to the current year value of $7.9 billion. The average full valuation of taxable real property represents a five-year average of the full value of assessed properties and is utilized in calculating the City s property tax levying limitation. 39

92 BUFFALO FISCAL STABILITY AUTHORITY ANNUAL INVESTMENT REPORT AS OF AND FOR THE YEAR ENDED JUNE 30, 2017 Requirements Section of the New York State Public Authorities Law requires public authorities to annually prepare and approve an investment report which shall include the investment guidelines, amendments to such guidelines since the last investment report, an explanation of the investment guidelines and amendments, the results of the annual independent audit, the investment income record of the corporation and a list of the total fees, commissions or other charges paid to each investment banker, broker, agent, dealer and advisor rendering investment associated services to the corporation since the last investment report. Investment Guidelines The Investment Guidelines of the Buffalo Fiscal Stability Authority ( BFSA or Authority ) reflect the principles and precepts of investment safety and control contained in the BFSA Act Article 3854(11), as well as the New York State Office of the State Comptroller s Public Authorities Regulation Part 201.3, Accounting, Reporting, and Supervision Requirements for Public Authorities Investment Guidelines for Public Authorities. The BFSA s Investment Guidelines set forth the BFSA s policies and objectives regarding the investment of BFSA funds in accordance with the BFSA statute and the bond indenture executed by BFSA and its trustee for debt issuances, the Bank of New York-Mellon (Trustee). The investment objectives of the Authority are set in the guidelines as follows: The Authority s investment activities shall have as their first and foremost objective the safeguarding of the principal amount of the investment funds. Additional considerations regarding the Authority s investment activities shall be liquidity of investments, realization of a reasonable return on investments and diversification of investments. No modifications were made to the Investment Guidelines this past year; such guidelines were approved by the BFSA Board of Directors on August 15, 2017 via Resolution No

93 Investment Activity The Authority s cash and investments at June 30, 2017 consisted of the following: Fair Cost Value Cash $ 74,480 $ 74,480 Money Market 644, ,000 U.S. Treasury SLGS 1,383,122 1,397,347 Federal National Mortgage Association Discount Notes 1,428,128 1,467,879 Federal Home Loan Mortgage Corporation Medium Term Notes 1,587,464 1,616,316 Federal Home Loan Banks 1,863,207 1,890,995 Total cash and investments at June 30, 2017 $ 6,980,401 $ 7,091,017 All investments mature no later than September 1, 2017, except for one investment in U.S. Treasury Securities State and Local Government Series (SLGS) in the amount of $135,000, which matures on September 1, This amount was invested in a long-term SLGS investment to address potential arbitrage matters associated with the refunding bond issued by the BFSA in December The BFSA recorded total investment earnings of $152,949 for the year ended June 30, 2017, consisting of investment earnings on bond funds, state aid held on behalf of Buffalo (the City ) (representing New York State Aid to Municipalities ( AIM ) as defined below), and the BFSA s operating funds. Additional information on the sources of the investments of the BFSA is below. Actual investment earnings, according to investment type, are as follows: Bond funds, held by Trustee $ 152,493 AIM funds 157 Operating funds 299 Total investment earnings for the year ending June 30, 2017 $ 152,949 During the year ended June 30, 2017, the BFSA had three principal types of investment accounts: 1) accounts held by the Bank of New York-Mellon as trustee under the BFSA s Bond Indenture, which contained debt service set-asides; 2) BFSA operating funds accounts, and; 3) a money market account for restricted State Aid held by the BFSA. The restricted State Aid represents AIM funds which the BFSA holds pending the City s notification of intended use of such funds, which must be approved by the BFSA s Board of Directors. Deposits of the Operating funds and AIM funds are held at KeyBank in BFSA owned money market accounts. 2

94 The BFSA Trust Indenture requires the Authority to retain out of the first payment of sales taxes each month an amount equal to 1/6 of the next interest payment and 1/12 of the next principal payment. The full amount of the next payment must be fully funded two months in advance of the maturity. These set asides are deposited into each bond account upon receipt of the funds (usually by the 6 th or 7 th of each month) and invested in A1/P1 commercial paper or U.S. Government and Agency obligations until the 15 th of the same month. After a bidding process, the Authority entered into various Forward Delivery Agreements for delivery of securities against the cash set-asides. These agreements are structured to yield investment earnings within the parameters of the yield restrictions imposed by the federal government s requirements for tax-exempt bonds. To avoid potential yield issues in accordance with the tax-exempt status of the bonds, certain set asides are invested in 0% state and local governments series securities U.S. Treasury (SLGs). All securities, except for $135,000 in U.S. Treasury SLGS, mature before or on the next required payment date, so the longest maturity possible (although not common) is approximately 13 months. All transactions take place within the trustee accounts. All bank deposits of Authority funds are required to be fully collateralized. Bank deposits are covered by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. Additional collateral is obtained to collateralize the remaining balances, and is held by a custodian in the Authority s name. Such collateral consists of U.S. Government and Agency obligations. Investments were fully collateralized at June 30, GASB Statement No. 72 Effective June 30, 2015, the Authority adopted GASB Statement No. 72, Fair Value Measurement and Application, which required the Authority to measure investments at fair value. At June 30, 2017, the balance of investments was increased by $15,015 to value the investments at fair value. Fees No fees were paid in connection with the investment portfolio during the fiscal year. BFSA pays the Trustee an annual fee of $2,200 for each bond transaction covering all trustee services, including the operational aspects of the investments in each bond account. The trustee also charges a $250 dissemination fee and a $1,600 custodial fee each year. Total expenses for the year ended June 30, 2017 for trustee fees were $10,583. The cost of the operating funds bank accounts are currently covered through compensating balances. Independent Audit Please see separate documents for a copy of the independent auditors report. 3

