Niagara Falls Bets on More Gaming Amid Casino Spat: Muni Credit

Niagara Falls, New York, lost its budget reserves and best bond rating since the 1970s amid a dispute over casino revenue between the state and the Seneca Nation of Indians. Now the city is betting even more gambling will bolster its credit.

New York’s biggest Indian tribe stopped paying the state 22 percent of its slot-machine revenue in 2009 after nontribal lottery terminals were allowed inside its 10,500-square-mile exclusivity zone. With the two sides locked in arbitration, Governor Andrew Cuomo wants a rival casino for Niagara Falls. The move is supported by the city’s mayor, Paul Dyster, who said the revenue loss triggered a “full-blown cash-flow crunch.”

“Our primary concern is to get paid the money that we’re owed under the existing arrangement,” Dyster, a 58-year-old Democrat, said in a telephone interview. Still, the new casino pushed by Cuomo “provides a potential way forward and suggests what the course of action would be if the Senecas continue to refuse to pay.”

Niagara Falls joins cities from Pennsylvania to Iowa that are counting on gambling to fill budget gaps after the longest recession since the 1930s reduced tax collections. Yet casino revenue is dwindling as more competitors fight for market share.

Long Dispute

Atlantic City, the New Jersey resort that ruled the East Coast market for three decades after the first casino opened in 1978, is suffering after six years of declining revenue as a result of losing business to casinos in neighboring states. Across the border from Niagara Falls in Ontario, Canada, casino revenue has dropped 88 percent since 2001.

New York has been battling the Senecas over money and sovereignty for decades. In 2010, the two sides fought in court over the state’s plan to implement a new tax on cigarette purchases made on the reservation. In the 1990s, the dispute over tobacco taxes turned violent as Senecas blocked the New York Thruway, burning tires and skirmishing with state troopers.

The Seneca Nation has withheld payments of at least $350 million, according to Patrick Sullivan, an attorney at Dickinson Wright PLLC in Washington who specializes in gaming and Indian law. From 2002 to 2009, the Senecas gave the state $476 million, and New York in turn gave 25 percent to localities that house the tribe’s casinos, including Niagara Falls.

Rating Cut

Niagara Falls alone is owed $60 million, Sullivan said. The payment loss drained a $20 million reserve the city of 50,000 had in 2011, Dyster said.

Moody’s Investors Service cut the city’s rating last month two levels to Baa1, the third-lowest investment grade, and may downgrade it again in the next two months based on the outcome of the dispute. Niagara Falls, site of the waterfalls dividing the U.S. and Canada that are a popular tourist destination, previously had an A2 rating after a so-called recalibration by Moody’s in April 2010. The downgrade caused the yield on some city debt to jump 39 percent.

Cuomo, a 55-year-old Democrat, is planning to propose a privately run casino for downtown Niagara Falls if the state Gaming Commission determines the 2002 contract between New York and the Senecas has been breached, an administration official said. The official spoke on the condition of anonymity because Cuomo hasn’t announced the proposal.

Voter Approval

The Niagara Falls casino would add to the three that Cuomo said he wants to build in upstate New York, with 90 percent of the tax revenue generated going to education and 10 percent for property-tax relief. Last year, lawmakers gave the first of two approvals needed for a constitutional amendment allowing casinos in the state. After final legislative approval, the measure would go before voters in a referendum.

Such a plan may be used by Cuomo to gain an advantage in negotiating with the tribe, said Howard Cure, director of municipal research at Evercore Wealth Management LLC, which oversees $4.5 billion. He said the company doesn’t invest in the area of New York that includes Niagara Falls, citing an aversion to “any place that is reliant on gaming revenues.”

Susan Asquith, a spokeswoman for the 8,000-member Seneca Nation, said the tribe’s president, Barry Snyder, couldn’t publicly comment on the dispute. Josh Vlasto, a Cuomo spokesman, didn’t respond to an e-mail requesting comment on the status of the talks.

Not Prepared

Niagara Falls used the cash from the Seneca Niagara Casino & Hotel for economic development and infrastructure projects, Dyster said. The complex has 604 rooms, 4,000 slot machines and more than 100 live table games, according to its website.

“We were prepared for delays or fluctuations in the amount of casino revenue,” Dyster said. “What we were not prepared for is what happened: a total stoppage in casino revenue for several years.”

Moody’s placed the city on review for further downgrade on Jan. 9, signaling that the rating could be cut within 90 days. The yields on at least nine Niagara Falls bonds increased following the Moody’s cut. The yield penalty on some debt has since narrowed, according to data compiled by Bloomberg.

A city general-obligation bond maturing in 2024 traded Jan. 10 at 3.54 percent, up 0.43 percentage point from three days earlier and about double the interest rate on benchmark AAA munis, Bloomberg data show. The debt most recently traded on Jan. 31 at 2.59 percent, or 0.65 percentage point above top-grade securities.

Increasing Competition

Across the border, profits the Ontario Lottery and Gaming Corp. gets from casinos dropped to $100 million in 2011 from $800 million in 2001, according to a 2012 report by the corporation, the agency that oversees gambling in the province.

The study cites Chicago, Detroit, Baltimore, Boston and Buffalo as examples of U.S. cities either with casinos or that are planning to expand their offerings. That may imperil smaller municipalities like Niagara Falls that rely on income from gaming, said Matt Dalton, chief executive officer at Belle Haven Investments Inc.

“If you don’t diversify yourself off of casino revenue, at some point you’re in trouble,” said Dalton, whose White Plains, New York-based firm oversees $1.4 billion in munis. “They become so dependent on that, and as the business of sin becomes more common, it’s at the expense of those original areas that had the monopoly on gambling.”

Following are pending sales:

BOSTON plans to sell $175 million of general-obligation bonds as soon as Feb. 28, according to Bloomberg data. The tax-exempt debt, which has Moody’s top grade, will be issued through competitive bid. (Added Feb. 25)

VENTURA COUNTY PUBLIC FINANCING AUTHORITY in California is set to issue $300 million of tax-free lease revenue bonds as soon as this week, Bloomberg data show. Standard & Poor’s rates the sale AA, third-highest. (Updated Feb. 25)

Before it's here, it's on the Bloomberg Terminal.