Standard & Poor's Ratings Services said it has placed its BBB-plus long-term rating on Niagara Falls, N.Y.'s general obligation bonds on CreditWatch with negative implications.
"The action is based on information provided by the city that shows a weak liquidity position, which we view as a significant credit risk given upcoming debt service payments," said Standard & Poor's credit analyst Hilary Sutton.
City officials provided two cash flow analyses for fiscal 2013 (Dec. 31 year-end) that include all of its major funds; one with capital expenditures and one largely without.
The former shows the city's cash turning negative in July ($2.5 million) and reaching a deficit of $23.6 million by Dec. 31, while the latter shows the deficit occurring in September ($1.6 million) and reaching negative $8.4 million by year-end.
Management reports that some, but not all, of the city's capital spending is discretionary and that it will only fund projects for which it is contractually obligated. Furthermore, management reports funded projects will be reimbursed at a rate of 80% by the state and that bond proceeds on hand will cover the balance.
As a result, based on the city's projections and barring any significant changes, we expect the cash to go negative at some point between July and September. This is important because the city has sizable debt service payments in September ($1.3 million), November ($1.3 million), and December ($1.6 million). Both cash flow projections include all debt service payments.
The city's fiscal 2013 budget was adopted with neither a tax rate increase nor layoffs, though the mayor's proposed budget included both. The budget also assumes the receipt of $5.3 million of disputed casino revenue though, importantly, the cash flow analyses do not.
The city's general fund, through 2012, is owed roughly $17.3 million of gaming-related revenue that is being held in escrow by the Seneca Nation pending resolution of a lawsuit between it and the state of New York. The mayor expects arbitration to conclude, and for the city to receive the funds at midyear. However, if the ruling is not found in favor of the state, or if it is delayed, we believe the city will be under considerable pressure to make its debt service payments.
City officials report two contingencies should the casino money not come in as expected. First it could terminate an agreement with the New York Power Authority (NYPA) that would generate an immediate cash payment of $13.4 million. If this option is exercised, the city would then forego annual payments of $850,000 from NYPA for the next 44 years.
Alternatively, the finance director could declare a deficit and the city would then be required to make significant budget cuts. The second option requires a willingness to make budget cuts that has not been demonstrated in recent years and that it would need to be done well in advance of the debt service payments to generate the necessary savings.
