Fitch Affirms Niagara Falls, NY's GOs at 'BBB'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the City of Niagara Falls, NY's (the city) outstanding general obligation (GO) bonds as follows:

--Approximately $65 million GO bonds at 'BBB'.

The Rating Outlook is Stable.

SECURITY

The bonds are general obligations of the city for which the city has pledged its full faith and credit and unlimited ad valorem tax.

KEY RATING DRIVERS

DISPUTE RESOLUTION RESTORES STABILITY: In August 2013, the city received over three years of casino revenue payments that had been delayed by a dispute between the Seneca Nation (the Senecas) and New York State. As a result, the city's previously tenuous liquidity position improved dramatically. Timely subsequent payments have helped restore general fund reserves to more adequate levels.

DIVERSE BUT VOLATILE REVENUES: The city remains dependent on casino revenues that are subject to periodic renewal of an agreement between the state and the Senecas. Resources also rely on potentially volatile sales tax revenues.

WEAK ECONOMIC INDICATORS: Wealth levels are well below average and unemployment remains high.

TOURIST ATTRACTION: The city benefits from its status as a major tourist attraction, drawing visitors from around the world.

HIGH FIXED COST BURDEN: Pension costs have been increasing, and other post-employment benefits (OPEB) are high as a percentage of market value. Overall debt levels are also high.

RATING SENSITIVITIES

FINANCIAL CUSHION MITIGATES RISK: The influx of compact revenues has greatly improved financial flexibility. The rating is sensitive to the city's ability to maintain financial stability in light of its limited economy, high liability burden and potentially volatile revenue over which it has limited control. Maintenance of reserves at current levels could result in an upgrade.

COMPACT EXTENSION: Failure to extend the compact with the Senecas in 2016, pursuant to the current memorandum of understanding, would likely alter the city's long term financial profile. The rating would be downgraded in that scenario absent corrective action related to both operating and capital reliance on compact revenues.

CREDIT PROFILE

Located on the western edge of New York on the U.S.-Canadian border, Niagara Falls is home to one of the world's unique natural attractions.

RESTORATION OF CASINO PAYMENTS PREVENTS CASH CRUNCH

The city is home to one of three Seneca casinos in New York. The Senecas operate under a compact with the state whereby the state receives a portion of casino profits, which it shares with the city, in return for exclusive gaming rights in certain parts of the state. The city received its last full annual payment in 2008 totaling $19 million, of which $5 million went to the general fund (6% of 2013 general fund revenues) with the remainder distributed to other city agencies including the schools.

In August 2013, the city received approximately $89 million of delayed payments from the state of New York that were the city's share of a compact between the Senecas and the state. The compact promised the state a portion of casino profits in exchange for exclusive rights to offer gaming in parts of the state.

The Senecas ceased making payments after 2008, arguing the state had violated the compact, and the city's liquidity position and reserve levels rapidly declined. The dispute was resolved in 2013 and the city received $89 million representing the city's share of payments from 2009 through May 2013. The city was obligated to distribute approximately $24 million of these funds to outside entities.

The city's unrestricted general fund balance subsequently increased from -$178 (-0.2% of expenditures) at the end of 2012 to $16.5 million (19% of expenditures) at the end of 2013. Additionally, the fund balance in the Miscellaneous Special Revenue Fund that is used to collect and distribute casino funds increased from -$4.3 million to $43.9 million. This high balance greatly improved the city's overall liquidity and financial flexibility, covering future capital contributions that otherwise would be supported from operations.

The compact goes through 2016, with the potential for an extension through 2023. With the resolution of this dispute, both sides signed a memorandum of understanding confirming that the compact will be extended in 2016 barring a material violation of the compact. The Senecas also agreed to make more timely payments, and the city has received three quarterly payments in 2014 of which it has kept a total of approximately $16 million. If the compact is renewed with current terms, steady-state casino revenue for operations would represent roughly 6% of general fund revenues. Much of the revenue is maintained outside of the general fund for capital projects.