95 September 18, 2017 Ms. Jeannette Robe Executive Director Buffalo Fiscal Stability Authority Market Arcade Building, Suite Main Street Buffalo, NY Dear Ms. Robe: Thank you very much for the opportunity to serve as financial advisor to the Buffalo Fiscal Stability Authority ( BFSA ). Public Financial Management ( PFM ) has greatly enjoyed working with you over the past several years. We understand that the BFSA is willing to renew the terms of the 2004 Financial Advisor Agreement ( the 2004 Agreement ) for a period of one year, from October 1, 2017 to September 30, 2018, on the condition that PFM agree to maintain the same terms as are provided for in the 2004 Agreement. The purpose of this letter is to acknowledge PFM s willingness to provide the Financial Advisory Debt Transaction Services set forth in Section 2 and Strategic Consulting Services set forth in Section 3 of the 2004 Agreement on the same terms, conditions and prices in the 2004 Agreement. We will use the billing rates provided for 2006 in the 2004 Agreement. Again, thank you for the opportunity to once again serve as your financial advisor. Sincerely, Tracey Keays Managing Director

96 BUFFALO FISCAL STABILITY AUTHORITY AUDIT, FINANCE AND BUDGET COMMITTEE RESOLUTION NO. 17-XX APPROVE ENGAGEMENT OF PUBLIC FINANCIAL MANAGEMENT AS FINANCIAL ADVISOR WHEREAS, the Buffalo Fiscal Stability Authority ( BFSA ) was formed by Chapter 122 of the Laws of 2003, as amended (the BFSA Act ), to: oversee the city s budget, financial and capital plans; to issue bonds, notes or other obligations to achieve budgetary savings through debt restructuring; to finance short-term cash flow or capital needs; and, if necessary, to develop financial plans on behalf of the city if the city is unwilling or unable to take the required steps toward fiscal stability. ; and WHEREAS, BFSA previously contracted with Public Financial Management ( PFM ) as BFSA s financial advisors pursuant to a request for proposals after determination that the firm was the most capable of carrying out the required duties; and WHEREAS, PFM has submitted a letter to BFSA to continue to serve as the BFSA s financial advisors for a period of one year, from October 1, 2017 to September 30, 2018, on the condition that PFM agree to maintain the same terms as are provided for in the previous year; and WHEREAS, PFM has served as financial advisors for the BFSA for its debt issuances and continues to provide assistance based on this historical knowledge. NOW THEREFORE BE IT RESOLVED, that the Buffalo Fiscal Stability Authority does hereby engage Public Financial Management as the BFSA s financial advisors for a period of one year, from October 1, 2017 to September 30, Such services shall be undertaken for such amounts and on such terms as agreed upon by the Chair, Interim Vice Chair, or Executive Director. This resolution shall take effect immediately. Approved September 25, 2017 Frederick G. Floss, Committee Chair Pro Tem

97 BUFFALO FISCAL STABILITY AUTHORITY TAB 3

98 BUFFALO FISCAL STABILITY AUTHORITY Meeting Minutes August 15, 2017 The following are the minutes from the meeting of the Buffalo Fiscal Stability Authority (the BFSA or the Authority ) held on Tuesday, August 15, 2017, in the first-floor conference room of the Buffalo Market Arcade Complex. The meeting was called to order at 1:05 PM. Board Members Present Chair R. Nils Olsen Interim Vice-Chair Jeanette T. Jurasek Secretary George K. Arthur Director Frederick G. Floss Honorable Byron W. Brown, City of Buffalo Mayor (proxy Estrich) Honorable Mark C. Poloncarz, Erie County Executive Board Member(s) Excused Director Dottie Gallagher-Cohen Director Frank B. Mesiah Staff Present Executive Director Jeanette M. Robe Principal Analyst/Media Contact Bryce E. Link Administrative Assistant Nikita M. Fortune Senior Analyst II/Manager of Technology Nathan D. Miller Additionally Present Mr. James L. Magavern, Esq., Magavern Magavern & Grimm LLP Dr. Kriner Cash, Superintendent, Buffalo City School District ( BCSD ) Dr. Barbara Seals Nevergold, President, Buffalo Board of Education Mr. Geoffrey Pritchard, Chief Financial Officer, Buffalo City School District Opening Remarks Chair Olsen welcomed everyone to the August Board meeting, thanked all who were in attendance, and reviewed the logistics and agenda of the meeting. Chair Olsen advised the Directors that the Governance Committee met earlier and recommended that the full Board approve various BFSA policies and procedures. BFSA staff provided a brief, unchanged organizational overview. Chair Olsen stated that the annual Board self-evaluation form should be completed and submitted anonymously to staff. The results will be compiled and reviewed at the next Governance meeting scheduled for September 25, In addition, a code of ethics certification page was included for submittal to staff. 1

