Fairfield, Iowa’s general obligation rating by two notches to Baa1 from A2 and warned of further negative action as the city struggles with ongoing budget deficits.

The action affects $5.6 million of rated general obligation debt. The outlook was shifted to negative. The city has an additional $5.9 million of GO bonds not rated by Moody’s.

“The downgrade to Baa1 reflects the city’s continued structural deficits that have led to depletion of general fund reserves, resulting in a deficit cash balance in fiscal 2011,” Moody’s said.

The city has limited financial flexibility with its operating property-tax levies at or near their limit and has an elevated with plans to add more debt in the near term.

The assignment of the negative outlook reflects Moody’s expectations for continued structural imbalance in the near term, with a preliminary plan of action by management to achieve balanced operations within the next three years,” Moody’s wrote.

The credit benefits from rapid debt repayment and a stable economy with modest growth in its property tax valuation.

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