DIVERSE BUT VOLATILE REVENUE STREAM

The city's revenue stream is made up of a diverse bundle of sources, including property taxes (37% of 2013 revenues), state aid (31%), a hotel, restaurant and utility (HRU) sales tax, the city's share of a county sales tax, and several other taxes, in addition to casino revenues. The two economically sensitive sales taxes have grown a total of 15% over the last four years and are budgeted conservatively. State aid and property tax revenue have been stable.

The large decline in revenues due to the withholding of casino funds largely was not offset by a reduction in expenses, which led to fund balance dropping to very low levels. During this period, employee benefit costs went up while the mayor's proposals to have layoffs and large property tax increases were rejected by the city council.

The city's 2014 budget included a $4.4 million draw on $22 million fund balance and conservative assumptions for its economically sensitive taxes. HRU tax revenue is up through the first half of the year while the county sales tax is flat. A contract for the fire departments wages for 2010-2013 that was settled after budget adoption is putting expenditures over budget, resulting in the city currently expecting to be on budget for the year. All labor contracts expired at the end of 2013 except police, which expired at the end of 2010. Fitch believes the risk of budget shock associated with contract resolutions still exists but is reduced, given current budgeting practices.

HIGH PENSION COSTS AND LARGE OPEB BURDEN FURTHER STRESS FINANCES

The city is pressured by increasing employee pension and health care costs. City employees participate in cost-sharing multiple-employer public employee retirement systems administered by the state: the New York State and Local Employees' Retirement System (ERS) and the New York State and Local Police and Fire Retirement System (PFRS).

The city's contributions to these plans have been rapidly growing, though have shown some signs of flattening and will likely begin to decline in the near future as a result of their high funded levels and strong market returns. As permitted by the state, the city has amortized a portion of its ERS payment in 2012 and 2013 and PFRS in 2011 and 2013 and expects to amortize both again in 2014. Both plans are well funded at approximately 83% using a Fitch-adjusted 7% return assumption. The city's unfunded OPEB liability is a very high $210 million or 15% of market value as of Jan. 1, 2013.

Overall debt levels are high at $3,306 per capita or 11.6% of market value, though much of that debt is overlapping school district debt supported through state building aid. Amortization is moderate at 60% in 10 years, and future debt plans are manageable. Total carrying costs are a moderate 16% of government fund expenditures. Carrying costs would be much higher at 23% of spending if the full OPEB ARC was funded but Fitch believes the flattening out of pension costs and expected declines in debt costs should create room for potential OPEB increases.

LIMITED TOURISM ECONOMY

The city's economy is limited, driven by tourism activity, competing with the Canadian side of Niagara Falls for visitors. Millions of people visit Niagara Falls annually with further activity supported by the Seneca Niagara casino and related hotel/retail development. Several large development projects have recently been announced, including new hotels and the redevelopment of a large, shuttered shopping mall into a hotel and entertainment complex.

The city remains dotted with poverty and empty homes, hurting its assessed value levels. Unemployment rates for the city have historically been well above the state and national rates and remain so in May 2014 at 8.2%, compared to the state's 6.4% and the nation's 6.1%. Employment levels have been trending down. Wealth levels are low, with per capita and median household income levels far below state and national averages, and educational attainment levels also well below national norms.

Additional information is available at 'www.fitchratings.com'

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, and National Association of Realtors.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=860614

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Contacts

Fitch Ratings
Primary Analyst
Eric Friedman
Director
+1-212-908-9181
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Karen Wagner
Director
+1-212-908-0230
or
Committee Chairperson
Jessalynn Moro
Managing Director
+1-212-908-0608
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Eric Friedman
Director
+1-212-908-9181
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Karen Wagner
Director
+1-212-908-0230
or
Committee Chairperson
Jessalynn Moro
Managing Director
+1-212-908-0608
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com