Casino payment stoppage drags down Niagara Falls, N.Y. rating

The ceasing of casino revenue sharing payments continues to hamper the credit conditions of Niagara Falls, N.Y., according to S&P Global Ratings.

S&P lowered the city’s long-term general obligation rating one notch to BBB from BBB-plus late last week citing a lack of adequate budgetary adjustments to offset the Seneca Nation of Indians halting of casino transfer payments in June last year. The downgrade came just over a month after Fitch Ratings also dropped its Niagara Falls debt rating one notch to BBB due largely to the Seneca’s decision to cut off casino gambling monies paid to the state that are distributed to host municipalities. Moody’s Investors Service rates Niagara Falls one notch lower at Baa3 following an October 2017 downgrade.

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"The downgrade reflects our view of the city's misaligned revenue and expense structure, which led to sustained deterioration in budgetary performance and a precipitous decline in fund balance over the last three audited fiscal years to negative levels," said S&P Global Ratings credit analyst Thomas Zemetis. “We believe the city has not made sufficient budgetary adjustments to insulate itself from future gaming revenue disruptions.”

Zemetis noted shared casino payments accounted for 15% of the city's operating revenue in the 2016 fiscal year. The Seneca Niagara Casino and Hotel is one of three Western New York gambling facilities run by the tribe as part of a 2002 agreement where it agreed to split 25% of slot machine revenues between host municipalities and the state. The Senecas previously withheld casino revenue to Niagara Falls from 2010 to 2013, which forced the Canadian border city to dip into its reserves.

“We believe Niagara Falls' budgetary performance and flexibility is unlikely to return to levels that support a higher rating in the near term,” said Zemetis. We also believe that management's efforts to reduce expenditures will likely remain insufficient to close the structural gap, which may lead the city to exhaust casino fund reserves and reduce its cash position.”

S&P kept a negative outlook on Niagara Falls GO bonds one year after revising from stable because of revenue limbo with the Senecas. Zemetis said there is a one-in-three chance that S&P could lower the rating because of expectations the city will continue facing budget challenges finding alternative revenue sources to replace previous casino payments.