99 Roll Call of the Directors Secretary Arthur called the roll noting that Directors Gallagher-Cohen and Frank B. Mesiah were excused. A quorum being present, the meeting commenced. City of Buffalo Commissioner of Finance, Administration, Policy, and Urban Affairs, Ms. Donna Estrich, represented Mayor Byron W. Brown in accordance with Subdivision 1 of 3853 of the BFSA Act. Subdivision 1 of 3853 of the BFSA Act reads: The Mayor and the County Executive shall serve as ex officio members. Every director, who is otherwise an elected official of the City or County, shall be entitled to designate a single representative to attend, in his or her place, meetings of the and to vote or otherwise act in his or her behalf. Such designees shall be residents of the City of Buffalo. Written notice of such designation shall be furnished prior to any participation by the signal designee. Chair Olsen introduced Resolution No : Approving Minutes and Resolutions from June 16, Secretary Arthur made motion to consider and approve both Resolution No Director Floss seconded the motion. The Board voted 6-0 to consider and approve Resolution No BCSD Adopted Budget and Financial Plan Chair Olsen advanced the agenda to review the BCSD Adopted Budget and Financial Plan. The District submitted the final plan to the BFSA on June 21, The final plan was submitted in response to BFSA Resolution No which directed the District to clearly define potential actions to close projected budgetary gaps. Additionally, Superintendent Cash, Board of Education President Dr. Barbara Seals Nevergold, and Chief Financial Officer Geoffrey Pritchard were asked to attend today s meeting. Chair Olsen thanked District officials for their attendance and gave the floor to BFSA Executive Director, Ms. Robe and BFSA Sr. Analyst II Nathan Miller for their presentation and analysis. Ms. Robe stated the BCSD Financial Plan is based on a consistent set of key assumptions over the life of the plan. Deficits were reported for four of the past five fiscal years. Fiscal Year End ( FYE ) there was a cumulative deficit of $44.6M FYE had a surplus of $12.2M FYE has a projected deficit of $43.0M, of which $38.8M is attributed to the settlement of the BTF labor contract. The new Financial Plan includes deficits in all four fiscal years totaling $100.1M over the life of the plan. 2

100 Key Observations 1. General Fund expenditures increase at a rate slightly greater than revenues over the Financial Plan. The Comprehensive Annual Growth Rate ( CAGR ) for revenues is 2.37% whereas the CAGR for Expenditures is 2.39%. 2. The District has budgeted the remaining amount of fund balance set aside for collective bargaining of $54.7M by the end of the current year. Additionally, the District has included $5.0M to $6.0M annually in the Financial Plan as a projected expenditure available solely for the negotiation of labor contracts. 3. The Financial Plan includes the use of fund balance in the first three years of $46.0M. Total fund balance is projected to decrease by 28% by 6/30/ The combined use of fund balance along with proposed gap-closing measures address out-year budgetary gaps. If the District does not receive a substantial increase in revenue, there will need to be a significant level of cost reductions implemented by the District. The reductions include reducing or eliminating non-mandated programs and instructional positions. Ms. Robe turned the presentation over to Mr. Miller provide further detail on the Adopted Budget. General Fund Revenues: $872.2M. This includes $27.9M in additional State Aid as compared to the prior year. General Fund Expenditures: $894.2M Adopted Budget deficit $22.0M although BCSD has been receiving more than the statutory minimum in State Aid for several years. The deficit gap is filled with the use of: o $15.2M assigned fund balance ($14.2M assigned for settling labor contracts, $1.0M assigned for capital needs) o $6.8M unassigned fund balance The Adopted Budget includes full implementation of the New Education Bargain. FY Revenue is broken down as follows: o NYS Aid $626.3M, or 71.8% o Real Property Tax $70.8M, or 8.1% o NYS Building Aid $115.8M, or 13.3% o Erie County Sales Tax $42.4M, or 4.9% o All Other Revenue $16.9M, or 1.9% County Executive Mark Poloncarz stated Erie County Sales Tax has increased approximately 1.7% therefore there should be a revenue increase for the BCSD. FY Expenditures are broken down as follows: o Employee Compensation $300.0M, or 33.6% o Employee Benefits $192.0M, or 21.5% o Debt Service $113.7M, or 12.7% o Charter School Payments $123.8M, or 13.8% 3

101 Increase of $14.2M due to increase of approximately 622 pupils as well as increased tuition o Transportation $48.5M, or 5.4% o All Other Expenditures $116.2M, or 13% Dir. Floss asked if retirees are included in employee benefits. Mr. Miller replied in the affirmative. Vice Chair Jurasek questioned if most of the Debt Service is related to the Joint Schools Construction Board projects. Mr. Miller answered in the affirmative. Mr. Miller stated District enrollment is projected to decrease and charter school enrollment is projected to increase due to more charter schools opening and existing charter school expansion. A new policy approach is to reduce the number of teaching Full Time Equivalent ( FTE ) positions by 6.5 for every 100 pupils that leave a District school to attend a charter school. FY Adopted Financial Plan A four-year cumulative deficit of $100.1M is projected. Budget gaps are reduced to a cumulative deficit of $54.1M following the drawdown of $46.0M in fund balance. Total assigned and unassigned fund balance is projected to be significantly reduced from $139.0M to $93.0M, of which $52.8M is assigned and $40.2M is unassigned. Most of the assigned fund balance, $42.7M, is allocated for Other Postemployment Benefits ( OPEB ). Based on rollforward assumptions the OPEB liability currently is $2.1B. By the third out-year the unassigned fund balance is projected to be $40.2M which is slightly above the District s policy of maintaining 4% unassigned fund balance as compared to expected expenditures. County Executive Poloncarz commended the District for putting monies aside for OPEB and noted that most local governments are not doing the same. Financial Plan General Fund Revenues highlights: New York State Aid increases 9.8% over the life of the plan. Erie County Sale Tax is expected to increase 4.5% over the life of the plan. Financial Plan General Fund Expenditures highlights: Charter school payments account for the largest expenditure increase at 18.5% over the duration of the Financial Plan. Compensation and benefits account for the second largest expenditure increase at 15.9% over the life of the plan. Mr. Miller noted that most labor contracts will expire at some point over the life of the plan. The teachers contract is in effect for the first two years of the plan and bus aides contract will expire at the end of The margin between available unassigned fund balance and the amount required to be set aside per District policy continues to decline over the life of the plan. At BFSA s inception in , the total number of teacher FTEs was 5,656 on an all funds basis. There are currently 5,327 teacher FTEs for on an all funds basis and is expected to remain flat for the duration of the financial plan. 4

