NEW YORK - Moody's Investors Service said it has downgraded to A2 from A1 the city of LaGrange, Ky.'s long-term general obligation rating and assigned an A2 rating to the Oldham-LaGrange Development Authority's $7.9 million general obligation lease revenues notes (city of LaGrange), Series 2012A.

Concurrently, Moody's has assigned a negative outlook.

The downgrade to A2 and assignment of a negative outlook affects $12.1 million in outstanding general obligation parity debt, including the current issue.

The notes are secured by lease payments from the city, backed by the city's general obligation pledge. The lease is not annually terminable or subject to appropriation.

Current proceeds will refinance term bonds the authority issued in 2005 (subsequently refunded in 2008 and refinanced in 2010), to purchase and develop 1,000 acres of land for office building and other commercial purposes.

The downgrade to A2 reflects the deteriorating fundamental credit characteristics of the city of LaGrange, which are characterized by a declining general fund balance, narrowing liquidity, and a modest tax base located in the Louisville-Jefferson County Metropolitan Statistical Area (MSA).

The rating also reflects the city's weak debt structure that, with term bonds, will again depend on market access in coming years for additional restructuring if the remaining property is not sold.

The assignment of the negative outlook is due to the uncertainty regarding future plans of the debt structure related to this issuance, which is magnified by the city's deteriorating fundamental credit quality.

The city is proposing to adopt a local payroll tax on wages and salaries earned within the city's taxing jurisdiction and may be implemented as early as August 2012.

The additional revenues are expected to generate approximately $1 million in annual revenue which officials indicate will be used to begin amortization of principal. Failure to adopt and implement this tax may result in downward pressure on the rating.

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