Moody's Investors Service said it has downgraded Montgomery County, Pa.'s general obligation rating to Aa1 from Aaa, affecting $417 million of long-term debt outstanding. Concurrently, Moody's has revised the outlook to stable from negative.

The county's bonds and notes are secured by a general obligation, unlimited tax pledge. The downgrade of the county's rating to Aa1 reflects its narrowed financial position following several years of sizable operating deficits caused by a growing structural imbalance.

The county's general fund reserves at the end of fiscal 2011 (unaudited) were $24 million, equal to a weak 6.2% of revenues, and well below average for the rating category.

The downgrade to Aa1 also takes into account the county's weakened cash position, ongoing exposure to derivative agreements with a notional amount totaling approximately $200 million, and recent pattern of not making its annual pension contribution.

The county's new management team will be challenged, in the near term, to replenish financial reserves in an environment characterized by slow economic and employment growth.

The current rating and stable outlook also reflect the county's large and diverse tax base with high income and wealth levels located in the Philadelphia (GO rated A2/stable outlook) metropolitan area and a below-average direct debt burden with manageable exposure to variable rate debt. The stable outlook also reflects the belief that new management will stabilize financial operations and restore reserves over the medium-term.


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