102 Ms. Donna Estrich asked how the FTE s are funded. Mr. Miller responded that they are funded by grants, general operating funds and by food service revenues. Vice Chair Jurasek clarified there is an assumption that 100 fewer pupils in the District would result in the decrease of 6.5 FTE BTF teachers in the classroom. Ms. Robe began her presentation of the general fund budget gap closing measures. The baseline gap of $100M is being filled with the use of fund balance for a total of $54.1M over the life of the plan. The BFSA Board requested that the District provide a detailed gap closing plan. The District in turn provided 23 actions for closing the gap in three categories in order of priority: Other Revenue and Fund Balance Items ($5.0M anticipated savings if all options are implemented): o District to request an additional $500,000 increase each year from the City. However, the maintenance of effort states that once an increase is made it must be maintained unless certain provisions are met such as a decrease in the overall tax base. It is important to note the City s financial plan does not include an increase beyond the current FY. Therefore, this action is highly speculative and unlikely. o Revenue enhancements through better data collection for better understanding of state and federal regulations for $300,000 cumulative budgetary savings. o Additional fund balance of $1.7M, representing the estimated available amount in excess of the minimum amount to be retained. The District is no longer able to rely on fund balance to close budget gaps. Director Floss noted this is a less conservative approach to budgeting since the fund balance is being used to close a gap. Ms. Robe noted the budget has become less flexible but the District is maintaining the minimum fund balance of 4%. Savings to be achieved through efficiencies ($31.1M anticipated savings if all options are implemented): o Vacancy control in both white and blue collar groups. County Executive Poloncarz clarified this is not a deletion of positions. Director Floss expressed his concerns of double counting positions as the monies are to be used in the outyears. o Retiree healthcare: $6.9M cumulative budgetary savings over the life of the plan which would require direct negotiations with retirees to forego their cosmetic surgery option. This is considered speculative since there is no clear plan as to how this would be achieved. Chair Olsen asked which bargaining groups have a cosmetic provision in their retiree health insurance. Ms. Robe replied most groups have negotiated away that benefit but the effective dates vary. The savings appears to be overstated. o Reduce substitute teacher costs through better management of teacher absences. On average per teacher FTE there have been 13.5 days missed of 181 school days. o Re-appropriated grants: not guaranteed aid o Renegotiate service contracts 5

103 Other cost reductions ($55.3M anticipated savings if all options are implemented): o Reduce or eliminate the contingency fund of $3.9M cumulative. The fund is used for unforeseen expenditures. o Reduce or eliminate contract settlement contingency fund of $5-6M budgeted annually to provide monies to the District to negotiate unsettled labor contracts. Chair Olsen noted the elimination or reduction of this fund indirectly correlates with ability to successfully negotiate. Ms. Robe noted the City accrues for this expense annually. Director Floss stated in the past the District did not set monies aside for contracts and instead used the fund balance reserve. o Eliminate non-mandated programs: Say Yes! Summer Program and Hillside Work Scholarship Connection program were once grant funded and are now paid for through the general fund. The elimination of these programs would provide a cumulative savings of $3.1M over the duration of the plan. Director Floss asked how many students use the two programs. Dr. Cash responded that approximately 3,000 students use the programs. Ms. Estrich asked if the District receives any funding from either agency. Dr. Cash stated the amount listed represents the District s responsibility. o Delay or eliminate the Emerson II expansion: would provide cumulative budgetary savings of $2.7M. o Reduce Central Office positions: up to 15 FTEs could be eliminated through layoffs or attrition which would provide $3M cumulative budgetary savings. o Reduce teachers and support positions by 100 FTEs, which would provide $25M cumulative budgetary savings: The Master Scheduler would locate 10 FTEs to eliminate; 40 physical education teachers were added in and 20 of them could be laid off; Assistant Principals could be laid off; and 40 non-mandated teacher aides and teaching assistants could be laid off. The total for the proposed actions exceeds the baseline gap and provides a general roadmap for the District to follow. The remaining surplus after the application of all the options is $64.3M with each fiscal year being in balance. Director Floss asked if there have been any negotiations with the City providing additional funding to the BCSD for a specific length of time. Ms. Estrich responded that maintenance of aid restricts the possibility of decreasing funding in subsequent years. However, the City does provide additional funds in other ways i.e., Say Yes and staff support. The District is receiving just under 53% of the city s tax levy. Therefore, the requested increase is unlikely. Chair Olsen asked what the impact of the efficiencies would be on Special Education. Ms. Robe stated that information has not been made available. Dr. Cash stated there are two Master Schedulers at the BCSD Cabinet level that will assist high school principals with this skill. Chair Olsen commended the District for disaster planning if additional revenue streams are unable to be secured. 6

