NEW YORK - Moody's Investors Service said it has downgraded to A1 from Aa3 the rating on the city of La Mirada, Calif.'s 2006 lease revenue bonds, for $13.6 million outstanding.

Concurrently, a negative outlook has been assigned. The bonds are secured by lease payments made by the city of La Mirada and by the city's covenant to annually budget and appropriate the lease payments for the use and occupancy of the leased asset.

The downgrade and negative outlook reflect the city's February 14 declaration of fiscal emergency. The city stated in its announcement that due to the loss of revenues from its redevelopment agency (RDA) it "will not be able to maintain essential city services at the levels necessary for the community."

The city's financial profile appears strong, with reserve levels that could accommodate the lost RDA revenues. However, the declaration of a fiscal emergency casts a certain level of doubt on this strength.

The declaration in part enables the city to seek revenues from a possible sales tax, as it was required under the California constitution (article 13C § 2(b)) before the city could place a general sales tax measure on the upcoming November 2012 election ballot. Moody's believes the city will likely address the revenue shortfalls effectively even if the sales tax does not come to pass.

However, substantial uncertainty is generated by the declared fiscal emergency. This uncertainty is also incorporated in the negative outlook on the city's rating. The city's other strong fundamental credit factors continue to be reflected in the rating including the relatively small tax base participating in the larger Los Angeles economy, and low debt levels.

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