Moody’s Investors Service last week downgraded Azusa, Calif.’s long-term issuer rating to A2 from Aa3, affecting $3.25 million of rated debt, and assigned a negative outlook.

The rating agency also downgraded the city’s 2003 lease revenue refunding certificates of participation to Baa1 from A2.

The downgrade was based primarily on the rapid deterioration in the city’s financial profile and continued general fund structural imbalance, according to the Moody’s report.

“Correcting that imbalance will prove challenging given the city’s and region’s economic weakness,” Moody’s analysts said. “The city’s cash and reserves have sharply deteriorated due to recent operating deficits, inter-fund transactions and the city’s apparent inability to convert fixed assets in its general fund into cash.”

The city’s year-end general fund cash and unrestricted spendable reserves are both negative, representing a significantly illiquid and weak financial position, analysts said in the report.

“The city of Azusa has a structural budgetary imbalance,” Moody’s analyst Eric Hoffmann said. “It has liquidity pressures that are a function of fact that much of their land is being held for resale; and that hasn’t occurred.”

The city appears to have a strong fund balance, but it is not liquid.

Azusa’s positive general fund balance is attributable to non-spendable reserves composed entirely of land assets held for resale, Moody’s said.

The city has incurred and continues to carry significant interfund debts in support of its redevelopment agency.

After the state’s elimination of redevelopment agencies, there remain risks to Azusa that certain of the debts will not be repaid in full or on time, risking losses to city funds.

The negative outlook reflects both the continued uncertainty regarding recent interfund transactions — and the negative balance-sheet impact that would result if the transactions become compromised or invalidated — and the city’s limited flexibility for dealing with unanticipated pressure in light of its significantly narrow financial position.

Moody’s analysts do not expect other cities to receive downgrades based on issues related to dissolutions of their redevelopment agencies.

Moody’s previously downgraded the ratings on all California tax-allocation bonds it covers by one notch, other than those that were all ready at the Baa3 level.

Azusa carries relatively little bonded debt, and the city tends to pay it off rapidly, according to Hoffmann.

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