104 Ms. Robe presented several other considerations for gap closing measures as provided by the District although actual cost savings amounts were not provided: Lobbying efforts: o Lobbying for an amendment in manner that charter school supplemental aid is received o This would provide a one-time State aid increase of $9M for with a smaller impact annually of $500,000 to $700,000 Employee Healthcare: o Aggressively negotiate healthcare concessions within new labor agreements o Eliminate cosmetic surgery rider for BCSA and Local 409 o Consider a waiver incentive for employees to move onto spouse s plan or to a public exchange Consolidation of Funds: o Exploring new methodology of cash management of school-level spending to maximize grant funds Special Education: o Place chairs on its committee of special education within individual schools o Examine whether centralizing this process will result in a reduction of students being identified as needing more restrictive settings Chair Olsen and Dir. Floss stated their concerns that the appropriate level of services would be affected. Dr. Cash stated that many children are misidentified during certain times of the year and this would help with identifying those pupils with moderate behavior issues which drives up the cost of special education. Retiree Health Insurance & Medicare: o Establish a goal for labor negotiations to include a provision that would automatically provide a Medicare Advantage Plan upon a retiree s eligible date for Medicare enrollment Estimated savings $7.7M based on current eligible population District has a goal to no longer provide health insurance in retirement for new hires Director Floss stated his continued objection of contribution rates for family plans being less than single coverage plans as a source of encouragement to enroll in a single plan. This makes the issue worse upon retirement. Ms. Robe noted when the speculative revenues and cost saving measures are removed as options, the revised surplus is reduced to $27.4M. Therefore, without a significant increase in revenues there is a greater need to begin the cost reduction efforts. The suggested changes are anticipated to begin during outyear one which is different from previous plans which would not seek implementation until outyear three or four. Conclusions and Recommendations: Two significant adjustments to the financial plan: o Reduction in teachers reflected for expected decrease in District enrollment and increase in charter school enrollment. This is a shift in District policy from previous administrations. 7

105 o Budgeted transportation expenditures reflect a decrease of $4.0M. This is in litigation and therefore is an unknown. Initial budgetary gap of $100.1M: o Use of $46.0M in fund balance, which essentially depletes all available fund balance to fund operation gaps. o Remaining gap of $54.1M must be address through various gap closing measures. o District provided a prioritized list. o Combined, the deficit closing costs and cost saving initiatives provided have a positive financial impact of $118.5M. o To avoid drastic actions in the future the District will need to monitor the gapclosing actions for timeliness and implementation. Director Floss noted the proposed gap closing measures would be implemented earlier than ever and asked if the financial plan has a timetable for decision deadlines? Ms. Robe stated a timetable was not provided. The financial plan appropriates $5.0 M to $6.0M each year in a reserve contingency to settle expired labor contracts: o BTF labor agreement expires June 30, 2019 o Bus Aides labor agreement expires June 30, 2018 o All other collective bargaining units have expired labor contracts o If the District has to eliminate this option as a deficit closing measure it will adversely affect the District s ability to settle labor contracts. The District received an increase in State aid of $29.8M for FY as compared to FY : o Positive impact on the proposed operating results o NYS aid is larger percentage of total General Fund revenues Chair Olsen stated there has been a yearly increase in NYS aid. Director Floss stated his concern about the federal changes with Medicaid and the impact those changes could have on the state budget and school funding. District Officials Chair Olsen advanced the agenda to the discussion with District Officials. Dr. Barbara Seals Nevergold, President of the Board of Education ( BOE ) began by stating the BOE passed the budget and financial plan with a vote of 7 to 2 after many meetings, discussions and questioning of the staff. The BOE is comfortable with the budget and plan as presented insomuch as it is a change from previous years. The BOE is aware of their fiduciary responsibility to the District and plans to make every effort to monitor the budget as the Finance & Operations Committee meets monthly. There will also be work sessions chaired by Board Member Paulette Woods, a senior budget examiner with the Erie County Budget Office. Chair Olsen thanked the Administration and BOE for their submission of such a responsive financial plan. 8

106 Dr. Cash began by thanking the BFSA board and staff for the opportunity to present the District s complex financial plan. The BFSA report is helpful in understanding what the financial plan consists of. The District is a complex organization but the plan is actionable and not merely forecasts and projections. Dr. Cash stated he has been in this field of employment for more than 30 years. Dr. Cash stated his experience with turning around a financially struggling district. He stated he began his tenure in the Memphis Public School system with a $100M deficit and when he left, after serving five years, the district had more than $270M in business and systems reforms in all areas of operation. He also yielded $190M from major grants from across the country from multiple foundations. Dr. Cash stated he brings that same aggressiveness to the BCSD. Anytime there is an opportunity to save, cost avoid or generate revenue staff is directed to address it. The new BTF contract has employees paying into their healthcare for the first time which yields $30.0M in the first year. This will continue to be sought in other bargaining units. The teaching profession is not as attractive as it once was and there will be a major teacher shortage. The District must be as competitive as possible for new, diverse teachers and the new benefit package reflects this change. While charter schools are growing, they are losing some of their teachers to the District. Chair Olsen stated his concern about the need to increase and support community schools because of their importance to stabilizing neighborhoods and the City. Vice Chair Jurasek stated her concerns about the timing of the implementation of the gap closing measures and requested a decision calendar with trigger dates. Dr. Cash replied that request is outside of the BFSA scope and that he has his staff working on it and the BOE will also keep him accountable to the issue and the results will be evident. County Executive Poloncarz commended Drs. Cash and Seals Nevergold on providing such a comprehensive financial plan and changes in the outyears are inevitable and expected. Chair Olsen stated this is the most detailed plan the BFSA has ever received from the District. Unfortunately, much of the revenue is based on speculative increased aid and it would be a tragedy if the lack of funding affected the quality of education pupils receive. Dr. Cash replied that the Board and the District administration are beginning to work more collaboratively with each other as well as other agencies and organizations. There is a major focus on relationship building in the communities which will aid in fostering communication with the nine major foundations. The community schools are critical to help fill the gaps that the population needs. Dr. Cash offered to provide quarterly ed updates to the Board regarding this issue. Hearing no other questions Chair Olsen extended the floor to BOE member Carl Paladino to address the Board. Mr. Paladino was elected by the Park District constituency four years ago. Mr. Paladino distributed a memo he drafted to Education Commissioner Mary Ellen Elia, the BFSA and the U.S. Attorney requesting the BOE be discharged, sanctioning of the BTF, the appointment of a special master to operate the BCSD, and for the BFSA to enact a control period and abrogate the BTF contract. Mr. Paladino read his memo and expressed his disdain with the new BTF contract. 9

