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

NEW YORK--()--Fitch Ratings has affirmed the rating on the City of Niagara Falls, NY's (the city) approximately $53 million of outstanding general obligation (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

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 Seneca Nation (the Senecas). Resources also rely on potentially volatile sales tax revenues. Recent budgets have been structurally imbalanced.

STRAINED OPERATING HISTORY: The city has a history of uneven financial performance and low reserves. Operating results in 2014 were weaker than anticipated, and further declines are projected for 2015 potentially bringing reserves below the 5% policy level.

WEAK ECONOMIC INDICATORS: Wealth levels are well below average and unemployment remains high. The city benefits from its status as a major tourist attraction, drawing visitors from around the world.

HIGH FIXED COST BURDEN: Pension costs are high but decreasing after several years of large increases, and other post-employment benefits (OPEB) are high as a percentage of market value. Overall debt levels are also high.

RATING SENSITIVITIES

FINANCIAL STABILITY: The rating is sensitive to the city's ability to achieve financial stability in light of its limited economy, high liability burden and potentially volatile revenue over which it has limited control. Results in 2015 finishing below projections or material use of reserves in the 2016 budget would likely lead to downward rating pressure.

COMPACT EXTENSION: Failure to extend the compact with the Senecas in 2016, although not anticipated, could challenge the city's financial position and ability to fund capital needs, and thus pressure the rating.

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. The city's population has been stable over the last decade at roughly 50,000.

FUND BALANCE VOLATIITY INFLUENCED BY CASINO AGREEMENT

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 a full annual payment in 2008 totaling $19 million, of which $5 million went to the general fund (6% of 2014 general fund revenues) with the remainder distributed to other city agencies including the schools.

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 non-city related entities.

The city's unrestricted general fund balance subsequently increased from -$178,000 (-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 city 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, which it has done. 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.

CITY CHALLENGED TO REVERSE OPERATING DEFICITS

The city's 2014 budget included a $4.4 million draw on fund balance and conservative assumptions for its economically sensitive taxes. Sales tax revenue was up slightly, but was $900,000 over conservatively budgeted figures. The city received $18.6 million of casino revenue for 2014. Several labor contracts for 2010-2013 that were settled after budget adoption put expenditures over budget, resulting in the city finishing the year with a $7.6 million deficit, bringing unrestricted fund balance down to $8.6 million or 9.3% of expenditures. All labor contracts expired at the end of 2013 except police, which expired at the end of 2010.

The 2015 budget includes another fund balance draw of $4.9 million. This would bring unrestricted fund balance down to 4% of expenditures, below policy levels. Sales tax revenue is currently trending slightly below budget. All other revenue and expenses are on budget. Discussions regarding the 2016 budget are currently beginning, and specifics are likely dependent on the results of an upcoming mayoral election. Further declines in reserves beyond those projected for 2015 could lead to downward rating pressure.

Compounding the city's ability to achieve fiscal balance is its somewhat limited ability to increase property taxes, the leading source of general fund revenue (36% in 2014), and exposure to economically sensitive taxes. The hotel, restaurant and utility (HRU) sales tax and the city's share of a county sales tax have grown by 7% over the last two years. As noted above, the Seneca casino payments have been a source of prior contention.

HIGH PENSION COSTS AND LARGE OPEB BURDEN FURTHER STRESS FINANCES

The city is pressured by high retiree 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).

After several years of large contribution increases the city's contribution for 2015 is down 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, 2013 and 2014 and PFRS in 2011, 2013 and 2014 but does not expect to amortize them in 2015. Both plans are well funded at approximately 84% using a Fitch-adjusted 7% return assumption. The city's unfunded OPEB liability is a very high $280 million or 20% of market value as of Jan. 1, 2014.

Overall debt levels are high at $3,166 per capita or 11.2% 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 for debt and retiree pension and healthcare are a moderate 19% of government fund expenditures. Fitch believes the declines 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 2015 at 7.5%, compared to the state's 5.3% and the nation's 5.3%. 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, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, National Association of Realtors.

Applicable Criteria

Tax-Supported Rating Criteria (pub. 14 Aug 2012)

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

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

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

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=989724

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=989724

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https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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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
Michael Rinaldi
Senior Director
+1-212-908-0833
or
Media Relations:
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com

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
Michael Rinaldi
Senior Director
+1-212-908-0833
or
Media Relations:
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com