Moody's dropped Ferguson's rating further into junk territory as its balance sheet pays a price for the controversial 2014 police shooting of Michael Brown.

CHICAGO – Ferguson, Missouri's rating has sunk further into speculative grade territory as the city's struggle to recover from a controversial 2014 police shooting continues to batter its once healthy balance sheet.

Moody's Investors Service lowered the city's general obligation rating on $6.7 million of debt from a 2011 issue to Ba2 from Ba1 and warned of the potential for further weakening by assigning a negative outlook. The rating on the city's $8.4 million of 2013 certificates of participation was lowered to Ba3 from Ba2 and the rating on $1.5 million of 2012 COPs was lowered to B1 from Ba3.

The action Dec. 10 concludes a review launched by Moody's in September on a possible downgrade or withdrawal of its rating for insufficient information. The city did provide the rating agency on its fiscal 2015 financial operations and the status of pending litigation and consent decree negotiations with the US Department of Justice.

Ferguson came under the national spotlight after the controversial killing of Michael Brown, an unarmed African-American, by a white police officer last year. The shooting sparked widespread protests and riots and prompted a federal probe of police tactics and the city's reliance on court fines.

"The downgrade of the general obligation rating to Ba2 reflects the lack of an adopted plan to address the city's rapidly declining reserves and limited options for restoring fiscal stability," Moody's wrote in the report published on Thursday. "The declines represent a severe departure from the city's prior strong financial performance, following the civil unrest in 2014."

Without action, the city has warned it could become insolvent by June 30, 2017, Moody's said citing the city's budget documents. "Management remains committed to identifying solutions to bringing the budget back into balance, but its options are limited," analysts warned.

The city faces further strains should it face new costs due to legal fees or provisions of the consent decree. "Further downgrades of the city's ratings are likely in the event the city fails to adopt measures to produce a balanced fiscal 2017 budget," Moody's added.

The rating also reflects the city's moderately sized tax base with a trend of declining assessed valuation, below average socioeconomic profile, and average debt burden. The city is northwest of St. Louis in St. Louis County.

Earlier this year, the rating agency dropped Ferguson seven notches to Ba1, one level into speculative grade territory, from Aa3. Between draws in fiscal 2015 which ended June 30, and fiscal 2016 projections, city reserves are expected to fall by 70% compared to audited fiscal 2014 levels.

The declines mark what Moody's called a severe departure from the city's prior financial profile which was bolstered by positive operating results through 2013.

The Justice Department conducted a review after the August 2014 shooting of Brown by Darren Wilson in August 2014. The March report from Justice's Civil Rights Division found the Ferguson police department engaged in unlawful and discriminatory practices partially driven by the city's reliance on court fine revenue to support its budget. Advocacy groups have filed a series of lawsuits challenging municipal ticketing operations.

The city has said it has taken action to with new laws to limit the use of revenue generated by court fines and fees to 15% of its budget. The city has also revised various policies on collections.

The city's options are limited due to constrained revenue raising ability and its stagnant economy. Missouri local governments may file for Chapter 9 bankruptcy protection by an action of the local governing body without sign off or approval from any other agency, although the city has not indicated plans to file.

Most Missouri local governments face new restrictions on the use of municipal court fines under legislation signed in July by Gov. Jay Nixon. A Nixon-appointed commission recently issued a report that suggested a sweeping overhaul of police tactics and court fine practices.

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