Moody's Investors Service downgraded Jackson County's implied general obligation rating one notch to Aa3 and warned of further action by assigning a negative outlook due to the county's fiscal challenges.

At the same time, the agency downgraded the county's leasehold revenue and special obligation rating one notch to A1, affecting $595 million of outstanding debt. The county does not have any outstanding GO debt.

"The downgrade reflects the county's strained financial position characterized by a sustained trend of structurally imbalanced operations, declining reserve levels and a lack of general fund liquidity," analysts wrote.

The negative outlook reflects analysts' belief that the county will continue to face fiscal pressures as its key revenue sources are expected to decline or remain stagnant in 2010 and the county has just a minimal cushion to offset revenues drops.

Jackson has carried a structural imbalance in its budget since 2005. This year, the county experienced significant revenue declines, forcing it to cut the budget mid-year. The county's largest revenue source is the sales tax that accounts for 29% of revenues. The sales tax declined by 6.5% this year over last year.

The 2010 budget also anticipates tax revenue will remain flat. Property taxes, which account for 21% of the budget, are expected to decline by 5%. The county has pushed off pay raises and is delaying capital expenditures until the second half of the fiscal year in response to its revenue struggles. Its 2009 and 2010 operating budgets include no undesignated reserve balances.

The credit benefits from a large and diverse tax base that includes much of metropolitan Kansas City and a favorable debt profile with no significant future borrowing expected. The county also lacks the burden of an other post-employment benefits unfunded liability, since it does not offer retiree health benefits and its pension plan is relatively well-funded at 78% as of June 30.

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