Moody's Investors Service said it has downgraded to Ba1 from Baa3 the rating on Arkansas City Public Building Commission, Kan.'s revenue bonds.

The Ba1 rating applies to $22.8 million in outstanding debt. The bonds are secured by unconditional lease payments from the city of Arkansas City that are not subject to appropriation. The city plans to make payments from the net revenues of the South Central Kansas Medical Center per a pledge of revenues agreement.

The downgrade to Ba1 reflects the city's narrow general fund reserve level that receives support from the city's utility system, enterprise risk from a city supported hospital with strained operating revenues and a narrow cash reserve position, and an elevated direct debt burden with a slow principal amortization. The rating also takes into account the dedicated sales tax for hospital operations which will sunset in 2019.

The negative outlook reflects Moody's expectation that hospital management will be challenged to improve reserves to a healthy level in the medium term and could become a burden on the city's general fund.

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