NEW YORK - Moody's Investors Service said it has downgraded to A2 from Aa3 the long-term issuer rating for the city of Azusa, Calif. Moody's has also downgraded to Baa1 from A2 the rating for the city's 2003 lease revenue refunding certificates of participation. At this time, Moody's has also assigned these ratings a negative outlook.

The downgrade is based primarily on the rapid deterioration in the city's financial profile and continued General Fund structural imbalance.

Correcting that imbalance will prove challenging given the city's and region's economic weakness. The city's cash and reserves have sharply deteriorated due to recent operating deficits, inter-fund transactions and the city's apparent inability to convert fixed assets in its general fund into cash.

The city's year-end general fund cash and unrestricted-spendable reserves are both negative, representing a significantly illiquid and weak financial position.

The city's positive general fund balance is attributable to nonspendable reserves composed entirely of land assets held for resale. The city has incurred -- and continues to carry -- significant inter-fund debts in support of its redevelopment agency (RDA), and there remain risks that certain of these debts will not be repaid in full or on time, risking losses to city funds.

The rating also incorporates the city's location within the Los Angeles metropolitan area, low debt burden and weak local economy. The negative outlook reflects both the continued uncertainty regarding recent inter-fund transactions -- and the negative balance sheet impact that would result if the transactions become compromised or invalidated -- and the city's limited flexibility for dealing with unanticipated pressure in light of its significantly narrow financial position.

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