107 Chair Olsen responded that he previously considered scoping out BCSD from the City and being a hard control board with respect to the BCSD only; however, because the BCSD is part of the City that is not a viable option. Chair Olsen also stated the BFSA Board is aware of the disparity between neighborhood schools and the District s schools of excellence. The Board has expressed its concerns about the BTF contract but there has no authority to address the legality of the BTF contract. Dr. Seals Nevergold stated Mr. Paladino s adversarial role would be of better use as an advocate for the children. Director Floss thanked Mr. Paladino and Dr. Seals Nevergold for their comments and stated the goal of the BFSA Board is to assist with working through many issues regarding CBA s and other issues regarding the City and its covered organizations. That each year that a union is out of contract, it makes it much more difficult to negotiate a successor agreement. Chair Olsen called for a motion to approve Resolution. No : Review of the Buffalo City School District Final Four-Year Financial Plan. Secretary Arthur made the motion to approve. Director Floss seconded the motion. The Board voted 6 to 0 to approve Resolution No BFSA Business Chair Olsen advanced the agenda for the organizational overview to be presented by Ms. Robe. Ms. Robe stated the bylaws established two standing committees: 1) Audit, Finance and Budget Committee: Assists the Directors in meeting the requirements relating to budgeting, financial reporting, and internal controls. Members of the committee are Chair Olsen, Director Floss, and Director Mesiah. Additional directors will participate at the request of the Chair. The committee meets three to four times per year to review annual BFSA budgets and four-year financial plans and to review the independent audit. Additional meetings will be called as necessary. 2) Governance Committee: Keeps the Board informed of all matters involving corporate governance, policies, and procedures. The required annual Board self-evaluation is reviewed in this committee. Members include Chair Olsen, Interim Vice-Chair Jurasek, and Secretary Arthur. Additional Directors participate at the request of the Chair. The committee meets two to three times per year or as necessary to review, renew and/or modify existing operational policies. Ms. Robe continued with the overview of the BFSA. There are five staff members of the BFSA: Ms. Jeanette Robe, Executive Director, who reports to the Directors; Mr. Bryce Link, Principal Analyst/Media Liaison; Mr. Robert Miller, part-time Comptroller; Mr. Nathan Miller, Senior Analyst II/Manager of Technology; and, Ms. Nikita Fortune, Administrative Assistant. 10

108 Ms. Robe provided a snapshot of all negotiating units for all covered organizations by listing the number of full-time equivalent employees for each unit as well as the expiration date for each agreement. It was noted that minimal pay increases were included in the City of Buffalo s four-year financial plan, outside of what was negotiated. City of Buffalo (the City ): PBA 703 FTEs, CBA in effect through 6/30/19; Local 282 (Fire) 657 FTEs, CBA in effect through 6/30/17; Local 264 (Blue-Collar) 546 FTEs, CBA in effect through 6/30/19; Local 650 (White-Collar (including exempt employees)) 577 FTEs, CBA in effect through 6/30/19; Crossing Guards 118 employees; CBA in effect through 8/31/19; AFSCME 2651 (Building Inspectors) 53 FTEs, CBA in effect through 6/30/20; Local 264T 30 FTEs, CBA in effect through 6/30/17; and Operating Engineers 26 FTEs, CBA in effect through 6/30/20. Buffalo City School District ( BCSD ): BTF (teachers) 3,542 FTEs & 158 part-time employees ( PTEs ) (CBA expired on 6/30/19); BEST (teacher aids/assistants) 901 FTEs, (CBA expired on 6/30/12); Su/B (substitutes) 618 PTEs (CBA expired on 6/30/12); TAB (bus aides) 336 PTEs (CBA in effect through 6/30/18); PCTEA (White-Collar) 436 FTEs (CBA expired on 6/30/13); Local 264 (Blue-Collar) 54 FTEs (CBA expired on 6/30/13); Local 264 (Food Service Workers) 27 FTEs, employees, (BCSD unable to determine number of part-time employees; CBA in effect through 6/30/17); BCSA (Administrators) 240 FTEs (CBA expired on 6/30/04); and Local 409 (Custodial Engineers) 55 FTEs, CBA expired on 6/30/10). Buffalo Municipal Housing Authority ( BMHA ): Local 264 (White-Collar) 56 FTEs, CBA expired on 6/30/11; Local 264 (Blue-Collar) 75 FTEs, CBA expired on 6/30/11; Local 264 (Managers) 6 FTEs, CBA expired on 6/30/11; Local 17 (Operating Engineers) 8 FTEs, CBA expired on 6/30/13; Exempts 3 FTEs, each with individual contracts; and Non-Represented Civil Service 8 FTEs, at-will with certain New York State civil service protections. BMHA has yet to approve the MOA reviewed by this Board during the May 15, 2017 BFSA Board meeting. An update is to be provided by BMHA in September. BMHA does have a new Board of Commissioners and hopefully a better relationship can be forged. Buffalo Urban Renewal Agency ( BURA ): CSEA Local FTEs, CBA in effect through 6/30/17; and Exempts 8 FTEs, employed at-will. 11

