CHICAGO -- Evanston, Ill. lost its coveted Aaa rating last week when Moody’s Investors Service downgraded it to Aa1 in light of the city’s large pension liability.

Evanston is a suburb of Chicago with strengths that include an affluent tax base, financial flexibility, and strong management, Moody’s said in the downgrade report. It’s the home of Northwestern University, its largest employer, and several large health care institutions.

But a $171 million pension liability has plagued the city for years despite efforts to deal with it. The liability totals $260 million under Moody’s adjusted pension liability methodology.

“Pension liabilities are a source of budgetary pressure for the city,” analysts said in the report. “Management has expressed a commitment to continue their efforts to address the city’s sizable pension liabilities.”

The city’s main strategy has been to adopt more conservative assumptions and then fully fund the annual contributions.

“The city has controlled costs in its general fund to moderate overall levy increases as ARC payments have increased,” Moody’s said.

Despite challenges, including its pensions and a recent decline in property values, Evanston is expected to remain stable over the long term, Moody’s said.

The city has $154 million of outstanding Moody’s rated General Obligation debt and $70 million of outstanding unrated Illinois Environmental Protection Agency loans.

The ratings agency could upgrade the city if it reduces its pension liability or sees strong growth in its reserves and liquidity. Evanston could be downgraded again if there’s a substantial increase in debt, a deterioration of the tax base, or decline in liquidity levels, Moody’s said.

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