Standard & Poor’s last week dropped Davenport, Iowa’s general obligation rating by three notches to A from AA due to the city’s liquidity woes.

“The downgrade and outlook revisions reflect our view of the city’s continued limited liquidity position, the temporary use of restricted cash and bond proceeds to avoid cash-flow borrowing, and general fund reserves that rely on long-term receivables,” said Standard & Poor’s analyst Blake Yocom.

A negative outlook was assigned to the credit. The action comes as Davenport plans to enter the casino business.

The rating  review came in conjunction with the city’s sale of $22 million of new-money and refunding bonds.

The rating reflects the city’s position as an anchor for the Quad Cities region covering a portion of Iowa and Illinois, a strong and growing tax base, good financial management policies even though the city relies on interfund borrowing, and a low overall debt burden.

Its challenges include a depleted cash position and a declining general fund balance.

Officials said in published reports that the city’s proposed purchase of a casino would bolster its financial position and that it is addressing Standard & Poor’s fund-balance concerns in its two-year budget plan.

Moody’s Investors Service last month affirmed its Aa2 rating on $206 million of Davenport debt, but revised its outlook to negative as analysts raised concerns over the city’s decision to get into the gambling business.

“Assignment of the negative outlook is based upon continuance of the city’s limited unrestricted cash position as well as new risks posed by expected future ownership of a casino,” analysts wrote.

The looming purchase of the casino “raises new risks for general operations,” according to Moody’s. “Furthermore, purchase and ownership of the casino is expected to increase the city’s debt burden, either directly through the issuance of GO bonds or through the inception of a lease agreement.”

The city has proposed purchasing the Rhythm City Casino for $46 million as a means to keep local gamblers from flocking elsewhere, to draw more tourists, and to improve its financial position.

The city contends future gambling revenue would support the purchase and not property taxes.

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