109 Secretary Arthur made a motion to consider these items by consent and approve the following resolutions as recommended by the Governance Committee: Bylaws Res No Whistleblower Policy Res No Code of Ethics Res No Lobbying Policy Res No Mission Statement Res No Procurement Report Res No Investment Guidelines Res No Prompt Payment Policy Res No Property Disposal Guidelines Res No Prompt Payment Report Res No Use of Discretionary Funds Policy Res No Secretary Arthur made a motion to approve the items as recommended by the Governance Committee. Director Floss seconded the motion. The Board voted 6-0 to approve Resolution Nos through New Business Director Floss asked if a memo has been sent to the Comptroller s office regarding the Board s ongoing bonding concerns. Ms. Robe replied the information was sent to the BFSA financial advisor and suggested the advisor address the BFSA at the September 25, 2017 meeting and make a decision after that. Privilege of the Floor Chair Olsen extended the Privilege of the Floor to any member of the attending public who wished to comment for the public record on any actions taken by the Board at the day s meeting. Ms. Marilynn Gallivan commented on the appropriateness of the BFSA board looking at the Buffalo School District. Chair Olsen asked if there was any new business, hearing none he asked for a motion to adjourn. Secretary Arthur made a motion to adjourn. Director Floss seconded the motion. The Board voted 6-0 to adjourn. The Board adjourned at 3:44PM. 12

110 BUFFALO FISCAL STABILITY AUTHORITY RESOLUTION NO APPROVING MINUTES AND RESOLUTIONS FROM AUGUST 15, 2017 BE IT RESOLVED that the Buffalo Fiscal Stability Authority hereby approves the minutes of its meeting on August 15, BE IT FURTHER RESOLVED that the Buffalo Fiscal Stability Authority ratifies and affirms Resolution Nos through that were approved on said date. This resolution shall take effect immediately. Approved September 25, 2017 George K. Arthur, Secretary

111 BUFFALO FISCAL STABILITY AUTHORITY TAB 4

112 BUFFALO FISCAL STABILITY AUTHORITY RESOLUTION NO. 17-XX APPROVE INDEPENDENT AUDIT REPORT AND ANNUAL REPORT FOR FISCAL YEAR WHEREAS, Chapter 122 of the Laws of 2003, as amended, requires that the Buffalo Fiscal Stability Authority ( BFSA ) be subject to an annual financial audit performed by an independent certified public accountant selected by the BFSA; and WHEREAS, the accounting firm of Lumsden & McCormick, LLP, was selected and has conducted an audit of the BFSA s general ledger; and WHEREAS, Lumsden & McCormick, LLP, has presented the results of their independent audit and the related Independent Auditors Report on the BFSA s financial statements for the fiscal year ended June 30, 2017, to the Audit, Finance and Budget Committee; and WHEREAS, the Public Authorities Accountability Act of 2005 (specifically, Section 2800 of the Public Officers Law) requires state and local public authorities to file an annual report with the State of New York, detailing its operations and activities as well as other budgetary and financial data; and WHEREAS, the Public Authorities Reform Act of 2009 maintains existing annual report requirements; and WHEREAS, the annual report must be certified as accurate by the Executive Director of the BFSA; and WHEREAS, much of the data and additional information within the annual report is required by regulations promulgated by the State Comptroller; and WHEREAS, the deadline to submit an approved final version of the annual report and audited financial statements to the New York State Office of the State Comptroller is September 30, 2017; and WHEREAS, the BFSA staff has presented for approval a draft of the Annual Report in substantially its final form. NOW THEREFORE BE IT RESOLVED, that the Buffalo Fiscal Stability Authority does hereby accept the Lumsden & McCormick, LLP, Independent Auditors Report on BFSA s Financial Statements for the Year Ended June 30, 2017, and the BFSA s Annual Report for the year ended June 30, 2017, as prepared by the BFSA staff; and

113 BE IT FURTHER RESOLVED, that the Chair, the Interim Vice Chair, the Executive Director, and the Comptroller are hereby authorized to make such changes to the Annual Report and Audited Financial Statements for the year ended June 30, 2017, in the form presented, as they may deem necessary for its timely and accurate completion; and BE IT FURTHER RESOLVED, that the Executive Director is hereby authorized to release these reports to the public and provide copies to the parties designated by Section 3871 of the BFSA Act and Section 2800 of the Public Authorities Law; and BE IT FURTHER RESOLVED, that the Executive Director is authorized to certify that financial statements filed with the above reports are accurate and correct. This resolution shall take effect immediately. Approved September 25, 2017 George K. Arthur, Secretary

