Uncertainty surrounding a casino revenue sharing agreement with the Seneca Nation of Indians triggered a one notch downgrade for Niagara Falls, N.Y., by Moody's Investors Service.

Moody’s lowered Niagara Falls’ general obligation debt to Baa3, the lowest rung of investment grade, from Baa2 late Tuesday citing budgetary pressures after the Seneca Nation halted casino transfer payments in June. The rating outlook is negative.

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 in which it agreed to split 25% of slot machine revenues between host municipalities and the state.

The Seneca Niagara Casino and Hotel in Niagara Falls, N.Y. is run by the Seneca Nation of New York.
The Seneca Niagara Casino and Hotel in Niagara Falls, N.Y. is run by the Seneca Nation of New York. Bloomberg News

“The downgrade to Baa3 is largely based on the uncertainty surrounding the dispute between the Seneca Nation and New York State regarding casino revenue sharing payments, which are the city's fourth largest revenue source,” said Moody’s analyst Chris Salcedo in his report. “The rating also incorporates the city's adequate but declining financial position, moderately sized tax base, tourism centric economy that is performing well and above-average debt and [other post-employment benefits] burdens."

An April Moody’s report noted that the Senecas previously withheld casino revenue to Niagara Falls from 2010 to 2013 forcing the city to dip into its reserves with the fund balance falling from 24.4% in 2009 to negative 0.2% in 2012. Salcedo noted that in addition to near-term fiscal challenges from the Seneca dispute, the city also faces budget pressures implementing revenue and spending adjustments as it seeks to diversify away from a reliance on casino transfer payments.

"Expenditure reductions are constrained by fixed costs, minimum staffing requirements and relatively lean employment operations," Salcedo said.

Niagara Falls has $55.1 million in outstanding general obligation debt, according to Moody’s. S&P Global Ratings revised the outlook for its BBB-plus Niagara Falls rating to negative from stable in August due to the revenue limbo with the Senecas. The Canadian border city had a population of 50,193, according to the 2010 U.S. Census.

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