SAN FRANCISCO – Moody’s Investors Service cut Fresno, Calif.’s sewer revenue bonds one notch to A1 from Aa3 because of the city’s financial problems.

The city’s poor fiscal state has increased the chance it could borrow money from the sewer utility, and possibly seek bankruptcy protection, which could cause debt service payments for the bonds to accelerate, according to Moody’s ratings report issued Monday.

The lower rating affects $160 million debt backed by revenues from the city’s wastewater utility, the company said. Fresno, located in the state’s Central Valley, is California’s fifth-most-populous city with about 500,000 residents.

“The downgrade is primarily the result of the sewer enterprise’s exposure to the financially and economically stressed City of Fresno,” Moody’s said in the report Monday. “The sewer enterprise itself is financially very healthy, but the city’s general credit quality has weakened significantly in recent years.”

The city places the utility’s cash reserves in a pool with other city funds, Moody’s said.

Concerns about the city’s fiscal problems have yet to worry bondholders of the sewer debt. In the last large trade, of $2 million on Nov. 9, bonds with a 2037 maturity sold at $110 with a yield of more than 3%. Those bonds had initially sold in 2008 for $101 with a 5% yield.

Other cuts to the city’s bond ratings earlier this year underscore its fiscal struggles.

The Fresno City Council approved a budget for the fiscal year that started in July that closed an estimated $16 million shortfall using one-time fixes, by increasing in its sales tax revenue forecast, and assuming concessions from unions that had yet to be nailed down.

Earlier this month, Fitch Ratings moved its outlook to negative on sewer systems bonds it rates AA and AA-minus. 

Fresno’s issuer rating was dropped by Standard & Poor’s in August to BBB from A. Fitch also trimmed its general obligation bond rating to A-minus from A in July. Both left a negative outlooks on the credits. 

The city also had its long-term rating reduced by Moody’s in July to A3 from A2, affecting $462 million of debt.

“The negative outlook reflects the likely emergence of a general fund budget gap in the current fiscal year, the possibility of continued economic weakness and the city’s now limited options for managing continued financial pressures given its very weak financial reserves,” Moody’s said in the July 23 report.

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