114 September 18, 2017 Memorandum To: From: Re: Buffalo Fiscal Stability Authority Public Financial Management, Inc. Debt Issuance Considerations Public Financial Management ( PFM ) has been asked to evaluate the concerns raised by the Buffalo City Comptroller regarding the Buffalo Fiscal Stability Authority ( BFSA ) reinstating the practice of issuing debt on behalf of the City of Buffalo ( Buffalo or the City ) versus the City continuing to issue bonds on its own credit. The BFSA began issuing debt on behalf of Buffalo in 2004, and last issued new money bonds in Since 2008, the City has issued bonds and notes under its own credit. In conjunction with each issuance of City bonds, PFM produces an evaluation of the pricing differential between the two credits, and the estimated additional interest cost of the City issuing on its own. Buffalo s current ratings are A1 from Moody s, A+ from S&P, and AA- from Fitch Ratings ( Fitch ). Although the interest cost of a Buffalo issuance has declined considerably since 2008 because of the significant improvement in ratings, there is still an incremental cost compared to an issuance through the BFSA, which is rated Aa1 and AAA by Moody s and Fitch respectively. There are provisions of the BFSA Act that restrict the BFSA s ability to issue debt. Because the Act provides for the BFSA to be in effect only until June 30, 2037, no BFSA bond can have a maturity date later than June 30, The City has been issuing bonds with a final maturity of about 12 years, meaning that the last date the BFSA could issue similar debt would be The Act also limits the aggregate amount of outstanding BFSA bond principal to $175 million, excluding refunding bonds. Cash flow borrowings are excluded from the $175 million bond principal cap, but are limited to $145 million of aggregate outstanding principal. PFM has reviewed the correspondence between the BFSA and the Comptroller regarding the BFSA s potential future new money debt issuance. In a May 30, 2017 letter, the Comptroller indicated that he was concerned about maintaining the City s position in the bond market. The Comptroller wrote, I still believe the City s long term financial health is enhanced by the City annually accessing the bond market. He further wrote, In addition to the City s financial position, the relationships we have developed with the rating agencies and their analysts, based on continuous contact, have led to recent ratings upgrades and outlook changes. I have also made it a priority to meet with different investor groups to tell our story so we have more competition for our bonds. In the past few years, we have received bids from new investor groups based on these presentations. Not being a continuous issuer will hurt the momentum that we have worked hard to develop. Developing relationships with rating analysts is fine, but the rating agencies make it a practice to routinely change the analysts assigned to a credit to assure that fresh eyes review it. In light of increased regulatory concerns, they are not interested in their analysts having good relationships with issuers; they are interested in them having a good, unbiased (either positively or negatively) understanding of the credit. However, if the BFSA were to issue bonds, the Comptroller could still participate in the rating calls or meetings. Given the rating agencies consistent focus on the BFSA s oversight and the City s practice of institutionalizing strong management policies, this type of joint participation and cooperation between the City and the BFSA would be another strong indication that the two parties were working closely together to further improve the City s financial position.

115 September 18, 2017 Buffalo s 2017 rating reports primarily focus on the City s financial position and economic conditions these are the key drivers in any rating. The non-financial and economic factors that affect ratings are not relationships - they are management practices and policies. The 2017 rating reports include the following comments on these factors: Moody s: State oversight board provides third-party supervision of city s finances and Trustee held bi-annual set aside of debt service. S&P: Oversight of the city s management practices and policies is provided by the Buffalo Fiscal Stability Authority and The city utilizes conservative budget assumptions that have generally led to positive variances and are supported by historical trend analysis and forward financial projections. S&P also discusses the requirement to submit annual forecasts to the BFSA, and the City s Council s quarterly review of budget to actual performance, as well as the Comptroller s report forecasting the maximum amount of debt that could be prudently issued over the next five years without hurting the City s financial position, and by extension, its ratings. Fitch: The city s operating performance has been sound and reflects management s conservative budgeting practices and proactive fiscal management. and Fitch believes management s efforts to codify many of the policies required by BFSA so that best practices remain in place are positive for credit quality. As to developing relationships with investors, I am assuming that these are the investment banks that bid on the bonds, rather than ultimate investors. Meeting with investment banks to encourage bidding is fine, but it has virtually no impact on bidding decisions. Banks are all about profits, and they bid on competitive issues for two primary reasons. The first is to support a client relationship to either maintain and or get commercial banking business or negotiated bond business in the future. (For local issuers in New York, negotiated bond business is only possible for refunding bonds and note issues.) The second reason is that they believe they can make money reselling the bonds to investors. Factors that can affect these decisions include the size of the issue, ratings, and other competitive bond issues that are pricing that day. The timing of the City s bond issuance, whether annually or after a multi-year hiatus, is irrelevant to any decision to bid on the bonds. Competitive sales are a commodity business. Bids are conducted electronically on independently run bond auction platforms that all of the investment banks use. Each competitive sale appears on the auction platform s bidding calendar, and has links to the Preliminary Official Statement. The sales are also listed on TM3 and the Bond Buyer, both commonly used municipal resources. For most competitive desks, any credit rated A or better is automatically approved for bidding. Given the current three notch ratings differential between the BFSA and the City, from an interest rate perspective the BFSA debt will always cost less than Buffalo debt. The BFSA issuance does increase overall costs due to the need for the City to issue mirror bonds. However, until the City s bond ratings improve to the point that the difference in interest cost between the BFSA bonds and the City bonds is offset by the additional BFSA related issuance costs, the BFSA debt will produce the lowest overall cost of funds. I hope this information has been helpful. I look forward to discussing it with you next week.