CHICAGO — Moody’s Investors Service downgraded Akron’s general obligation and income-tax backed debt as the Ohio city struggles with a budget deficit and heads into what is expected to be a tough 2010.

Moody’s last week lowered $183.4 million of the city’s GO debt to A2 from A1 and $205.7 million of income-tax backed debt to A3 from A2. Akron’s outstanding debt totals roughly $780 million, much of which is utility-related and unrated by Moody’s.

The downgrade comes as a former City Council member has launched a petition drive to amend Akron’s charter to cap the city’s debt. Under the proposed amendment, the city would not be able to issue more than $775 million in debt without voter approval.

It’s been two years since the city issued general obligation debt, according to Moody’s analyst Thomas Schuette.

Located in northeast Ohio, Akron is the state’s fifth largest city and despite its problems, enjoys a diverse economy that is anchored by several large employers, including Goodyear Tire and Rubber Co., Bridgestone/Firestone, and the University of Akron. Due to its employment base and other strengths, Moody’s said it expects the city’s economy to remain stable despite its near-term fiscal challenges.

More than half of the city’s revenue comes from income taxes, which have declined steadily since mid-2008, Schuette noted. Projected by city officials to remain flat throughout 2009, income tax revenue has instead declined 4.5% so far this year. Property tax revenue has fallen 3% below 2008 collections.

Despite the declines, debt service coverage remains strong, Moody’s said.

Officials have made a number of cuts — including layoffs and mandatory furlough days — in an effort to whittle down a 2009 budget gap that is estimated at around $12 million. Officials might be forced to dip into the city’s modest reserves to close the budget gap.

Next year is also expected to be tough, according to Moody’s.

“The city is expected to face a challenging FY 2010 budget environment with a very minimal cushion against unexpected revenue or expenditure performance,” Schuette wrote in a report on the downgrade. “Income tax revenues are unlikely to experience a rapid recovery given the economic conditions in the region and other key revenue sources, including local government funding from the state of Ohio, are anticipated to decline further.”

In related news, city officials this week announced they have reached an agreement with the U.S. Environmental Protection Agency relating to work needed to upgrade Akron’s sewer ­system.

The city has agreed to upgrade its wastewater treatment plant and construct two additional sewer separation projects within four years and three others within the following four years. The agreement gives Akron officials 12 months to update their long-term control plan for the sewers, and outlines the method for conducting studies and evaluations to determine which projects need to be completed over the long term.

“With this agreement, we will finally be able to start cleaning the water ­going into the Cuyahoga River rather than ­paying attorneys to argue with ­bureaucrats in Washington who seem to care very little about the hard-working people in our community who have to pay for this,” Akron Mayor Don Plusquellic said in a statement ­regarding the agreement.

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