Moody’s Investors Service downgraded Niagara Falls, N.Y.’s general obligation rating two notches to Baa1 from A2 and kept the city on review for a further downgrade.

Moody’s said the downgrade reflects the decline of the general fund’s liquidity starting in fiscal 2010. A failure to receive budgeted casino revenues triggered the decline.

The city’s reserve levels declined to 11% of general fund revenues at the end of fiscal 2011 from 29% at the end of fiscal 2010. During the same period revenues declined $5.3 million, or 6.2%, due to the loss of Seneca Niagara casino revenues.

“The city has not received its local share of gambling revenues from the Seneca Nation for fiscal 2010, 2011, and 2012 resulting in the loss of $60 million in revenues during this time period, due to the dispute between the Nation and the State of New York,” wrote lead Moody’s analyst John Palazzolo. “The dispute between the Seneca Nation and the State of New York is currently in arbitration, with city management expecting a resolution within the first half of 2013.”

Moody’s rating “also incorporates the city’s high unemployment, depressed wealth levels, an elevated debt burden, and a moderately-sized tax base,” Palazzolo wrote.

“Moody’s expects the city’s debt position will remain manageable given the lack of substantial future borrowing plans, and a steadily decreasing maturity schedule,” he wrote. “Maximum annual debt service occurred in fiscal 2012, and represented a modest 6.6% of operating expenditures.”

The future of the rating will partly depend on the outcome of the dispute between the Senecas and the Empire State, according to Palazzolo.

Moody’s rating action affected $65.7 million in long-term debt.

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